Seeking Alpha

Mark Anthony's  Instablog

Mark Anthony
Send Message
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/)
My blog:
  • The Real EUR Of EOG's Bakken Shale Wells 8 comments
    Jan 8, 2013 10:10 PM | about stocks: CHK, EOG, COG, KOG, QEP, APA, ECA, SD, JRCC, ANR, ACI, BTU, UNG, KOL

    SA author Michael Filloon wrote on the Bakken shale wells of QEP Resources (QEP). He projected an EUR up to 2 million barrels of oil equivalent. I disagree with his calculation. Real production data does not support his conclusion. I pick the first well listed in his article, No. 16637, owned by EOG resources (EOG), for a case study.

    Modeling Shale Well Declines

    Traditionally natural gas (UNG) producers use the classical Arps formula to model a conventional oil or gas well's production decline.

    As I discovered, and as many people pointed out, the classical Arps formula is not suitable for projecting shale well's decline patterns, as shale wells decline much faster than the formula projects in the long term. Specifically the terminal decline of Arps formula approaches zero, and the cumulative production it projects approaches infinity with a b-factor larger than 1.0. That's problematic, as in the long term, shale wells should decline a terminal decline rate above zero.

    Let's re-cap about the classical Arps formula and how I modified it:

    (click to enlarge)

    I am happy to find out that even though most producers insist on using the classical Arps formula, QEP does use the SAME modified Arps formula with a terminal decline term introduced. In that sense they agree with my own modeling method. I congratulate management of QEP for being a little bit more honest than Chesapeake (CHK) and Cabot Oil & Gas (COG).

    But even QEP used the same correct modified Arps formula as I do, and admitted a reasonable terminal decline rate, they still pushed for a set of parameters that gave a higher EUR (Estimated Ultimate Recovery) than what is realistically possible.

    Modeling Bakken Well No. 16637

    I extracted monthly production data from ND DMR web site. I did the calculation on a spreadsheet. Here are the comparisons. Note that both QEP and I used the same formula with four parameters: IP, D, b-factor and terminal decline rate Beta. I just disagree with QEP on what parameters provide the best fit. Here is QEP's model:

    (click to enlarge)

    According to the chart, here are QEP's parameters, versus mine:

    • QEP adopts IP = 724 BPD, D = 0.0035/day, B = 1.80 and Terminal decline rate Beta = 0.000228/day
    • I adopt IP = 1250 BPD, D = 0.020/day, B = 1.80 and Terminal decline rate Beta = 0.000280/day.

    Both QEP and I use the same b-factor of 1.80. I use slightly higher IP, slightly higher terminal decline rate beta. But the biggest difference is that QEP uses an extremely low initial decline rate, by the shale industry's standard. I think there is no justification for using such a low value of D. Shale wells decline extremely fast in the first few weeks. Other producer use a D ten times as higher.

    As I said, I agree with QEP in the formula used, I disagree with them in the specific fitting parameters. Let's see who fit the data better:

    (click to enlarge)

    It appears to me that my curve fit the actual production data much better. The QEP curve does not fit the well data very well.

    My speculation is that they know that they need a flat curve to obtain a higher EUR value. The more flat the curve is, the higher EUR it will calculate. Thus they probably deliberately pull the IP down to a much lower starting point.

    To compensate for a lower starting IP, they adopt a much smaller initial decline rate D, which makes the curve flatter.

    Finally, to further flatten the curve, they tried to fit the artificial local peak of production, at April and May of 2008, which resulted from re-fracing operation (re-stimulation). I believe the cur should follow the non-disturbed natural decline trend, instead of following the artificial temporary boost of production, to be realistic.

    The chart above shows that my curve following the real production down closely, while the QEP curve deviate on the higher side.

    (click to enlarge)

    The above chart, plotted in much longer time scale, and using logarithm scale, shows the deviation much better. Once again, my curve tracks the actual production data very closely. But the QEP curve clearly deviates from the real data and projects too high.

    As a result, when you integrate the cumulative production over time, QEP's curve would over-estimate while my curve gives the accurate projection. See below:

    (click to enlarge)

    As shown above, my parameters leads to accurate projection of the actual production. The QEP curve clearly deviates on the high side.

    I projected that the EIR of well No. 16637 will likely be 500 MBOE. The QEP projection is 750 MBOE. The chart clearly agrees with me.

    Calculation and Discussion

    As of now, the well 16637 is a bit more than five years old, and has produced an accumulative 355.280 MBOE. Current production rate is 80 BOE/day. Current annual decline rate is -16% to -22%. Using -18% annual decline, and using 10 BPD as cut off, the well will produce another 145 MBOE, bring the total EUR to 500 MBOE.

    This well is NOT a typical or average Bakken shale well. If it is, even if the EUR is only at 500 MBOE, producers would make an incredible profit at $100/barrel oil price. Unfortunately that is not the case. The average Bakken shale well has a much lower IP and much lower EUR, even if they are equally cost to drill.

    As of October 2012, there are 6349 producing Bakken shale wells. They collectively produced 821.30 MBOE/day. There are 6077 wells which were also producing in September, and 272 new wells which first show up in October. The 6077 wells producing in both months collectively declined from 790.33 MBOE/day to 715.820 MBOE/day from September to October, or -9.5%/month. That is a daily decline rate of /month, or -0.33%/day. At this decline rate, these well's future production will be equivalent to 1/0.33% = 303 days worth of production at current rate of 716 MBOE/day, or 217 million BOE. Divided by well numbers, each well has an average of 35.7 MBOE remaining production. That does not look like a lot of value to me. At $90/barrel, that's a remaining production value of $3.2M each.

    Good luck drilling every well as productive as No. 16636, producers!

    I repeatedly pointed out that shale oil and gas producers tend to over-exaggerate productivity of their wells, under-estimate the well declines, and under-calculate the fair capital amortization cost, in order to pitch their investment case to banks and investors, so they can keep borrowing more money to keep drilling shale wells.

    In reality, even Bakken shale oil wells are hardly profitable at current oil prices and current development costs. My advice to investors is to do your own due diligence research and scrutinize the data. Avoid the hyped shale oil and gas sector. The sector you should get into, is the US coal mining sector. The meme that natural gas is replacing coal, is completely wrong. Natural gas will always be an important part of America's energy supply. But at fair cost, shale gas can not compete with the cheap king coal.

    The investment case in coal is made better as nearly 99% of investors made the wrong bet, as there is 75 times more market capital invested in the NG sector than in the US coal sector, while both sectors contribute about equal energy to the US economy.

    Imagine what happens when the looming debt crisis in the NG sector unfold, and shale gas production collapses, sending prices of both NG and coal much higher, and 75 more market capital in the NG sector now moves to coal sector instead. This is not an opportunity you get to see every year. Now is the best time to get into coal.

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

Back To Mark Anthony's Instablog HomePage »

Instablogs are blogs which are instantly set up and networked within the Seeking Alpha community. Instablog posts are not selected, edited or screened by Seeking Alpha editors, in contrast to contributors' articles.

Comments (8)
Track new comments
  • Mark, you've been saying that there would be an imminent coal rally since last March. JRCC is now under $3. Don't know when JRCC will go back to double digit! What is your target price for the next 3 months and the target price for 2013?
    Maybe you're right that there'll be a looming debt crisis in the NG sector. But when will it happen? Will JRCC go bust before the NG debt crisis occurs??!!! Then holding JRCC shares is not a good bet on the NG debt crisis!? I want your opinion because I'm long JRCC and ANR! Thanks!
    15 Jan 2013, 10:58 PM Reply Like
  • Mark, you are doing a great job. More people are on the right track.

     

    See next link:

     

    http://bit.ly/13EVuHX

     

    For sure, the world is fooled by greedy people. Not only in the shale business.
    16 Jan 2013, 05:48 PM Reply Like
  • It's an interesting article. I just looked at the financial information of some oil and natural gas companies at yahoo finance. I'm surprised to see that many of them have current ration less than 1! The total debt to total cash ration is also worrying. Hopefully the NG debt crisis will happen sooner rather than later. If several NG companies file for bankruptcy, NG price will surge!
    16 Jan 2013, 09:41 PM Reply Like
  • CHK was upgraded to Buy from Hold at Stifel Nicolaus. http://yhoo.it/TWc1Xx
    It seems that investors are more bullish on natural gas producers than coal miners! Mark, what do you think?
    30 Jan 2013, 06:40 AM Reply Like
  • Where are your comparisons on completion designs?
    In previous articles you used a well completed in 2006.
    1. Was this well completed with a liner or was it open hole?
    2. The early Bakken wells were stimulated using slick water fracs and high rates of pumping, and low concentrations of sand.
    3 What service company completed the stimulation? They are not all equal.
    4 Was the fluid used slick water (cheap) ,a borate,a zirconite which is a highly refined guar that cleans up well but much more expensive.
    5 What type of proppant was used ? Ceramic or natural ?
    6 Plug and perf or sliding sleeve, early 18-22 zone designs, or newer 30 zones.? Also what length where the zones stimulated.
    7 Did the well experience any problems during stimulation, such as a screen out in any zone?
    My point is there are so many variables involved in completing a well. I would like to see you use a apples to apples comparison.
    28 Feb 2013, 11:42 AM Reply Like
  • It might be interesting to check the share prices of the four companies recommended back in January: JRCC, ANR, ACI, and BTU with a follow-up article.
    6 Mar 2013, 08:34 PM Reply Like
  • HI Mark, what software do you use to model decline curve?
    15 Apr 2013, 07:51 AM Reply Like
  • Please tell me I'm not the first to notice that Michael Filloon's article had nothing to do with QEP EUR results and was written about EOG Bakken wells. Do you even edit your material, Mark? You have EOG all over the production charts but discuss QEP throughout the text. Did you assume that QEP and EOG use the same decline curve analysis methods or do you just have trouble with ticker symbols?
    30 May 2013, 05:25 PM Reply Like
Full index of posts »
Latest Followers

StockTalks

  • Jim Rogers favors water investment! California is in a water crisis. Cardiz (CDZI) is up almost 50% today on news: http://tinyurl.com/qpddql
    Jun 5, 2009
  • China is still buying US T-Bonds and Yuan is pegged to dollar. WHY? Read my shocking discovery: http://tinyurl.com/rcuofx Enjoy!
    Jun 4, 2009
  • PEIX, a once hot ethanol play, goes Ch.11 today, as expected. Recent unusual price moves must lured speculators in. Good lesson learned.
    May 18, 2009
More »

Latest Comments


Instablogs are Seeking Alpha's free blogging platform customized for finance, with instant set up and exposure to millions of readers interested in the financial markets. Publish your own instablog in minutes.