Thursday, June 30, 2011

New Milestone for "New Age of Energy Abundance"

Natural gas production in the U.S. set another new monthly record in April according to data released yesterday by the Energy Information Administration.  Gross withdrawals of natural gas increased to an all-time high of 78.58 billion cubic feet (Bcf) per day in April, up by 0.54% from the 78.16 Bcf a day in March, and up by almost 7% from production in April last year (see chart above).  

This new natural gas production record is another new milestone for the ongoing success of the hydraulic fracturing method of extracting natural gas from deep shale rock that is bringing about a new age of energy abundance in the United States.  

32 Comments:

At 6/30/2011 1:37 PM, Blogger Benjamin said...

One of the most thick-witted articles in history recently ran on the cover of the NYT, to the effect that natural gas prices are so low that companies are not making profits they expected.
Duh!
It's called a glut (Dr. Perry: Note I use correct punctuation).
Natural gas markets promise to be lush for a long, long time. No, some players won't make money, and other lied to get investors into the game. Duh, again.

The overall news is that global natural gas markets are going to be lush for generations. People are getting better and better at extracting the gas, and there seems to be gobs of it everywhere.

The natural gas story alone would upend the doomer visions of a world without any affordable energy. But there are other stories too, of PHEVs, of biofuels, of much higher mpg motors etc.
There is no shortage of electricity--we get that from coal, gas, nukes, wind, solar, geothermal, biomass and hydro--and we can run our cars from electricity easily.

An interesting idea is a PHEV with an all-ethanol motor, designed to run at very high compression ratios.

Expect lithium batteries to improve at about an 8 percent annual rate--in other words, to double in commercial quality in another nine to 10 years,

Imagine a PHEV that gets 80 miles on the battery, and then a three hundred more on ethanol.

The real story may be Peak Demand, not Peak Oil.

A cleaner and more prosperous future lies ahead.

 
At 6/30/2011 1:53 PM, Blogger Buddy R Pacifico said...

Thirty two U.S. states combine natural gas output to make America: world's biggest natural producer.

 
At 6/30/2011 2:24 PM, Blogger VangelV said...

Not too long ago I pointed out Bill Powers' comments about the peak of the Fayetteville shale area after just six years.

"So what is this table telling us about EURs in the Fayetteville shale? First, based on the above information, there is little doubt that CHK and SWN have grossly overstated their EUR per well. For example, the 594 wells drilled between 2005 and 2007 are unlikely to ever produce much more than 1 bcf each. While I do not have access to the actual decline curves for these wells, there is no doubt that Fayetteville operators are using unrealistic decline curves that include transient flow (the gush of gas occurring immediately after a well is put on production which should not be included in proper analysis) and b-factors that are unrealistically high."

Powers' commentary makes a critical point; less than one third of one percent of the wells have produced more than 2 bcf. But the chief promoter of shale gas, Aubrey McClendon, is claiming that his company expects that its average well will show a EUR of 2.6 bcf.

This means is that the Wall Street shills had their way when they got Art Berman fired for blowing the whistle on the scam.

Add to this the fact that indisders do not believe the story, and that some believe that "the industry may be set up for failure", and that, "quite likely that many of these companies will go bankrupt," and we have a serious problem with the optimistic story that Mark is reporting. Keep in mind that Don Coxe argued many years ago that the fault lay with the SEC, which allowed companies to game reserve estimates. Well, the NYT seems to agree. Its investigators discovered that during the 2008 crisis the natural gas industry convinced the SEC to let it come up with its own reserve estimates without having to prove their claims. This would be analogous to the Canadian government getting rid of the 43-101 requirements that mineral producers have to comply with.

Once again we see an optimistic scenario that is not supported by reality. Invest in the shale scam at your own risk. I prefer to find my opportunities in other parts of the energy sector. The coal players look a lot better right now as do the conventional oil and gas producers. No matter how much Mark hopes that it is true, Aubrey McClendon is no Wyatt Ellis.

 
At 6/30/2011 2:55 PM, Blogger Buddy R Pacifico said...

VangelV has excerpts from a New York Times article on shale natural gas.

Here are numerous rebuttals to the NY Times "hit piece" from: Government, academics, independant experts, investors, analysts, industry, and peer media.

 
At 6/30/2011 2:56 PM, Blogger Benjamin said...

Vange-

No one is saying start-up natural gas companies, or any gas companies, will make boodles of money. There is a glut!

A runaway, honking glut! Of energy! Just the opposite of what pin-headed doomsters are preaching.

However, many producers will survive; the best ones in fact. The ones who know how to do it, even as technology improves and extraction costs fall.

There is a long, long, long run for the natural gas industry. Who will make money, I cannot tell you. I can tell you it great news for business, our economy and consumers.

 
At 6/30/2011 3:00 PM, Blogger Benjamin said...

Also, Vange, you are flip-flopping like a mackeral with really bad hemmorroids on a hot plate.

If oil prices go to the moon (you say), then natural gas prices will eventually rise, putting money in the pockets of producers.

You seem to be farting out of both cheeks.

Do you mean natural gas prices will stay low, crushing all players, or that gas prices will rise--meaning even more production is validated?

Either poop or get off the pot.

 
At 6/30/2011 4:34 PM, Blogger rjs said...

a contrary point of view: http://www.declineoftheempire.com/2011/06/the-shale-gas-scam-goes-public.html

 
At 6/30/2011 4:56 PM, Blogger Che is dead said...

Vange,

If, as you argue, all of these wells crap-out after 1 bcf of production, why is the price of gas so low?

Chesapeake stands behind all of its statements to shareholders, partners and the public regarding our natural gas discoveries and production. Our industry’s operations and investment decisions are informed and guided by the best geoscientific, petrophysical and 3-D seismic data available and analyzed by some of the best drilling, completion, production and reservoir engineers in the business. The results of the industry’s efforts to revolutionize natural gas development and production have been extraordinary and continue to improve. …

By analyzing our own and industry peer well performance, we know that the initial productivity of a majority of the industry’s shale gas wells have been steadily improving, both in initial production rates and the expected ultimate recoveries of natural gas. We fully expect that the majority of these wells will be productive for 30-50 years, or even longer. …

It is also absurd to conclude that shale gas wells are underperforming while America is awash in natural gas and benefiting from natural gas prices less than half of what they averaged in 2008. I also note that Chesapeake and other shale gas producers are routinely beating natural gas production forecasts. In fact, in 2009, thanks to shale gas, the U.S. passed Russia as the largest natural gas producer in the world. Today shale gas production represents approximately 25 percent of total U.S. natural gas production. How can shale gas wells be underperforming if shale gas companies are beating their production forecasts, natural gas prices remain low and U.S. natural gas demand is at a record high? …

Chesapeake Energy Corporation

 
At 6/30/2011 5:02 PM, Blogger Che is dead said...

Ooops, I forgot to include this quote, which seems as if it was specifically directed at Vange:

"In addition to Chesapeake, the list of large companies now active in shale gas development in the U.S. includes such world class energy companies as Anadarko, BG, BHP, BP, Chevron, CNOOC, Conoco, Devon, EnCana, ENI, EOG, ExxonMobil, KNOC, Marathon, Mitsubishi, Mitsui, PetroChina, Reliance, Shell, Statoil, Talisman, and Total, among others. Consider whether it could really be possible that all of these well-respected energy leaders, with a combined market cap of almost $2 trillion, know less about the economics of shale gas production than a single New York Times reporter, a few environmental activists and a handful of shale gas doubters?"

Chesapeake Energy Corporation

Stick to the 9/11 conspiracy sites and your Noam Chomsky readers.

 
At 6/30/2011 6:52 PM, Blogger Craig said...

"I prefer to find my opportunities in other parts of the energy sector."

Well, go right ahead. Good luck.

I will enjoy cheap natural gas while you search.

 
At 6/30/2011 6:56 PM, Blogger RollCast said...

The following is a balanced essay on the Urbina gas problem:

http://blogs.cfr.org/levi/2011/06/27/is-shale-gas-a-ponzi-scheme/

 
At 7/01/2011 8:58 AM, Blogger VangelV said...

The following is a balanced essay on the Urbina gas problem:

http://blogs.cfr.org/levi/2011/06/27/is-shale-gas-a-ponzi-scheme/


I responded to this on another thread in error. Let me replicate the answers one point at a time.

First the EIA.

One guiding principle that we employ is, “look at the data.” It is clear the data shows that shale gas has become a significant source of domestic natural gas supply. Prior to 2005 shale gas constituted only 4% of natural gas production and had grown to become 23% of production for 2010. EIA’s continued monitoring of the situation indicates that growth in shale gas production continues and that shale gas has exceeded 30% of total marketed natural gas production through May of this year.

This is meaningless. Of course shale gas production has increased. That is what we expect when billions of dollars are spent to drill new gas wells. The Times certainly does not dispute that point. What it says is that the wells are not profitable because the depletion rates are too high and the ultimate recovery is way too low to justify the drilling cost. This is why the producers are losing money as a group from shale gas drilling.

Let us move on to the McClendon comments in the Oklahoman.

It is also ludicrous to allege that shale gas wells are underperforming as we sit awash in natural gas, with natural gas prices less than half of what they averaged in 2008,” he said. I also note that Chesapeake and other shale gas producers are routinely beating our production forecasts. How can shale wells be underperforming if shale gas companies are beating their production forecasts and as U.S. natural gas production has recently surged to record highs?

This is the same point as the EIA. They point to the aggregate production figures rather than the actual per well production data that shows that his well depletion and UAR data. As Bill Powers pointed out the average EUR assumption made by Aubrey McClendon's company has only been met by less than 1% of the wells drilled. Now it is obvious that some wells that were just drilled cannot possibly be expected to meet that figure but when you look into the production data you will find that the depletion rate makes it impossible for the new wells to reach it in the future.

This is one of those deception moves where the argument is designed to divert attention from the actual material points that were made by the analysts.

Keller said he talks with lots of industry officials in the course of his work and hasn't heard anybody talk about inflating reserves.

Wow. He hasn't heard? Why not look at the actual per well production curves and do the calculation instead as the critics have done?

More on next post...

 
At 7/01/2011 8:59 AM, Blogger VangelV said...

We move on to the cited piece, Natural gas giant EQT is optimistic about the future of drilling in the Marcellus Shale.

Here we have the company EQT trying to promote the Marcellus shale formation. Here we read the following paragraphs:

Understanding of the Marcellus Shale gas play is growing and, with it, industry interest in the play’s West Virginia region.

It’s a maturation process that took place in the more developed shale plays, Rodney Waller of Range Resources explained recently to The State Journal: first in the Barnett Shale in Texas and over time the Haynesville in Louisiana and Texas and the Fayetteville in Arkansas and Oklahoma. Range Resources operates in the Barnett and Marcellus shales.


I expect that most readers missed the irony. The Fayetteville has already peaked. While new wells that are just in the drilling phase can get production to rise slightly the long term for the formation is down after just six years of serious development. The production data shows that the depletion rates are too high and the estimated EURs are
not going to be reached by any but a tiny fraction of wells. The Fayetteville formation has been a net destroyer of capital even as it created jobs and helped the local economy.

More on this on next posting...

 
At 7/01/2011 9:08 AM, Blogger VangelV said...

If oil prices go to the moon (you say), then natural gas prices will eventually rise, putting money in the pockets of producers.

Yes they will. Some producers will make a profit. But those producers that rely on wells where the net return on the energy invested is negative will never make money because the price of their inputs will continue to rise as quickly as the price of gas over the longer term.

The trick in investing is to look at the returns. Right now we are enjoying very cheap gas thanks to a collapse in the real economy and an abundance of investment in shale production. But the shale producers are getting killed on their operations and are bleeding red ink, just as the internet companies were doing during the dot . com bubble. I seem to recall that I had many people calling the critics idiots at that time because they could not see how the internet companies could lose given the reported increase in eyeballs, installations, and other data. The argument was that eventually the companies would be very profitable because we were living in a new age. I hear the same thing today from the idiots who are falling for unprofitable shale production as easily as idiots fell for the internet boom in the 1990s.

 
At 7/01/2011 9:14 AM, Blogger VangelV said...

No one is saying start-up natural gas companies, or any gas companies, will make boodles of money. There is a glut!

But that is the point. If they keep losing money because the net return on the energy invested is negative or very low there cannot be a glut. And that is what Mark and the optimists are betting on; cheap energy to fuel economic growth.

A runaway, honking glut! Of energy! Just the opposite of what pin-headed doomsters are preaching.

Really? I still see Brent near $110 and WTI over $90. Ten years ago it was around $20 and the decade saw new investment of more than $1 trillion in exploration, development, and distribution infrastructure.

There should be a lot of natural gas production in many oil producing regions of the world. Those areas were ignored because the countries did not want natural gas until recently. So the world will do OK as far as gas is concerned from conventional sources for the next few years. But this is not about conventional sources. It is about the "New Age" where energy comes from stone. I merely point out that there is no evidence to support the hype because shale has been a net loser. And in successful investing profits are what matters over the long run.

 
At 7/01/2011 9:32 AM, Blogger VangelV said...

However, many producers will survive; the best ones in fact. The ones who know how to do it, even as technology improves and extraction costs fall.

You are missing the point. If you have a negative return on energy the costs will keep going up no matter what you do. As the late Mat Simmons pointed out, we are not talking about some new technique here. We are talking about horizontal drilling and fracking, processes that have been used for a very long time in the industry.

And keep in mind that people like Simmons are optimists. They believed in rising prices because they did not expect that the economy would collapse from the strain at price levels under $250 a barrel or so. But we found out that the real economy was much weaker than expected and is incapable of sustaining much of an increase.

There is a long, long, long run for the natural gas industry. Who will make money, I cannot tell you. I can tell you it great news for business, our economy and consumers.

Well, all we can say is who is losing money. And right now that is the shale producers, who need at least $7.50 to break even. That is with the engineers picking the low hanging fruit by going after the sweet spots in the formations. Well, if they can't make a buck getting out the easy gas or oil how the hell will they make money on the more difficult parts of the formations?

 
At 7/01/2011 9:33 AM, Blogger Che is dead said...

Vange vs. Vange

On low natural gas prices:

Right now we are enjoying very cheap gas thanks to a collapse in the real economy and an abundance of investment in shale production.

On high oil prices:

Really? I still see Brent near $110 and WTI over $90. Ten years ago it was around $20 and the decade saw new investment of more than $1 trillion in exploration, development, and distribution infrastructure.

Read your own posts, you're arguing with yourself.

 
At 7/01/2011 9:39 AM, Blogger VangelV said...

Let us move on. This is in response to the material and references provided on the link supplied by Buddy R Pacifico at 6/30/2011 2:55 PM.


Michael Levi, Ph.D., Council on Foreign Relations: “The New York Times’ war on shale gas continues”: “I hate to say it, but on the whole, both pieces are of pretty poor quality. That’s a shame, because both – particularly the first one – had the potential to raise some important issues for debate. The first bit of context worth noting is that the story relies heavily on geologists’ concerns about shale gas economics. That should be a red flag. There are very few emails from industry accountants or economists in the story. The Times descriptions of the emails (not just in the article, but in the document database) also betray a serious lack of understanding of the industry.

This is the argument? Sorry but the damaging charges are very simple. The depletion rates are too high and the EUR levels are way too optimistic. That is it. To take out the critics all you have to do is to go to the production data and show that the estimates are valid. End of story.

The fact that nobody is dealing with the actual depletion and EUR levels tells us that this is a faith based story. Like our friend Benji, we are supposed to have faith in the industry reports and trust that the people who are running the show will figure out how to get around the net energy return problem. Well, investing does not work that way. And neither does geology. If I can't extract enough gas to run the compressors that deliver it to market the wells will not be economic. It is that simple. And if I assume a 50 year life when I am getting a five year life I have to adjust the assumption, not talk about how things will turn around in the future when I go after the harder to develop ares.

 
At 7/01/2011 9:42 AM, Blogger VangelV said...

We go on.

PSU geologist Terry Engelder: "The Reporters Didn’t Talk to Me in Person”: “One of the Times stories quotes Terry Engelder, a professor of geosciences at Pennsylvania State University. Engelder told Platts that the newspaper took his quotations from an email he wrote on shale economics, and that email did not express the full range of his views on the subject.’The reporters didn’t talk to me in person,’ Engelder said, adding that his email had ‘a lot of nuance in it. The reporters could have learned something from the nuance.’"

What we have is someone who wrote a pretty damaging e-mail arguing that he should not be fired by claiming nuance. Well, as I said above and have said many times, all that is needed to kill the critics' argument is actual production data that shows that the depletion and EUR estimates are reasonable. You would think that a geologist could come up with such an argument.

 
At 7/01/2011 9:46 AM, Blogger VangelV said...

Next comment...

Leading Global Energy Consultancy, IHS CERA: "This article does not reflect the IHS position on shale gas." … "E-mail messages referenced in the article were written in 2008 and 2009, early in the understanding of the performance metrics for shale gas, and the information they contain has been proven completely wrong by events. Unconventional technologies and resources have moved with great speed. There is much more information about the performance and potential of shale resources available today than in the past. Shale gas supplies have built up very rapidly and now account for 25 percent of total US gas supply, as costs have come down dramatically and experience and knowledge have progressed. If there has been any surprise about shale gas, it has been the speed at which its output has grown."

Let me note that CERA got the depletion rate wrong. Very wrong. It argued around 4-4.5% while the real depletion rate was north of 6.5%. When you are off by more than 50% it is difficult to claim expertise and credibility.

But let me get away from the credibility issue and look to the actual argument made here. Note that CERA is arguing aggregate production here, which is not in question. The question is DEPLETION again, a CERA weak point, and the related EAR levels. You would think that CERA has the experts who would use the real world production data to destroy the NYT story. That fact that it did not try speaks volumes.

 
At 7/01/2011 9:57 AM, Blogger VangelV said...

another comment...

William Featherston, Managing Director, UBS: NYT Claims “Overstated and Misleading”: “Amongst publications written by research analysts, the article included findings made in a study done by Art Berman, who alleged that shale producers overstated recoverable resources per well. We do not consider research from Mr. Berman new as he has been crusading against data supporting vast shale gas resources for years, despite supply and productivity continuing to exceed expectations. … We believe the allegations and inferences made in the NYT article were exaggerated and offer no specific or credible source and context. We believe the article ignored the substantial growth in proved reserves and production as verified by independent reservoir engineers, Energy Information Administration data, and numerous independent organizations outlined below. Moreover, the article does not address how the rise of shale gas reversed the trend of last decade’s sharply rising natural gas price, sending gas prices plummeting in 2008-10 under the weight of much greater than expected production growth . . . despite a lower than expected rig count.” (NYT Shale Gas Allegations Seem Exaggerated, 6/27/11)

This is just lovely. UBS does not like the fact that Art Berman, who got fired for blowing the whistle on the shale gas scam, is using real production data to report the EUR and depletion figures. I guess that we should accept the unsupported EUR claims made by companies that are selling off their supposedly profitable properties.

Well, UBS has the same opportunity as Art Berman. Use the real data to show that the critics are wrong. I know that I have been looking for such data to prove me wrong for several years and have yet to see it.

JP Morgan note to investors: "We fail to see how [The Times] article breaks new ground." From the note: "An article published in the New York Times this past Sunday is causing a buzz in the natural gas community, as well as on Wall Street in general. … We fail to see how this or other articles on the same topic are breaking any new ground, as the ultimate 5,000 recovery from shale wells and initial decline rates have long been the point of contention between those evaluating shale producers’ equity and those defending the entire business of unconventional production. … We believe that with current production rates, cost reductions from increased efficiencies in extraction methodologies (i.e. horizontal drilling and hydraulic fracturing) and joint venture contracts with international companies that have carried up to 75% of costs for domestic producers in many of these shale plays in some cases, increased focus on liquids-rich plays, and vigilant hedging (seen during any price spike in the intermediate and deferred tenors) have made drilling for natural gas economic for many of these producers at the current time. And while decline rates will become increasingly apparent as time goes on, as long as we continue to find new points of extraction of gas (i.e. the Utica Shale, located underneath the Marcellus Shale), the US natural gas market will likely remain in an oversupplied state until demand can meet this production"

It fails to break new ground? How strange that JPM's analysts are not careful readers. First of all, the depletion rates are higher than estimated. The EUR levels are lower than estimated. That means that the reported costs are lower and the shale players can look profitable until reality forces them to write off the undepreciated investment.

I don't know about you but I think that the report breaks new ground. Imagine buying into the hype only to find out that the company that you purchased has negative equity because it has to write down properties that are not profitable. When you are down 90% you will begin to think that the failure to report the proper EUR was material.

 
At 7/01/2011 10:04 AM, Blogger VangelV said...

Tudor, Pickering, Holt & Co.: “Disregard this as an unsubstantiated NYT hit piece” … Saying shale gas not easy/cheap to extract is cheap shot with no back up info and rehashing discredited arguments. But calling it Enron? Better back it up with more than this article does. Remember, Barnett shale production is currently at record levels, even with rig count one-half of peak levels. Shale gas is real. Disregard this as an unsubstantiated NYT hit piece. … Production doesn’t lie…natural gas production from the Barnett is now higher (at ~5.6 Bcf/d) than it was in 2008 (previous peak was ~5.3 Bcf/d in 2008) despite rig count being more than cut in half. If wells are declining faster than expected, the Barnett would not be at record production with reduced rig count. … The NYT has been consistent in their distaste for shale gas from their fear mongering about hydraulic fracture contamination of ground water (no basis) to concerns about water disposal in the Marcellus (an issue identified 3 yrs ago and is being addressed). We are sure the industry is touched by the NYT’s newfound concern for well economics and industry profitability. … “Actions by a myriad of companies, hundreds of executives and thousands of employees indicate the industry believes in both the short?term and long?term viability of shales. They are speaking with their capital budgets, their bonus pool, their acquisition budgets…not with their keyboards and chatroom postings. If there is any conspiracy or hidden agenda, it’s amongst those writing articles, not drilling gas shale.” (Energy Thoughts, 6/27, 6/28)

Once again this is not an adequate response. We expect that the huge investment in shale drilling will be meaningful and will create a nice new supply of gas. The fact that some of the supply was hedged will make it easier for companies to take bigger risks and invest more than they otherwise would. Nobody, not even the idiots at the NYT are arguing that there is no supply coming from sale or that the supply is insubstantial.

The point again is the economics of the process. Once again an analyst, who should have access to real data is not using the production data to argue that production if economically viable. No argument is made against the charges that the depletion rates and EURs have been overstated. Why? Because the data is very clear that the drillers and analysts were way too optimistic.

 
At 7/01/2011 10:31 AM, Blogger VangelV said...

Next we have another analyst...

Darren Horowitz, Managing Director, Raymond James: "I think the article is very misleading": Long story short, Gary, I think the article was very misleading. I think a lot of what was in the article was unfounded.

OK, so this is just an opinion of Darren Horowitz. This weasel word makes the rest of the commentary easy because unless he brings up a fact that is an outright lie Mr. Horowitz cannot be held accountable even if he is dead wrong.

"And I would really highlight the following three points: First and foremost, about 25 percent of U.S. natural gas production comes from the big shales, really the big five shale plays at this point. A lot of these wells have been online 20 or 30 years – some 7,000 or 8,000 – so this has been around for a long time.

I would not say this at all. Most of the shale wells have been drilled recently. The depletion rate for a new well, and new wells produce most of the gas, runs around 80% per year. They will not last 20-30 years. You would think that someone who was the Managing Director at Raymond James would know this.

Second key point: This is a multi-billion-dollar investment and extrapolating the natural gas curve and the productive landscape. And this is not just a lot of the larger, independent companies – this is also from a global perspective the big integrateds; ExxonMobil, Shell, BP have spent multiple billions of dollars and also have the best geoscientists in the world looking at U.S. natural gas.

So? The assumption is that the big players need shale gas for their production. But that is not the case. The greatest value for the big companies come from the reserve reporting side of the story. Surely the Managing Director of Raymond James would know this. After all, people like Don Coxe predicted that this would happen quite some time ago.

Third and final point: This is an industry that follows best accounting practices, which are regulated by the SEC. Quite frankly, in our opinion, shale gas production is going to be a game-changer for the U.S.” (Horowitz comments on CNBC, 6/27/11)

What a crock or dog poo this is. The SEC gave in to industry pressure and allowed companies to book reserves without being able to prove it with real production data or test wells. (Think of the 43-101 requirement going away for Canadian juniors.)

Once again no mention of EURs or depletion rates and no reference to actual production data and actual profits if the real EUR figures were to be used. Luckily for Raymond James, Mr. Horowitz began by saying that the comments were his opinion.

 
At 7/01/2011 10:42 AM, Blogger VangelV said...

One last analyst(?)...

Financial analyst with degree in Petroleum Engineering from Stanford: “The NYT suggests that maybe there isn’t as much natural gas as the industry says. Indeed, some wells will be less economic than others, driven both by rock characteristics and gas prices, so no, at $4 per mmbtu there isn’t as much gas as has been targeted by wells drilled assuming $6 long-term gas prices, a huge difference. But the fact is, shale wells are quite productive and applicable to gigantic areas that we wouldn’t have thought of drilling ten years ago. Challenged by lower prices, gas producers are innovating to reduce costs and improve recoveries, the way learning curve behaviors would predict. … Typically slower in making big moves, domestic majors including ExxonMobil and Chevron have also embraced gas and oil shales development in the U.S. Along with many of the top independent producers in the U.S., these are excellent technology companies with prudent risk management, and part of why 25% of today’s natural gas production comes from shales, and the driver of the large increase in U.S. gas production since 2005.” (Duane Grubert, Susquehanna Financial Group, 6/28/11)

I am sorry but you would think that someone with a PhD in Geology would come up with real well production data to argue that the real returns would be better than the critics are saying and would know that the shale gas production has come at the cost of a lot of negative cash flow and losses.

Again, it is easy to drive a stake through the heart of the critics' argument. Show that the estimated ultimate recovery and depletion levels are supported by the well production data. That would leave the critics with no reasonable counterargument to fall back on until the less productive areas had to be relied on. But the PhD in Geology does not seem to have such data, which means that the critics' argument is still valid.

 
At 7/01/2011 10:47 AM, Blogger Che is dead said...

As for the risks of rapid depletion of resources, it is unlikely that the depletion rates of shale gas wells would be a problem. Whilst it has been noted that shale gas wells deplete rapidly compared to conventional wells, individual shale gas wells can maintain a level of production, albeit at a lower level than at first production, for a significant period of time. This should not discourage initial projects, as long as this depletion rate is factored into the economic rationale behind the investment.

Report to Parliament, UK

Currently there is a kind of "land rush" surrounding the development of shale gas fields with scores of marginal producers hoping to cash in, the result has been a temporary glut of natural gas. Going forward the marginal producers will likely be squeezed out by the low profit margins that they have helped to create and the larger companies with lower costs and better technology will inherit the field. This is a natural part of the free market process. At that point, the higher depletion rates that Vange obesses over may actually work in the industry's favor. In a world where - supply equals rig count - large companies will be able to more effectively manage their resources and as a result gas prices will tend to reflect the actual costs of production making the exploitation of shale gas resources sustainable. The gas is there and it is not going away, if left alone, the market will effectively deliver the benefits to us all.

 
At 7/01/2011 10:58 AM, Blogger Che is dead said...

"The depletion rate for a new well, and new wells produce most of the gas, runs around 80% per year."

Where is the supporting evidence for this claim?

 
At 7/01/2011 1:30 PM, Blogger Buddy R Pacifico said...

This is in response to VangelV's mistaken posting at the similiar topic "North Dakota's Booming Oil Economy". Here is a quote from VangelV:

"The shale gas and oil producers are hurting because the depletion rates are too high and cash flows are lousy. They can't make a profit from selling their product so they settle for the next best thing. They inflate their reserves (you can thank the SEC for that one) and sell them off to conventional producers looking to hide their own reserve declines."

This is the most ridiculous of a long line of unsubstantiated statements by VangelV, on the subject of shale gas/oil.

Conventional producers are going to buy inflated reserves in order to hide their own reserve declines?
This would be snake oil sellers buying snake oil from snake oil sellers, if true.

 
At 7/01/2011 10:28 PM, Blogger VangelV said...

Read your own posts, you're arguing with yourself.

My arguments are very consistent. We have a glut in natural gas thanks to a collapse in the real economy. The US has more natural gas than it needs and Canada still has enough to export. The same is true of oil. At $90 oil is cheap. Had it not been for a collapse in the real economy, which cut demand, you would have $200 a barrel price. At $90 many of the conventional and old unconventional plays can still make a very nice profit, particularly if natural gas, an input used in heavy oil production, stays low in price. But that $90 prevents new unconventional projects from being developed because it is too low to allow them to make a decent return.

We are on the back end of Hubbert's Peak. The sooner you guys figure it out the better off you will be.

 
At 7/01/2011 10:32 PM, Blogger VangelV said...

As for the risks of rapid depletion of resources, it is unlikely that the depletion rates of shale gas wells would be a problem. Whilst it has been noted that shale gas wells deplete rapidly compared to conventional wells, individual shale gas wells can maintain a level of production, albeit at a lower level than at first production, for a significant period of time. This should not discourage initial projects, as long as this depletion rate is factored into the economic rationale behind the investment.

But that is the problem. Once you factor in the depletion and you come up with a reasonable EUR shale gas makes no sense in all but the best locations in the most prolific formations.

Going forward the marginal producers will likely be squeezed out by the low profit margins that they have helped to create and the larger companies with lower costs and better technology will inherit the field.

The larger companies don't have 'better' technology. The problem is not the technology but the negative return on the energy invested. The bigger companies have better lawyers and accountants. They can use the SEC rules to paper over the reserve issues that will drive their prices lower without shale acquisitions.

 
At 7/02/2011 9:04 AM, Blogger VangelV said...

"The shale gas and oil producers are hurting because the depletion rates are too high and cash flows are lousy. They can't make a profit from selling their product so they settle for the next best thing. They inflate their reserves (you can thank the SEC for that one) and sell them off to conventional producers looking to hide their own reserve declines."

This is the most ridiculous of a long line of unsubstantiated statements by VangelV, on the subject of shale gas/oil.

Conventional producers are going to buy inflated reserves in order to hide their own reserve declines?
This would be snake oil sellers buying snake oil from snake oil sellers, if true.


But I have been proven right. The shale producers have been reporting very large negative cash flows and are bleeding red ink. And if you look at the logic, as advanced by Don Coxe, the large companies have declining reserves. Until the Peak Oil scenario becomes more accepted and reported in the media it is cheaper for these companies to spend a few billion to paper over the declines than to report things as they are and see a $50 billion decline in market cap. Not only do the benefit from the 6:1 ratio they also benefit from the reserve inflation that was permitted by the SEC. Actually, the companies can play the victim card because they can always claim that the SEC allowed the inflation that caused them to pay more than they should have for reserves that were not economical.

Right now the conference calls and the actual production data support my argument. The depletion rates are running much higher than estimated and the EURs are overstated by a significant amount. If the accounting were changed to reflect the actual EUR per well there would be no profit to be made from shale other than in a few unique instances where a company had access to the best part of a formation.

 
At 7/02/2011 9:37 AM, Blogger VangelV said...

Where is the supporting evidence for this claim?

The evidence is in the well production data that I cited before. The depletion rates depend on the shale area, formation, and which segment of the formation is being drilled off. Art Berman pointed out that in most formations you were looking at between 60 and 90% for the typical well. Note that the older wells, which were drilled in the best areas of the best formations tend to do a lot better than wells drilled in the typical shale formation. Here are some references:

http://tinyurl.com/65wb4rs

http://tinyurl.com/5v8rrwf

http://tinyurl.com/63blage

We forecast a sub-commercial average EUR for the Haynesville Shale because of the extreme rates of production decline. Most wells with an IP of more than 10 MMcfd have a decline rate of 25% per month. The average EUR in our study is 1.72 Bcf/well, compared to the 6.5-7.5 Bcf/well reported by many operators. Only two wells of the 67 evaluated have an EUR greater than 6.0 Bcf. At the same time, seven wells have already produced more than 2 Bcf and one has exceeded 4 Bcf.

Here is data from one of the better formations, the Barnett.

http://tinyurl.com/3s8bqen

And here is data from the Haynesville Shale. The average monthly decline for the wells that Berman looked at was between 20% and 30%, and the projected annual decline rates came out between 80% and 90%.

http://tinyurl.com/3eqt432


There is actually quite a bit of data to look at and anyone interested, as all energy investors should be, should be able to connect the dots. Right now the picture does not look very good. And from everything that I see there is little hope for a real solution from the shale front.

 
At 7/03/2011 8:04 PM, Blogger VangelV said...

Here we go. Don Coxe, who notes that the NYT is using greens and idiots who oppose fracking, goes over some of his previous comments on the reserve issues with shale gas. The comments are around 20 minutes into the call.

http://www.investmentpostcards.com/2011/07/02/don-coxe-webcast-%E2%80%93-updated-thursday-june-30-2011/

The point is a simple one. If you can use the 6:1 ratio when the price ratio is significantly higher it can pay for the oil companies to overpay for questionable shale reserves. For some reason he does not cover the SEC change that allowed the shale producers to estimate reserves without having to drill test wells that would use real production data to support their conclusions.

 

Post a Comment

Links to this post:

Create a Link

<< Home