Thursday, November 14, 2013

How Much Natural Gas Reserve Do We Have

There's been a propaganda that the world has a reserve of hundreds of years worth of supply of natural gas, in the form of shale gas. Nothing could be further from the truth, as natural gas is the least abundant of all three fossil fuels: coal, petroleum and natural gas.

But exactly how much natural gas reserve the world has? And how much the USA has within its land?

One thing can give us some clue, the oxygen in the earth's atmosphere,which can be calculated accurately.

Oxygen does not exist without life form. Every free oxygen molecule that exists in the atmosphere was breathed out by an ancient life form, which uses the photo synthesize or other energy driven process to extract the oxygen either from carbon dioxide, or from water. So each and every oxygen molecule is associated with some alive or dead biomass on earth, or with some carbon scattered in the soil which originally came from biomass, or with buried fossil fuels. So let's do some calculation.

The entire atmosphere of the earth, if condensed into a layer of uniform pressure of one standard atmospheric pressure, 101325 pascal, then it will be a layer of 26200 feet (8000 meters) thick.

Oxygen is 20% of the atmosphere, in volume. So the atmospheric oxygen can be condensed into a uniform layer of 5240 feet deep on the earth surface. That gives us an idea of the quantity.

Natural gas is mostly methane molecules, which contains one carbon and four hydrogen atoms. When one carbon atom is extracted from CO2 (carbon dioxide), two oxygen atoms are released. When four hydrogen atoms are extracted from water molecules, H2O, two oxygen atoms are released. So one methane molecule is associated with four oxygen atom, or two oxygen molecules. That's a 1:2 ratio.

Thus, if the earth's 5240 feet thick layer of oxygen is completely associated with buried natural gas, and there is no other biomass or fossil fuel. That will give us a uniform layer of 5240/2=2620 feet of buried natural gas. That's the absolute theoretical maximum, assuming there is no live organs, no scattered biomass and no other fossil fuels, just buried natural gas only.

But we know the distribution of biomass and fossil fuels are not uniform. The ocean is four times as active as the land area as a biomass circle. Consider 29% of the earth surface is land and 79% is ocean, the  layer of biomass on land is only 32% (100%/(29%+4*71%) = 32%) of the global average. That's equivalent to a layer of 838 feet deep, if all the land biomass is converted to underground natural gas reserve.

But not all biomass is converted to natural gas! Some of them are living organisms: animals, plants, insects, germs, etc. Some of them are scattered biomass int he soil. Only a small portion is converted to fossil fuel.

Based on best available scientific estimates, vast majority of biomass either exists in live organisms, or in organic material scattered in soil. Only a small portion, less than 10%, forms ancient fossil fuels. So that cuts possible fossil fuel down to the equivalence of a 84 feet deep natural gas layer.

But NOT all fossil fuels exist in the form of natural gas. Vast majority of buried ancient biomass becomes just carbon when they were compressed at high temperature and high pressure underground and dehydrated. That forms coal. A small portion, given existence of water and micro-organism and suitable conditions, can be converted into hydrocarbon by combining with hydrogen extracted from water by such germs. My estimate is 70% of fossil fuels became coal, and 30% became various hydrocarbon. Within the 30% hydrocarbon fossil fuels formed, 30% became the thicker and heavier hydrocarbon molecules, which is petroleum, and only 10% became the lightest hydrocarbon, methane, or CH4. So 10% of the 84 feet worth of natural gas equivalent layer will be actual natural gas reserves. That gives us 8.4 feet.

The 8.4 feet deep is the average expected natural gas reserve you can find any where in land areas of the earth. How much is that for the USA? The USA has a land area of 9.3 million square kilometers, or 9.3 trillion square meters, or 328 trillion square feet. Multiply by 8.4 feet, the total expected buried natural gas reserve in the USA is 2760 trillion cubic feet of natural gas, or 2800 TCF (trillion cubic feet).

The USA extracts 28 TCF ofnatural gas per year. So 2800 TCF of underground natural gas can provide 100 years of supply. But that's assuming every single buried natural gas molecule can be extracted. That is of course unrealistic. Most of buries natural gas molecules are either not concentrated enough to be extracted economically, or can not be extracted completely due to technology limitation.

Take shale gas as an example. Geologists estimate that by hydraulic fracturing, only no more than 5% of the original gas in place can be extracted and produced. The other 95% stays underground.

So that cuts producible natural gas to 5% of 2800 TCF, or 140 TCF, or a mere 5 years supply of shale gas.

The USA does NOT have one hundred years of supply of shale gas. We have much less, five years worth, or maybe a little bit more. Not no where near one hundred year's worth of gas supply!

Tuesday, March 5, 2013

Cabot Oil and Gas Bragged About EURs

All shale gas companies love to brag about the EURs (estimated ultimate recovery) of their best producing shale wells, Cabot Oil and Gas (COG) is no exception.

On Feb. 20, 2012, COG made mention of two most productive Marcellus shale wells on the same pad and claimed:

Specifically, in data just released by the Pennsylvania Department of Environmental Protection (PaDEP) on cumulative production for the last six months of 2011, Cabot had eight of the top 10 performing wells. In addition, for two of the identified wells, Cabot booked initial estimated ultimate recoverys (EURs) in excess of 20 Bcf each. These two wells, on one pad, have been on production for about 275 days and have cumulative production of 4.5 Bcf each. The Company does have one other well that has exceeded 5.0 Bcf of production since being placed on-line in the summer of 2010. "Also of note, is the result from our first pad drilling effort, which to date has produced 12.5 Bcf in less than 500 days and is still producing about 16 Mmcf per day from three wells," said Dan O. Dinges, Chairman, President and Chief Executive Officer.

An EUR of 20 BCF each well? Wow. That would have been hugely profitable. These two wells are indeed exceptionally good ones. But I know that when a shale company claims that a well's EUR could reach such and such level, you'd better chop half off their numbers to get a more realistic number.

How are the productions from these two wells stacked up so far?

I identified those two wells as well no. 115-20375 and 115-20378.

You can get the actual well production from the PA DEP web site:

Well No 115-20375:
  • H1-2011: 898,773 MCF in 40 days, or 22469 MCF/day
  • H2-2011: 3,028,634 MCF in 184 days, 16460 MCF/day
  • H1-2012: 2,169,999 MCF in 181 days, 11989 MCF/day
  • H2-2012: 1,380,137 MCF in 184 days, 7501 MCF/day
  • Total production by end of 2012 was 7.48 BCF
  • Estimated end of 2012 production rate was 5880 MCF/day
  • Estimated end if 2012 decline rate: -0.255%/day

Well No 115-20378:

  • H1-2011: 909,051 MCF in 40 days, or 22726 MCF/day
  • H2-2011: 2,884,292 MCF in 184 days, 15676 MCF/day
  • H1-2012: 2,029,866 MCF in 181 days, 11215 MCF/day
  • H2-2012: 1,270,247 MCF in 184 days, 6904 MCF/day
  • Total production by end of 2012 was 7.09 BCF
  • Estimated end of 2012 production rate was 5364 MCF/day
  • Estimated end if 2012 decline rate: -0.264%/day

Based on those data, well 115-20475 is expected to produce 2.3 BCF more, bring the ultimate production to 9.8 BCF. Well 115-20378 is expected to produce another 2.0 BCF, bring the total to 9.12 BCF. So the realistic estimate of those two wells are 10 BCF each. That is far from COG's 20 BCF original estimates.

COG bragged.  

Sunday, February 24, 2013

Did CHK Counterfeit Marcellus Production Data?

I looked at CHK production data at Marcellus closer, and find more disturbing pattern which suggest that they may have pulled a DATA SCAM on the production of their Marcellus shale wells.

CHK had 321 Marcellus production in First half of 2012, By second half of 2012, 4 of the production wells were dropped and 94 new production wells were added.

The 4 wells dropped were:

015-20132, 015-20133, 015-21101, 015-21117

The 94 new wells added were:


There were 317 wells that produced in both first half and second half of 2012. The top producing 62 wells shows little production decline, the combined daily production of these group actually INCREASDE by 7.7% from H1 to H2 of 2012, going from 365.3 MMCF/day to 393.4 MMCF/day, or 5.892MMCF/day to 6.346 MMCF/day on a average per well basis.

The remaining 255 wells produced a combined 998.65 MMCF/day in H1-2012 and dropped to 737.25 MMCF/day, or dropped -26.2%. This percentage drop is the NORMAL and expected percentagedrop in half a year, for the group of existing shale wells. On per well basis production dropped from 3.92 to 2.89 MMCF/day.

I believe that CHK either unintentionally messed up the data and reported them wrong, or they intentionally pulled a DATA SCAM on the reported production data on some of the most productive wells.

The 62 wells with questionally high productions which do not seem to drop much, are:

131-20062, 115-20256, 115-20269, 131-20058, 115-20257, 115-20268, 115-20324, 131-20169,
131-20121, 131-20125, 115-20296, 131-20138, 115-20458, 015-20673, 115-20279, 015-20242,
015-20600, 115-20271, 115-20393, 015-20701, 115-20341, 115-20325, 015-20452, 115-20351,
015-20458, 115-20244, 115-20272, 015-20488, 015-20482, 015-20645, 115-20303, 015-20997,
115-20243, 015-21224, 015-21521, 015-20644, 015-20457, 015-21302, 015-20403, 015-21293,
115-20498, 015-20646, 115-20426, 015-21980, 115-20424, 015-21979, 115-20593, 115-20592,
115-20105, 115-20442, 015-20124, 015-20234, 015-20625, 115-20073, 115-20068, 115-20182,
115-20108, 115-20066, 125-23943, 015-20410, 125-23944, 015-20425

Study the data and draw your own conclusion:

131-20062 1476659 179 8249 131-20062 1653825 183 9037 9.55%

115-20256 1459709 181 8065 115-20256 1634887 182 8983 11.39%
115-20269 1461695 182 8031 115-20269 1631246 184 8865 10.39%
131-20058 1440822 182 7917 131-20058 1604633 181 8865 11.98%
115-20257 1465199 181 8095 115-20257 1600436 184 8698 7.45%
115-20268 1402920 179 7838 115-20268 1576530 183 8615 9.92%
115-20324 1469184 182 8072 115-20324 1563409 184 8497 5.26%
131-20169 330849 57 5804 131-20169 1547512 183 8456 45.69%
131-20121 332043 57 5825 131-20121 1554890 184 8450 45.06%
131-20125 777646 135 5760 131-20125 1542115 183 8427 46.29%
115-20296 1416337 182 7782 115-20296 1524309 181 8422 8.22%
131-20138 770648 134 5751 131-20138 1437812 173 8311 44.51%
115-20458 1476401 182 8112 115-20458 1519707 183 8304 2.37%
015-20673 1441316 181 7963 015-20673 1508240 184 8197 2.94%
115-20279 1474577 182 8102 115-20279 1494398 183 8166 0.79%
015-20242 1429295 182 7853 015-20242 1413111 177 7984 1.66%
015-20600 1428242 182 7847 015-20600 1448489 183 7915 0.86%
115-20271 1477172 182 8116 115-20271 1454022 184 7902 -2.64%
115-20393 1472000 182 8088 115-20393 1434924 182 7884 -2.52%
015-20701 499066 81 6161 015-20701 1441815 184 7836 27.18%
115-20341 1479389 182 8129 115-20341 1407474 180 7819 -3.80%
115-20325 1469388 182 8074 115-20325 1427779 183 7802 -3.36%
015-20452 1044552 137 7624 015-20452 1432879 184 7787 2.14%
115-20351 1406359 182 7727 115-20351 1398467 181 7726 -0.01%
015-20458 1419562 181 7843 015-20458 1251273 162 7724 -1.52%
115-20244 1460883 182 8027 115-20244 1396425 182 7673 -4.41%
115-20272 1404935 182 7719 115-20272 1383846 183 7562 -2.04%
015-20488 1428338 182 7848 015-20488 1269073 168 7554 -3.75%
015-20482 1330503 164 8113 015-20482 1378817 183 7535 -7.13%
015-20645 472839 80 5910 015-20645 1376408 183 7521 27.25%
115-20303 1459934 182 8022 115-20303 1354704 181 7485 -6.70%
015-20997 355326 72 4935 015-20997 1359431 183 7429 50.53%
115-20243 1452286 182 7980 115-20243 1353519 184 7356 -7.81%
015-21224 1433244 182 7875 015-21224 1296706 179 7244 -8.01%
015-21521 98217 17 5777 015-21521 1314852 184 7146 23.69%
015-20644 489638 80 6120 015-20644 1287480 182 7074 15.58%
015-20457 1419537 182 7800 015-20457 1158702 164 7065 -9.42%
015-21302 388357 66 5884 015-21302 1291010 183 7055 19.89%
015-20403 1288945 177 7282 015-20403 1288649 184 7004 -3.83%
015-21293 546162 121 4514 015-21293 1137136 183 6214 37.67%
115-20498 383140 78 4912 115-20498 797474 129 6182 25.85%
015-20646 796271 135 5898 015-20646 1087595 182 5976 1.31%
115-20426 562665 102 5516 115-20426 1090302 183 5958 8.01%
015-21980 529852 90 5887 015-21980 1083175 183 5919 0.54%
115-20424 576143 101 5704 115-20424 1086960 184 5907 3.56%
015-21979 501435 91 5510 015-21979 998933 184 5429 -1.48%
115-20593 504734 102 4948 115-20593 967251 182 5315 7.40%
115-20592 454040 100 4540 115-20592 975384 184 5301 16.75%
115-20105 404616 127 3186 115-20105 890616 183 4867 52.76%
115-20442 314250 78 4029 115-20442 874448 184 4752 17.96%
015-20124 537558 182 2954 015-20124 493574 184 2682 -9.18%
015-20234 501389 181 2770 015-20234 480784 181 2656 -4.11%
015-20625 482920 181 2668 015-20625 436565 172 2538 -4.87%
115-20073 440528 182 2420 115-20073 428935 177 2423 0.12%
115-20068 403515 177 2280 115-20068 445109 184 2419 6.11%
115-20182 280366 177 1584 115-20182 322340 184 1752 10.60%
115-20108 331008 182 1819 115-20108 322502 184 1753 -3.63%
115-20066 281002 182 1544 115-20066 271904 179 1519 -1.62%
125-23943 224515 182 1234 125-23943 241290 184 1311 6.30%
015-20410 207206 182 1138 015-20410 194015 178 1090 -4.26%
125-23944 180793 182 993 125-23944 194181 184 1055 6.24%
015-20425 204524 182 1124 015-20425 191805 184 1042 -7.24%

Explanation of the data above, with the first row as an example:

131-20062 1476659 179 8249 131-20062 1653825 183 9037 9.55%

131-20062  is well number
1476659  is H1 2012 production in MCF (thousand cubic feet)
179         is days of production in H1 2012.
8249       is calculated average per day (=1476659/179)
131-20062 is well number again
1653825 is H2 2012 production in MCF (thousand cubic feet)

183         is days of production in H1 2012.
9037       is calculated average per day (=1476659/179)
9.55%    is percentage change of daily production, from H1 to H2.

Friday, February 22, 2013

The Marcellus Shale Production Update

The PA DEP finally released Marcellus shale production data for second half of 2012. It shows significant production growth from the first half to second half. So I want to study the data closer to get an idea what's going on.

Looking at the data I note the following summary:

  • In H1-2012, there were 2835 wells produced a total of 895.555 BCF of shale gas in 442194 well production days. That figures to an averages of 4.92 BCF/day total production, and an average of 2.0246 MMCF/day per well.
  • In H2-2012, there were 3551 wells produced a total of 1146.8 BCF of shale gas in 558212 well production days. The average is 6.233 BCF/day total production, 2054.4 MCF/day per well.
There are two surprises to me. One is the data suggests that there seems to be 716 new wells added in H2-2012, averaging 3.9 new wells per day. I knew from my previous study that 4 wells per day in average is needed to maintain flat Marcellus production, and the well spud rate dropped to roughly 2.5 new wells per day starting in July 2012. Obviously the drop of spud rate has not translated into the drop of well completion rate so far yet. It will take a bit more time for the slow down of well drilling to lead to slow down in well completion.

Another surprise to me is that the data seems to suggest that production from existing wells some how are not dropping as fast as I believe they should. Thus I looked at the data closer.

I screwinized the production data and removed a few wells that were producing in H1-2012 but not in H2-2012, as they may distort the data. The remaining wells are in two categories:

  • Existing wells that produced in both H1 and H2 of 2012. There are 2823 of them. They produced 892.7364 BCF in H1 in 436366 well production days. They averaged 4.905 BCF/day in total production and 2045.843 MCF/day per well. The average days of production is 154.6 days in the 182 days H1 period.
  • These same 2823 existing wells produced 881.8125 BCF in H2 in 490046 well production days. That averages 4.79 BCF/day in total production, and 1799.45 MCF/day per well. The average days of production is 173.6 days, in the 184 days H2 period.
  • There are 727 new wells in H2-2012. They produced 264.9895 BCF in 68165 well production days, averaging 1.44 BCF/day in total production and 3887.5 MCF/day per well. The average days of production of these wells is 93.8 days in H2-2012.

The data suggests that productivity of existing wells declined from 2045.843 MMCF/day to 1799.45 MCF/day in 182 days. The average decline is losing -0.07%/day. That's a far slower decline than my previous rule of thumb of losing -0.2%/day. What's going on? I will come back to look at this decline closer.

If existing production rate of 5 BCF/day is losing 0.07% per day. That's losing 3.5 MMCF/day. Since each new well averaged 3.8875 MMCF/day, the data suggests that 0.9 new wells per day is the threshold needed to maintain flat production. My previous estimate was 4 new wells per day.

Why the existing wells are declining at only -0.07%/day?

I examined the individual wells closer.

I find that MOST of wells indeed decline much faster than that. For example well 005-30503 declined 25% from H1 to H2. Well 015-20258 declined 43%!!! Well 015-20262 declined 40%!!!

Nowever there are SOME exceptionally good wells from the seeming sweet spots. These wells have extremely high production rates, and they don't seem to decline much so far.

For example well 015-20444 and 015-20488. The well 015-20488 produced at 7.848 MMCF/day in H1 and 7.554 MMCF/day in H2. That's hardly a decline of -3.75% in half a year. That well, owned by CHK, has produced 6.64 BCF so far. It has no sign of slowing down any time soon. That is really an amazingly high production well.

Are these exceptionally good sweet spot wells the exception, or the norm? I do not know. I have to scrutinize the data further.

But for H1 to H2 of 2012, lack of decline of existing wells supported the total production and pushed it higher. This trend may continue for Marcellus for a little while longer.

But at least by now I know the EIA data on Marcellus production is off. According to EIA, who ontained the data from Bentek, the Marcellus production averaged 6.873 BCF in H2-2012.

The PA DEP data, as discussed above, indicated an average production of 6.233 BCF/day in H2-2012. So the EIA data was off by 0.64 That is a pretty significant discrepancy.


I noticed one curious and interesting FACT.

When looking at the wells individually, most of wells decline at rates where I expect them to be, losing 25% to 30% in half a year.

However for those few wells that are exceptionally highly production, and also declines at incredibly low rate, there is NO EXCEPTION. Each and every one of such wells belongs to CHK. I have not find one such high productive and low decline well belong to another company.

Here are just some of the well numbers


Very interesting.

Is CHK, Chesapeake Energy, pulling a DATA SCAM on the records?

I don't know how they are going to explain who they have such high production wells that simply will not decline like most shale wells do.

Friday, February 8, 2013

The Real Bakken Shale Oil Well Declines

I am about done with analyzing the real production data from Bakken shale oil wells. I am posting the charts I obtained:

The above are well decline history of all Bakken shale wells that has been producing continuously.

The following shows the decline characteristics of Bakken wells started at different times:













In summary, the existing Bakken shale wells are collectively declining -0.2% per day. That's losing slightly more than HALF of production rate in one year.

The EIA Joked on Natural Gas Production Data

Here is a definite proof that the monthly natural gas production data published by EIA is nothing but a JOKE. They have almost zero credibility.

To start, go to EIA wek site and find the Weekly Natural Gas Update. At the bottom they have a chart showing productions from all shale plays. Below the chart there is a link allowing you to download the raw data used to create the chart.

Do you notice something odd? Despite of massive drilling rig drop, and a lot less wells drilled, and despite of the fact that shale wells decline fast, as shown by EIA, the Marcellus production sems to defy gravity and continue to grow up without any slowing. How could it be possible.

I extracted the Marcellus part of the data, it looks to me like a complete joke. Let me paste all the Marcellus data here, so you can judge whether this is ridiculous or not:

Dry shale gas production (Billion cubic feet per day)

Marcellus (PA and WV)

1/1/2007 0.020414941
2/1/2007 0.021928615
3/1/2007 0.023202324
4/1/2007 0.023539191
5/1/2007 0.024270666
6/1/2007 0.025593099
7/1/2007 0.026332206
8/1/2007 0.025327993
9/1/2007 0.028556724
10/1/2007 0.031472248
11/1/2007 0.034466894
12/1/2007 0.036114525
1/1/2008 0.036439162
2/1/2008 0.057211911
3/1/2008 0.076914715
4/1/2008 0.089541419
5/1/2008 0.109314548
6/1/2008 0.117205475
7/1/2008 0.136433165
8/1/2008 0.139649025
9/1/2008 0.139340395
10/1/2008 0.148172389
11/1/2008 0.148962162
12/1/2008 0.155200095
1/1/2009 0.134042178
2/1/2009 0.091690035
3/1/2009 0.107014843
4/1/2009 0.111614036
5/1/2009 0.117017073
6/1/2009 0.11661637
7/1/2009 0.118719651
8/1/2009 0.128221411
9/1/2009 0.137161605
10/1/2009 0.141329818
11/1/2009 0.140823304
12/1/2009 0.127659797
1/1/2010 0.481882287
2/1/2010 0.637744188
3/1/2010 0.798307082
4/1/2010 0.868073158
5/1/2010 1.017980024
6/1/2010 1.276166703
7/1/2010 1.269514246
8/1/2010 1.42571918
9/1/2010 1.647672123
10/1/2010 1.821883771
11/1/2010 2.047449075
12/1/2010 2.082841924
1/1/2011 2.366314737
2/1/2011 2.526894717
3/1/2011 2.773444294
4/1/2011 3.012380529
5/1/2011 3.057075584
6/1/2011 3.057975032
7/1/2011 3.544594619
8/1/2011 3.568587512
9/1/2011 3.762196787
10/1/2011 3.949613152
11/1/2011 4.405352219
12/1/2011 4.793736336
1/1/2012 5.164640947
2/1/2012 5.478762587
3/1/2012 5.61576504
4/1/2012 5.639587719
5/1/2012 5.991993065
6/1/2012 6.262796758
7/1/2012 6.290871349
8/1/2012 6.555845752
9/1/2012 6.714694689
10/1/2012 6.984281178
11/1/2012 7.257084169
12/1/2012 7.437482985

It can be seen much clearer, if you plot the data into a chart. The chart basically is composed of two straight lines. One straight line is from Jan. 1 of 2007 to Dec. 31 of 2009. It was flat, very low production and virtually no growth. It took three years and production grew from 0.02 BCF/day to 0.128 BCF/day. Effectively no growth.

And then magic happened in Jan. 2010. The production suddenly jumped from 0.128 BCF/day to 0.482 BCF/day. And from then on it was no stop, constant growth at a uniform rapid pace.

From Dec 31, 2009 up to Dec. 31, 2012, latest data available, the Marcellus production was basically a STRAIGHT LINE, going from 0.2 to 7.4 BCF/day in a straight fashion, adding exactly 0.2 BCF/day production rate each month. The growth was so uniform and so linear, it looks like rig count, well count, well declines, production rate change are all irrelevant and all had NO IMPACT on the production. It was just a straight line.

What a joke! EIA has lost all credibility in its data modeling!!! They even pretend it was actual production data. No, it was NOT actual production data. Actually None of the Marcellus producers has reported any H2 2012 production figure to any state government agency, except that they reported the production total in the Q3 quarterly report. The quarterly reports contradict EIA data, BTW.

How Fast Does Bakken Shale Oil Wells Decline

Arthur Berman is not the only shale gas skeptism. I am probably the most outspoken critic Shale Gas among all people who wrote on Seeking Alpha. They have now imposed worse censorship on me because I spoke out on the truth of shale gas. Not only they banned me from writting any article or instablog on Seeking Alpha. They banned me from making any comment or even communicate privately with any Seeking Alpha readers. In communist countries at least people are free to communicate privately.

This tells you that they feared people to hear the truth on shale gas. I intend to complaint to SEC about Seeking Alpha's blatant market manipulation by supressing truthful information. Some vested interest group played a dirty hand in getting me, Mark Anthony, completely banned on Seeking Alpha. My previous articles are still there. But I bet they will ultimately remove all traces of them eventually.

Now, Arthur Berman first got my attention to the potential scam in the US shale gas industry. But unlike most people, I do not take Arthur Berman's words on face value. I dig out data myself and do my own data analysis.

Here is what I find out by studying data from several thousand Bakken wells. Bakken is a good study candicate thanks for excellent public data release by North Dakota Department of Mineral Resources. They have month by month production statistics of ALL Bakken shale wells. So you can track each well and see how the production declines.

My study shows that Bakken well declines MUCH FASTER than even Arthur Berman claimed. For example I summed up production from 3062 Bakken wells that has been continuously producing in all the months from May to Nov 2012, including 128 wells that only started in May 2012. That's the entirety of all wells I can find that has been producing continuously, but excluding a few that produced for a while and then shut down.

In May 2012, those existing wells produced at average of 506869 Barrels per day (BOE), with gas and oil production lumped together as Barrel of Oil Equivalence (BOE).

In Nov 2012, only six months later, these same 3062 wells produced at 353040 BOE/day. That's a drop of -30.35% in merely six months. That's averaging at -0.2% drop per day, or -5.9% drop per month, or -51.5% drop per year.

That's how fast the collective group of existing wells drop, with newest and oldest wells all included. That's losing slightly more than half of production rate in a year.

Identifying only the newest 128 wells which only started in May 2012. These 128 wells dropped from 62067.67 BOE/day to 27950.77 BOE/day, or losing -55.0% in six months. That's a -0.436% drop per day, or -12.5% loss per month, or losing 80% in a year. Here are just some of the well numbers in this group:




Now looking at the oldest wells within this group. There are 1244 Bakken wells that has been producing continuously since Dec., 2009. These wells produced at 111911 BOE/day in Dec. 2009. They dropped to 54539 BOE/day in May 2012 and further dropped to 50234 BOE/day in Nov 2012. So these vintage wells more than three years old were dropping at -7.9% every half year, or losing -15.2% per year. These wells show that even after more than three years, the well decline is still very steep.

Singling out wells first started in Jan. 2010, no early and no later. There are 31 of them:





These wells that started in Jan 2010 produced at 8052.68 BOE/day in that month, dropped to 2433.77 BOE in May 2012 and then to 2007.77 in Dec. 2012. So these three year old wells dropped at losing -17.5% in half a year, or losing -32% per year, or losing 0.1% per day.

At such steep decline, even Bakken shale, perceived as most profitable due to its high content of oil and high oil price, is NOT profitable currently. They need $20 or $30/barrel higher oil price to break even.

The US shale gas industry has created a Ponzi Scheme from over a trillion dollars of investor money. This is a bubble that will burst soon. What do they get after spending over a trillion dollars and accumulated half a trillion dollars of debts? They drilled roughly 36000 shale wells and produced roughly 23 TCF of shale gas. And they are left with shale wells that produce gas at 27 BCF/day and decline at roughly losing -0.2% per day.   If they stop spending money and stop bringing any new wells onto production, the existing wells, producing at 27 BCF/day and continue to decline at losing 0.2% per day, will produce another 13.5 TCF of gas before they are exhausted.   So that means the entire shale gas adventure so far, which counted the industry one trillion dollars, brings in 23 TCF pas production and 13.5 TCF future production, total 36.5 TCF of gas. At today's gas price of roughly $3.5/mmBtu that would be worth $128B of revenue. The shale gas industry is losing their collective arses and their collective minds.

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.