According to Industrial Info Resources, a leading provider of industrial intelligence data, the sustained high prices for oil and natural gas that existed at the time prompted an increasing interest in drilling in locations that were previously not considered. For example, oil is being extracted from sands in countries such as Canada, where the deposits are second in size to Saudi Arabia, at approximately 170 billion barrels. In the US, ‘wet gas’ is being extracted, as well as ‘dry gas’ from shale deposits. Wet gas refers to natural gas, which has a lower methane content, typically less than 85 per cent. This lower methane content increases the processing costs. Nevertheless, according to Industrial Info Resources, with natural gas prices at \($4\) per thousand cubic feet, New York based Seneca Resources achieved a return in investment of 20–40 per cent in extracting dry gas from shale deposits. In comparison, the report also mentions Range Resources Corporation, which achieved a 40–60 per cent return on a well in south western Pennsylvania, which had higher gas content. The cost of both wells was estimated at \($4m.
Questions:
1 Other\) than the volume of oil or gas found, what factors might affect the return on investment for a particular drill site?
2 Do you think oil and gas exploration companies are likely to continuously use sensitivity analysis in exploration activities, developing oil/gas finds or both?