Posted on 10/29/2010 12:17:53 PM PDT by Ernest_at_the_Beach
Shale gas plays in the United States are commercial failures and shareholders in public exploration and production (E&P) companies are the losers. This conclusion falls out of a detailed evaluation of shale-dominated company financial statements and individual well decline curve analyses. Operators have maintained the illusion of success through production and reserve growth subsidized by debt with a corresponding destruction of shareholder equity. Many believe that the high initial rates and cumulative production of shale plays prove their success. What they miss is that production decline rates are so high that, without continuous drilling, overall production would plummet. There is no doubt that the shale gas resource is very large. The concern is that much of it is non-commercial even at price levels that are considerably higher than they are today.
Recent revisions to SEC rules have allowed producers to book undeveloped reserves that questionably justify development costs based on their own projections in public filings. New reserves are being booked at the same time that billions of dollars in existing shale gas development costs are being written down because the projects are not commercial. Concerns about the logic of ongoing gas-directed drilling while prices collapse have been partly diffused by a shift to liquids-rich plays like the Eagle Ford Shale in Texas. These new ventures, however, produce significant volumes of gas which is partly why gas prices continue to fall.
(Excerpt) Read more at theoildrum.com ...
So now we could have a Gas Bubble?
Get the pipeline from Alaska built....
Oh yeah. Real disappointing news. Conveniently disappointing news fromObama’s ABCNNBCBS “news” and propaganda dept’s via his federal govt.
(And if they opened up ANWR to drilling (instead of predicting failure for the past 15 years) we’d be earning money form that right now.
Closing Thoughts
The so-called shale gas revolution promises E&P opportunities that are geographically immense with no barriers to entry. These ventures supposedly have no risk. Because of shale plays, we are told that there will be an abundant supply of inexpensive gas for 100 years. And the E&P companies involved will all earn big profits. Is there precedent for this improbable combination of make-believe business assumptions that did not end in disappointment?
U.S. shale plays have been over-sold and are unlikely to deliver the results that investors now expect. In fact, shareholders have already lost most of their investment. The shale gas resource is huge but the commercial portion is likely to be much smaller than what has been claimed or hoped for. At higher gas prices, more of the resource makes economic sense but that depends for the near term on production discipline that seems to be absent in the U.S. E&P companies. It also assumes that attendant service costs do not escalate at similar multiples to gas prices.
For many companies, there is no turning back--the entire company has been bet on the success of shale plays. This seems to violate what has been learned in the E&P business about the importance of having a balanced portfolio. In some cases, companies do not have sufficient shareholder value to justify being bought and, therefore, saved.
Our evaluation suggests that there is limited commercial value from these plays despite public enthusiasm and operator claims. E&P company shareholders have subsidized low natural gas prices and have little hope of recovering their investment in the near term. The underlying problem is a failure to grasp the concept of discounting. Reserves that are produced in small volumes over decades have little future value and are, therefore, not reserves. The shale plays are called resource plays for a reason: they are all about resources but not profit or the shareholder.
What a giant load...
I WANT companies to investigate the most cost efficient ways to recover the oil and gas in shale deposits. The more they consider the possibility, the more time and money they put into R & D, for eventual recovery. Better to do that now, when the need for those resources is marginal, than get caught flat-footed when they are desperately needed.
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aeberman on October 28, 2010 - 3:25pm
Steve,
It's a fair question. If by "skin in the game" you mean do I have investments that would benefit if shale gas suffered, the answer is an unequivocal "No."
I am a consulting geologist. Because of my published opinions about shale gas plays, I have probably closed dozens of doors for consulting with companies that are either involved with those plays or who mistakenly believe that other big companies are smarter than a solitary geologist.
Luckily, my clients don't employ me to work on shale projects so they don't really care about my public views as long as I do a good job for them. Most of what I do is basic subsurface geological and geophysical interpretation--well log and core interpretation, mapping, production and reserve analysis. I also evaluate the technical and economic risk of prospects that others bring to my clients.
As a result of the low-level notoriety that I have gotten because of my shale gas views, I now have clients in the investment and financial services sector, but not because of those views--they are interested in the data-based analysis that I do. They believe that the methods that I use are useful in their efforts to decipher supply, demand and price trends. I don't do forecasting but focus on describing the current state. Understanding the present is obviously a prerequisite for guessing about the future.
I hope that answers your question.
Art
For gas take teaspoon of bicarbonate in half gas of water....
“For nearly two years, while natural gas prices were falling to below $4 per thousand cubic feet (mcf) of production, but have recently rallied to slightly above that level, drilling and production in the Marcellus was ramping up. A land rush of leasing has been underway which has created extraordinary pressure on the industry to drill the leases in order to hold the acreage by production. Once wells are drilled and begin producing, the producer can choke back the rate of production or possibly suspend the well in response to the low gas price.”
FROM: Musings: Marcellus Shale: Good News Critique
http://www.rigzone.com/news/article.asp?a_id=99414
Be sure to read the whole article on the above link, as it has a lot of data. I think only time will tell what the decline curves will be and thus profitability on the Marcellus.
Valid points, in all regards.
But note that “good return on investments” given x, y, z, and a,b,c “facts and assumptions” may still result - even if the (as you point out) the easy riches projected by sleazy investors don’t pan out.
So one big question is, how many aquifers are going to be ruined (and wilderness trashed,
Check what Rockman says.
Good stuff.
Check this out:
http://www.devonenergy.com/CorpResp/initiatives/Pages/HydraulicFracturing.aspx?disclaimer=yes
What a giant (OilDrum) load...
Yeah, I remember these “experts” from the oil drum predicting the well heads in the gulf were going to collapse in and the gulf would be doomed. And the oil would spread and kill 1/3 of the wild life in the ocean’s and were all gonna DIE!!!!
We beat on the Doomsday crowd here pretty well too...
I would defend the Oil Drum ...they do have expertise...we just have emotions on this site too many times.
Yes, gas fields deplete rapidly, before these plays, the rate of depletion of existing more conventional fields was about 7% per year.
I can guarantee you that the oil and Gas producers are aware of this, but the economics work if the costs are contained so that the prodcued gas pays for the well and produces a reasonable return on the investment--in a reasonable time.
Aklmost all horizontal wells in tight formations have a rapid decline from IP to stable production figures over 1-2 years, and generally (from the wells I am familliar with) that decline is about 70% in rate of production.
Initial figures tend to be high after the frac, and that 'burst' of production is where the well costs are recovered in successful prospects. That frees up the drilling budget and allows the 'recovered' money to be rolled over into additional wells. While that might seem odd, rather than take that profit immediately, the companies are investing in more leases, more wells, and infrastructure for production before their competitors do.
Oil and gas has always been a business which requires developing tomorrows resources today so they will be ready to go when the need arises. You have to think ahead to replace depleted reservoirs with new production.
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