Monday
Jun102013
by 
Bishop Hill
Bishop Hill More shale numbers
Jun 10, 2013 Energy: gas Nick Grealy has come up with some news on the long-withheld report from the British Geological Survey:
The BGS Assessment of the Bowland Shale will be published, allegedly, by the end of the current Parliamentary session, July 18. A study for DECC on the price impact of shale gas, undertaken by Navigant will be released simultaneously I’m told.
He also says that a representative of the UK Onshore Operators has put UK reserves at 200Tcf, or nearly a century's worth of supply. This is similar to numbers that have been bandied about in the past, but much more than official estimates.
Reader Comments (62)
Did I miss Vangel's point?
Gas companies drill for shale then sell it to me (the consumer) at a loss.
Remind me why I should be worried about this? I don't care very much about the internal financial workings of M&S or IBM or Apple or Tesco or the greengrocers down the road or the
But I do care about the transactions where I get involved...i.e. buying something. If they are stupid enough to lose money on the deal, that's their lookout. I'll be quite happy to take advantage of their dumbness.
You cannot compare the US and UK.
The US has space (and I mean SPACE). The US can support well head contracting teams permanently moving around the country. It still has a "wild west" approach, hence the unique US environmental movement. Start-up is cheap and quick.
No wonder everyone wanted a slice. Part of the US culture is built on the desire to be the next J.R. Ewing. Look at Texas, it went from being a primitive backwater of a state, barely connected to the Union, to being one of the richest and most influential.
Let the UK market sort itself out. We have huge capital investments in building storm proof and salt-water proof platforms on some god-forsaken part of the continental shelf. I will not even mention the direct loss of life such exploration costs.
If the reserves are there, and provided the market is left to itself (within reasonable local planning laws) I see no reason no to begin exploitation of this resource.
Take the money from gas and invest in researching THORIUM .
Confused
I second that !
So much rhetoric from improbable friends who seem so concerned for the balance-sheets of investors in the oil/gas industry. Crocodile tears?
Shale gas may or may not be profitable. There seems no shortage of investors willing to try and make it so. Let them. They can take the risk to try and achieve the extra reward. The same for offshore wind. Ho ho.
A properly regulated functioning energy market without too many undue political distortions is most important to me. Using generalised criticisms of capitalism as a stick to beat the oil/gas industry, leaves me persuaded.
I'm not sure what planet Vangel came from or what school he went to, but here's a few facts:
- in the Marcellus, Bakken or Eagle Ford plays they can drill a well for around $10millon
- the recoverable reserves vary, but nowadays they expect about 1million boe (barrels oil equivalent) production. Revenue is - if oil say $85million ($85/bbl), if NGLs say $50m, if gas (at $4mcf) about $24m. Oil is lucrative
- all the oilcos are heading towards the oil "window". They will produce mostly oil, but some NGLs and gas. Lets say $60/bbl mix. Per barrel: Development $10. Opex $5. Shipping $3. Royalties $2. Overheads $2. That is $39/bbl pretax, $39million per well. The cost can vary quite a bit but you get the picture.
- Since George Mitchell pioneered fracking in the '90s in the US the process is now proven. Thousands of wells drilled. Safe, reliable, low risk investment.
- Statoil (that safe boring Norwegian company mostly owned by the government) has invested significantlyin US shale. Today they announced investment in onshore Australian shale (see Petro Frontier Northern Territory). Statoil have significant gas reserves in Norway, but they can see which way the wind is blowing.
- in 2012 US oil and gas production has arrested a decline over the years and is back where it was in the mid '90, mostly driven by onshore shale. It is accelerating, particulary in places like the Bakken where production has doubled in three years to about 800,000bll today. Texas (Eagle Ford, Permian etc) above 2million. That is more than UK North Sea.
- the US has experienced a gas price of about $4mcf for a few years now. That compares to about $9mcf in the UK and $13 in Japan.
- US don't need imports any more. They are planning to build export LNG terminals. UK LNG imports from Qatar = Ferraris for Qataris. Gas imports from russia prop up corrupt Gasprom.
Vangel, if you are sure its a scam, then short the oilcos that are heavily involved in shale. Sit back and make a mint.
Gas companies drill for shale then sell it to me (the consumer) at a loss.
Correct so far.
Remind me why I should be worried about this? I don't care very much about the internal financial workings of M&S or IBM or Apple or Tesco or the greengrocers down the road or the..
You should worry because capital is being destroyed and a country becomes wealthier by capital formation, not destruction. In the end it will be depositors who will have to pay to bail out the bad loans made by the bankers and you will experience lower purchasing power as the Pound falls towards its intrinsic value as wallpaper.
But I do care about the transactions where I get involved...i.e. buying something. If they are stupid enough to lose money on the deal, that's their lookout. I'll be quite happy to take advantage of their dumbness.
I agree fully about the short term. But this argument is not about a temporary gain as others lose but about securing a stable and cheap supply of energy. The more distractions that we see as we move towards capital destroying efforts such as wind, solar, or shale the further we will be from where we have to get to in order to keep our standard of living high. In the long run that matters.
Note that I have not even mentioned that the idiots who run your pension funds are likely to jump into shale in the hope that money can ultimately be made by producers who lose on unit sales but make it up on volume.
Take the money from gas and invest in researching THORIUM .
Who should take whose money? And aren't you already free to invest in thorium reactors? We should do away with the central planners and let companies invest their own money wherever they want. If they make profits let them keep them. If the lose money let them cover their own losses.
- in the Marcellus, Bakken or Eagle Ford plays they can drill a well for around $10millon
- the recoverable reserves vary, but nowadays they expect about 1million boe (barrels oil equivalent) production. Revenue is - if oil say $85million ($85/bbl), if NGLs say $50m, if gas (at $4mcf) about $24m. Oil is lucrative
EXPECT 1 million boe? What does that mean? Why not just look at what you are actually getting? And you certainly were not and are not getting a $4 MMcf Henry Hub price today. And why is $4 a good price when the companies need around $7.50 to break even when you add up ALL of the costs? Also, you have a boe conversion factor that uses a 6:1 energy equivalency ratio. But an investor is interested in the price ratio and that is more than 20:1 today. This means that the gas part of the production is overvalued by you and others who make the claims of profits even as companies like Chesapeake and Exxon have admitted to losing their shirts on shale gas. (That part is not an assumption or expectation but clear fact.)
Now let us look at the oil wells in the Bakken. The EURs may say 1 million recovery but the actual production data does not. The total number of wells in the Bakken sits at 8361 and the daily production rate is 94 bpd. Note that around 50% of all of the production from a horizontal shale well comes in the first three years and that three years ago the number of wells stood at 4,527. Sorry but the math does not work.
The analysis above is not exactly fair because it includes some very nice vertical wells that were a lot cheaper to drill and produced a decent amount of oil but are not near stripper status. So let us look at the Bakken numbers only. As I write this there are 5,457 wells operating in the Bakken. Three years ago there were only 1,459 so you are looking at a very nice increase. But as I said, most of the oil is extracted in the first three years. This means that if you are really looking at 1 million barrels out of a well you are going to need to see a significant increase in the average production rate and that rate should be quite substantial. The problem is that the data for March 2010 shows an average production rate of 138 barrels per day. What did the $40 billion in new drilling accomplish? The average production rate did not go up; it had fallen to 132 barrels per day by March 2013, which is the last monthly data by the state.
As I wrote above, there is no way to make the numbers work. And it seems that it is you who is not living in the real world. I have already cited companies that have admitted that they are losing and have lost money on shale production. On previous threads I have cited actual production data and have noted that the EURs are inflated. Once again, British people have fallen for an American scam. In the early 2000s they could not understand why it was a bad idea to buy AAA rated bundles of mortgages given to lousy credit risks who were allowed to LIE ON THEIR APPLICATIONS. Now they ignore the massive debt explosions on the balance sheets of producers and accept the Estimated URs when the production data shows that they are far higher than they should be.
If you are still in doubt, this should help you see the light.
- in 2012 US oil and gas production has arrested a decline over the years and is back where it was in the mid '90, mostly driven by onshore shale. It is accelerating, particulary in places like the Bakken where production has doubled in three years to about 800,000bll today. Texas (Eagle Ford, Permian etc) above 2million. That is more than UK North Sea.
The economics of the North Sea is not in doubt. Companies know how much oil they are likely to get from the wells and depreciate those wells accordingly. They have sufficient cash flows to finance their own projects and to pay out dividends. That is not the case for shale companies.
- the US has experienced a gas price of about $4mcf for a few years now. That compares to about $9mcf in the UK and $13 in Japan.
But the US companies used to be very clear that when they added up their costs they needed $7.50 to make a profit. That was when they were drilling the core areas in the better formations. The average well outside of the core areas will require a much higher price because it will yield much less revenue over its shorter lifetime.
- US don't need imports any more. They are planning to build export LNG terminals. UK LNG imports from Qatar = Ferraris for Qataris. Gas imports from russia prop up corrupt Gasprom.
The US is unlikely to export shale gas because the producers can't make money at $4.00 per MMcf and at the break-even price of marginal production American LNG cannot compete with other sources. The only reason why we hear talk of exports is because domestic demand was hurt after the real economy collapsed.
To prove me wrong you don't need a lot of narrative and misleading statistics. All you need to do is to show that the actual filings with the regulatory authorities show that shale projects and primary shale production is self-financing. Good luck on that one.
Vangel, if you are sure its a scam, then short the oilcos that are heavily involved in shale. Sit back and make a mint.
Shorting is for suckers because the madness can continue for a lot longer than most people think. If you want to make money from a shale collapse you might want to look to very cheap coal companies that have enough cash flow to ride out the storms that are likely to come. Or you could make a bet against currencies by buying some physical gold and storing it outside of the banking system that will try to confiscate it when the crunch comes.
"You should worry because capital is being destroyed and a country becomes wealthier by capital formation, not destruction. In the end it will be depositors who will have to pay to bail out the bad loans made by the bankers and you will experience lower purchasing power as the Pound falls towards its intrinsic value as wallpaper."
This sounds like a great investment for you and other people who know the outcome of current policies. Shouldn't depositors in institutions who make lots of dodgy loans deserve to lose their money anyway. What do you think the best currency is to be in?
This sounds like a great investment for you and other people who know the outcome of current policies. Shouldn't depositors in institutions who make lots of dodgy loans deserve to lose their money anyway. What do you think the best currency is to be in?
You will see the Cyprus model used to 'save' the financial institutions as depositors are forced to take losses. Hopefully we will see depositors learn and start to protect themselves. As for the best currency, I prefer the free market's choice as money; gold or silver, although I can make a good case that platinum will do much better than either for a while. Currencies and credit can be created out of thin air to bail out the financial system. They will be until something finally breaks.