Last week, two remarkable events at World Oil magazine raised the decibel level about shale gas. First, WO columnist Art Berman’s latest shale piece, intended for the November issue, was yanked prior to publication. Berman immediately resigned. Berman and WO editor Perry Fischer issued on-line statements, saying the column was axed due to pressure applied by one or two natural gas companies on the president of Gulf Publishing. Fischer, the magazine’s editor for 11 years, reports that he fought the column’s cancellation, then took two days off. “When I returned I was fired,” Fischer relates. “I wasn’t told why, but neither was I surprised.”
If you’re keeping score, this isn’t the first blood to be spilled over shale gas production, nor will it be the last.
The industry has been aware of shale gas for decades. Historically, few shale gas plays proved economic; the rocks were generally too impermeable to be tapped with vertical wells. But then came the Barnett, which was unlocked by ingenious new horizontal drilling and multi-stage frac techniques. More than 12,000 wells have since been drilled in the Dallas/Ft. Worth area, and the play now yields 5 billion cubic feet per day, or more than half of all the shale gas produced in the U.S. As it became clear that the Barnett was a world-class gas field, E&P companies went on a frenetic and successful hunt for other shale plays in Oklahoma, Texas, Louisiana, Arkansas, Pennsylvania, Colorado, and Canada. As a blogger noted last spring, most in the industry view shale gas as the energy equivalent of a winning lottery ticket.
Yet a handful of skeptics, most prominently Berman, have raised concerns about the economics of shale gas in the Barnett and elsewhere. Their critiques aren’t based on arm-waving, but on detailed statistical analysis that questions the productivity and cost assumptions behind optimistic shale gas forecasts. Defenders of the mainstream view, using different takes on much of the same well production data, are both numerous and vocal. The key issues revolve around the ultimate recovery of a typical shale gas well, and the gas price necessary to make it worthwhile to drill expensive horizontal wells with multi-stage fracs. The debate is a heated one, as the following clips illustrate:
From Kate Mackenzie, the Financial Times, energysource blog, November 3, 2009:
* “There’s a persistent bunch of doubters about the shale gas story. The explosion in shale gas is new, and the horizontal wells that are being drilled furiously by Chesapeake are widely known to decline in output fairly rapidly after the first 12 months. This has led some respected resource watchers, including Matt Simmons, to voice skepticism that shale gas is really about to revolutionize supply.”
“Ben Dell, of Bernstein Research in New York, whose work is respected by both sides in the debate, says: “The average well deteriorates more in quality, and more wells fail, than people believe. Still, I think a rise in prices would make more (shale prospects) economic. Plenty of plays work at $9 per mcf [1,000 cubic feet].'”
From John Dizard, the Financial Times, November 1, 2009:
“The leading shale skeptic, independent geologist Art Berman, is often described as a ‘radical.’ Rather soft spoken, though, he says: ‘I hope I’m wrong about shale.’ The problem, as he sees it, is that the standard industry analysis about shale well Estimated Ultimate Recovery, or lifetime production, is too optimistic. ‘They have fantastic initial rates, but the question is whether the rate of production persists as they say. In deep shale formations the rock collapses as gas is produced.
This crushes the proppant that braces open the microscopic fractures. To keep the well producing you have to frac and frac and frac, which is expensive.'”
* Dan Pickering, director of research at the Houston investment firm of Tudor Pickering and Holt, counters: “Berman’s decline curve analysis is inadequate to judge what the long-term decline (rate) will actually be….Exploitation techniques have improved, so rising decline does not necessarily mean worse economics.”
* Gail Tvorberg, with The Oil Drum
, reflected on a critique of Berman’s work by Drilling Info Inc., that dings Berman for taking results from the early Barnett wells and projecting those results forward, which discounts the progress companies claim to have made in production technology. She adds, “natural gas is one substance where there really does seems to be a lot of resource available, if the price is high enough. But for the price to be high enough, there needs to be a huge amount of debt based financing available… It may turn out that inability to obtain debt financing will be a big obstacle to development.”
A geologist who wishes to remain anonymous had this to say:
“The lack of capital discipline is easy for less-than-stellar companies to get away with when you have the situation of 2004-2008, where rapidly escalating prices hide sins. In this type of environment, it is nearly impossible for an outsider to decipher your real performance. However, when the bust arrives, the write-offs of past mistakes flow with gusto and a high degree of leveraging creates crises. Then, lenders suddenly become brilliant and are not as eager to lend which makes getting back in the groove difficult.”
A former geologist who lives over the Marcellus shale wrote:
“NIMBYism is huge here…At a regional level, we shut down one of our nuclear reactors before it produced a useful electron of electricity, by using trumped up fears of the difficulty of evacuating Long Island. This was, however, after a trial operational run had been conducted, ensuring that the whole facility has to be decommissioned and demolished at vast time and expense as a rad waste site. You have a large, fearful, entitled, scientifically illiterate, but vocal and wealthy population here with substantial lobbying power and strong ties and access to Madison Avenue advertisers and Park Avenue lawyers. I think their influence and the costs of future environmental regulation has not been adequately factored in to the cost estimates of developing the Marcellus.”
Tom Fowler wrote for the Houston Chronicle (November 1):
Some see abundant North American natural gas as the gateway to reduced dependence on foreign oil and a bridge toward carbon-free energy sources since gas is the lowest-emission fossil fuel. Others say the surge in next-generation gas production isn’t paying off as promised and threatens local water supplies. Some even see it as another speculative bubble, driven by hype that will never deliver the fuel it promises. What is happening in Haynesville is typical of what has happened and will likely occur in the other shale regions – millions of dollars in investment, plenty of lawsuits against the drilling companies and concerns about the safety of the drilling techniques being used.
A more bullish view is offered by John Curtis, Director of the Potential Gas Committee, and Chris McGill of the American Gas Association:
“The problem with arguing these points based on current decline curves, innate biases or even the most objective opinion is that they miss the point of resource development in this country. The fact is that more natural gas has been produced in the United States during the past forty years at a lower cost than any person could have imagined. It has occurred because of new resource plays, evolving technology to extract the gas, changes in energy economics and most importantly – new ideas. Focusing on a single element of the resource story is inherently self-limiting.”
Where does the real truth lie? Probably somewhere in the middle. For now, it might be wise to heed the advice that Yogi Berra once offered: “it ain’t over til it’s over.”
Steve Andrews is a co-founder of ASPO-USA.