Dr. Arthur Berman, of Labyrinth Consulting Services has taken a hard look at actual production data from Barnett Shale in 2007. What he found should worry anyone expecting this abundant, relatively clean, domestic energy resource to be cheap. It should especially worry investors in shale gas companies, such as CHK, DVN, and XTO.
In a panel entitled "Natural Gas Game Changers?" at the 2009 International Peak Oil Conference, Dr. Breman presented some results from his research into the actual production from the nearly 2000 horizontal gas wells drilled in the Barnett Shale in 2007. The Oil Drum has some interesting background and comments here. Here are a few of my take-aways from his presentation:
- The average well he studied will produce 0.95 Billion cubic feet (Bcf) of gas during its productive lifetime, yet he average production expected by Chesapeake (NYSE:CHK), Devon Energy (NYSE:DVN), and XTO Energy (XTO) is 2.65 Bcf, 2.2 Bcf, and 3.3 Bcf respectively.
- The gas companies are assuming a hyperbolic decline curve based on a very limited data set from a few wells, while Dr. Berman found, after studying far more wells, that an exponential decline is the best model for horizontal gas wells in the Barnett Shale.
- A $7-$8/Bcf price is required for these companies to break even on a well that produces as much as 1.5 Bcf.
- Shale gas companies are funding drilling with debt and asset sales.
- There is not enough data on the later shale plays such as the Haynesville. Nevertheless, there is no early indication that recoveries will be higher in these new plays.
- Operators often state that the average well life will be 40+ years, but Dr Berman has found that the average commercial life is 7.5 years, with the most common well life being only four years.
- From a hallway conversation, Schlumberger (NYSE:SLB) has a more effective fracking technology which could produce better results, but Schlumberger has not been able to find a shale gas player willing to try this technology. The problem is that Schlumberger's technology produces lower initial flow rates, and the shale gas players are relying on high initial flow rates for their high well production projections. They rely on these projections for their reserves estimates. These estimates are essential to their ability to tap the financial markets for funding.
- US Geological Survey estimates for shale gas reserves are approximately three times too high.
Too good to be True?
I don't analyze the gas market, so I have no personal expertise to evaluate Dr. Berman's analysis. However, they have the ring of truth. Put simply, when something sounds too good to be true, investors are usually wise to assume that it is not true.
Peter Dea, of Cirque Resources LP made the optimistic case. He called shale gas the solution to his "three E's:" Energy Security, the Environment, and the Economy. That sounds great to me, and he was quite convincing. Towards the end of his talk, I was thinking about investments in natural gas pipeline companies with pipelines leading from the biggest concentrations of North American shale plays in the Rocky Mountains to areas of potential increasing demand, especially the Northeast US. The Northeast would likely increasingly substitute natural gas for heating oil under a peak oil, abundant natural gas scenario.
I'm no longer considering gas pipeline investments. If natural gas infrastructure is overbuilt in the expectation of abundant natural gas supplies, it is not only exploration and production companies with overly optimistic estimates that are likely to suffer.
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