Shale Gas - Abundance or MirageMore grim tidbits (but very bullish for conventional NG plays):
Shale Gas—Abundance or Mirage? Why The Marcellus Shale Will Disappoint Expectations (28-Oct)
"The Barnett was advertised as a 9 million-acre play that all held equal potential based on the manufacturing model. A year ago, Chesapeake CEO Aubrey McClendon told Bloomberg News (October, 2009), “There was a time you all were told that any of the 17 counties in the Barnett Shale play would be just as good as any other county. We found out there are about two or two and a half counties where you really want to be.”
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When we examined Chesapeake Energy’s type curve for the Barnett Shale and assumed that all parameters were correct--initial production rate, decline rate, well life, etc.--we found that most of the discounted net present value (NPV10) occurred in the first five years and that there is negligible value after Year 20 (Figure 10). The type curve, however, forecasts about half of the reserves in years 20 through 65. Since these volumes have no discounted value, reserves are over-estimated by as much as 100 percent. There is clearly more risk in the shale plays than we are told.
Consider also the Chesapeake type curve for the Haynesville Shale (Figure 11) which predicts that an average well will produce 6.5 Bcf of gas reserves.
The match with wells drilled by all operators that have 12 months or more of production is good. The problem lies in how future decline trends are projected and what hyperbolic exponents (curvature or b-factor) are assumed. At this time, we do not know how these wells will decline--only time will tell. It, therefore, seems reasonable to present a probabilistic range of possible reserves rather than a fixed value. Depending on a range of possible hyperbolic exponents, we can project reserves that range from 2.5-6.5 Bcf per well. We do not know which outcome to choose but it seems clear that small changes in the curvature of the hyperbolic exponent result in radically different reserve outcomes (Figure 12).
This implies greater uncertainty and, therefore, greater risk than operators represent. It seems more reasonable for companies to use an intermediate hyperbolic exponent (as recommended by Society of Petroleum Engineers peer-reviewed papers) to project their reserves and, later, revise them upward or downward when production has stabilized. Using a hyperbolic exponent of 0.5, the average Haynesville Shale well will produce 3.0 Bcf, which is not commercial at $7.00/Mcf. For reputable companies to say that the least likely case (b = 1.1) is the most likely case does not prudently represent uncertainty.
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Shale play promoters constantly try to divert attention and analysis from current plays to newer plays. Newer plays have less data to analyze and, therefore, reserve claims are more difficult to question. Because the Barnett and Fayetteville shale plays have under-performed expectations, we were invited a few years later to consider the future potential of the Haynesville Shale play. Now that the Haynesville looks disappointing, we are asked to consider the Marcellus Shale play. Since the State of Pennsylvania does not publish monthly production data for analysts to evaluate, no one can dispute or confirm the claims made by operators. With the shift to liquids-rich plays like the Eagle Ford Shale, we are again asked to trust the same promoters that sold us under-performing plays in the past that this time it will be different.
We should call a time out at this point and ask for a reality check. This will never happen because the capital keeps flowing and the promoters continue drilling and leasing. There appear to be a host of foreign investment companies that may provide capital for the shale plays now that operator debt has reached extreme levels, and most available assets have been sold at considerable damage to shareholders."