December 18, 2014

Where’s the Gas? USGS Releases Damning EUR’s For Shale

The extraordinary hype surrounding this industry has been impressive to say the least. It has clearly been a public relations exercise of disproportionate scale compared to what the wells are actually producing.
By Deborah Rogers, Energy Policy Form, September 2, 2012

Energy in Depth (EID), a public relations entity formed and funded by the oil and gas industry, made the following statement:

“…all one has to do is look at the evidence…where the ultimate recoveries (EUR’s) of wells are increasing each year through better technology and production management [emphasis mine], to see the truth she is intent on denying.”

This statement was in response to my presentations on shale gas economics. Unfortunately, this is yet another of EID’s many prognostications that have no basis in reality or fact. It is mere spin. And the latest numbers on EUR’s (estimated ultimate recoveries) from the U.S. Geological Survey (USGS) confirm this.

Art Berman, a petroleum engineer and former contributing editor at World Oil has, like me, been skeptical of shale plays since 2009. He has been the recipient of enormous backlash from the natural gas industry. EID showing their propensity for poor prognostications yet again had this to say about Mr. Berman only last year:

“We think he’s wrong about shale. But the good news is: we won’t have to wait but two or three years to figure out who’s right.”

If you will allow me to indulge my Texas roots: Didn’t even take that long, boys.

About a year after EID’s statement, the USGS has released new data on all shale plays in the US and the numbers are damning. Further, they corroborate Mr. Berman’s work.

Chesapeake Energy (CHK) claims average EUR’s for the Marcellus at 4.2 Bcf. Range Resources (RRC) has claimed average EUR’s as high as 5.7 Bcf in investor presentations. According to the USGS, however, the average EUR for the Marcellus turns out to be about 1.1 Bcf.

This is obviously problematic on many levels not least of which is the fact that these companies can borrow money based on EUR expectations and claims. If they have overstated EUR’s, then monies may have been borrowed on assets that either simply don’t exist or are not commercially viable.

Sound familiar?

The extraordinary hype surrounding this industry has been impressive to say the least. It has clearly been a public relations exercise of disproportionate scale compared to what the wells are actually producing. That should have been our first clue. Methinks they doth propound too much.

For instance, in July 2011 a giddy article on monetizing the Marcellus was published by E&P magazine, an industry publication. They had this to say:

“At press time, Cabot reported new whopper Marcellus wells…the newest wells suggest an EUR of at least 15 Bcf per well [emphasis mine].”

As I make clear in my presentations, such “monster wells” are the darlings of industry PR departments. There is nothing wrong with touting your best results provided you temper such statements. Unfortunately all too often these statements are taken out of context and the reader is left with the notion that every well is performing at these high standards. In reality, nothing could be further from the truth.

Based on production data filed with the Texas Railroad Commission about 94% of all wells in the Barnett are underperforming their type curves. This is not surprising in that every major operator in the Barnett has bailed on its properties. They have jv’ed or sold outright to get the proverbial albatross off their financial necks. I don’t care how much PR spin you put on it, if these properties were monetizing at the giddy levels originally claimed by operators, they would not be selling.

In an email sent to me by a senior Chesapeake executive, she claims an average EUR of 3.0 Bcf in the Barnett. The new USGS numbers, however, state the Barnett at 1 Bcf. Unfortunately the Ft. Worth Independent School District thinks they will get 3.0 and thus made the decision to allow wells only feet from elementary schools.

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.

As you can see, yet another pattern is emerging in shale plays.

Another interesting aspect is of course the hype that has been contributed by Wall Street investment banks. For instance, in that same E&P article, it was stated:

“The wells cost some $7.5 to $8 million. “This sort of type curve should generate acceptable economics with gas as low as $2 [emphasis mine],” said Biju Perincheril, equity-research analyst for Jefferies & Co. Inc.”

Well, sort of!

For those few wells that are producing at top levels, this sort of type curve probably does generate acceptable economics. The trouble is that such wells are few and far between. Which is precisely why, with gas trading even above $2, these companies are having to write down assets as impairments on a massive scale.(See previous post)

But shale gas has turned out to be a major profit center for the investment banks and so it is in their interest to promote the hype every bit as much as their oil and gas clients. I often refer to this phenomenon as “financial co-dependency”. A dysfunctional behavior, yes, but one which has been very, very profitable.

Shale accounted for 46% of all energy M&A in Q3 2011. Neal Anderson of Wood Mackenzie stated in Oil & Gas Financial Journal:

“…it seems that the equity analyst community has played a key role in helping to fuel the shale gas M&A market, acting as chief cheerleader for shale gas plays.”

We certainly see that above with the Jeffries analyst.

If only the wells performed… then perhaps the rest of us could enjoy the profits too.