Monday, June 27, 2011

In the Barnett Shale, Technology and Innovation answer Peak Oil Pessimism

A friend queried me about the current discussion that implies that shale gas might not be all it is cracked up to be.  The question is really about “Decline Curves” in gas production and the future of shale gas economics and hence, production.

Here is a link to Arthur Berman's 2009 article, “Lessons from the Barnett Shale imply caution in other shale plays” advising caution in believing the decline curves propounded by investment advisors.

Skepticism is always good practice when dealing with someone who makes money from obtaining yours, so I have no problem with the advice. Investment advisors are salesmen and they will always exaggerate, consciously or unconsciously. It is human nature, one tends to see rosier futures when the future includes themselves. 

When reading Berman's article please note that the critical variable in the viability of the Barnett Shale is gas prices. During the period from 2003-2008 the price of gas at the wellhead ranged from a low annual average of $4.88/1000cf to a high of $7.97/1000 cf (annual average) and averaged $6.38 (annual) for the period ( Gas prices averaged $3.67/1000cf in 2009, It is The success of the Barnett, Bakken, Marcellus and other shale plays has driven down gas prices by increasing supply.  In fact according to the report referenced below
"Shale Gas and US Energy Outlook" shale gas production has increased 14x in the last 10 years.

The Barnett Shale was first developed by Mitchell Energy beginning in 1981 in Wise County, TX and now the primary player in the field is Devon Energy of which Mitchell is now a part. Here is a link to a history of the Barnett Shale ( 
It is interesting to realize that it took 22 years of experimentation with drilling and fracking technology to reach the point in 2003 when the Barnett Shale  became the prime gas exploration location as a result of technological innovations. These are still very young techniques.  An unseen variable, therefore, is evolving extraction technologies.    
Regardless of decline curve and rig count numbers The Barnett Shale averages about 5.25 Bcf per day even though many producers have pulled rigs out of the area and (mostly) sent them to the Eagle Ford.  This move would indicate a lower rate of production because of the lack of new wells coming online.  Overall production numbers, as of 2011, show no reduction of this rate of production.

The reason for this move to the Eagle Ford is economics. The price of gas is low and the price of oil is high. The operators in both plays are largely the same companies. The Eagle Ford in South Texas has a large oil zone and there are not enough rigs to both develop the Barnett Shale and the Eagle Ford simultaneously, so they are moving drilling operations to the more profitable of the two locations. The Eagle Ford oil discovery is touted as being the third (or the sixth) largest oil find in US history and the largest since Prudhoe Bay. 

The primary driver of the oil production in the Eagle Ford is EOG who was rated by some as a “marginal” investment in the Barnett Shale because their acreage was not in the sweet spot and they were trying to “squeeze” oil out of the shale. Their stock was valued in October 2005 at $75 by Pickering Energy Partners.  The price stands today at $100.02 In essence they experimented with their processes in the Barnett Shale and are applying them to great effect in the Eagle Ford. 

Berman's report takes issue with the USGS estimate of recoverable reserves from the Barnett Shale of 26Tcf and claims that his calculations (quickly published by the Peak Oil fans) is 8.8Tcf recoverable with questionable economics. In considering this difference one should take into account that in 1980 recoverable reserves from the Barnett Shale were estimated at 0Tcf. It was the unanticipated technology of horizontal drilling combined with hydraulic fracking that led to the current argument.

Peak oil and decline curve predictions will always lag new technologies as the former cannot incorporate the latter into its estimates but the incentive to innovate in order to exploit known reserves is immeasurable.  Consider George Mitchell plugging away in the Barnett Shale for 22 years until he got it right. 

Here is a link to the report "Shale Gas and US Energy Outlook" which has lots of nice charts on the subject.

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