Berman To McClendon: Some Support From An Unexpected Source

This has been a tough period for Chesapeake Energy and Aubrey McClendon with his loans and losses on drilling investments. Despite these issues, I give him and his company credit for vision and leadership in the shale revolution.

He once described me as "a third-tier geologist who considers himself a reservoir engineer, that somehow [knows] more about the shale gas revolution in America than companies that have combined market caps of almost $2 trillion and have spent hundreds of billions of dollars to develop these new resources, I mean, it's ludicrous."

Nice.

The logic is that corporations that spend billions of dollars of shareholder money are inherently more knowledgeable and credible than industry professionals who have published dozens of technical papers on the questionable reserves and economics of shale gas.

What the revelations about McClendon's losses really mean is that what we have been saying for years is true: shale gas is an economic loser.

Still, McClendon has shown singular direction and foresight in an exploration and production industry commonly characterized by the herd mentality of late adopters.

Meet the man the shale gas industry hates

Dave Parkinson has written a good article in The Globe and Mail about me called "Meet the man the shale gas industry hates."

I could say a lot about some of the comments by industry people in the article, but I will focus on Devon Energy spokesman Chip Minty's statement that, "We kind of look at Arthur Berman as a dinosaur. With every day that goes by and these shale production numbers come in, the validity of Arthur Berman's claims becomes more questionable."

First of all, Chip, let's talk about grammar and proper English. "We kind of look" sounds like teenager speak. Do you have an opinion about me and my work or kind of an opinion?

What Chip Minty is really saying is that he dismisses the decades of industry experience that underlie the many technical articles that I and my colleagues have published on shale gas reserves and economics. If he had a technical rebuttal to our work, he would have presented it but his best shot is to say that I am a dinosaur. Touche, Chip. That really gets to the heart of the problem!

His company and the industry have recklessly over-produced large volumes of natural gas at a price that is not commercial for anyone. The headlines about Chesapeake Energy and its problems over the past week show that shale gas investments are not profitable.

I am used to the personal attacks by shale gas defenders. If they had anything to say about the real issues of lack of profit and shareholder equity, they would.

Who is the dinosaur in this debate?

To The Editor of The New York Times

“U.S. Inches Toward Goal Of Energy Independence” (news article, March 23) adds fuel to a growing but unfounded perception that recent increases in domestic oil production means we will someday be able to forgo imported oil altogether.

There is no question that production has increased. This, however, constitutes less than five percent of total U.S. consumption. While any reversal in production decline is encouraging, this is far from a cause for exuberance, let alone long-term confidence in our prospects for energy independence.

The current gap between U.S. crude oil production and consumption remains near nine million barrels per day. This is not a trivial obstacle: maximum U.S. production has declined from 10 million barrels in 1970 to 5.7 million barrels today.

Even assuming the most optimistic published estimates of U.S. crude oil production growth, we would be left with a gap of six million barrels per day. Those who predict energy independence need to demonstrate how this gap will be filled, particularly given the precipitous decline rate of wells that contribute to higher production.

Respectfully,

Arthur E. Berman

Petroleum Geologist, Managing Editor of TheOilDrum.Com, and Director, Association For The Study of Peak Oil and Gas USA

Sugar Land, Texas

Rolling Stone Responds to Chesapeake Energy on 'The Fracking Bubble'

Rolling Stone Contributing Editor Jeff Goodell has published a response on March 6, 2011 to Chesapeake Energy's rebuttal of his "The Big Fracking Bubble: The Scam Behind the Gas Boom" that was published on March 2, 2012.

The New York Post: Another Shale Gas Attack

On March 5, 2012, The New York Post featured a post called "Another Shale Gas Attack Full of Hot Air." The author, Abby W. Schachter, noted my dissatisfaction with being mis-quoted in the recent Rolling Stone article "The Big Fracking Bubble: The Scam Behind the Gas Boom."

She wrote, "Only trouble with the claim is the main person Goodell uses to substantiate this claim has now written that he was misquoted, that the reporter had a political agenda and that there is no truth to the reporter's claim."

She, apparently, has the same problem mis-quoting me as Goodell. I wrote that I was mis-quoted but never said that the author had a political agenda or that there was no truth to the reporter's claim.

The statements incorrectly attributed to me in Rolling Stone are "According to Arthur Berman, a respected energy consultant in Texas who has spent years studying the industry, Chesapeake and its lesser competitors resemble a Ponzi scheme, overhyping the promise of shale gas in an effort to recoup their huge investments in leases and drilling. When the wells don't pay off, the firms wind up scrambling to mask their financial troubles with convoluted off-book accounting methods."

What I wrote was "That may be what Goodell thinks but that is not what I said, think or imply."

The two quoted statements by me that follow in the same paragraph were accurately represented by Goodell.

I Was Mis-Represented in the Rolling Stone Article: The Big Fracking Bubble

"The Big Fracking Bubble: The Scam Behind the Gas Boom" by Jeff Goodell was published March 1, 2012 in Rolling Stone. I was interviewed by Goodell and was mentioned in the article. I sent the following rebuttal to the editors of Rolling Stone:

March 3, 2012

To the Editor:

I was interviewed by Jeff Goodell and mentioned in his recent Rolling Stone article "The Big Fracking Bubble: The Scam Behind the Gas Boom."

He wrote, "According to Arthur Berman, a respected energy consultant in Texas who has spent years studying the industry, Chesapeake and its lesser competitors resemble a Ponzi scheme, overhyping the promise of shale gas in an effort to recoup their huge investments in leases and drilling."

I never said that Chesapeake or any other company involved in shale gas drilling is involved in or resembles a Ponzi scheme. That may be what Goodell thinks but that is not what I said, think or imply. I have expressed doubts about the viability of the shale gas business model used by some companies, but I do not question the legality of those business models. The term Ponzi scheme does not remotely apply to the way that exploration and production companies obtain capital and rationalize earnings.

Jeff Goodell may think that some shale gas companies are involved in Ponzi schemes, but such statements cannot be attributed to me.

Respectfully,

Arthur E. Berman

U.S. Shale Gas: Less Abundance, Higher Cost

SEE THE FULL POST ON THE OIL DRUM:

http://www.theoildrum.com/node/8212

Arthur E. Berman and Lynn F. Pittinger

Lynn Pittinger is a consultant in petroleum engineering with 30 years of industry experience. He managed economic and engineering evaluations for Unocal and Occidental Oil & Gas, and has been an independent consultant since 2008. He has collaborated with Berman on all shale play evaluation projects since 2009.

Introduction

Shale gas has become an important and permanent feature of U.S. energy supply. Daily production has increased from less than 1 billion cubic feet of gas per day (bcfd) in 2003, when the first modern horizontal drilling and fracture stimulation was used, to almost 20 bcfd by mid-2011.

There are, however, two major concerns at the center of the shale gas revolution:

• Despite impressive production growth, it is not yet clear that these plays are commercial at current prices because of the high capital costs of land and drilling and completion.

• Reserves and economics depend on estimated ultimate recoveries based on hyperbolic, or increasingly flattening, decline profiles that predict decades of commercial production. With only a few years of production history in most of these plays, this model has not been shown to be correct, and may be overly optimistic.

These are not purely technical topics for debate among petroleum professionals. The marketing of the shale gas phenomenon has been so effective that important policy and strategic decisions are being made based on as yet unproven assumptions about the abundance and low cost of these plays. The “Pickens Plan” seeks to get congressional approval for natural gas subsidies that might eventually lead to conversion of large parts of our vehicle fleet to run on natural gas. Similarly, companies have gotten permits from the government to transform liquefied natural gas import terminals into export facilities that would commit the U.S. to decades of large, fixed export volumes. This might commit the U.S. to decades of natural gas exports at fixed prices in the face of scarcity and increasing prices in the domestic market. If reserves are less and cost is more than many assume, these could be disastrous decisions.

Executive Summary

Our analysis indicates that industry reserves are over-stated by at least 100 percent based on detailed review of both individual well and group decline profiles for the Barnett, Fayetteville and Haynesville shale plays. The contraction of extensive geographic play regions into relatively small core areas greatly reduces the commercially recoverable reserves of the plays that we have studied.

The Barnett and Fayetteville shale plays have the most complete history of production and thus provide the best available analogues for shale gas plays with less complete histories. We recognize that all shale plays are different but, until more production history is available, the best assumption is that newer plays will develop along similar lines to these older plays. There is now far too much data in Barnett and Fayetteville to continue use of strong hyperbolic flattening decline models with b coefficients greater than 1.0.

Type curves that are commonly used to support strong hyperbolic flattening are misleading because they incorporate survivorship bias and rate increases from re-stimulations that require additional capital investment. Comparison of individual and group decline-curve analysis indicates that group or type-curve methods substantially over-estimate recoverable reserves.

Results to date in the Haynesville Shale play are disappointing, and will substantially underperform industry claims. In fact, it is difficult to understand how companies justify 125 rigs drilling in a play that has not yet demonstrated commercial viability at present reserve projections until gas prices exceed $8.68 per mmBu.

SEE THE FULL POST ON THE OIL DRUM:

http://www.theoildrum.com/node/8212