Kimmeridge White Paper on Remaining North American Shale Inventory is Informative: Summary Review, & Commentary

  

      This May 2025 paper utilizes some interesting economic methodologies, cost-comparisons, and reserves evaluation to determine economic inventory remaining in the major North American shale plays, encompassing both oil and gas plays. It ranks plays according to future potential and shows that there will be some shifting of play focuses. In Canada, there is significant room to expand the Montney and Duverney plays. With Canada contemplating another major oil pipeline to the Pacific Coast and more LNG export capacity on that Pacific Coast, there is interest in expanding the country’s energy superpower status to new markets. Canada is the world’s fourth-largest oil producer after the U.S., Russia, and Saudi Arabia. In the U.S., some prominent shale basins are getting low on core location inventory. These include Haynesville, Midland, Williston, and SCOOP/STACK.

     Kimmeridge explains its goals and focuses in the report:

“…we set out to model well economics for the majority of foreseeable North American shale inventory  to provide a nuanced, bottom-up view on where the industry falls within the capital efficiency life cycle. Then we used this information to achieve a greater understanding of the current investment opportunity landscape and what the future has in store by coupling historical well data with our inventory characterization to illustrate the full life cycle of shale capital efficiency. We finish this piece with our views on Kimmeridge’s large remaining investment opportunity set, and also some notes on potential global supply implications from our work.”

     The report makes me wonder about the future of oil & gas supply in light of planned significant increases in U.S. LNG exports and oil exports, along with expected higher natural gas demand due to higher electricity demand. Oil demand trends are less certain, but with expected OPEC near-term increases and corresponding low oil price forecasts, it seems that oil is well-supplied for the moment. Some macro trends in North American oil plays by Eneverus are shown below:

     The report also notes that there is still some great inventory out there and opportunities to make deals that pay out well. However, they also indicate that there is a likelihood of production plateauing at some point:

“The Step-Change in Production Growth Is Behind Us: We expect that declines in capital efficiency should cause North American production to plateau and ultimately begin to decline over the coming decade. This will likely set a floor for commodity prices longer-term, as the industry will struggle to deliver the hydrocarbons the world demands. This dynamic will also undoubtedly spur further consolidation of the North American E&P sector over the next 10 years, as shale matures.”

     Their outlook 10 years into the future suggests that natural gas growth may not be able to keep up with new LNG demand expected to come online over the next decade without the price of natural gas rising. The EIA expects the natural gas price to rise, especially in areas like the Marcellus, where it is suppressed due to inadequate pipeline takeaway capacity. This, along with projected domestic electricity demand growth, could mean higher electricity prices for U.S. consumers (grumble, grumble). Higher prices could unleash non-core locations that could then be drilled economically.

     The white paper says that there are three ways to compare inventory quality by basin:

1) recycle ratio,

2) calculating the number of locations with economics above a certain threshold

3) comparing inventory between basins by front-end inventory duration.

     According to Investopedia:

“A recycle ratio, or recycle rate, is a key profitability measure of the oil and gas industry. The ratio is calculated by dividing the profit per barrel of oil by the cost of finding and developing that barrel of oil.”

     The white paper explains the recycle ratio in detail:

“As we discussed in prior research, the recycle ratio is a useful economic metric for determining and comparing profitability at the well, asset or company level. Specifically, we have discussed in depth how the proved developed recycle ratio can be determined at the company level from Form 10-K data and is useful for comparing capital efficiency both between companies in a given year as well as for the US oil and gas industry through time. In its simplest form, the recycle ratio calculation is:

“Said another way, the recycle ratio is the operating cash flow generated per barrel produced divided by the cost to add a barrel of reserves to replace it. This metric indicates whether you are generating enough cash flow to replace the barrels you are producing, and therefore can grow economically through internally generated cash flow. As an example, a recycle ratio of 200% (or 2.0x) means the operator is generating $2 for every $1.00 invested. A recycle ratio of 50% (or 0.5x) means the operator is only generating $0.50 for every $1.00 invested, which suggests capital is not being invested in an efficient manner.”

     Below are the five basins with the best recycle ratios:

1. Delaware at 3.24x

2. Marcellus at 3.19x

3. Montney at 2.79x

4. Midland at 2.69x

5. Williston at 2.61x

 

     They note that recycle ratios often do not tell the whole story and can be incomplete. This is because they are an average and that the average can be pulled down in large basins with a variation in rock quality and economics (Ex, Eagle Ford & Austin Chalk) or pulled up in basins where economics are challenging enough that only Tier 1 locations are drilled (Ex, SCOOP/STACK).

     They also utilize creaming curves for each basin in their recycle ratio analysis, as shown in the second graphic below, where they plot each basin’s recycle ratio with its creaming curve. This is how they arrive at method #2 of deriving the remaining inventory by the total number of locations with economics above a certain threshold. The creaming curve is a metric used to determine the production maturity of a basin. According to a 2014 AAPG presentation paper by Mauricio Orozco Bohorquez of Repsol:

     Based on method #2, they give the following basin rankings by remaining locations above a certain economic threshold, in this case, using recycle ratios above the 2023 average of 2.6x. One limitation of method #2 is that it ignores the pace of development. If operators are burning through inventory, there will be less room to grow in the future.

1. Delaware at 24,000

2. Montney at 20,000

3. Marcellus at 4,600

4. Midland at 4,500

5. Eagle Ford and Austin Chalk at 2,400

     They consider method #3 - comparing inventory between basins by front-end inventory duration – to be the best overall method.

“This means evaluating how long it would take for operators to drill from the highest to the lowest recycle ratio locations at the current activity pace (2023, in this case) until they start drilling below-2023-average wells (i.e., below the average recycle ratio.)”

     The basin rankings for method #3 are given below:

1. Montney at 22 years

2. Duvernay at 15 years

3. Delaware at 8 years

4. Marcellus at 6 years

5. Uinta at 4 years

     The paper goes on to explain some of the possible overly optimistic assumptions as well as the possible overly pessimistic assumptions in their analysis. They believe that those assumptions will more or less cancel each other out.

   In the appendix, they explain how they did the modeling for the paper:

 Step 1: Build and Train Machine Learning (ML) Models

     First, they built and trained ML models for two key metrics: estimated ultimate recovery (EUR) and capex across 25 major oil and gas plays. They utilized Shapley plots to estimate the impact of each variable.

 Step 2: Establish Commercial Assumptions Models 

     Here, they built a framework for estimating key commercial parameters for any given well location. The averaged mapped value for each of the eight parameters used is shown in the table below.

Step 3: Make Standardized Maps

     Then, based on the previous steps, they were able to make standardized maps for each basin for EURs, capex, and economic performance. Below is a standardized recycle ratio map for the 25 major North American oil & gas plays.

Step 4: Construct Inventory Shapefiles and Database

“The final step in our process utilized our in-house geographic information systems (GIS) expertise to create “shapefiles” representing the remaining inventory in North America. Using the same well spacing assumptions from the standardized mapping workflow, we extrapolated inventory shapes between existing wells and out to the basin edges. Each location was credited with as much lateral length as possible, given nearby offsets and land constraints. Each remaining location required a modern well within a five-mile radius. Key details—such as lateral length, child designation, likely operator, true vertical depth, and completion design—were populated for each location. EUR and capex predictions were then extracted from the nearest mapped grid point and scaled based on the actual lateral length of each location. Finally, commercial assumptions were applied to calculate the well’s recycle ratio at midcycle $70 oil and $3.50 gas prices.”

     Overall, this was an excellent report. It shows that there are other geologists, engineers, and accountants working on ML-based basin analysis and comparison besides NOVI Labs, who also does excellent work in this area.

     Below are some interesting summaries of Kimmeridge’s analysis published by OilGasLeads.com, which characterize the aspects of the five best-ranked plays (by method #3) through about 2035: Montney, Uinta, Marcellus, Delaware, and Duverney.

   

 

 

References:

 

What Remains: North American Upstream Inventory. Kimmeridge. May 2025. What-Remains-North-American-Inventory.pdf

The Next Shale Frontier: Kimmeridge Ranks the Top North American Basins for the Next Decade. OilGasLeads.com. May 3, 2025. The Next Shale Frontier: Kimmeridge Ranks the Top North American Basins for the Next Decade – Oil Gas Leads

Recycle Ratio: What it Means, How it Works, Example. Will Kenton. Updated September 20, 2022.Reviewed by Thomas Brock. Investopedia.  Recycle Ratio: What it Means, How it Works, Example

Hydrocarbon Discovery Potential in Colombian Basins: Creaming Curve Analysis. Mauricio Orozco Bohorquez. AAPG Search and Discovery Article #10613 (2014). Hydrocarbon Discovery Potential in Colombian Basins: Creaming Curve Analysis; #10613 (2014)