Chesapeake Energy CEO: US soon to be awash in natural gas

Kingcoal

This thread reminds me of the old saying on this site that "Peak Oil is a liquid fuels crisis," and it is. 70% of the oil we consume gets burned up in internal combustion engines, which are vastly inefficient I might add. Natural gas is very versatile and is the feed stock for many petrochemical industries. NG home furnaces are approaching 95% efficiency. Compare that to an internal combustion engine, which has a hard time breaking 40% under absolutely ideal conditions. Finally, NG burns much cleaner than distillates; no sulfur, much reduced CO2, etc. To the end user, NG is easy to distribute through underground pipes. IMO, NG is a great next step, however burning it up in internal combustion engines is stupid.

The real problem we have is the automobile, period. Converting automobiles over to NG is like switching from wood to coal in a steam locomotive. The problem is the ICE, not the fuel. We really need to restructure our transportation habits more than anything. I think that much expanded public transit is the answer, but that is a different thread.

What is the EROEI of shale gas? I know that oil shale has a very poor EROEI and I'm curious about shale gas.
_________________
"That's the problem with mercy, kid... It just ain't professional" - Fast Eddie, The Color of Money

OilFinder2

Article on the growth in US natural gas production on the EIA website, just out today.

--> Is U.S. natural gas production increasing? <--

ROCKMAN

OF2 and Seahorse,

Increased NG production does fall into a good news/not so good news category.

Gas deliveries are up due to two key factors: Increased gas prices and improved technology. Vitually all the unconventional gas and tite sand reserves have been known by the industries for decades. But the relatively low flow rates combined with low prices made them uneconomic. But as NG prices began rising indutry could work on improving technology while achieving some financial reward.

It has turned into something of a "perfect strorm" for such exploration. Improvements in horizontal drilling and fracturing these hard rocks have exceeded the expectaions of most in the industry. Combine that with the very widespread nature of the plays (millions of acres of open leases across dozens of states) the opportunities seem almost unlimited. I'm working with an operator in an area where they are competing with Chesapeake. The biggest hold up at the moment is a near shortage of steel pipe to complete the wells.

BUT here's the other shoe dropping on this story. The biggest reason why these plays have caught on fire is that the intial production rates are fantastic. Even with the sky high driling costs it's not uncommon for many of these wells to payout in less then 12 months. As such they can yield a 50% to 100% rate of return. The not so good news is that they decline very fast...much faster then the conventional gas reservoirs of old. Some decline at 50% to 80% per year. They can last a long time but at a very low relative rate. A well could produce a net income of $200,000/month the first year, $50,000/ the second year and then perhaps as low as $5000/month the third year. But it might average tha $5000/month for the next 10 to 20 years. I deal with economic decisions regarding such drilling opportunites every day. You might be surprised to hear that the ultimate recovery from such wells is seldom part of the economic analysis. It's the high probability of commercial success and the high rate of return that drives these plays. This is why we should temper the ultimate recovery numbers thown out about unconventional gas reserves. They may be accurate but the recovery rate is slow and requires a constant supply of huge amounts of capital.

These plays are not so much driven by the ultimate amount of NG they will produce but more by the high rate of return. Cheasapeake, like most of the public companies in these plays, are posting huge increases in income but only because they are drilling more and more of these type wells. In a way, it's something of a trap for a public company: if they stop drilling their income will fall off sharply within a year or two. This would basicly present a picture of a dying company. They would still be tremendously profitable but they would lack the asset growth potential that all public companies are judged by. Just yesterday a big independent (XTO) announced the purchase of Hunt Petroleum for $4 billion. They bought Hunt for their huge acreage positions in the tite gas play in N TX. I actually witnessed a public conpany (UPRC) destroy it self over 20 years ago by developing an oil play in Texas (the Austin Chalk). They drilled over 600 very commercial horizontal oil wells and developed a tremendous cash flow. But eventually nearly all the potential drill sites were completed. As production rapidly fell off and they had nowhere else to drill to offset the declines they went from a darling of the stock market to the biggest dog around. They could not find enough new prospects to drill to make up for declining income. Eventually they were sold for "scrap".

The Chesapeakes have no choice but to drill or die. Which is great news for the NG consumers in the US. But if for some unforeseen event NG prices drop significantly over a couple of years this gravy train would slow greatly and NG production would drop must faster than anyone could imagine.

But my bet is that won't happen short of a true economic depression in the US.

OilFinder2

joewp

OilFinder2

dorlomin · Light Sweet Crude Joined: Aug 05, 2007 Posts: 1061

ROCKMAN

dorlomin

Where do you most of the new oil coming from? There are some new big plays/fields about to pop up but what's your impression?

ROCKMAN

OF2,

I'm not sure I'd care to own too much Chesapeake stock if they should start sliding into negative cashflow growth. I doubt their dividends would be as good as a money market account...and that's if they had any at all. Most of these public companies big into the resource plays are taking on tremendous debt but with good reason: if you can borrow money at 8% or 10% and make a 30%+ return you would borrow as fast/much as you could.

On of my problems with jumping on any oil stock (despite being a petroleum geologist for over 30 years) is my technical background. It's difficult for me to swallow much of the hype on oil stocks these days while understanding the fundamentals. But the market is driven by the expectations of the general public. Their analysis of a stcok may be flawed but as long as they keep the buying pressure on then the stock values will grow,

ROCKMAN

joewp

Love the logo...Sinclare has always been my favorite.

Don't fret about OF2 hyping Chesapeake or any other oil stock on this site. There's so much expectation built into stock value now by the pros out there that we're not even a blip on the radar.

dorlomin · Light Sweet Crude Joined: Aug 05, 2007 Posts: 1061

ROCKMAN

dorlomin

Ahhh...that subtle British sarcastic humor has caught me again. But I've worked with a few Brits overseas and learned how to enjoy it...just harder to pick up in the printed word.

I'll offer a bit of unasked for advice: when folks start throwing around the "billion of barrels of oil" here and there just accept it as fact. I've been a petroleum geologist for over 30 years. These reserves are out there and they will be produced...in time.

And time is the critical issue. I won't bore the thread with the tech info of oil field development but it's not the amount of oil left in the ground that's critical. It's how fast we can recover it. The Bakken does contains billions of BO but we knew that 30 years ago and didn't pursue it. We have better technology and price support to chase it now but that doesn't change the laws of physics. Bakken wells will have big initial flow rates and make us a handsome return. But they will drop off very quickly. There is not enough drilling rigs, personnel or equipment to develop any of the resource plays quick enough to change the fundamental dynamics of PO.

But that deson't mean the inductry wont chase these plays like a hungry lad going after a spotted dick. (My weak effort at Brit humor). I run oil drilling economics almost daily and can tell you that the ultimate recovery from a project is a minor consideration in the decision process. The key is (and always will be) the recovery rate of the investment. This fact determines the rate of return...not the total amount of oil eventually produced. And this is the captain steering the ship now.

seahorse · Expert Joined: Oct 15, 2004 Posts: 2185 Location: Arkansas

OilFinder2

Starvid