According to oil geologist Arthur Berman, company production projections for shale gas in the U.S. are at least double what drill results justify. Mr. Berman’s claims are nothing new. He has been a long time shale gas skeptic, but he is making headlines now because his public statements calling shale gas a “speculative bubble” have prompted a response from many industry players such as Chesapeake Energy Corp. and Devon Energy Corp. who have outright rejected Mr. Berman’s claims.
Mr. Berman does not dispute the shale gas is there, but argues that the decline rates used by the industry under-play the true rates of decline at the average shale gas well. He simply disagrees with how producers are interpreting the data. Mr. Berman claims to have reviewed data for thousands of wells and sets his own projections at an average output of less then 1 billion cubic feet per horizontal well. But this assumes that Mr. Berman is looking at the same data as the energy companies which are likely to keep relevant data confidential and proprietary. A spokesman from Quicksilver has stated that Berman underestimates Quicksilver’s Barnett Shale production by using data from the Railroad Commission that does not include natural-gas liquids.
The technology and processes for unlocking natural gas from tight shale rock formations is relatively new and highly specialized to say the least. So while Mr. Berman believes operators are being overly optimistic, there are those that question Mr. Berman’s research and shale gas experience.
“Mr. Berman doesn’t have the experience in unconventional gas projects to validate his assertions”; Mr. Dave Pursell, Managing Director, Tudor, Pickering, Holt & Co. (Investment Bank)
One of the easiest ways to get media attention is to take an opposing opinion or position to the prevailing trend. Especially, if the common consensus is of massive scale like the potential of shale gas as a so-called “game-changer” in the North American energy markets, and perhaps around the world. If there is anything good to come out of Mr. Berman’s claims it is healthy debate which does force operators to reaffirm their forecasts. Which they have done. Steve Dixon, CFO of Chesapeake Energy devoted part of Chesapeake’s analyst and investor meeting on October 14 and several others have responded and restated their experiences with their respective shale plays.
And while Mr. Berman risks little in expressing his opinion, the energy companies are risking billions and did not do so based on a preconceived plan of deception. No single person at a large operator analyzes the data and makes the investment decision alone. The energy companies have large teams of geologists that crunch over the data before taking a calculated risk to invest. Billions are invested so these calculations are not taken lightly. Most major producers are publicly traded companies where regulations provide a framework for projections. Companies need to carefully consider the low, medium and high case in production forecasts. The point here is that major operators are investing billions into shale gas after extensive analysis and ground work and exploratory drilling.
Mr. Berman’s suggestion that shale gas is a “speculative bubble” is to misuse a term that is generally associated with a spike in asset values within a particular industry, commodity, or asset class. This is certainly not the case for natural gas prices and for those producers that have seen market caps decline along with natural gas prices. If there was a “speculative bubble” in energy it was two years ago when energy prices were hitting an all time high. (And if you really think about it… it would be Mr. Berman that would be promoting a “speculative bubble” in natural gas prices by suggesting that there is much less natural gas then the operators suggest).
With this said, forecasting is not an exact science and unforeseen circumstances – good and bad – inevitably come into play. No company can guarantee future results; and no company has ever met production forecasts to the decimal point. Some wells exceed expectations and some fall short and some are a “bust” and simply not economical. The same will hold true for the production decline rates. Some will decline faster, some will not. Hopefully, Mr. Berman does not claim victory by stating “I told you so” by focusing on those wells that do not meet forecasts or are simply uneconomical and shut in.
What Mr. Berman is ultimately saying is “I’m right. And everyone else is wrong”. The difference is that the natural gas operators are following up their analysis by investing billions.
Bloomberg: Shale-Gas Skeptic’s Supply Doubts Draw Wrath of Devon
