Sunday, October 25, 2009

Facts are stubborn things

Several rebuttals to our position that shale gas reserves may be overstated have surfaced in recent weeks. This development is welcomed and positive because it elevates the important discussion of shale reserves and economics to a higher level of public awareness and dialogue. Although these rebuttals have been directed at me, I am not the only one with doubts. Ben Dell at Bernstein Research has published several reports recently that express similar, independently determined concerns about the cost, efficiency and reserves of shale plays. These doubts are shared among many petroleum industry scientists and financial analysts despite the enthusiasm for these plays by large public companies.

Critics of our position on shale gas plays have focused on methods of decline-curve analysis, and the projections of estimated ultimate recovery (EUR) that result. The problem with this debate from all sides is that we are uncertain about how to apply decline models to newer shale plays because there is insufficient production history to satisfy all of our questions. I will, therefore, focus on some stubborn facts about Barnett Shale cumulative production and approaches to play development.

(Click figures to enlarge)

Major operators claim that their average Barnett EUR will reach 2.2-3.3 Bcf/well. Figure 1 shows that those levels of EUR are unlikely to occur in an economically meaningful time frame based on cumulative production to date. Figure 2 shows that well performance has been erratic since operators began drilling horizontal wells, though the trend has been improving in recent years. This is probably due to drilling in areas outside of what are now known to be the core areas. The manufacturing paradigm that is prevalent in shale plays has lead many companies to assume that all areas in the Barnett Shale and other plays are uniformly attractive. Shale plays typically begin with a leasing frenzy whereby major players accumulate hundreds of thousands of acres, often at astronomical bonus prices. Next, a drilling frenzy ensues driven more by lease expiration schedules than by science. Only after considerable capital has been destroyed in this manner are the core areas recognized. This “Braille method” is completely opposite to the customary approach to E&P projects, where a cautious approach based on science is used to high-grade focus areas.

The methods used to obtain decline rates and reserve estimates for shale plays presented in this column employ best practices in the petroleum industry. Yet a group of professionals believe that some shale plays are exceptions to the methods of decline-curve analysis established by the Society of Petroleum Engineers (SPE). They should take this dispute to the SPE. It does not seem logical that type-curve methods should be more reliable than individual well decline-curve analysis. If the pattern of well decline is empirically exponential, it makes no sense that it should be treated as hyperbolic for conceptual reasons or because of a preference based on production from tight gas sand reservoirs that are not comparable in performance to shale gas reservoirs. We recognize that it may take many years before true steady-state flow is reached. But in the Barnett, decline trends are well developed in thousands of wells, and we must forecast reserves based on those trends, and not on some future, model-driven expectation of flattening decline rates.

Let me be clear. We do not dispute the volume of gas resources claimed by operators. We do question the reserves that, by definition, must be commercial on a full-cycle economic basis.

The time has come for the companies that operate in the shale plays to show the data that supports their optimistic forecasts for natural gas supply in the U.S. The economic viability of shale gas is a serious issue with profound implications for policy, alternate energy research funding, and national security. To simply say that those that have doubts about shale plays are wrong will no longer satisfy the many intelligent people who follow this debate.

Data provided courtesy of IHS Inc. However, the analysis and opinions expressed here are solely those of the authors and do not represent those of IHS or any other organization.


15 comments:

Drainage said...

Art,

Thanks for fighting the good fight.

My take, as a former geologist (you were my first boss when I joined Amoco in 1988) is that things are getting dicey when we need to resort to production from source rock.

A great follow-on would be a review of the North American explorers that are most aggressively going after high ROI *conventional* plays. These are the longer term winners.

Arthur E. Berman said...

Drainage,

Thanks for your comments. I am currently consulting for a company whose business model is to develop and inventory of high reserve/ROI conventional plays! Please send me an email so I can remember who you are from ancient history at Amoco bermanae@gmail.com.

Art

elwood said...

yeah, if a composite type curve yields a different result than the sum of individual well analysis, the monkey is on the back of the composite type curve adherents.

and a question. does your data indicate that the diminishing returns with time indicate the barnett wells are being drilled too close together ?

Anonymous said...

Could you comment on the criticisms of some of your conclusions that have been made by Gilmer, Hovey, and Simmons here.

If nothing else, you have certainly stimulated a lot of discussion and we will all walk away the wiser for it.

Alan von Altendorf said...

I followed the link to DrillingInfo.com and enjoyed reading their remarks, which were well organized and professional.

The way I understand it, horizontal wells indeed produce more than vertical, but not enough to justify the cost of horizontal drilling.

I appreciate that best practice makes a difference. Too many drillers steer for thin pay and lose circulation, LWD, seismic probes, wireline tools, etc.

David P. Craig said...

I recently reviewed a technical paper by Peter Valko (Texas A&M University) entitled "Assigning Value to Stimulation in the Barnett Shale: A Simultaneous Analysis of 7000 Plus Production Histories and Well Completion Records" (SPE 119369).

What's interesting is Valko's observation that Barnett average EUR is on the order of ~1.0 bcf/well. It's independent analysis of essentially the same dataset with the same conclusion.

Very interesting.

Arthur E. Berman said...

David,

Thanks for the reference on the Barnett Shale. Here is another:

Wright, John D., 2008, Economic evaluation of shale gas reservoirs: SPE 119899.

Wright comes to precisely the same conclusions that we do about the Barnett Shale--about 25% may break even or make money and the rest are sub-commercial.

It seems that when independent observers evaluate the Barnett, the conclusions are basically the same. It is industry and its collusionary "research" groups with investment advisory firms that consistently get it wrong!

Art

Aria Kerry said...
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