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Mark Anthony
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Mark Anthony, is an IT professional and who had a scientific research background before joining the information revolution. Visit his blog: Stockology (http://stockology.blogspot.com/)
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  • The Fracking Tale Of Consol Energy

    Consol Energy (CNX) told another fracking tale to investors during their recent Q3-2012 earnings conference call. The CNX president said that:

    On the drilling complete costs, let's go there first. Right now, and again, this varies quite a bit across our Marcellus field because it's a very large field, so I'm generalizing with an average view, and the actuals will be variations off of that on the high and low end, but the drilling complete cost is going to be somewhere around, I'll call it, $6.5 million per well, and that should get us on average somewhere around 8.5 Bcf per well. So when you do the funding and development math, it should be around $0.75, give or take, on our average type curve.

    The claim of EUR of 8.5 BCF per well is a fracking tale.

    (click to enlarge)

    The above chart summarizes the 19 shale wells that CNX operates in Pennsylvania Marcellus.

    The highest cumulative production is No 129-28363, which produced 1.310391 BCF in 457 days.

    The average of 19 wells, is an accumulative production of 0.53 BCF per well in 235 days.

    So the CNX president's claim that they achieved an average EUR of 8.5 BCF, is a long stretched fairy tale. The actual productions are far below that number.

    Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

    Oct 26 1:41 PM | Link | 4 Comments
  • The Fracking Tales Of Natural Gas Producers

    There is a controversy on shale gas. Natural gas (UNG) producers love to boast the high productivity of their shale wells. Some claim that they could still make a profit even at current ridiculously low gas prices. But the data speaks otherwise.

    Fracking Tales Meet The Reality

    Recently USGS published report OF12-1118 which surveyed the EUR (Estimated Ultimate Recovery) of gas wells in 132 different natural gas resource areas. The USGS numbers released are very damning to the rosy claims made by NG producers over the years. Let us look at the numbers for the top US shale plays below:

    (click to enlarge)

    The Shale Shock Media called the report a Huge Fracking Surprise and had this to say:

    Southwestern Energy (SWN) and Chesapeake Energy (CHK) claim average EUR's in the Fayetteville of 2.4-2.6 Bcf. The Powers Energy Investor, an industry publication stated:

    "To put into perspective how ridiculous Chesapeake's claims of 2.6 Bcf is, consider the following: of the company's 742 operated wells completed on the Fayetteville, only 66 have produced more than one Bcf and none have produced more than 1.7 Bcf. Chesapeake's average Fayetteville well has produced only 541 Mcf."

    The USGS confirms these numbers again with the average EUR for Fayetteville wells coming in at 1.1 Bcf, significantly lower than 2.4-2.6.

    Critics like Arthur Berman, Chris Neddler, or any one who cared to study the real shale gas production data already know that the NG industry exaggerated the productivity of they shale wells. The data does not lie. Here is a quick statistics of all major US shale plays:

    (click to enlarge)

    Taking the cumulative volume of shale gas produced and dividing it by number of wells in each play, the results are far below the EURs that the NG industry claimed for these shale plays:

    • Barnett: 0.663 BCF. CHK projected EUR of 2.65 BCF per well.
    • Fayetteville: 0.673 BCF. CHK calculated an EUR of 2.4 BCF.
    • Marcellus PA: 0.662 BCF. But Southwestern Energy (SWN) pitched EURs of 6.00 BCF or higher.
    • Haynesville: 2.63 BCF/well. But Goodrich Petroleum (GDP) pitched EURs as high as 8.6 BCF per well.

    Overall, for all US shale plays, there are 35,996 production wells with an accumulated shale gas production of 22,971 BCF. The average is only 0.638 BCF. At current gas price of $3.40/mmBtu, 0.638 BCF of gas is worth $2.17M. That is only a fraction of the costs of drilling a well and brining it into production.

    Shale Gas Is Neither Cheap Nor Abundant

    Decades after the NG industry venture into shale gas development, the industry has spent more than half a trillion dollars and developed 36,996 shale wells, averaging more than $13.5M per well total cost. The industry only had 23 TCF of shale gas production to speak for the money spend. That amount of gas is less than one year of US consumption, and is worth only $78B at today's gas price.

    I believe it is conclusive that shale gas is non-economical at current gas price environment. The industry might be able to pitch a few exceptionally good wells drilled at sweet spots, but the overall performance of the entire shale gas industry is dismay.

    Implications to Investors

    As I always said, if you invest in NG producers, you need to do your own due diligence study. You cannot take the well performance claims of the producers at face value.

    If shale gas cannot be produced cheaply, price must go a lot higher to allow some producers to make a decent profit. That means the current low price of NG is only temporary. NG cannot compete with coal in the long term.

    I believe investors should switch away from the NG sector, and switch to the coal sector. Do you notice that investor put 75 times more investment capitals in the NG sector versus the coal sector? I think this is one of the biggest investment portfolio imbalances in the history of energy investment. Money was put in the wrong sector. This means huge investment opportunity for people willing to stick to coal, when naysayers claim that NG is replacing coal.

    Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

    Oct 15 2:33 AM | Link | 11 Comments
  • The Real Natural Gas Production Cost

    I have written several articles on the shale gas controversy. In my last article, I analyzed the real decline of Fayetteville shale wells operated by Southwestern Energy (SWN). I decided to do more data analysis after I read SWN's detailed investor presentation.

    I post this article here on my Instablog because SA decided that they would not accept any more of my articles for publication. Sad!

    Is Natural Gas Cheap and Abundant?

    There is a common myth within the investment community that the new horizontal drilling and hydraulic fracturing technologies opened the door for cheap and abundant natural gas (UNG) from shale. An NG supply glut since late 2011 pushed NG prices to decade lows, yet there was few sign that producers were cutting production in any significant way. This further supports the general consensus that at least some producers believe they could still make a profit at the record low gas prices.

    Can shale gas really be produced cheaply as some claims? This question is critically important to coal investors. At a price of $3.00/mmBtu or lower, NG competes with coal for electricity generation. If NG producers can make a profit producing shale gas at $3.00/mmBtu, then the future of coal looks dim.

    On the other hand, if NG producers can only make a profit at much higher gas prices, then the current depression in coal prices is only be temporary. This would mean there is a great opportunity to invest in the coal mining sector now.

    My study convinced me that shale gas is non-economical unless the gas price goes much higher. Let me speak with data and facts.

    SWN claims to the lowest cost shale gas producer in the industry. They operate mostly in Fayetteville, a shale play of low drilling cost due to shallow depth of the shale. Let's find out what is their real production cost of the shale gas.

    The cost boils down to two things:

    1. The lifetime cost of a shale well
    2. The EUR (Estimated Ultimate Recovery) per well.

    Estimating the Cost Per Well

    Some NG producers provide well cost numbers. Always take their numbers with a grain of salt and ask: What costs were excluded?

    SWN gave per well cost of $2.8M in 2011. They spent $2.2B in capital spending and completed 560 Fayetteville wells in 2011. $2.2B divided by 560 is $3.93M. So I think the real cost per well was $4M.

    In the bigger picture, the top 40 NG producers spent roughly $128B capital spending in 2011. There were 16,000 wells drilled. So the industry wide average drilling cost was about $8M per well.

    Modeling Fayetteville Well Declines

    All shale gas wells are in continuous decline once they were brought into production. So estimating EUR is a matter of trying to project the production decline.

    The industry uses the Arps formula to calculate EURs. Critics like Arthur Berman pointed out that the formula was never confirmed to be working in hydraulic fractured wells. The formula, when used with a high b-factor, often leads to grossly over-estimated EURs.

    A good example is Barnett Shale. Chesapeake Energy (CHK) projected an EUR = 2.65 BCF using Arps formula. But after decades of development and 70% of the core area of Barnett already drilled, the cumulative production per well is only 0.663 BCF. That's only 1/4 of the projected EUR.

    Here is an explanation of the Arps formula:

    (click to enlarge)

    How does Arps formula fit with Fayetteville well data? The SWN presentation contains this chart showing two type curves against actual production data:

    (click to enlarge)

    It looks to me that the two type curves do not fit the production data very well at all. So I painstakingly extracted data from the chart, based on the thick blue curve for all wells. I plotted the data with the Arps curves and my own model as below:

    (click to enlarge)

    Neither of the two Arps curves matched the well production data. But my model matched seamlessly. See the blow-up details:

    (click to enlarge)

    I discussed my decline model previously so I will not elaborate here. With an IP = 4.0 MMCF/Day, my model predicts an EUR of 1.75 BCF. So the EUR is rough 438 days or 1.2 years worth of IP production.

    Calculating the Real Production and EUR of Fayetteville Wells

    Encouraged by my model's seamless match to real production data, I went further to calculate the projected total production, based on SWN's well completion statistics:

    Once again my result matches the actual production perfectly:

    (click to enlarge)

    My data model is validated! So let me calculate the EUR per well. Based on the SWN well chart, the average IP = 3.125 MMCF/day.

    As explained, EUR is approximately 438 days worth of production at IP rate. So EUR = 438 days * 3.125 MMCF/day = 1.37 BCF/well.

    This number is way below what SWN believe their EURs are. But my number is consistent with my last estimate. In previous article, I argued that 1.56 new wells a day is needed to maintain a flat 1.95 BCF/day production. So one well is worth 1.95 BCF/1.5 = 1.25 BCF.

    What is the Real Cost of Fayetteville Shale Gas?

    If my numbers are right, we are talking about each well costs $4M from drilling to completion. It can produce 1.37 BCF in its lifetime. The well cost of the gas is $4M/1.37BCF = $2.92/mmBtu.

    On top of that, SWN reported $1.13/mmBtu of finding and development cost, and $1.20/mmBtu of cash and operating cost.

    But SWN calculated its F&D cost based on inflated EUR. Adjusted to realistic EUR, I think the F&D cost should double to $2.26/mmBtu.

    The total comes to $2.92 + $1.20 + $2.26 = $6.38/mmBtu. That is the real cost of producing from the Fayetteville, the cheapest shale.

    Cheap Natural Gas is an Illusion

    I argued here and in the past that NG producers over-estimate the EUR of their wells. I am not the only critic. Even the USGS agrees. Please read this Huge Frack Surprise:

    Southwestern Energy and Chesapeake Energy claim average EUR's in the Fayetteville of 2.4-2.6 Bcf. The Powers Energy Investor, an industry publication stated:

    "To put into perspective how ridiculous Chesapeake's claims of 2.6 Bcf is, consider the following: of the company's 742 operated wells completed on the Fayetteville, only 66 have produced more than one Bcf and none have produced more than 1.7 Bcf. Chesapeake's average Fayetteville well has produced only 541 Mcf."

    The USGS confirms these numbers again with the average EUR for Fayetteville wells coming in at 1.1 Bcf, significantly lower than 2.4-2.6. (more at the link)

    The latest USGS report on shale EURs makes Arthur Berman look like an optimist! Here are the EUR numbers (in BCFs) from the report:

    Barnett - median 0.7, average 1.0
    Marcellus - median 0.8, average 1.158
    Fayetteville - Median 0.8, average 1.104
    Haynesville - Median 2.0, average 2.617

    These numbers are in huge contrast to the rosy numbers that NG producers have been selling to investors over the years.

    Wake up, people! The NG industry have spent more than half a trillion dollars over the decade to develop shale gas. So far they drilled 36,000 wells and produced 23,000 BCF of shale gas. That averages $13.9M per well and $21.74 per mmBtu of gas produced.

    Shale gas is neither cheap, nor abundant!

    Implications for investors

    My conclusion is that energy investors made the biggest mistake in energy investment history, by placing 75 times more investment capitals in the NG sector, than in the coal sector. This happened because of the wide-spread myth that natural gas has become cheap and abundant, and that we are seeing a paradigm shift away from coal. The myth is false. It is not supported by data and facts.

    This creates one of the biggest investment opportunity today. My advice is get out of the NG sector and get into the coal sector.

    If I have to pick an NG producer that I like, I have to pick one which has low debts and low costs. After looking at the data, I like SWN best. They have relative low debt load. They have the lowest cost in the industry. Gas price has got to go much higher. SWN should be among the first to benefit.

    But I would recommend coal stocks ahead of the NG producers:

    • Arch Coal Inc. (ACI)
    • Alpha Natural Resources (ANR)
    • James River Coal Company (JRCC)
    • Peabody Energy (BTU)
    • Cloud Peak Energy (CLD)

    Disclosure: I am long ANR, ACI, JRCC, BTU.

    Oct 12 5:34 PM | Link | 10 Comments
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