It’s not the OIL price. It is the GAS price that is killing Chesapeake and other similar shale players. Yes, that is right. Natural gas prices are less than $2 an MCF. As bad as the oil price is, natural gas is the main asset of the early shale players who drilled up tremendous reserves in the early years before someone discovered about five years ago that you can actually make oil too.
Memories are short. The idea that shale gas could be developed was poo-poohed for a number of years before the Barnett Shale blossomed. The scramble was on and areas identified where the geology for gas was favorable. But the notion was that oil would plug the time pore spaces in the rocks and was a bad thing. As it became clear that a glut of natural gas was developing, it was discovered that oil could be produced and the anticipated problem did not develop. The boom was on.
Banks shoveled money to the drillers who sold off legacy shale gas to raise funds for oil drilling. From 100% gas, folks like Chesapeake sought those “liquids-rich” plays. Associated with those liquids however, was tons of natural gas. So, natural gas, already in high supply and low demand, became so much in abundance that the price has plunged to below $1 in some cases.
There is no quick fix to the glut of gas. Producing oil will continue to increase the glut. Drilling a well solely for gas is madness. And the loss of income will be too much for many shale players. The Wall St. Journal said that if prices for gas do not improve soon, Chesapeake will have to file for bankruptcy. Sandridge, in the meantime, is trading for under a quarter per share. Many other shale players are basically underwater the moment their hedges are off and their reserves have to be written down. The water is circling the drain and it’s not going to be pretty.
Air-Drilling Atoka Gas- 1986