CARPE DIEM
Professor Mark J. Perry's Blog for Economics and Finance
Saturday, June 16, 2012
About Me
- Name: Mark J. Perry
- Location: Washington, D.C., United States
Dr. Mark J. Perry is a professor of economics and finance in the School of Management at the Flint campus of the University of Michigan. Perry holds two graduate degrees in economics (M.A. and Ph.D.) from George Mason University near Washington, D.C. In addition, he holds an MBA degree in finance from the Curtis L. Carlson School of Management at the University of Minnesota. In addition to a faculty appointment at the University of Michigan-Flint, Perry is also a visiting scholar at The American Enterprise Institute in Washington, D.C.
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11 Comments:
I would not expect much from the Communist News Network than this type of puff piece. But I do agree with the last person who comments on the video. Take advantage now and when things end just go back to the way that things were. There clearly was not anything wrong with that.
Out of curiosity, how much evidence would be needed to change your mind?
Out of curiosity, how much evidence would be needed to change your mind?
I want to see the average project be self financing. Opinions and narrative do not matter. Note that the CNN pieces is all about the narrative. Nowhere do we see the average company in the sector generating positive cash flows or supporting any of the stated EURs as being viable. Nowhere do we see the BOE conversion ratio being based on the actual market price rather than the energy content. And nowhere do we hear about the production curves encountered in tight oil and gas formations. If we did we would quickly realize that you cannot make the math support Mark's narrative and there would be a realization that any attempt to significantly grow tight oil and gas production will run into supply chain issues in the services sector.
If we did we would quickly realize that you cannot make the math...
Seeing as you have done the math, ran the production curves, ran the BOE using actual market prices, may we see it?
Seeing as you have done the math, ran the production curves, ran the BOE using actual market prices, may we see it?
There is not enough well production data to do the math for Kansas but we have looked at the work done by Arthur Berman and others in which the Barnett production data, which was long enough to draw conclusions, was used to look at departures from the assumed production volumes. You can apply the same analysis to each field in which sufficient data is available.
During the analysis it was found that most wells did not maintain the projected hyperbolic decline path implied by the first few months of production data and it was discovered that catastrophic departures from the hyperbolic declines production rates were quite common by the fourth or fifth year of operation for the wells in the control group. As pressures fell the fractures closed and production collapsed. This meant that the 40 year well life assumption would be wrong for most wells as a huge percentage of them had lives of less than a decade. Essentially, by trying to assume a correlation between IP and the hyperbolic decline that could not be supported with real world data the shale producers overestimated the EURs and did not depreciate well costs properly.
The big problem was the depletion. Suppose you drill four wells. At the end of the year the decline curve takes you down to around 25%, which is the same as the IP for one of the wells. To replace production flat you need to drill three new wells, which means that to double that first year number you need to drill seven new wells. That gets very costly very quickly. Since there isn't enough cash flow to pay for the drilling by the end of the first year you have to add debt to the balance sheet. (Look at your average shale producer to see how this works.) Letting production fall is not much of an option because the market will kill the shares and lenders will get very nervous. So you are trapped by the math as depletion has to be replaced by expensive drilling in less than prime locations that have more and more problems associated with them. But the huge increase in demand for drillers drives up the prices paid to the service companies. While some of this is offset by productivity increases the costs still keep going up as demand rises faster than supply. The services companies have their own problem as the labour market tightens up and they find that their supply chain is incapable of scaling up as rapidly as is required. In the end you need for prices to explode, which kills the economy and sets off another decline in commodities, or you see the debts overwhelm the operations as companies are forced into bankruptcy.
The math is simple. You try to create a production increase using wells that lose more than 75% in their first year and cannot generate enough cash to make the operations self financing. Can't do it.
Apache just announced a large Mississippi Lime position in northern Kansas and Southern Nebraska.
All the other Mississippi Lime stuff I have seen is northern Oklahoma and southern Kansas. Given the reach to Nebraska the Mississippi Lime may prove to be far larger than earlier thought.
Peak what?
This comment has been removed by the author.
Peak what?
You have to look to see. With rig count dropping we will see a nice decrease in shale gas production over the next year. We will see how you change your narrative to avoid dealing with the contradictions.
One of the things I find most interesting about these unconventional plays is the potential for stacked pay zones. I know I e-mailed MP a while back about the fun Continental is having with the Bakken and the various benches of the 3 Forks. I have been listening to the Apache stuff and they are looking at 3 zones here-Mississippi Lime, Cherokee and Upper Penn-so once an area is held by production (unless there is a vertical Pugh Clause) companies can have lots of fun exploiting these multiple layers over time.
One of the things I find most interesting about these unconventional plays is the potential for stacked pay zones. I know I e-mailed MP a while back about the fun Continental is having with the Bakken and the various benches of the 3 Forks. I have been listening to the Apache stuff and they are looking at 3 zones here-Mississippi Lime, Cherokee and Upper Penn-so once an area is held by production (unless there is a vertical Pugh Clause) companies can have lots of fun exploiting these multiple layers over time.
Fun is not the word that an investor would choose. In the Bakken the only formation worth paying much attention to is the Middle Bakken. That is where the most prolific wells and fields like the Elm Coulee are found. The problem is that even this formation is not all that productive. Most of the good results come from a very tiny core that is scattered among poor target areas. Now it may be 'fun' to explore and evaluate all these areas if the EROEI ratios made these areas economically viable but when the break even (all in) cost needs to be $8 to stay afloat wasting capital on drilling wells in most of these formations is anything but fun.
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