Vose SoftwareModelChoice decision tree · Oil and gas
Shale Gas Development Decision
Develop the whole pad, drill two delineation wells first, sell the acreage, or wait?
From the model’s decision tree
Best first decision: Delineation Wells First (2 Wells)
The expected value of each first option when every later decision is also made well (the tree rolled back).
| First decision | Expected value | |
|---|---|---|
| Full Pad Development (8 Wells) | $19,925,000 | |
| Delineation Wells First (2 Wells) | $21,800,000 | ✔ best |
| Sell Undeveloped Acreage | $8,000,000 | |
| Hold and Wait | $7,500,000 |
| Measure | Value |
|---|---|
| Expected value of the best strategy | $21,800,000 |
| Chance of a loss on the best strategy | 36.2% |
| Best outcome on the best strategy | $133,000,000 |
| Worst outcome on the best strategy | −$37,000,000 |
S-curve (cumulative probability) of Delineation Wells First (2 Wells) from the saved simulation.
The decision
A mid-size E&P company has secured leasehold rights on 5,000 net acres in an emerging shale gas play. Offset operators have shown mixed results, with well productivity varying significantly based on completion design and local geology. The company must decide how to develop the acreage position before leases begin to expire.
Objective
Maximize expected NPV. Key tradeoff is between the cost efficiency of full development vs. the information value of delineation wells that reduce reservoir uncertainty before committing capital.
The options
- Option 1: Full Pad Development - 8 Wells ($40M)
Commit to a full 8-well pad development program at $5M per well including drilling, completion, and facilities. This captures economies of scale but carries maximum exposure to well productivity risk.
- Option 2: Delineation Wells First - 2 Wells ($12M)
Drill two delineation wells at $6M each (higher unit cost due to mobilization) to test reservoir quality. Based on results, decide whether to commit to full development or sell the acreage with production data. Classic value-of- information approach.
- Option 3: Sell Undeveloped Acreage
Sell the leasehold position to another operator. Expected $8M based on current market comparables for unproven acreage.
- Option 4: Hold and Wait
Defer the decision and monitor offset well results and gas prices. Risk of lease expiration and reduced acreage value.
The decision tree
The tree has 4 decisions, 9 chance events and 25 outcomes. The best path is open: at every decision the best choice is marked, and the expected value beside each branch counts every cash flow from the start. Open any other branch to see what follows it.
DecisionChance event+$ cash flow on the branch
Full Pad Development (8 Wells) −$40,000,000expected $19,925,000
Chance: Well Productivity (Full Pad)20% High EUR (2.5 Bcf/well)expected $81,250,000
Chance: Gas Price (High EUR)- 25% High Gas Price ($5.50/Mcf) +$190,000,000payoff $150,000,000
- 50% Mid Gas Price ($3.50/Mcf) +$120,000,000payoff $80,000,000
- 25% Low Gas Price ($2.00/Mcf) +$55,000,000payoff $15,000,000
50% Mid EUR (1.5 Bcf/well)expected $21,750,000
Chance: Gas Price (Mid EUR)- 25% High Gas Price ($5.50/Mcf) +$105,000,000payoff $65,000,000
- 50% Mid Gas Price ($3.50/Mcf) +$62,000,000payoff $22,000,000
- 25% Low Gas Price ($2.00/Mcf) +$18,000,000payoff −$22,000,000
30% Low EUR (0.7 Bcf/well)expected −$24,000,000
Chance: Gas Price (Low EUR)- 25% High Gas Price ($5.50/Mcf) +$42,000,000payoff $2,000,000
- 50% Mid Gas Price ($3.50/Mcf) +$15,000,000payoff −$25,000,000
- 25% Low Gas Price ($2.00/Mcf) −$8,000,000payoff −$48,000,000
Delineation Wells First (2 Wells) −$12,000,000expected $21,800,000 ✔ best
Chance: Delineation Well Results30% Strong Results (High IP)expected $68,000,000
Decision: After Good DelineationFull Development (6 More Wells) −$30,000,000expected $68,000,000 ✔ best
Chance: Gas Price (Good Delin)- 25% High Gas Price +$175,000,000payoff $133,000,000
- 50% Mid Gas Price +$110,000,000payoff $68,000,000
- 25% Low Gas Price +$45,000,000payoff $3,000,000
- Sell Acreage with Data +$35,000,000payoff $23,000,000
45% Average Resultsexpected $7,000,000
Decision: After Average DelineationFull Development (6 More Wells) −$30,000,000expected $7,000,000 ✔ best
Chance: Gas Price (Avg Delin)- 25% High Gas Price +$95,000,000payoff $53,000,000
- 50% Mid Gas Price +$48,000,000payoff $6,000,000
- 25% Low Gas Price +$5,000,000payoff −$37,000,000
- Sell Acreage with Data +$18,000,000payoff $6,000,000
25% Poor Results (Low IP)expected −$7,000,000
Decision: After Poor DelineationAttempt Development Anyway −$30,000,000expected −$43,250,000
Chance: Gas Price (Poor Delin)- 25% High Gas Price +$30,000,000payoff −$12,000,000
- 50% Mid Gas Price −$5,000,000payoff −$47,000,000
- 25% Low Gas Price −$25,000,000payoff −$67,000,000
- Sell Acreage with Data +$5,000,000payoff −$7,000,000 ✔ best
- Sell Undeveloped Acreage +$8,000,000payoff $8,000,000
Hold and Waitexpected $7,500,000
Chance: Market Conditions After Wait- 30% Market Improves +$15,000,000payoff $15,000,000
- 40% Market Flat +$6,000,000payoff $6,000,000
- 30% Market Deteriorates +$2,000,000payoff $2,000,000
Change the numbers. Open the workbook with ModelChoice, change a probability or a cost in the tree, and the best decision updates at once.
Key assumptions
| Assumption | Value | Notes |
|---|---|---|
| Full Pad Cost (8 Wells) | $40,000,000 | $5M/well including facilities |
| Delineation Cost (2 Wells) | $12,000,000 | $6M/well (higher mobilization cost) |
| Development After Delineation | $30,000,000 | 6 additional wells at $5M/well |
| EUR per Well (High) | 2.5 Bcf | Top quartile offset well performance |
| EUR per Well (Mid) | 1.5 Bcf | Median offset well performance |
| EUR per Well (Low) | 0.7 Bcf | Below expectations, poor completion |
| Gas Price Scenarios | $2.00/3.50/5.50 | Low/Mid/High per Mcf |
| Undeveloped Acreage Value | $8,000,000 | ~$1,600/acre, unproven |
| Proved Acreage Value (Good Data) | $35,000,000 | ~$7,000/acre with strong IP data |
| Well Spacing | 8 wells / 640 acres | 80-acre spacing assumed |
The figures are illustrative: the companies and numbers are invented for teaching.
Try it in ModelChoice
- Strategy Table. Compare full pad vs delineation-first vs sell approaches
- Sensitivity Analysis. How do gas price and EUR per well affect optimal strategy?
- Risk Profile. Compare risk exposure of full development vs staged approach
- Value of Information. Quantify the benefit of delineation well data
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Further reading
Download the workbook and open it with ModelChoice. The free trial opens every example.
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An illustrative example: the figures are invented for teaching. Last updated 9 October 2026.