Wasting Natural Gas – A Glut Already Made

There are a lot of misstatements about shale gas and “fraccing”. It only makes a bad situation worse to claim earthquakes are caused by “fraccing”. It is unlikely they have much impact. But disposal wells are another matter. The problem is compounded by trying to associate all frac fluids with injection disposal wells. Much of the water is produced from the wells as well as old existing wells. The well in Ohio, for instance, was likely overloaded with mostly Pennsylvanian water because there are darn few disposal wells in PA. Likewise, disposal wells are few and far between in the Fayetteville play. Texas and LA is luckier in that there are thousands of old wells that can be turned into disposal wells in depleted zones.

Further, the mantra is that we cannot produce enough oil and gas to fuel the country thru the next 4 decades or so that will be needed to make a significant dent in the energy needs of this nation. In fact, we can but there is a big problem. First, we need the Keystone Pipeline. That will reduce our dependence upon middle east and Nigerian oil and secondly, if we don’t take it, the Canadians will sell it to the Chinese who intend to import about 100,000 bbl of oil per day more than last year despite an economy that is slowing…but all that is not “the big lie.”

The “big lie” is with the gas producing companies themselves. They are desperate to make more oil. And horizontal drilling is doing so. The problem is there is already a glut of natural gas. They over drilled the Barnett, Fayetteville, and are in the process of over-drilling the Marcellus. The Marcellus, Utica, Bakken and other oil bearing shales also make a lot of gas with their oil….too much gas. Natural Gas is so abundant they are filling the pipelines to capacity and have nowhere to go…except to BURN OFF the natural gas so they can produce more profitable oil…a hideous waste of an important fuel.

By not pushing for more nat gas autos, our government is bottlenecking the oil industry. There is now a push among the old line oil men to have the states re-impose conservation measures that would reduce production to a percentage of the potential. These “allowables” were the law for 40 years or more. You were only allowed to produce a certain percent of the well because of over-production. We are over-producing natural gas in an effort to make more oil. Why?

Because companies like Chesapeake, Petrohawk, Cabot, etc. are like hamsters on a treadmill that goes faster and faster and they cannot get off. If the treadmills stop, they are so over-leveraged, they would be bankrupted in days. And how are they handling that? But selling off huge chunks of their holdings to the French, the Brits, the Chinese, the Norwegians, and every other foreign company that has been denied the chance to buy say a Chevron or Marathon oil. So by partnering with these companies, these foreign oil companies are getting a toe hold and they are doing it for one reason…so they can export that natural gas out of this country and back to Asia and Europe. Europe is scared of Russian who plays coy with them every once in a while and cuts off supplies to raise prices.

Europe wants a lever without actually drilling for gas there. Poland and France are about the only places that allow significant drilling. They want to join these Joint Ventures in hopes to take over eventually. And in owning it outright they will have bypassed governmental approval to simply buy a company.

It is nuts that on a BTU content basis an MCF of natural gas is 1/10th the BTU and 1/40th the price of a bbl of oil…nat gas is less than $3 in the gas fields. That’s about $1.00 per gallon plus tax (typically in the 50-75¢ range)

Yet we have few nat gas stations, and all nat gas conversion kits are pretty much from overseas…so we have companies burning up natural gas and wasting it… Bring back proration NOW and start producing nat gas autos and fueling stations….otherwise, we will rue the day these foreign companies start liquefying natural gas and shipping it overseas.

The old timers are tired of shale gas and shale oil. The SEC change that allows companies to book reserves that are PUD – proven undeveloped (now there’s a real oxymoron for you) and this has inflated the reserves of the drillers. That in turn has made their stock look a lot better than it is.

Investors who see thorough this charade are finding they are unable to obtain acreage to drill conventional targets because the shalers have sucked all the air out of the room. Sandridge for instance has 500,000 net mineral acres in the Mississippian play in N. Oklahoma and S. Kansas. That’s a 1,000 wells to drill or about $4 BILLION dollars on 500 acre spacings. And the typical drainage of these wells is maybe 50 acres.

Further, shale oil wells make tons of associated gas that we have no market for. Are we really going to let them burn that off into the air just so they can get the oil? Further, many of these wells are producing several barrels of salt water for every barrel of oil. This means huge sums of money are needed to dispose of the water, to pipe that water to disposal wells and the more water produced the more likelihood of a spill or environmental incident. Worse, there is clear evidence that disposal wells in Arkansas and Ohio, at a minimum, are inducing or increasing the incident of small to medium earthquakes.

Conventional wells are cheaper. They produce less water. No one expects the “economy of scale” will require entire counties be gobbled up into vast land plays. Chesapeake allowed fully one-third the acreage they leased in the Fayetteville to lapse. Why did they lease it in the first place? Shear speculation and a waste of the stockholders cash is the only answer in my opinion.

We have set on a path to over-produce gas which makes the price not reflect fundamental value for the BTU content. We have no plan to produce significantly more natural gas filling stations and cars to use them. We are given a choice. Either sell the natural gas to the Europeans, who are buying into U. S. ventures right and left, or we flare (burn) off the gas to get to the oil.

Evoke conservation rules now. Do not allow gas to be flared off just to get to the oil. Build the Keystone Pipeline and build an infrastructure that adds significant numbers of natural gas vehicles and stations across the nation. That’s my story and I’m sticking to it.
TLS

The Keystone Pipeline & High Prices for Gasoline

Today we import way too much oil and, in fact, import gasoline. We also export surplus fuels. While it is illegal to sell oil from the U. S. to foreign countries, it is not illegal to sell finished products overseas. Today, due to EPA regulation, there are very few diesel vehicles in the U. S. and diesel fuel, traditionally a cheaper product than gasoline, actually cost far more than gas. It is solely due to EPA regulations. For all the hoopla about Europe and controlling global warming, the European standards for diesel are much lower than our own. Therefore, American manufacturers build a lot of diesel engines and put in small pickups and cars. These are all exported.

Ford does not want to build the Ranger pickup. GM wants to phase out the Colorado size pickup and Dakota pickups are gone. These smaller pickups get no better gas mileage than many larger vehicles. They would if equipped with smaller diesel engines and priced right. Today, the pickup is a monster stout enough to match power and towing with many 2 ton trucks sold overseas. All because the car companies cannot make a profit on smaller pickups that a public does not want to buy if it only gets 17 – 19 mpg…which most any ½ Ton or diesel vehicle can get. In the mid 80s a small pickup was expected to get 24 mpg and a 3/4 T pickup with a diesel could exceed 22 mpg routinely.

The Keystone Pipeline will send oil from Canadian tar sands to the refineries in Texas that can handle that type of crude. Some will go to Indiana and Illinois refiners who are already ramping up production due to the Marcellus play. Obama is holding up the deal. Apparently he wants to win political favor with environmental groups who oppose the mining of tar sands as producing excessive carbon dioxide…a dubious claim at best.

The resulting stalemate could force Canada into diverting the pipeline to the W. Coast where they will ship it to Japan, China, and other Asian nations. If they do, we are screwed. The oil from Canada will displace oil in the Middle East and Nigeria lost by turmoil that came about with the “Arab Spring” and Nigerian civil strife. That oil could reduce our oil imports from those places by 20%. Not only does it mean we have a safer, saner supply of oil, but it puts pressure on the Middle East to moderate prices…something our excessive demand is making more problematic.

Libya will not restore production for 3 or more years. Iraq, as soon as we left, is degenerating into chaos and production there is likely to fall. Iran is unstable, Egypt is unstable, and long term, the Saudi’s will have to change too. Even as is, and our ally, much of the petrodollars which is distributed among the thousands of Saudi families is being diverted to some degree to terrorist. I don’t worry much about Canadian terrorists.

If the pipeline is delayed or not built, then gasoline prices in a few short years will be $8, $10, who knows…and we will have an even larger trade deficit. Our trade deficit is already over 50% OIL….

The Pickens Plan ( www.pickensplan.com ) is exactly correct. We should implement it immdediately. And the “fuel of the future” is nat gas…which has got so cheap we are on the verge of EXPORTING it… how insane.

I predict the price of oil, if it stays in the $90 – $120 a bbl. price into the spring, we can expect $4.00 to $5.00 gasoline for the summer with only slight moderation into the silly season of politic…and I don’t think Obama is going to tolerate $5 gasoline. He needs $3 or less gasoline to win this election. He has to give on this issue or it is disaster for taxpayers.

The Hoax of BEV (Business Enterprise Value)

I have a copy of a letter from the author of an Intangible Assets Class in 2004, during a period when Hmong poultry farmers were driving chicken farm prices sky high. New farms were being built and sold to the neophyte buyers right and left. A contract with the grower by an integrator is central to the use of the farm as a poultry operation.

If you would like a copy of the whole four page letter, PM me.

The gist of the letter was it was a response to a complaint made by Tim Kelley of the Missouri FSA and addressed to Sharon Lowman, Chair of the MO. Real Estate Commission…(the Board).

The letter was addressed to James Vine, TAF chair at the time. (apparently forwarded to TAF from Ms. Lowman??) The author of the class, Mr. Ronald Geer, ASA and creator of the Intangible Assets class, authored the letter.

Apparently Mr. Kelley objected to the class on the grounds that he felt the interpretation of the author would require 2 appraisals, one with the contract and one without. Mr. Geer wants to reassure Mr. Kelley that 2 appraisals are not required, only 1 but the impact of the BEV must be addressed.

That’s all good and well in the super hot market of 2004. The same could apply to a host of developments, hotels, and even housing….fast forward to current market conditions. Now read the excerpt.

Mr. Geer gave a credible example of what BEV was by demonstrating that farms were selling for more than the depreciated cost of the barns thus the difference was “BEV” – a value accrued to the contract to grow birds according to Mr. Geer…a business enterprise value.

There is an alternative view. I shall express it. Two issues. The buyers were ill informed about the economics of poultry farming in the first place…duh. Secondly, most of these farmers were from Minnesota. As refugees from Vietnam, many received subsidies . They call it “farming the government when it involves FSA. http://www.minneapolisfed.org/public…ay.cfm?id=2415
http://www.minneapolisfed.org/public…mong/index.cfm

As an appraiser I had more than one Hmong tell me that they were paid an annual payment of $4000~ per month as a “new” farmer. One said they got the subsidy in MN to grow vegetables and flowers but that the subsidy was phased out and they were told that if they moved south to grow poultry, they could get a “new farmer” subsidy. In fact, I have evidence that some farms changed hands between relatives after 2 years and the “new” farmer got the subsidy as well. Thus, there was an “intangible” value to certain people that was not disclosed nor was it calculatable in the poultry contract itself.

Secondly, dozens of Realtors left this region regularly and gave seminars in Minnesota hawking the glories of chicken farming in the Ozarks and KY, E. Texas, etc. Speciality Realtors sprang up selling only farms and obviously, the bigger the better since FSA seemed to be unwilling to turn down any Hmong in fear of a discrimination complaint after all the grief they got from the lawsuit by Black Farmers.

There was no “BEV”, imho. Chicken farming is buying a job. Nothing more. And you only pay more because someone is giving you cheap and ready credit, an annual subsidy, and a snow job. The Hmong got screwed. Before the present financial crisis, Hmong realized the economic was decidely poor. By 2006, sales tailed off rapidly. Since then the farms are selling for a fraction and absolutely no one is building a new farm to market to Hmong. The last few new operations I have seen that sold are selling for a reasonable discount from the RCN and the rest that have gone under are selling as distressed property….some are put back in production. Most of the oldest are not.

The difference between farms with and without a contract that Mr. Geer alludes to isn’t a measure of the contract BEV. It is a measure of the distress of a farm that no longer can meet contract standards. There is no “BEV” and what was mistaken for it is nothing more than a whole ethnic group being duped by the government and Realtors preying upon their naivety.

Climate Change – Cosmic Origin

After nearly two decades of being pooh poohed by the Global Warming Cult, the truth is slowly leaking out bit by bit. There is a distinct relationship between cosmic radiation (which in turn relates to solar sunspot activity) and the weather. Increased rain lowers temperature, decreased cosmic radiation reduces rain. It is simple but look for the GW Lobby to fight tooth and nail for fear of losing their funding…

http://blogs.telegraph.co.uk/news/jamesdelingpole/100102296/sun-causes-climate-change-shock/

Myth Science = The New Fraud

The public in general and letter to editor writers typically, are ignorant as a hog about real “science.”

Myth 1 – Bush Created Oil Subsidies for Dick Cheney’s buddies.

When Apple Computer makes billions in profit, everyone hails Steve Jobs as a hero. When he is sick he gets get well cards. When an oil company shows a profit, you’d think they kicked your dog. In reality, that Intangible Drilling Cost deduction has been around since the 1920’s. The big boys only get 70% of the Intangible Drilling Cost deduction in year one anyway. But it is a major benefit to companies that actually drill the most wells in America, small independent firms. Small private oil companies would be hurt because their investors have to pay taxes on their investment in the first year. If you have $1,000,000 to invest, then you pay no tax for putting that million in a drilling project. The tax is paid only after production commences. With a tax the investor will only put in $650,000 because they will have to pay the other 35% in taxes in year zero. This will reduce drilling by 35% among companies who depend upon investor money. That will result in a significant reduction in drilling, with an equal reduction in new reserves found, which means we import more oil and thus, and ultimately pay more for gasoline.

Myth 2 – We Should not Drill More, but rely upon “alternative” energy

I was visiting with a friend recently and we were talking about the “good old days” which we recalled to not always be so good. But I ventured that without electricity, we would be back to the old days overnight. How would we survive? I still have a barn with milk stanchions. I still have an old work harness and even a wood beam turning plow along with a few other horse drawn work tools…but could I really survive out of my garden and with an old milk cow and few chickens? I don’t know. But the generations before me did.

I was actually born before electricity came to our farm. We had coal oil lamps (I still have one myself.) We had no air conditioning, no generators, and still plowed the garden with “Pet”, our horse, until I was in school. We drew water from the well (again, I have a pulley and well bucket so I could get water…) and cut firewood for heat. The electricity in 1950 and that today was predominately generated from fossil fuels. Coal, oil, and gas are used to generate most electricity in the world. Relatively small amounts are generated by hydroelectric plants and nuclear plants. Solar and wind account for virtually nothing. If all the solar and wind generators shut down tomorrow the world would hardly notice. Yet people seem to still delude themselves into thinking that a few more windmills and solar panels will replace the entire oil and gas industry.

The new energy source of the future may not even exist in the minds of mankind today. It will develop when the necessity forces people to think outside the energy box we are in. Oil companies should not be reviled for doing what they do best.

Myth 3 – Man is changing the Environment by warming it with Carbon Dioxide

The doomsday flat-earthers believe that climate never changes, and that burning fossil fuels is the cause of “global warming.” After nearly 10 years where the global basically has not warmed, the hysterians are claiming that perhaps it is not warming so much as changing… thus was created the “climate change” mantra.

The Ice Ages ended some 20,000 years ago and we have not reached a defined nadir in global warming. Do you really think that man’s campfires 20 millennia ago changed the climate? I don’t think so.

The jury is still out if carbon dioxide is warming, or as some scientists say, there is a better argument for saying that carbon dioxide is increasing due to natural warming. As the oceans warm, more carbon dioxide is released into the atmosphere.

Myth 4 – High Speed Railroads are economic means to travel for everyday folks

The history of the railroads should speak for itself. The government gave them huge chunks of land to get them to build across America. Without that land which they sold and kept the mineral rights off for the most part, it couldn’t happen. And a number of large companies like Burlington Resources and Santa Fe Energy are a direct outgrowth of railroad company mineral holdings.

Railroads have had subsidies from day one. To create high speed rail means we will see increased crashes with deer and other wildlife as well as a huge slaughter at the crossroads of America. The alternative is to built overpasses or underpasses for rails on every road in the path of the rails. Likewise, trains would need to be computer operated which increases the cost to conventional ‘slow’ trains hauling freight.

Myth 6 – Oil is running out and we have reached the “Peak”

Assume for the moment that oil and gas are doomed industries and we have reached “peak oil”. Yes, perhaps but that means we have 50% of the world’s oil still left to be discovered and developed. Oil took 150 years to get to this point, so the remaining oil should last us another 150 years, right? The Shah of Iran, who has been dead for over 30 years, once proclaimed that Iran would run out of oil in 20 or 30 years. It hasn’t happened and they remain one of the largest oil producers in the world along with being the largest reserves of natural gas.

The oil remaining is going to be more difficult to develop but it doesn’t mean we should not proceed with more drilling. We will need the next 50 – 100 years to transition from oil and gas to something else. We cannot simply quit drilling and expect this country and the world to not suffer incredible economic distress and outright famine worldwide. Without oil the agricultural output of the globe would plummet and mass starvation would occur.

Myth 7 – Fraccing is dangerous and Frac Fluids are “secret” and toxic

One letter to the editor confidently stated that fraccing is hazardous…even suggesting there are “deadly kinds of bacteria” that are “naturally deep.” Do papers ever check the accuracy of such claims? Do you drive a car or own anything made from plastic, like the case on your cell phone or the computer keyboard you type with? Can you live in a world without hydrocarbons, plastics, and electricity?

An acquaintance wrote the following. “Texas ERCOT (that’s the electric power grid oversight) mandated that a significant part of the electricity in Texas be generated by wind….and it stopped blowing. Now we’re facing brownouts during 100+ degree days.”

Truth is that petroleum products are a necessity or the world goes into an incredible chaos and mass starvation as farm tractors are idled, plants are unable to operate and cars become useless. And windmills and solar panels aren’t going to replace it.

In fact, the first fraccing was done in Fredonia, NY before Col. Drake even drilled his first oil well. Fredonia can lay claim to developing natural gas which lit the town’s street lights a decade before Drake’s discovery. The first frac job occurred shortly afterwards when a young engineer lowered 8 pounds of gunpowder (black powder) down a hole then dropped a red hot rod into the hole which penetrated the container and ignited the powder, blasting the rocks at depth.

Several states publish the contents of frac fluids on their regulatory sites. It is not some secret cocktail of toxins. On the contrary, Jim Cramer, of CNBC’s “Mad Money” recently drank a glass of frac water on his show while interviewing a Halliburton engineer. And if those deadly bacteria that supposedly lurk underground are a worry, then the tiny amount of biocide in some frac fluids ought to kill them. http://www.cnbc.com/id/44207363

People prefer hysteria to truth, so “Gasland” is more entertaining than Cramer drinking frac water. The oil industry hardly tries to defend themselves from the mindless piffle of conspiracy theorists but the truth is we cannot live in the modern world without drilling and the fraccing it necessitates. If you want an idea what life would be like without petroleum then look at the sub-Saharan region of Africa. That’s your future without oil.

Myth 8 – A Consensus of Scientists Makes it so

Scientists are human and few understand that they are and can be as biased as the most scientifically ignoramus on the planet. But science is not about consensus; rather it is about testing over and over until something is proven wrong or not refuted.

Global warming is caused by humans according to some. A consensus of scientists apparently said so. Truth is that only a handful of scientists have the training and knowledge necessary to make any judgment about global warming. I am a geologist. That does not qualify me to make a serious scientific judgment about the issue. But my training does prepare me to spot statistical inconsistencies and question the quality of the work presented as the basis of such “truths.”

The reaction of scientists in the Climategate scandal should have alerted the public that there are a number of scientists who were letting their personal feelings get in the way of true science.. They should not have been so quick to launch ad homen attacks upon their critics. They were particularly critical of a statistician who requested the raw data they were using to make their case for global warming. Much of what he had obtained was proven to be misleading and deceptive and the worse of all sins in science. When your experiment cannot be replicated with the same data, then there is a question as to its accuracy. Much of what was done has been distorted, often by the fact that during the early 90s Russia removed a large number of temperature recording stations in Siberia due to budget cuts. Those “cool” temperatures skewed the data points. No satisfactory adjustment has been made to that data.

In short, science has degenerated into political sound bites to the detriment of the scientific community. God help us all. We seem poised to degenerate back into the stone ages of ignorance and National Inquirer is on the verge of becoming the new “Scientific American” magazine.

A World Without Oil

The electricity in 1950 and that today was predominately generated from fossil fuels. Coal, oil, and gas are used to generate most electricity in the world. Relatively small amounts are generated by hydroelectric plants and nuclear plants. Solar and wind account for virtually nothing. If all the solar and wind generators shut down tomorrow the world would hardly notice. Yet people seem to still delude themselves into thinking that a few more windmills and solar panels will replace the entire oil and gas industry.

And folks absolutely hate the oil companies. Apple recently displaced Exxon-Mobil as the world’s largest company and was hailed as a fantastic achievement. Steve Jobs is a hero. Bill Gates is a hero and admired for his passion to provide better health to the world. It seems to never occur to anyone that Mr. Gates money was once their money and if oil tankers crashed as frequently as Windows, you would not have electricity to run your laptop and Ipad.

Not once is the oil company given credit for making your lives better. In fact, apparently the oil companies not only need to supply the consumer with profit free oil but they expect them to spend their profits not for the shareholders of the company but to find some alternative to oil and gas to literally replace themselves. What obligation does Exxon-Mobil have to find better solar panels? Or, build wind generators? Remember Mobil’s venture into retailing when they bought Montgomery Ward? It lost the company money and caused the eventual demise of Montgomery Ward, a company that could have been the Amazon.com before Amazon existed.

Oil companies need to stick to their knitting and remain oil companies. New technologies need to be developed by new technologists. The new energy source of the future may not even exist in the minds of mankind today. It will develop when the necessity forces people to think outside the energy box we are in. Oil companies should not be reviled for doing what they do best. Find, produce, and refine oil and gas products. Price is a global indicator of comparative worth and there is no evil plot to price it by anything but a global market.

The doomsday flat-earthers believe that climate never changes, that oil companies are evil and should be nationalized. They eschew modern conveniences, except those important to themselves. They think you and I should go back to living in mud huts and eating rabbit guts. They are delusional when they suggest that wind generators can replace oil and gas. Or, that electric cars are sufficient to meet the needs of transportation and that mass transportation is a meaningful and economic way to move folks around in a large country which contains a lot of places with sparse populations.

Wind generators and solar panels contain petrochemicals and plastics that were created from oil. Do you really anticipate seeing wooden propellers on wind mills? Or, perhaps concrete?

There are voices claiming that oil and gas are doomed industries and we have reached “peak oil”. It is a waste of resources to drill for new oil. Yes, perhaps but that means we have 50% of the world’s oil still left to be discovered and developed. The Shah of Iran, who has been dead for over 30 years, once proclaimed that Iran would run out of oil in 20 or 30 years. It hasn’t happened and they remain one of the largest oil producers in the world along with being the largest reserves of natural gas.

The stupidest argument is that reserves in any given place, say the North Slope, will only supply the needs of the U. S. for 5 years. Yes, if all other sources of oil are cut off, it would last 5 years. But if it supplies 5% of our needs, then it would last 100 years. Such fateous logic comes from simple souls.

Oil companies owe us nothing. In fact, our very way of life depends upon their success. Without oil there would be no Ipad, Iphone, no air conditioning, no medicine, no automobile, and no food nor clean water. If you go to the Sub-Saharan desert of Africa you will get an idea of what the entire world would degenerate into within months if the wells were shut off. How would you as the pampered Westerners we are going to live without the oil companies? The short answer is you are not. For me, I hope to never have to milk another cow by hand or plow my garden behind a horse. God help the world if we have to resort to that again.

Shale Economics & Decline Curves

Are Shale Plays economic with $4 Natural Gas?

introduction

Natural gas prices fell in 2008 and recovered only feebly. Some are arguing that low prices reflect the presence of huge natural gas reserves. It is a glut of gas that is driving prices. Others are arguing that such gas reserves have been systematically over-booked by companies and over-estimated by engineers. Actual ultimate recovery and production per well will be significantly less. This would signify that the companies are deliberately lying about their reserves or are incorrectly calculating the reserves.

Either scenario has major implications for gas pricing. If low prices reflect the premise that a huge glut exists and the reserves are over-stated, then restating reserves would result in higher natural gas pricing thus improving the economics of shale drilling.

But if the glut is real, then chronic low prices will make drilling for additional reserves uneconomic. The SEC should revise the practice of allowing PUD – proven undeveloped- gas to be booked by public companies. Unbooking those reserves would reduce the implied reserves which should help prices and thus generate more income for the companies. PUD reserves do not generate income and no bank should be lending on the basis of undeveloped reserves.

The Decline Curve Dilemma

Classic Decline Curve analysis is well explained here

http://www.fekete.com/software/rta/media/webhelp/c-te-analysis.htm

This internet link examines all the variations in decline curves from Exponential decline (b = 0) , Hyperbolic decline (b = > 0 and < 1) , Harmonic Decline ( b = 1) and where the b factor exceeds 1 or is variable over the life of the well. Any search engine should produce a number of useful links explaining decline curves.

Perhaps the most important thing to understand comes from a statement in report linked above.

“Decline curve analysis is based on empirical observations of production rate decline, and not on theoretical derivations.”

Implicit in that is to say knowledgeable engineers and geologists can disagree over the issues surrounding curve analysis. The Arps’ curve is not a hard and fast rule rather is a rule that has to be fitted to the project at hand. The issue is reserves and how they are calculated and projected into the future. Older texts and reservoir engineers use mostly decline curves which actually measure the decline in production using a formula known by its author, Arps. The Arps formula traditionally uses an exponent that is called the “b” factor. If that factor is zero, then it is called exponential decline – a straight line if you will. If between 0 – 1 it is generally referred to as a hyperbolic decline. But if the factor exceeds 1 then eyebrows used to be raised and most reservoir engineers were reluctant to use it. But the shale plays suggest that the B factor may be well over 1 and in fact, is often projected at 1.5 or greater in shale plays. This is called a “Power Law” decline.

Using the Power law decline a well may last 65 years or longer and have far larger reserves than if a more conservative “B” factor is used. But although reserves may be double under the power low scenario, the net present value of the gas may only increase by 5 or 6% because the value is eroded by the time – value of money. Investors rarely have 65 year time lines and expect their investments to pay off quicker.

The problem in use of the Arps formula is that over the short term, the actual shape of the decline curve is difficult to vet. With only a year or two of data, the rapidly declining production curve may mistakenly be interpreted as an exponential decline, a hyperbolic decline or a power law decline. That is further complicated by changes in nearby wells (which may communicate) or by actions taken to correct mechanical problems or actual refraccing of a well. As one wag put it, the decline curve is only accurate after you have depleted the well past the economic limit.

Dr. Terry Engelder, professor of Geosciences at Penn State on the Basin Oil & Gas site found at http://fwbog.com/index.php?page=article&article=144 , pointed out

The best fit curve for the Chesapeake pro forma curve follows a power-law rate decline with a poor fit to initial production (Fig. 3A). The shape of the three most commonly used production-decline curves, depending on circumstances, are an exponential rate decline, a hyperbolic rate decline, and a harmonic rate decline (Fig. 3B). A power-law rate decline is steeper than the three traditional rate decline curves.
So little public data is available on Marcellus decline that it is impossible to grade the Chesapeake pro forma curve with confidence …

Thus the question remains. Can Chesapeake’s numbers be relied upon? Are we totally confident that those numbers are not “inflated” just as real estate appraisers inflated values for homes during the housing boom? And can we expect even third party vendors to have been under considerable pressure by their clients to see that the bright side of things? There is also something called the anchoring bias. Anchoring induces a bias into the person by suggesting that a higher or lower result would be better. Even though the engineer or estimator may not realize it, they may have been “contaminated” by the power of suggestion.

But under the best of circumstance, the engineers don’t agree whether they are getting the “best fit” to the decline curve for a hyperbolic decline, a power law decline or a hybrid that truncates the hyperbolic decline after some fixed period.

One really has to question the wisdom of seeking to make the curve match the data vs. making the data match the curve. Are we doing shale gas decline analysis in a consistent fashion, or are we attempting to maximize EUR (expected ultimate reserves.)

Ultimately outsiders can interpret EUR only by use of publicly available data, specifically monthly gas production reported by the companies themselves. If the method has a weakness beyond the difficulties raised above, then the question is what is the alternative?

Alternative Measurements

The alternative to decline curves is to determine gas by volumetrics. Unfortunately, that is only accurate based on the available data and such data are limited to the companies themselves. Although they do generally use outside vendors to provide estimates based on seismic data, well logs, cores, and perm/porosity measurements, even then the #600 gorilla in this room is the “recovery factor”. Is it 10%, 20% or more? One intuitively knows that if all the factors except recovery are accounted for to the N^th degree, the difference between a recovery factor (F) of 15% and 30% would double or halve the reserve estimate.

Engineering firms like Schlumberger are vendors and compete for business Will they end up being like real estate appraisers in the housing bubble and prove to be too optimistic as well? Maybe. During the past “Oil Boom” of 1974 – 1981, the investment houses of Wall Street created drilling partnerships. These were sold to wealthy taxpayers facing huge tax bills. The depletion allowance (that $5 billion tax break for big oil that is a heckofalot more valuable to small oil than big…) allowed investors to write off dry hole costs in Year 0. This deferred taxes and if the well was a dry hole, then at least the investor didn’t have to pay tax on the investment. With 50% tax rates and higher, investors lowered the actual risk.

Nevertheless, these drilling funds were such bad deals even a good well rarely paid off of fund investors. The same couldn’t be said of the investment houses of Wall Street that made a killing on fees promoted to the wealthy oil investor.

Sensible people would wonder just how solid an investment in nat gas from shale gas is. Are the reserves really there? Are they going to require frequent re-fraccing to get that gas? Are costs really going to come down as technology improves?

Price, Cost, Volume

Pricing in the natural gas fields is partially a problem of determining economic limits. What is the terminal point when price of product, cost of production, and future volumes are all moving targets? The “science” of decline analysis is more art than science. It is subject to speculation and conjecture.

But no matter how accurately one predicts volumes (the only thing decline analysis can do), price or costs could change the metric. Likewise, no price will save a well which has simply stopped producing. Therein lays the rub, as Shakespeare might put it.

What do these wells cost? And how much money do they generate and how is that pie sliced? I saw Aubrey McClendon’s rebuttal to the NYT article (June 26, 2011) on Jim Cramer’s Mad Money show (CNBC) the following week. Even Chesapeake’s own geologist that was quoted (who probably doesn’t have a job anymore since McClendon indicated on Mad Money that they know who that geologist was) wondered if the wells could actually produce for extended years.

McClendon raged on in a 1300 word memo blaming environmentalists for the New York Times article. https://www.facebook.com/note.php?note_id=10150305143547565

McClendon launched an ad hominem attack on a “third tier geologist who thinks he is a reservoir engineer”. He was undoubtedly referring to Arthur Berman who has been a frequent critic of the shale play economics and whose column was discontinued by World Oil over the issue, apparently under pressure from advertisers. Berman was not an employee of World Oil Magazine, but the editor who oversaw him was fired. Berman has a blog http://petroleumtruthreport.blogspot.com/

However, Aubrey was coy about the real issues raised by Berman. Berman isn’t worried about the ultimate amount of shale gas that may be recovered at some future data, but rather expects an honest accounting of the total expenses associated with individual wells and if that impacts the reserve issues raised by the article. Are these companies being coy with the facts or truthfully telling us about the real economics of shale gas at $4 per MCF.

Early wells in the Fayetteville play were rarely over 2,000′ lateral (horizontal) but today those laterals are typically over 4,000′ long and are fracked in multiple stages, often fracking several nearby wells at once creating an interconnection of the fracture systems. Thus individual wells will produce far more than before. My concern that I expressed in the O & G Journal letter was that individual wells may make more gas, but the overall production per unit or acre may not increase significantly.

In my opinion, the SEC made a serious mistake by allowing companies to “book” reserves based on PUD – Proven undeveloped – acreage. Proven undeveloped is an oxymoron as “development” (drilling) may “prove” that it isn’t there and the individual wells are performing far less uniform than many believe. The SEC requires these companies to drill those PUD locations within 5 years and so there is a lot of scrambling to drill for the numbers rather than where the best locations are. Others, like McClendon, argue that they control much more reserves than the SEC allows them to book.

There is only one problem. The companies are using forced pooling to pool interest in these plays and in doing so they are controlling mineral rights that they do not OWN. They lease them and the lease terms are generally not more than five years. But by careful use of pooling, they are holding these leases while the royalty owners are getting stiffed and are not seeing their interests being developed properly and in a timely manner. They can give up those leases at any moment but the mineral owner is unable to develop or re-lease to someone else.

Here are some salient points to remember

Low product prices are hurting the gas companies and the break even price for gas is likely well above the current market price. This is really the gist of the natural gas argument. If the reserves stated are inflated, then the appearance of having a large surplus of gas is depressing the price. But to restate the reserves would invite an SEC investigation or stockholder lawsuit.

The major Arkansas based companies, mostly found in El Dorado and Ft. Smith, are virtually absent in the Fayetteville Shale play. Southwestern Energy is alone among Arkansas companies. This is a reflection of the skepticism of the “old heads” – the geologists and engineers that run those companies. Also, shale gas requires a lot of cash and the logistics of managing the huge number of wells is enormous.

The Barnett shale is maturing and production is already declining significantly as drilling rigs leave for the oily (a. k. a. – Liquids Rich) plays in the Eagle-Ford and Bakken. Individual companies are widely variable in their projections for well performance. Some are saying their wells will produce double that of other horizontal drillers.

Jason Baihly, Raphael Altman, Raj Malpani and Fang Luo, all Schlumberger engineers, authored a special report for The American Oil & Gas Reporter magazine (May 2011 issue) recently and did a study of the shale decline rates. Ultimately they concluded those with the lowest lease costs and lowest royalty payments had a much easier economic metric to vet but at spot pricing, few plays could claim to be “economic”. Since many companies had hedged positions which kept the price above the $4 level, they could claim to be profitable.

If low prices are sustained however, those hedges will ultimately expire and the pressure to hedge at break even pricing could hurt their prospect of rapid recovery should the prices break to the up side.

There are clearly better areas within a play. Southwestern Energy was first in leasing the Fayetteville and it is quite apparent they have better economics than other players. First, they bought the most desirable leases with the highest carbon content as well as a favorable geologic structure. Secondly, most of their leases are 1/8th royalty meaning they get to keep a much higher percentage of the proceeds than the late-to-the-table players like Chesapeake and XTO who often gave lease royalty amounts up to 20% or more.

My own assessment is that about 20% of the wells are very profitable. Probably 50% make no profit and the balance are break even prospects… production declined to near the cost of maintenance before the well did anything other than pay for the drilling and fracking. Just on a subjective basis, I was think a well that makes 1.5 BCF (billion cu. ft) of gas and costs no more than $4 million would be considered a successful well under the prices seen in the Fayetteville since the summer of 2008.

I am unconcerned about the individual well performance. If laterals continue to grow then the EUR of individual wells will increase but does that improve the EUR of the unit as a whole? I have some doubts about it and can think of no drilling unit in the Fayetteville where 30 BCF gas has been produced, in fact, none over 15 BCF. In a speech one mover shaker argued that they had discovered “thirty to forty” BCF of gas per unit (Square mile). Since 8 long laterals will completely penetrate a section on 660’ spacings, I have to question how all those interconnected wells will average 4 – 5 BCF each. I don’t think they can do it and certainly not without additional fraccing and re-completion efforts that cost enormous amounts of money. It doesn’t add up.

CHK and Petrohawk – Why did they sell out the Fayetteville Assets?

I get a propriatory newsletter on O & G financials. I cannot link it for copyright reasons.

Petrohawk sold 300 Billion CFG for $575 million (that is $1.92 per MCF ) plus they sold their midstream assets (compressor and pipeline, etc.) for $75 million. (Exxon/XTO is buyer)

Chesapeake sold its Fay. assets for $4.75 Billion to BHP Billiton and claims some 2.5 Trillion CFG or $1.90 per MCF. Both of the above are about 50% of the actual current market prices and I am assuming that this also includes substantial undrilled locations which means the net sale is more likely in the 33% of current price range plus some value for the probable but unproven reserves.

This discount reflects the time value of money (it will take time to produce it all), and the engineering and geological risk of producing the wells as well as the expense of doing so.

They sold out to spend that money elsewhere, and in the case of Chesapeake, to reduce debt loads. They owe billions. But Chesapeake feels that they can arbitrage more money by drilling in areas which are “liquids rich” [that only means it also makes oil] and oil is selling for a huge premium on a BTU content basis over the dry gas of the Fayetteville. They are making a major push in N. OK /S. Kansas as well as the Niobrara play in Wyoming.

Petrohawk sees considerable value in redirecting their cash to Eagle Ford play in S. Texas which like the Niobrara is “liquids rich”. Oil is where the game is currently. Meanwhile the new owners of the assets of the Fayetteville see a maturing play where the risk is low, and they intend to invest in lower risk properties. And these companies have a lot of cash so they can tie up cash money in development that was putting a squeeze on the more nimble and risk taking companies of Petrohawk and Chesapeake.

Meanwhile, SEECO (SWN or Southwestern as it is known now) is still the low cost provider and they estimate their finding costs to be about $1.02 per MCF. (Personally, I am of the opinion that perhaps all the above estimates of cost and reserves may be fairly optimistic but that is another story.)

Do You Still Own Your Property?

A private landowner is clearing about 80 acres or so that was his grandfather’s place. They are logging what hardwood timber is salable ahead of the clearing and then rolling and planting permanent grasses. Basically restoring it to its per-1960s condition.

Granddad lived to be well into his 90s and purchased the place adjacent to his ranch basically to hunt on. He let it grow up into open woods and managed it for quail. In the 1950s part of it was a sheep ranch and part was a mixed wood and pasture place. Both with houses and the foundations and wells as well as a couple of barns were on the place. It was grazed occasionally by his cattle. As the old guy got too old it was managed less well. It became thicker second growth hardwood trees… what foresters call “woodlot” around here and not what you would say was managed as forest anyway. It isn’t in any government management program nor do they get FSA financing, etc.

The owner got a call from the state forestry service wanting to know if they were complying with Best Management Practices in cutting the trees. Grandson didn’t know what they were talking about but apparently the state is now monitoring such clearing and arguing for private landowners to comply. The forester said there is no law against non-compliance but that it was considered and if more people didn’t voluntarily comply, they were trying to legislate and keep people from clearing land without a government permit.

It looks to me like private ownership of land is becoming a thing of the past. The government wants to manage everything. Today, school boards exist in our community but the state regulates everything so tight, I honestly don’t know of anything they can do except rubber stamp the mandates the state has… Is that the fate of private ownership of property in America?

Where will Our Energy Come From?

“Oil, it’s always about oil. If we were a bunch of Bedouin running around the desert on camels, do you think the US would care?” – Kuwait businessman

Electric batteries required for much of our electric storage needs.

Lithium – Nickel – Cadmium.

50% of our lithium is imported, any additional supply will come from overseas. Only a couple of places in the U. S. produce lithium. NC and NV.

The world sources are Chile, Argentina, China,Russia, Australia,
Canada, and Zimbabwe.

Nickel comes mostly from Canada, Russia, Norway, and South Africa

Cadmium isn’t mined but is a by-product of zinc mining. China, Japan, and Korea are the world’s largest producers, with Mexico, the United States, the Netherlands, India, the United Kingdom, Peru, and Germany next. About 15 other countries produce smaller amounts.

Silica for solar panels is pure sand melted and formed into glass ingots then reprocessed by slicing very thin. The process is very energy consuming and the efficiency of Silica is less than 10% usually. A newer process of thin wafer panels relies upon creating a paste and literally painting on a surface. The good news is that silica is abundant world wide.

Matilda was a wind turbine located in Sweden. It produced a total of 61.4 GW·h in the 15 years it was active. It ceased in 2008. At the end of 2009, worldwide nameplate capacity of wind-powered generators was 159.2 gigawatts The US uses 3300 gigawatts. There are roughly 60,000 wind generators (commercial size) in the U. S. indicating we would need roughly 1.25 million wind generators to replace coal and gas fired plants. Also, we would need a substantial amount of backup generation for times when the winds are becalmed.

The additional cost of these standby generators (co-generation or peak generation) plus the huge losses of electricity between the areas where wind blows well (like the Great Plains) and where the juice is actually needed, means the advocates of wind generation have understated the actual unit cost of wind-generated electricity (they claim 11¢ per Kw compared to 7¢ from coal, but others suggest the actual cost would be about 30¢ per Kw)

This leaves only one low carbon footprint solution – nuclear. But no new plants have been built in 30 years and the permits for all plants expires in 40 years, meaning many are having to get approved to continue as is. Further, we have refused to deal with the issue of discarding nuclear waste. And our design of plants unlike the French designs does not reprocess the uranium, which would reduce the waste by 95%. … Finally, a nuclear accident will happen. Here, there or somewhere. It is a human endeavor and humans make mistakes. It could be a doozy like Chernobyl… preventing a huge chunk of countryside from being occupied for hundreds of years.

Energy – it’s a choice. choose it or lose it. The answer has the very future of this nation held hostage. Without increasing amounts of energy, our nation will come to a standstill.

Terrel Shields Blog