Tuesday, January 15, 2013

Blatant Censorship By Seeking Alpha on Shale Gas

They have finally imposed communist style information cersorship on the fact that the US shale gas industry is a bubble to be burst! People be aware, when vested interest group feel the need to use such extreme censorship to supress useful information that investors want to know!

Seeking Alpha author Mark Anthony has been critizing the US shale gas industry. He used compelling data and statistics to show that production of shale wells decline fast and fall far short of projection, and that the shale industry is deeply un-profitable, and it will lead to the collapse of the US natural gas industry. Read these pieces before they disappear altogether:


As a result of dirty hands of vested interest group from the industry, Seeking Alpha now completely banned Mark Anthony from writting any article or instablog posts, making any comment on any article, or even responsing to any private messages sent to him for private discussions. He can still receive private messages sent to him. But he cannot respond any more.

Mark Anthony is considering formally file a complain to SEC on blatant information supressions and market manipulation by Seeking Alpha. He has done tremendous research to dig out the truth of the shale industry. Agree with him or not, the public deserves to learn what Mark Anthony has discovered in his research. Especially when it involves a trillion dollar industry, the public need to know the truth. The public deserves to know the truth and hear different opinions.

The shale gas industry is a bubble to burst soon, due to high debts and deeply money losing shale adventure. As a result, natural gas supply will be disrupted, leading to much higher gas prices, benefitting the US coal sector. But I have repeatedly warned people that UNG, a paper future contract based ETF, is NOT the right vehicle to reap profits from the looming gas price rally. Stay clear of UNG and move to coal names JRCC, ANR, ACI, BTU, WLT etc.

Saturday, January 12, 2013

How Many Marcellus Shale Wells Exist in PA

The PSU Marcellus Research Center has a map showing all the shale gas well permits issued since 2007. See below:

The total comes to 11857 wells permitted as of the end of 2012.

Yet there are only 2000+ wells with reported production in PA DEP's twice per year production reports. WHY?

The US Natural Gas Industry is a Colloseum

The Colloseum is an ancient Rome amphitheatre where gladiators fight against each other until only a few strongest ones stand till the last.

In a sense, the US natural gas (UNG) sector is now a colloseum. There are too many players in this sector. They just have to kill each other, until there are only a few left at the end. I guess that happens to all economic sectors where there are too many players. Competition always do the job of eliminating too many players.

In the beginning of 2012, as decade low natural gas prices hurt producers, we heard a lot of producers vowed to curtail production to bring supply/demand to balance. By the end of 2012, we found that few NG producers actually did what they promised and curtailed their production, or postponed bringing new wells to production. Only one who actually curtained any production is Chesapeake Energy (CHK) who claimed that they ended the curtailment of about 0.2 BCF/day production as of end of Q2 of 2012. Why were producers eager to claim they were going to curtail production but were reluctant to do it?

If you go to investor presentation made by each individual producers, you heard the same story repeated: They all boast to investors how fast their productions have been growing, and how they project they will continue to grow.

Do you see the irony here? If every one keeps growing, the market will be more over-supplied, and the prices will continue to be killed, and it ultimately leads to the demise of their own industry. They understand it. They understand that the whole industry as a whole, they must keep production checked. They can not continue to grow recklessly. But as individual company, they want to see their own to continue to grow and expand. Because that is how they win the competition and get ahead of their competitors in attracting investment capitals.

It is a do or die situation. The shale oil and gas industry is a very capital intensive industry. They must spend large sum of capital money to drill and develop wells. So far the revenue stream is only a fraction of the capital spending. They can not sustain well drilling from cash flow from the business, they need continued injection of money from capital investment and from debt borrowing, in order to continue to drill wells. But the more wells they drill, the more they drive down the price and the more money they lose, which means they have to borrow more and beg the market for more capital investment money.

But then, it means they must continue to pitch an ever rosier pictures and try to portrait their business as rapidly growing, in order to make a case to continue to attract investment money and bank loan. Imagine the alternative. If the producers tell the truth that current NG prices are deeply non-profitable, and that they can not sustain their business from cash flow from revenue, and that they have no money to drill more wells, and that their production will fall and thus revenue stream will decline, and all that, and then they tell the banks and investors: please give up some more money so we can continue to drill more.

Imagine they say that to the banks and investors. Do they expect to get a dime of new loans or new investment capitals afterwards? No! They can not do that. Admitting facts and admitting failure will mean effective end of their business. Their competitors will win if they do so.

So that's why shale gas producers are getting bolder in projecting ever higher EUR (Estimated Ultimate Recovery) of their wells. That's why Cabot Oil & Gas (COG) claims that they are profitable even at current gas prices. They are not profitable. They cannot sustain their business if bank loans and new market capital injection stops, and they are unable to rise cash by selling assets. A profitable business should be able to sustain its own business operation from revenue cash flow. A profitable business does not need to continue to borrow money or sell assets just to make it through another day.

I see a big Ponzi Scheme here which will collapse soon, leading to collapse of US natural gas supply. It will be a big bonanza for the US coal sector. So I am holding my coal stocks firm: James River Coal (JRCC), Alpha Natural Resources (ANR), Arch Coal Inc. (ACI), Peabody Energy (BTU).

In the next few posts I will analyze COG's business to show whether they are really making a profit as they claimed. Stay tuned!

Tuesday, January 8, 2013

The Real EUR of EOG's Bakken Shale Wells

SA author Michael Filloon wrote on the Bakken shale wells of QEP Resources (QEP). He projected an EUR up to 2 million barrels of oil equivalent. I disagree with his calculation. Real production data does not support his conclusion. I pick the first well listed in his article, No. 16637, owned by EOG resources (EOG), for a case study.

Modeling Shale Well Declines

Traditionally natural gas (UNG) producers use the classical Arps formula to model a conventional oil or gas well's production decline.

As I discovered, and as many people pointed out, the classical Arps formula is not suitable for projecting shale well's decline patterns, as shale wells decline much faster than the formula projects in the long term. Specifically the terminal decline of Arps formula approaches zero, and the cumulative production it projects approaches infinity with a b-factor larger than 1.0. That's problematic, as in the long term, shale wells should decline a terminal decline rate above zero.

Let's re-cap about the classical Arps formula and how I modified it:

(click to enlarge)

I am happy to find out that even though most producers insist on using the classical Arps formula, QEP does use the SAME modified Arps formula with a terminal decline term introduced. In that sense they agree with my own modeling method. I congratulate management of QEP for being a little bit more honest than Chesapeake (CHK) and Cabot Oil & Gas (COG).

But even QEP used the same correct modified Arps formula as I do, and admitted a reasonable terminal decline rate, they still pushed for a set of parameters that gave a higher EUR (Estimated Ultimate Recovery) than what is realistically possible.

Modeling Bakken Well No. 16637

I extracted monthly production data from ND DMR web site. I did the calculation on a spreadsheet. Here are the comparisons. Note that both QEP and I used the same formula with four parameters: IP, D, b-factor and terminal decline rate Beta. I just disagree with QEP on what parameters provide the best fit. Here is QEP's model:

(click to enlarge)

According to the chart, here are QEP's parameters, versus mine:

  • QEP adopts IP = 724 BPD, D = 0.0035/day, B = 1.80 and Terminal decline rate Beta = 0.000228/day
  • I adopt IP = 1250 BPD, D = 0.020/day, B = 1.80 and Terminal decline rate Beta = 0.000280/day.
Both QEP and I use the same b-factor of 1.80. I use slightly higher IP, slightly higher terminal decline rate beta. But the biggest difference is that QEP uses an extremely low initial decline rate, by the shale industry's standard. I think there is no justification for using such a low value of D. Shale wells decline extremely fast in the first few weeks. Other producer use a D ten times as higher.

As I said, I agree with QEP in the formula used, I disagree with them in the specific fitting parameters. Let's see who fit the data better:

(click to enlarge)

It appears to me that my curve fit the actual production data much better. The QEP curve does not fit the well data very well.
My speculation is that they know that they need a flat curve to obtain a higher EUR value. The more flat the curve is, the higher EUR it will calculate. Thus they probably deliberately pull the IP down to a much lower starting point.

To compensate for a lower starting IP, they adopt a much smaller initial decline rate D, which makes the curve flatter.

Finally, to further flatten the curve, they tried to fit the artificial local peak of production, at April and May of 2008, which resulted from re-fracing operation (re-stimulation). I believe the cur should follow the non-disturbed natural decline trend, instead of following the artificial temporary boost of production, to be realistic.

The chart above shows that my curve following the real production down closely, while the QEP curve deviate on the higher side.

(click to enlarge)

The above chart, plotted in much longer time scale, and using logarithm scale, shows the deviation much better. Once again, my curve tracks the actual production data very closely. But the QEP curve clearly deviates from the real data and projects too high.
As a result, when you integrate the cumulative production over time, QEP's curve would over-estimate while my curve gives the accurate projection. See below:

(click to enlarge)

As shown above, my parameters leads to accurate projection of the actual production. The QEP curve clearly deviates on the high side.

I projected that the EIR of well No. 16637 will likely be 500 MBOE. The QEP projection is 750 MBOE. The chart clearly agrees with me.

Calculation and Discussion

As of now, the well 16637 is a bit more than five years old, and has produced an accumulative 355.280 MBOE. Current production rate is 80 BOE/day. Current annual decline rate is -16% to -22%. Using -18% annual decline, and using 10 BPD as cut off, the well will produce another 145 MBOE, bring the total EUR to 500 MBOE.
This well is NOT a typical or average Bakken shale well. If it is, even if the EUR is only at 500 MBOE, producers would make an incredible profit at $100/barrel oil price. Unfortunately that is not the case. The average Bakken shale well has a much lower IP and much lower EUR, even if they are equally cost to drill.
As of October 2012, there are 6349 producing Bakken shale wells. They collectively produced 821.30 MBOE/day. There are 6077 wells which were also producing in September, and 272 new wells which first show up in October. The 6077 wells producing in both months collectively declined from 790.33 MBOE/day to 715.820 MBOE/day from September to October, or -9.5%/month. That is a daily decline rate of /month, or -0.33%/day. At this decline rate, these well's future production will be equivalent to 1/0.33% = 303 days worth of production at current rate of 716 MBOE/day, or 217 million BOE. Divided by well numbers, each well has an average of 35.7 MBOE remaining production. That does not look like a lot of value to me. At $90/barrel, that's a remaining production value of $3.2M each.

Good luck drilling every well as productive as No. 16636, producers!

I repeatedly pointed out that shale oil and gas producers tend to over-exaggerate productivity of their wells, under-estimate the well declines, and under-calculate the fair capital amortization cost, in order to pitch their investment case to banks and investors, so they can keep borrowing more money to keep drilling shale wells.

In reality, even Bakken shale oil wells are hardly profitable at current oil prices and current development costs. My advice to investors is to do your own due diligence research and scrutinize the data. Avoid the hyped shale oil and gas sector. The sector you should get into, is the US coal mining sector. The meme that natural gas is replacing coal, is completely wrong. Natural gas will always be an important part of America's energy supply. But at fair cost, shale gas can not compete with the cheap king coal.
The investment case in coal is made better as nearly 99% of investors made the wrong bet, as there is 75 times more market capital invested in the NG sector than in the US coal sector, while both sectors contribute about equal energy to the US economy.

Imagine what happens when the looming debt crisis in the NG sector unfold, and shale gas production collapses, sending prices of both NG and coal much higher, and 75 more market capital in the NG sector now moves to coal sector instead. This is not an opportunity you get to see every year. Now is the best time to get into coal. I recommend these names: JRCC, ANR, ACI, BTU.