- November 25, 2009
- Posted by: Art Berman
- Category: The Petroleum Truth Report
Anonymous says that there is no data to show because we only disagree about how to project existing data. That is partly true, but some of the rebuttals to our work dispute the reliability of Texas Railroad Commission production data for the Barnett Shale play. They claim that they have “other data” that somehow leads them to different conclusions, but will not show it.
That’s a really interesting tactic that I remember from the elementary school playground as “I know something you don’t know”.
I think that questioning Railroad Commission data is a red herring since production taxes and royalty payments are based on what operators report to the Commission. Those who claim that this data is no good imply that operators are improperly reporting production to the state. I would very much like people that doubt the reliability of Railroad Commission data take this issue to one of the Commissioners.
Beyond the “data” issue is the larger question of how the operators and financial advisory companies arrive at such high reserves. I can reproduce these high reserves by using absurd hyperbolic exponent b values, no terminal decline rate, or no economic limit.
When I use group vs. individual well-decline methods and b factors somewhat greater than 1.0, I can get to higher average EURs (more detail on this in a few days) than what I have published, though these reserves are still marginally commercial. Since I assume the integrity of the people who claim reserves that are 50-100% more than my most generous projections, I would like to understand how they reach those reserves.
In addition, we have always cautioned that without pressure data that only operators have, we may be too pessimistic in our EUR projections. Decline-curve analysis is only a part of the EUR evaluation process. Other factors include calculating a drainage area and running reservoir simulations to match production history with reservoir properties. These require data that we cannot get.
Operators are not required to report water production to the state of Texas. Water disposal can be a considerable cost, and the onset of water production may result in catastrophic production rate decline. This is data that we cannot get.
Some readers point out the current decline rates are much lower that we predict in some cases. This may be true because of the frequent workovers and re-fracs done in the out years of many shale years. In order to evaluate the result of lower decline rates due to human intervention, we need to know the cost. This is data that we cannot get.
Some operators claim that natural gas liquids provide uplift to their Barnett Shale economics. NGLs are not reported to the state because they are separated during gas treatment and processing in a plant. Only operators know the volume of NGLs and the gas shrinkage that results from their extraction. This is data that we cannot get.
While it is true that much of the EUR debate focuses on how to project future production from exiting data, it is hardly the entire story. A respectable EUR does not necessarily mean that the well is commercial.
Art, it seems to me that cashflow and SEC filings tell the whole story.
Using Petrohawk as an example:
“Our current estimates are that the average rate of production from our Haynesville Shale wells will decline approximately 80%-85% during the first twelve months of production and the average rate of production from our Eagle Ford Shale wells will decline approximately 75%-80% during the first twelve months of production.” [2009Q3 press release]
In 2008, Petrohawk had $2 billion negative cash flow
Nine months ending Sept 30, 2009, they posted $1 billion net loss
I find it interesting that on page 189 of the 197 page Chesapeake investor presentation .pdf from October 2009 they show a decline curve chart reconstructed from an SPE paper justifying b>2 for Devonian shale gas wells. The paper is 22 years old. CHK also states that the study was from over 500 wells. If you read the paper beyond the abstract, it states that when duplicate/bad/incomplete data were removed, the study was actually on 162 wells. A small oversight? Given the timing of the paper (1987) most of these wells were vertical and shot completions, not horizonatals with multi-stage fracs.
In the last ten years, there have been numerous SPE publications arguing against unreasonably high b factors. One of the by-products of a high b factor commonly mentioned in these papers is overstated EUR’s, sometimes exceedingly so and unrealistic well life.
Much of this new literature is aimed at improving the decline curve analysis technique for shale gas wells to calculate legitimate EUR’s, including using a new technique called the “power-law loss ratio” method.
But what do I know, I’m just an exploration geologist, not a deal promoter.
Keep the faith Art.
I very much appreciate your fine work and the courage to speak truth to power. I have followed the shale decline controversy with great interest. Over time, I have come to believe this issue serves as an insight into the culture of 21st Century American finance. When first entered the oil business, there were independent oil companies in every office building. Finance for small independents came from banks and individual investors. For several reasons these sources of finance no longer exist, as a practical matter, for small independents. Wall Street is the only game in town, and most of the finance comes directly or indirectly from Wall Street. The analysts and investment bankers now control the strings. Watching the financial middle men and recipients of public investment react to your work is very telling, and very ugly. If the products they are selling were widgets, they would have a deceptive trade issue.
It seems like they will say whatever it takes to get their hands on the money.
The most significant bonus of 2008 was that of Aubrey McClendon, chief executive of Chesapeake Energy. Mr McClendon, who founded Chesapeake in 1989, received a bonus of more than $75m after Chesapeake’s falling stock price forced him to sell more than 90 per cent of his shares to meet a margin call from his creditors.
The highest-paid executives in the FT survey – Mr McClendon and Nabors’ Eugene Isenberg – were also ranked at the bottom end of their peer group in terms of shareholder return as well as return on capital employed, a metric used to determine how efficiently a company is run.
What a strange bird Aubrey McClendon is. It seems like he gets fulfillment by running power plays over people, not necessarily for profit. Consider his controversial real estate development in Michigan, where he wants to take an extremely environmentally sensitive tract, and build a gated subdivision, while claiming to be an environmentalist via American Clean Skies Foundation. Especially troublesome is the “gotcha” way he is approaching the local government in Michigan. Does he really need to be in the home subdivision business? It seems like his hands are more than full with lawsuits and Chesapeake. And what about his snatching of the Sonics? It seems to be just another power move, not to mention his funding of the Swift Boat Veterans for truth, and Gary Bauer’s anti gay organization. And what about those “big brother” add campaign in the Ft Worth area called “Citizen of the Shale”…how creepy is that? Bow down to the SHALE!!!! A clear case of what too much money can do to one’s personality.
I am reading your words for the first time, Art, as a newbie to this problem. I am an endocrinologist – a physician – and live in Ithaca, NY. We are at the epicenter of a debate on the Marcellus Shale. I am interested in your comment about not being able to get information out of producers. I am interested in endocrine disruptors. These are chemicals interacting with high affinity receptors in humans and other species. They potentially affect reproduction, energy metabolism and many other hormone systems in the body. Unfortunately, there are is no reliable information on hydro-fracturing fluids from the industry. In addition, there is a sparsity of information of what comes out of the ground in the effluent/or released into the air as aerosols. I am alarmed that this kind of natural extraction requires plentiful supplies of water and this water can be contaminated. Fresh water is arguably the most important natural resource in this new decade. If you have any insights I would find this helpful.
Much of this controversy can be eliminated by simply looking at log rate vs cumulative production graphs of these shale gas wells. If the data plots a straight line, the decline exponent is 1 and the decline style is known as Harmonic, Slider, pg 384.
This is simply math and there’s no arguing it!
Most tight gas reservoirs decline harmonically. Cotton Valley, Barnett, Fayetteville, Woodford, etc. SOme of this data is over 20 years old and still harmonic.
Extrapolating log rate vs cum plots is just extending a straight line to the economic limit. It’s that simple. No more arguing over subtle differences on a rate time plot vs projections and “when is it going to flatten out” nonsense.
Note that the one uncertainty not discussed is liquid loading in the deep gas reservoirs. Watch for this once production rates fall under 300 mcf/d. This could serverely reduce Ultimate Recoveries.
anonymous typed: “Much of this controversy can be eliminated by simply looking at log rate vs cumulative production graphs of these shale gas wells.If the data plots a straight line, the decline exponent is 1 and the decline style is known as Harmonic, Slider, pg 384”
that is not totally true. a straight line on a log rate -vs- cumulative defines a general hyperbolic, not just an harmonic. iow, a linear log rate -vs- cumulative may be harmonic, but not necessarily so.
SkepticalGuess what. The numbers are starting to gel in the Williston Bakken and the overly inflated EUR’s based on contrived IP’s are starting to catch up. The operators with the hottest reputations will be the ones that the street is shorting by this summer.
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