THE ROLE OF PRODUCTION DECLINE CURVES IN THE ECONOMIC EVALUATION OF OIL SHALE RESERVES

Abstract

The article considers economic prospects of shale oil extraction in the United States using the example of materials from the controversial May 2015 presentation of the famous financier David Einhorn. The author considers Einhorns «statistical» arguments which allow him to see signs of a «financial bubble» in the U S shale oil production. A careful analysis of these calculations carried out in the framework of the standard discounted cash flows approach, shows that behind his most controversial findings may lie the inflated by about half the estimate of the volume of capital costs in the oil production costs, which, in turn, was due to the implicit underestimation of the key parameter -decline of oil wells debit. Having corrected this error, Einhorns calculations produce results that comply with both the companies' estimates and stock market valuations. Thus, was identified a slight gap between critical statements made by the author of the presentation and calculations they are based on. It is the author's belief that the answer to the key question of the debate provoked by the publication in the current economic periodicals, the question of «option value» of reserves of shale hydrocarbons in the US, can not be found within a deterministic approach used in the publication that has sparked such a massive public outcry. On the contrary, it requires using formal stochastic models.