Saturday
Feb092013
by 
Bishop Hill
Bishop Hill Shale - more than we thought
Feb 9, 2013 Energy: gas The Times seems to have got sight of the British Geological Survey's new estimates of Britain's shale gas resource. The previous figure of 1000 tcf, widely pooh-poohed by greens, has been upped to between 1300 and 1500 tcf. Current demand is about 3tcf per annum.
It's only fair to note that not all of this will be extractable and the Times suggests a figure of 20% might apply with current fracking technology. That would be around one hundred years' supply.
I recall Roger Harrabin's tweet back in October:
RHarrabin Belatedly, via @zacgoldsmith, the relatively meagre reality of UK shale gas deposits. http://t.co/RUUJj0rN
The flow of good news continues unabated. Read the whole thing here.
Reader Comments (73)
Gilbert is right. If readers want to see a more technical presentation of how fracking is done here is a short presentation to students at Lafayette College by Jack Neal, a scientist at ExxonMobil (who own the largest hydrofracking company XTO). It's only 20 minutes, packed with actual facts and far less turgid than Ingraffea's talk. He shows how 80 'effective' wells can be achieved from one pad.
http://www.youtube.com/watch?v=WhGB-I76msg
There have been over 1,000,000 of these wells drilled so far worldwide. One wonders why so many private companies would make such large investments if they are as uneconomic as BB claims. The development of shale gas in the US is estimated to have created over 1.7 million jobs there so far, and with the petrochemical investments planned this figure is expected to grow. This figure far exceeds so the number of so-called green jobs from unprofitable wind, solar, and other renewables so beloved by Ed Davey and the Liberals. Plus the exploitation of shale gas has actually reduced CO2 emissions (3x less than coal), which is more than can be said for unreliable renewables which require generating back-up.
A couple of things regarding some points in the posts above. 1) Vangel there is no such thing as a "core" area in the Marcellus Shale in geographic terms. There are however two productive "zones" in the Marcellus separated by a thin limestone bed. At present it appears that the lower zone is the more productive of the two. Drilling and fracing in those zones is between the top and the bottom of each zone. By the nature of the drilling process you are forced to choose one or the other. If you choose wrong you cannot go back to the other without drilling another well to do so.Why? The typical well bore as it's being drilled is approx 8"(20cm) in diameter and it is cased all the way to the end of the lateral with casing that is approx. 5.5"(14 cm) in diameter. trying to drill a hole inside this is fruitless.
2) Directional drilling of horizontal wells has now advanced with geosteering software such that the well bore can monitored and steered in any direction and controlled to end up inside a target that is 3m x 3m. This target can be more than 2km from the surface location. The well can be controlled so precisely that one can follow the humps and hollows in the formation. In some places in the US the desired location is underneath a built up area with businesses and residences that would preclude setting the drilling rig up over the prime location. Most of the wells in the Marcellus are at a true vertical depth of 1500m to 1800m, well below any surface structure.
Mailman
"Because Entropic Man, that doesnt fit the catastrophiliacs narative."
It does not seem unreasonable to want numbers.
Bitbucket estimated total investment to harvest the UK's available shale gas as £150billion to £300billion.
The next question should be "Is the available shale gas worth at least £150billion to £300billion?
If the answer is "Yes", then private investment should be forthcoming.
If the answer is "No", all we would end up with is a gas bubble. :-)
Vangel,
Thank you for your contribution to the discussion. I'm sorry if I have missed the main bone of contention of this thread and this is tangential. Your E-commerce example rather refutes your own point, unless I misrecall and the correction of 2001 was not in fact followed by an explosion in investment and profit over the succeeding years, continuing to this day. The key issue long-term is not profitability - the market will take care of any problems with that. The key economic issue is gross production cost compared with competitors like oil, nuclear, and coal. It may sometimes be unpleasant and unfair, but to borrow a phrase, the free market is the worst system for solving supply and demand problems, except for all the others. I hope the rationalists can fend off the millenarians, pagans, genocidists, luddites, and crass NIMBYers whose highest, though never admitted desire, is to extinguish all hope for western civilization. Maybe it's too early to pop the champagne corks, but can't we start to think about putting a few bottles on ice?
@ mailman
No sir, I do not believe there is anything any sceptic could ever say that would convince you to mend your ways and step away from the catastrophilia that is Mann Made Global Warming (tm).
How ironic. Just like the fools who accept Mann's nonsense you keep talking about what people say rather than rely on the data yourself. As I said, the SEC filings are available to anyone who wants to look at them. If you want to argue for shale all you have to do is show that the shale gas producers have self financing projects. This shows up when you look on the balance sheets and cash flow statements so you should have no problem proving the position that you are pushing.
As I have written before, I have yet to find companies that were able to self finance shale gas production from their shale gas operations. To prove me wrong you have to find such companies. Until you do yours is as faith based a position as that of the AGW crowd.
@wellers
There have been over 1,000,000 of these wells drilled so far worldwide.
Where did you get this figure from? Horizontal wells in shale have not been drilled for a long time. Given the fact that each one costs around $10 million if you were right you would be looking at $10,000,000,000,000 spent on drilling shale formations. Does this seem reasonable to you?
One wonders why so many private companies would make such large investments if they are as uneconomic as BB claims.
For the same reason why so many internet companies built business models that could never work. The management, brokers, and employees get paid quite well for as long as the activities continue. Jobs were created for a while and insiders got rich by selling their shares. Until the bubble broke and people regained their sanity.
The development of shale gas in the US is estimated to have created over 1.7 million jobs there so far, and with the petrochemical investments planned this figure is expected to grow.
But it has destroyed capital because the shale wells were not profitable outside of very small core areas.
This figure far exceeds so the number of so-called green jobs from unprofitable wind, solar, and other renewables so beloved by Ed Davey and the Liberals. Plus the exploitation of shale gas has actually reduced CO2 emissions (3x less than coal), which is more than can be said for unreliable renewables which require generating back-up.
You are right on the first point. Shale is better than unprofitable wind, solar, and most other renewables. But you are wrong on the second because shale gas is not profitable. That makes shale a capital destroying process and you are essentially using more energy to produce, collect, and distribute the gas than you get out of that gas at the end of the line.
As for the presentation (http://www.youtube.com/watch?v=WhGB-I76msg) let us note that Exxon has now admitted that it was losing its shirt on shale gas. The company knew the lousy economics at the time that the presentation was made but did not see fit to tell investors of that inconvenient truth.
There is also a serious lie just after the 12 minute mark. Fracked horizontal shale gas wells are not producing for 25 to 40 years because they do not have the hyperbolic decline rates of typical wells. The statement does not come from observations or real production data but from models used by the shale company geologists. By using an assumption of b > 1 when they calculate the decline curves the geologists can ignore the production data that tells them that most wells are no longer producing after seven years and can pretend that low production will go on for an additional 18 to 33 years.
It is ironic how people who are so aware of the problem that the AGW people create with models ignore the same type of issues when it comes to something that they want to believe in.
@Gilbert
1) Vangel there is no such thing as a "core" area in the Marcellus Shale in geographic terms.
Sorry for not being more clear. When the term core area is used in this type of discussion it usually means areas within the formations that have sufficient natural fractures, permeability, and/or porosity to make production profitable. The characteristics vary so greatly within the same formations that the cost to produce the same amount of hydrocarbons from one area may be order of magnitudes higher than another. That is why we need to stay away from hype that looks at resources and stick with proven reserves.
@Neil
Thank you for your contribution to the discussion. I'm sorry if I have missed the main bone of contention of this thread and this is tangential.
I usually assume that people are more familiar with the subtleties of the debate so I am not always as clear as I should be. This is why some people accuse me of being on the AGW and alternatives side even though I have been calling to get the government out of the alternatives business and pointing out that the evidence is against AGW.
To be clear, my point is that once you go to the SEC's EDGAR database and start to look to the financials reported by the shale gas producers you will find that the average shale company does not have self financing operations even if it has been in operation for long enough to have generated positive cash flows and economic profits. I am more than willing to change my mind if someone shows me that I am wrong on that point. As far as the narrative is concerned, I do not like tall tales, assumptions, and unsubstantiated claims.
Your E-commerce example rather refutes your own point, unless I misrecall and the correction of 2001 was not in fact followed by an explosion in investment and profit over the succeeding years, continuing to this day.
I am talking about the lousy e-commerce business models that had no chance of making profits because of the low margins inherent in the spaces that they were working in. Lots of capital was destroyed and many previously reported profits had to be restated. Even in the tried and true hardware space we had companies like Nortel who made no money during the bubble and wound up getting destroyed in the aftermath. And the company was legitimate and had actual products being used. The eyeball promoters had nothing and got wiped out.
Note that I am not looking at the entire energy sector. If you want to make money you can find plenty of coal, uranium, or conventional oil companies that are not valued as highly as they should be. The fact that the energy sector will continue to make profits does not mean that shale gas producers will survive the lousy economics of their business models.
The key issue long-term is not profitability - the market will take care of any problems with that.
But that is not exactly true. If you have shale wells right now the market will not save you as you are forced to sell the product for less than the cost of production. Eventually you will go out of business but that gas will never be produced profitably. And because reservoirs are not uniform and companies pick the low hanging fruit first the passage of time makes future production more difficult. (Think of all those copper and gold companies that survived by high-grading. The rising prices cannot save them unless costs remain contained AND prices explode to much higher levels.)
The key economic issue is gross production cost compared with competitors like oil, nuclear, and coal.
If a shale gas company gets a negative return on the energy invested the company will fail.
It may sometimes be unpleasant and unfair, but to borrow a phrase, the free market is the worst system for solving supply and demand problems, except for all the others. I hope the rationalists can fend off the millenarians, pagans, genocidists, luddites, and crass NIMBYers whose highest, though never admitted desire, is to extinguish all hope for western civilization. Maybe it's too early to pop the champagne corks, but can't we start to think about putting a few bottles on ice?
I agree that we need to rely on the free market. But as I have argued before, we certainly do not have one. The only reason why most of the shale companies are still alive is because the central banks have flooded the system with liquidity and are manipulating interest rates. When you have Chesapeake giving money to environmental groups so that they can put pressure on the coal sector in the US you do not have a free market system. And when the EPA makes investment in coal and nuclear nearly impossible we have to stop pretending that we have anything but a command economy in the energy sector.
As I keep writing, proving me wrong is easy. All you need to do is to show me that the producers can self finance their shale gas operations.
@ Vangel: Shale by it's very nature is not porous, not permeable, is only fractured when it is acted on tectonically. I know where of I speak because I have logged wells as a wellsite geologist in the Marcellus. I can tell you from personal experience that based on our gas detection equipment that measures the gas liberated from the shale as it is drilled that there is sufficient gas to be producible after fracturing. Granted there will be "localized" zones (called "local variation") within the shale that have less gas than the rest but by and large there is gas that is economically recoverable. We sometimes joked that when you encountered the Marcellus in the lateral portion of the well that you only needed to collect 3 samples: one at the landing point of the curve, one in the middle of the lateral and one at the end of the lateral and the descriptions would be the same. The low price right now is due to an excess of supply. What you described above is a classic definition of a "conventional" reservoir Shale gas is anything but conventional. Remember shales are deposited over broad areas and are continuous within those areas.Whereas conventional reservoirs require a source rock, a reservoir rock (with sufficient porosity and permeability) and a trapping mechanism. As the technology evolves, the cost of drilling and production will decrease, thus decreasing the price that the natural gas producers need to get to make a profit.
Your claim of $10 million per well is off by a factor of 2. Most wells are drilled and completed for under $5million. Completion includes the cost of fracturing.
The reason there are no shale gas wells older than 25 years old is because it took Mitchell Energy over 18 years to develop the technology to complete the wells and that technology is only about 20 years old. Hyperbolic depletion curves are deceiving. If production drops too far the operator can do a refrac and return production to near the original rate. It will always be less than the original production however.
I would not doubt that there have close to 1 million wells drilled for shale gas world wide. I typically saw press releases and industry reports that XYZ Co. was planning on drilling 2000+ wells in a single year. How many of those actually got drilled is another story.
The ratio of reserves to resources is entirely price dependent. As price goes up reserves go up since it it now economic to drill wells in places that were once not economic or alternately as production cost goes down reserves go up. And the converse is also true.
@ Vangel: Shale by it's very nature is not porous, not permeable and not fractured unless acted on tectonically. What you have described above is the classic definition of a "conventional" reservoir rock. Shale is most definitely NOT a conventional reservoir. Shales are deposited over broad areas and are continuous. There may be "localized" zones with slightly different concentrations of gas but by and large the gas that is there is producible. I have worked as a wellsite geologist and logged many wells in the Marcellus Shale and what our gas detection equipment shows that there is liberated gas from the drilling in quantities that are producible. We sometimes joked that once you encountered the Marcellus in the lateral you only needed three sample descriptions: one at the landing point of the curve, one in the middle of the lateral and one at the end of the lateral and the sample descriptions would be the same. It's an exaggeration but not by much.
The ratio of reserves to resources is entirely price dependent.If the price for the product goes up and/or the cost of producing it goes down then the amount of the reserves increases. Right now the price is depressed due to an oversupply of product. Your cost of $10 million//well is off by a factor of 2. Most of the wells I've been on typically come in for about $5 million (drilling and completion). Completion includes fracking.
There is a very good reason why there are very few horizontal wells older than 25 years in shale. It took Mitchell Energy over 18 years to develop the technology to extract gas from shale reservoirs. That technology and the development of geo-ssteering are approximately 20-25 years old. Large scale production in the Barnett Shale (where the technology was developed) began in 1999. From there it migrated to the Fayetteville Shale and on to the Marcellus Shale. Hyperbolic decline curves are deceptive. When production declines the operator can go back in and refrac the well restoring production. It was not uncommon to see press releases that said:"XYZ Co. plans to drill 2000+ wells in the DEF Shale in the coming fiscal year." Whether all those wells got drilled is another story entirely I would say that the number of wells drilled world wide is probably close 1 million
Sorry for the double post... It took a long time for the first post to get posted. Mods please remove that post of 4:29 AM. Thanks Gilbert K. Arnold
@ Vangel: Shale by it's very nature is not porous, not permeable and not fractured unless acted on tectonically. What you have described above is the classic definition of a "conventional" reservoir rock. Shale is most definitely NOT a conventional reservoir. Shales are deposited over broad areas and are continuous. There may be "localized" zones with slightly different concentrations of gas but by and large the gas that is there is producible. I have worked as a wellsite geologist and logged many wells in the Marcellus Shale and what our gas detection equipment shows that there is liberated gas from the drilling in quantities that are producible. We sometimes joked that once you encountered the Marcellus in the lateral you only needed three sample descriptions: one at the landing point of the curve, one in the middle of the lateral and one at the end of the lateral and the sample descriptions would be the same. It's an exaggeration but not by much.
I am quite aware of the difference between conventional and shale reservoirs. And I am sure that you are also aware that shale reservoirs are not very consistent, which is why there has been extraction from shale formations for quite a long time without the use of horizontal drilling or fracking. You should also be aware that some areas of the same formation have significantly higher production costs than others. My point still stands. There are a few core areas where shale gas production is economic. But the average shale well is not economic. Which is why the shale promoters refuse to talk about what the SEC filings clearly show; the industry is losing its shirt on shale gas and the malinvestments in shale are causing many prudent conventional players to cut back and put themselves up for sale.
The ratio of reserves to resources is entirely price dependent.If the price for the product goes up and/or the cost of producing it goes down then the amount of the reserves increases. Right now the price is depressed due to an oversupply of product. Your cost of $10 million//well is off by a factor of 2. Most of the wells I've been on typically come in for about $5 million (drilling and completion). Completion includes fracking.
The ratio is not entirely price dependent. It is dependent on the energy you need to invest to extract the product that you are producing. You are glossing over the fact that the cost of energy is imbedded into the cost of production.
There is a very good reason why there are very few horizontal wells older than 25 years in shale. It took Mitchell Energy over 18 years to develop the technology to extract gas from shale reservoirs. That technology and the development of geo-ssteering are approximately 20-25 years old. Large scale production in the Barnett Shale (where the technology was developed) began in 1999. From there it migrated to the Fayetteville Shale and on to the Marcellus Shale. Hyperbolic decline curves are deceptive. When production declines the operator can go back in and refrac the well restoring production. It was not uncommon to see press releases that said:"XYZ Co. plans to drill 2000+ wells in the DEF Shale in the coming fiscal year." Whether all those wells got drilled is another story entirely I would say that the number of wells drilled world wide is probably close 1 million
You cannot use refracked well production when calculating the hyperbolic decline rates. You need to look at those wells separately and come up with a different decline rate. And you also have to account for the costs because refracking is not free. For those wells you have to figure out if the cost of the restimulation will be economic by looking at the new EUR from that point forward.
To help me find adequate examples to support my view I just did a quick Google search using the terms, "hyperbolic decline rates marcellus berman model". I used Berman because he has done a lot of work on the subject and has plenty of material that can be cited. I expected to get plenty of his analysis right at the top of the search page but was surprised to get a few commentaries from someone named Mark Anthony, a math geek in the IT field who seems to have done a lot of work on this topic. In the articles cited below he deals with the model problems and does an analysis of a typical Marcellus Shale well. Please feel free to cite any actual financial data that contradicts that conclusions drawn. It is obvious that if the industry models are right there would be few problems with accumulating debt and large negative cash flows. And if you want, you can see plenty of work by Arthur Berman that comes exactly to the same conclusions.
http://seekingalpha.com/article/656651-can-shale-gas-ever-be-profitable
http://seekingalpha.com/instablog/121744-mark-anthony/721811-shale-gas-type-curves-and-profitability-explained
This reminds me of the 'monetizing eyeball' debates in the 1990s. The analysts and promoters were telling the critics that they did not 'get it.' There was a new era that did not comply to the old outdated views of profitability and finance. As evidence they pointed to that massive spending and investment as there was a claim that investors would not waste their money on companies like pets.com and groceries.com if those companies had no hope of making a profit. As data showing that the growth of web sites and users exploded it was used to try to intimidate the critics into admitting that it truly was a new era. The problem came when reality intervened and everyone figured out that the old accounting rules did make sense and were applicable to the tech sector. The subsequent collapse took out many investors who were never able to recover. That was followed by a housing bubble that gave us similar arguments and a bond bubble that has grown into the biggest bubble in history. Shale gas does not need the bond bubble to burst in order to destroy most of the capital that was invested in the sector. It is so shaky that it will pop on its own even as gas prices go up to more reasonable levels.
No expert on fraccing, but OK at reading a balance sheet, I picked a US company at random which has shale exposure. SEECO (Fayetteville Shale, Southwestern Energy) seems a typical company. Some excerpts from its latest report:
Re well costs:
"In the Fayetteville Shale, Southwestern expects to place approximately 100 wells on
production during the fourth quarter of 2012. Current estimates of completed well costs
for wells placed on production during the fourth quarter of 2012 are approximately $2.5
million per well with average lateral lengths of approximately 4,300 feet. Average initial
production rates for these wells are currently estimated at approximately 3.8 to 4.0
MMcf per day. "
Accounting methodology (note the internal financing metric):
"Net cash provided by operating activities before changes in operating assets and
liabilities (net cash flow) is presented because of its acceptance as an indicator of an oil
and gas exploration and production company’s ability to internally fund exploration and
development activities and to service or incur additional debt."
And doing OK by all accounts, even with the depressed gas priced:
"Assuming a NYMEX commodity price of $3.50 per Mcf of gas for 2013, the company is
targeting net income of $525 to $535 million and net cash provided by operating
activities before changes in operating assets and liabilities (a non-GAAP measure; see
“Explanation and Reconciliation of Non-GAAP Financial Measures” below) of $1,750 to
$1,760 million in 2013. "
@ Vangel: Your point that shale gas has not been economic nor very productive, is valid primarily for vertical wells that only exposed maybe 50-300' of formation in a vertical hole. The whole premise of horizontal drilling is to expose more of the formation to the well bore. The geologists all knew which shales contained gas or oil. The problem was how to get the gas or oil out them. By drilling laterals into the shales and fracturing them exposed more of the formation to the well bore and thus allowed more gas to flow into the well bore. As for "local variation", there will always be some zones that are more permeable or less permeable than others. But fracking will tend to even those variations out. Please do not confuse production and economics between vertical holes and horizontal holes. They are different animals.
I repeat, the ratio between reserves and resources is price dependent. As I said if the price of a commodity goes up or the cost of producing it goes down, the amount of reserves will increase. The SPE (Society of Petroleum Engineers) has this to say about reserves: "... the SPE says petroleum quantities must fit four criteria to be classified as reserves. They must be (1) discovered through one or more exploratory wells, (2) recoverable using existing technology, (3) commercially viable, and finally (4) remaining in the ground." Resources are different. Again the SPE has this to say about resources. "There are two categories of resources: contingent and prospective.
Contingent resources are quantities of petroleum estimated, as of a given date, to be potentially recoverable from known accumulations, but the projects are not yet considered mature enough for commercial development due to one or more contingencies..."
"...Prospective resources are quantities of petroleum estimated to be potentially recoverable from undiscovered accumulations by application of future development projects."
Regarding Arthur Berman. He is among the minority regarding decline. He is saying the decline curve is exponential. Most industry analysts say decline is hyperbolic. In that wells will decline to a level and remain there for a long period of time. See http://www.powermag.com/gas/Is-Shale-Gas-Shallow-or-the-Real-Deal_5188.html
I don't think Berman is right, you do and I guess we will have to agree to disagree.
No expert on fraccing, but OK at reading a balance sheet, I picked a US company at random which has shale exposure. SEECO (Fayetteville Shale, Southwestern Energy) seems a typical company.
It might be typical but it is a subsidiary that has not filed much with the SEC. It is owned by Southwestern Energy, which also has midstream operations that generate income and cash flows, but even if we ignore those we still see Southwestern issuing a lot of equity and spending nearly around $400 million more in capital than it took in from operations for the 2011 year, which is the last one for which a 10-K has been filed. Let me note that Southwestern is one of the better players in the shale patch and the only oil and gas producer in the S&P 500 companies that saw an increase in 2008. It certainly does not represent the 'average' shale gas producer. But even Southwestern's capital spending exceeded its cash flow from operations in the last year for which it filed a 10-K with the SEC.
I think that you need to be very careful and look at the reports carefully. Whenever I look I see a lot of derivatives and either asset sales, new debt, or equity issues to finance capital spending that exceeds the cash flow from operations. As I said before, this does not bother me very much if a company is new and has little in the way of production. But when you look at the depletion rates you realize that wells have to pay for themselves rather quickly, which means that most of the cash flow is generated early. If the shale players were as profitable as they claimed they would be self financing after a few years. Most aren't. And if shale gas were that profitable why did Rex Tillerson say that Exxon was losing its shirt? Why was Aubrey fired from Chesapeake and why is the company trying to sell off many of its gas assets so that it can pretend that it is a liquids play?
And let us not forget that NYT piece from last year, which released hundreds of insider e-mails that questioned the ability of the shale gas players to make a profit. I have excerpted one of the milder comments. Many talk about Ponzi schemes, an Enron moment, and bring up the dot-com bubble.
Note that the shale gas industry went all out against the NYT and it dropped its questioning. But subsequently we have seen write-downs, executives being pushed aside, and many assets put up for sale.
"Assuming a NYMEX commodity price of $3.50 per Mcf of gas for 2013, the company is targeting net income of $525 to $535 million and net cash provided by operating activities before changes in operating assets and liabilities (a non-GAAP measure; see “Explanation and Reconciliation of Non-GAAP Financial Measures” below) of $1,750 to $1,760 million in 2013. "
Note the 'the company is targeting' and 'Non-GAAP Financial Measures'. (And note that the projected cash flows would still leave a funding gap even if capital spending is to stay flat.)
I prefer to look at the actual data and see what the actual URRs will be rather than to hope that the 'models' (that use hyperbolic curves that produce an infinite return without an arbitrary cutoff) are correct. You let me pick the EUR and I can provide you with any amount of profit and projected cash flow that you want. But that only works for a while because eventually reality will intervene because the math does not work and the results can't be hidden by funding drilling thanks to the massive decline rates. Expect more CEOs to be turfed out and more asset sales to take place.
Gilbert, re-spacing. Yes I see that 2-300m is more likely. So divide my numbers by 3 again. Begins to look more realistic...
Stun, how can they claim $525m from these wells. 4MMcf per day at $3.50 makes $14000 (1MMcf == 1000Mcf) and 100 of these wells would produce $1.4m on the first day. Over a year at that same rate they would produce 365 * $1.4 = $511m if they produced at the initial rate, but we know that they don't; at the end of a year daily rates are 80% down. Maybe their $525 includes other revenue not related to these 100 well, which makes the example somewhat pointless. The revenue will still bel a large number (after accounting for the 80% fall in production) but the $3.5 doesn't get paid at the well head, but after cleaning the gas and piping/trucking it out, which also cost.
@ Vangel: Aubrey McClendon was most likely forced out (I believe) for his "extra-curricular" activities with Chesapeake's money and for the fact that CHK has spent more than it has taken in for probably the last 10 years (possibly more). Chesapeake has to reposition itself as an oil and gas liquids company if it to survive in any way, shape or form. We can lay most of the blame for the current state of shale gas' poor economics at the feet of Aubrey McClendon. He has probably done more than anyone to destroy the NG market in the US. EOG Resources seems to be in better shape than most NG firms. Although that may be because it didn't put all it's eggs in one basket.
@ Vangel: After looking at some more data and articles, I'm now inclined to think that decline curves are hyperbolic for the first few years of production and some where past 6-7 years the decline becomes exponential. This is where I disagree with Berman. He asserts that decline is exponential from day one. I don't think it is. It's now been approx 5 years since the first horizontal wells in the Marcellus have been drilled and we should be able to get some sense of the shape of the decline curves. It will be most interesting to see what the results are.
@Gilbert
@ Vangel: Aubrey McClendon was most likely forced out (I believe) for his "extra-curricular" activities with Chesapeake's money and for the fact that CHK has spent more than it has taken in for probably the last 10 years (possibly more).
I think that the second part was more trouble for the directors and shareholders than the first part. They knew about his deals quite some time ago and did nothing about them because they were sold as an executive having skin in the game and believing what he was selling to investors. But when he turned out to be so wrong for so long the directors and large shareholders had to push him out.
Chesapeake has to reposition itself as an oil and gas liquids company if it to survive in any way, shape or form.
True. But it will only survive in some shape if its assumptions about ultimate returns turn out to be much better than the EURs it was using for shale gas. The problem was not just low prices. The problem was that the wells produced about half (or less) the gas that they were supposed to because the decline rates were not hyperbolic.
@Gilbert
We can lay most of the blame for the current state of shale gas' poor economics at the feet of Aubrey McClendon. He has probably done more than anyone to destroy the NG market in the US. EOG Resources seems to be in better shape than most NG firms. Although that may be because it didn't put all it's eggs in one basket.
It is not Aubrey's fault. The fact is that when we are talking about fossil fuels, shale gas is close to the bottom of the barrel. Outside of the core areas of some formations shale gas wells cost way too much to drill, and the product that they produce contains close to the amount of energy that it took to produce it. Like many optimists Aubrey jumped on the new applications of the older technology and thought that he had it made. Gas was expensive, the services sector had enough capacity, and the shale wells in the good areas were very productive and economic at much lower prices. The futures market offered a way to hedge production and protect the company from price declines.
The problem first came when new capital was needed to drill off the growing number of wells. The companies that made the new drill rigs had to pay for the energy went into the materials and processes that were used to create them. Costs exploded because everyone in the production chain had to cover their costs and make a profit. New drill crews took time to get good at what they did and new regulations added to expenses. The royalties added up and local, state, and federal governments extracted their pound of flesh.
As the company moved out of the core areas the well yields fell sharply and the costs kept going up. The savings created by more efficient techniques and better equipment got eaten away by lower prices due to higher production and lower demand due to a collapse in the real economy.
Once the falling economy and growing production did their damage to the shale gas sector the futures market took away the hedging blanket and the only way to ensure that your losses were manageable was to lock in production five years out even if that meant no chance of positive cash flows or profits.
But the biggest issue for Aubrey and his company were the overoptimistic EURs. As real recovery rates turned out to be below the estimates there was no way to generate enough cash flow to keep things moving without resorting to adding massive amounts of debt or to dilution of shareholders. It is those estimates that are killing the industry because it will have to write off many of the reported 'profits' or increase previously reported losses. Even worse, assets will have to be written down and many companies will have to wipe out their investors.
It is easy for any company to make money as long as the properties are limited to the core areas. But there are no companies that I am aware of that have taken that approach because the incentive for executives is to go big for as long as they can before the company goes under. That is the problem that most of the people who are so positive that the market will not waste resources have. They miss the fact that the rewards for Wall Street promoters, shale industry management groups, and the regulators are not always the same as those for investors. If you tell a CEO that he can make $120 million over five years by being reckless and win up with a bankrupt or he can make $20 million over two decades by being prudent he is very likely to choose being reckless. But suppose he doesn’t. Shareholders do not like caution during bubbles and push aside prudent CEOs who don’t have the stones to take risks. The prudent CEO winds up with a severance package looking at another man or woman getting rich by driving the company to bankruptcy. The psychology and economics are not as simple as they may seem and the logic does not always lead the decision makers to do what you think is reasonable.
@ Vangel: After looking at some more data and articles, I'm now inclined to think that decline curves are hyperbolic for the first few years of production and some where past 6-7 years the decline becomes exponential. This is where I disagree with Berman. He asserts that decline is exponential from day one. I don't think it is. It's now been approx 5 years since the first horizontal wells in the Marcellus have been drilled and we should be able to get some sense of the shape of the decline curves. It will be most interesting to see what the results are.
I have heard Berman and a number of other skeptical analysts argue that you need to throw out the first six months because the data is too noisy and volatile to allow you to draw meaningful conclusions. And as I have pointed out many times, I do not see how the Marcellus people can talk about 30 to 40 years of life when they have so little data and when the data that they have seems to indicate the frequent need to restimulate the wells. An additional problem is the mixing of some data from wells that have been stimulated again with ones that have just been drilled. It smells bad and as you said, it will be interesting to see what happens.
@ Vangel: I have heard Berman and a number of other skeptical analysts argue that you need to throw out the first six months because the data is too noisy and volatile to allow you to draw meaningful conclusions. And as I have pointed out many times, I do not see how the Marcellus people can talk about 30 to 40 years of life when they have so little data and when the data that they have seems to indicate the frequent need to restimulate the wells. An additional problem is the mixing of some data from wells that have been stimulated again with ones that have just been drilled. It smells bad and as you said, it will be interesting to see what happens.
That may well be. It has been almost 15 years since the first Barnett wells came on line so that may give us some indication about "general" trends of decline. Even if you throw out the first six months of data, you should be able to after at least 3 years be able to get a sense of what the decline curve will look like. Now admittedly the Barnett and the Marcellus are not identical, but they are "fairly" similar geologically speaking, so some sense of how the wells will perform may be able to be ascertained.
That may well be. It has been almost 15 years since the first Barnett wells came on line so that may give us some indication about "general" trends of decline. Even if you throw out the first six months of data, you should be able to after at least 3 years be able to get a sense of what the decline curve will look like. Now admittedly the Barnett and the Marcellus are not identical, but they are "fairly" similar geologically speaking, so some sense of how the wells will perform may be able to be ascertained.
The shale gas companies have admitted that Barnett was a failure. There was little money to be made outside of the core areas and the average horizontal wells that were fracked were not economic.