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More evidence that current natural gas prices are not covering costs [ClearOnMoney]
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More evidence that current natural gas prices are not covering costs

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Commentary

More evidence that current natural gas prices are not covering costs

27 Jun 2011 by Jim Fickett.

I have been saying for almost a year that most production of natural gas is not making money at current prices. Now Ian Urbina at the New York Times has written two articles, dated Saturday and Sunday, in which he presents a large number of emails from insiders supporting this view.

The New York Times attempts a narrative, and includes only a few, highly abbreviated quotes (though also providing an extensive archive of documents). For those who like evidence, I do the opposite. With no narrative, I present below a sampling of quotes, from different sources, at different times, all expressing doubt about the profitability of drilling at current prices.

An employee of one Texas-based oil and gas company wrote in Aug 2009,

engineers/geologist that are more familiar with the entire Haynesville Shale play are telling me, and I am beginning to believe them, that the only place where the Haynesville Shale play is going to ever be economical is the “sweet spot” [a small fraction of the overall region] …

Every single [person in the business] that I know, that has the ability to analyze the play, has chosen to sit it out an[d] further if they were lucky enough, like I was, to own mineral sell. EVERY SINGLE ONE.

An employee of IHS Drilling Data wrote, also in Aug 2009,

The word in the world of independents is that the shale plays are just giant Ponzi schemes and the economics just do not work.

An an internal EIA presentation from 22 Jun 2010 says,

An analysis based on the gas production profiles of 389 wells in three 9-square mile areas of the Barnett shale and using a $7.00 per MMBtu wellhead gas price concluded that “the 25th percentile areas based on EUR [estimated ultimate recovery] are not economically viable, the 50th percentile areas are almost economically viable, and the 75th percentile areas are reasonably economically viable.”

Note that this assumed price, under which only a fourth of the wells are economically viable, is well above current prices.

An employee of Schlumberger wrote in Jul 2010:

I'm working on a shale gas well that was just drilled in Europe. Looks like crap, but operator will flip it based on 'potential' and make some money on it.

Always a greater sucker…

A PNC wealth management official wrote in Feb 2011,

Money is pouring in like crazy to take advantage of the new “new thing” of an energy play that is inherently unprofitable (reminds you of dot-coms and eyeballs, doesn't it?)

In a Mar 2011 email from an engineer at Chesapeake energy,

I will say that these wells tend to decline quickly. …

In these shale gas plays no well is really economic right now. They are all losing a little money or only making a little bit of money. Hoewver, the only thing that matters right now is holding acreage. Then as production slows prices will rise and it well be economic to start drilling the rest of the asset.

In an Apr 2011 exchange between two employees of the Energy Information Administration, one writes,

It is quite likely that many of these companies will go bankrupt, or be forced to sell a lot of stuff at a loss … leases acquired during the first half of 2008 will probably never pay off

And the other replies

I'm not sure it will make sense to pursue drilling wells if the cost per well doesn't go down. … I would say that these technology-driven improvements in efficiency (as measure by cost per well), may not be enough to make the gas economically viable.

On the one hand, all this is just further confirmation of something that has been clear for some time. On the other hand, however, having it in the New York Times may hasten the end of the Ponzi aspect of shale gas.

It is somewhat odd that the NYT, which has been very uncritical of oil industry PR, now suddenly has some serious investigative journalism concerning shale gas and, in fact, may even be excessively negative. Stuart Staniford at Early Warning has an amusing and cynical interpretation of this editorial decision:

The New York Times basically reflects the interests and desires of the society in which its editors move - the upper middle classes of New York City: wealthy, but also politically and socially liberal. They'd like to see the world a better place, but they also don't want doing so to have a significant impact on their own lifestyles.

Seen from this standpoint, peak oil is bad news, since these folks drive late model Mercedes, Porsches, and BMWs, fly everywhere on business and vacation, and don't want to stop doing these things.

However, shale gas is a different story. The New York upper middle classes have summer places and take regular weekend getaways in various parts of upstate New York, and they don't want this playground messed up with a bunch of industrial fossil fuel extraction. This could happen with wholesale fracking of the Marcellus and Utica shales