[misterno]

Who would have guessed poisionous shale gas production would explode?

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It is perhaps less surprising that natural gas prices have
recently closed below $3/MMBtu, an event we have not seen during this time of
the year in a decade. Given the risk of storage containment this year, we now see
prices average just $2.90/MMBtu in the third quarter. In fact, US Henry Hub
natural gas prices may in our view have to temporarily drop below $2/MMBtu by
October in order to curtail rampant production growth and create enough demand
to avoid the storage containment issues outlined above.Sharply lowering our US natural gas price forecasts

While the strength in shale gas output has upset the supply demand balance in
the US natural gas market for some time now, abnormally low heating demand
this winter has further contributed to exacerbate the surplus. November and
December saw the warmest winter weather in over 30 years. We estimate that the
unusually warm weather deducted 1.64 bcf/d of demand growth in 2011, relative
to a normal winter. Thus, we are starting the new gas year with an incredible glut.
This is not just bearish for 2012 but also for 2013. As a result, we are cutting our
price forecasts for US natural gas significantly. For 2012, we now expect prices to
average $3.30/MMBtu, from $4.30/MMBtu prior. We only see a small recovery in
prices in 2013 when we expect prices to average $3.80/MMBtu, from
$4.70/MMBtu prior.
Expect a fine balancing act
On our updated balance, we see end of March inventories at 2.15 tcf, up from our
December estimate of 1.96 tcf. In our view, inventories will again test the upper
limits of storage capacity this year, similar to 2009, even though working storage
capacity expanded by 75 bcf since then. Assuming normal summer weather, we
expect inventories by the end of October to reach 4.11 tcf, a level very close to
the maximum demonstrated working capacity of 4.103 tcf as of April 2011.
We see prices drop below $2/MMBtu by October

With that in mind, it is perhaps less surprising that natural gas prices have
recently closed below $3/MMBtu, an event we haven’t seen during this time of
year in a decade. Given the risk of storage containment in 2012, we now see
prices average just $2.90/MMBtu in the third quarter. In fact, US Henry Hub
natural gas prices may in our view have to temporarily drop below $2/MMBtu by
October in order to curtail rampant production growth and create enough demand
to avoid storage containment issues

[copious.abundance]

Who would have guessed poisionous shale gas production would explode?

A lot of people guessed that. Including me. Instead, ppl here are too busy dismissing everything us Cornies say, and putting us on their ignore lists.

[kublikhan]

Wow, we are now talking $2/MMBTU or even $1/MMBTU? I don't understand how these shale gas operators expect to make a profit with gas selling for so little. And yet shale gas drilling continues to increase, despite the hit to cashflow. Makes me think they really don't care about cashflow and are simply interested in flipping the properties. Reminds me of the bubble mentality in the housing markets. That did not end well.

Shale gas drilling and production in the United States is ramping up like there's no tomorrow. Natural gas is going for $3.01 per MCF ($MMBTU, Henry Hub future). The average well-head price in 2010 was $4.48/MCF. Through the first 10 months of 2011, it was $4.04. It is impossible make a profit producing shale gas at that price.

Consider the situation. The natural gas market is out of balance. There is a glut (over-supply) of natural gas, which is driving down the price, although demand is rising somewhat due low prices. Now, you would think that producers would pull back on production to bring the market back into balance. But no! The shale gas operators keep drilling, which drives down the price, which makes it even more unprofitable to sell shale gas. This alone ought to tell you there's something fishy going on.

One answer to this conundrum is that operators need to keep drilling in order to hold onto their leases. If they don’t actively work the land that they spent the last several years acquiring in a buying frenzy, they lose it. The early operators in these gas formations, or “plays,” aren’t sufficiently well-funded to continue drilling at a loss; they’re simply trying to hold onto their leases long enough to flip them to larger companies at a profit. Hence the recent rash of joint ventures with deeper-pocketed players, which give the original leaseholders a way to pay off the leasing and initial drilling costs, but ultimately reduces their net asset values.

The production of associated natural gas liquids, which generally command about half the price of oil, further complicates the economics. (At the 2011 average of $95 a barrel for oil in the U.S., gas sells at an enormous discount to oil, at $3.29 per million BTU, versus $16.39 for oil.) Natural gas liquids produced along with the “dry” gas have certainly helped generate revenues, but to what degree, we don’t know, since they are not separately reported to regulators. Berman estimates they might add $1/mcf after processing. Operators commingle the revenues from “dry” gas with those from associated natural gas liquids, masking the true profitability of the gas production. Does it matter if some operators are able to drill profitably due to the natural gas liquids, but not the gas itself? Well yes, it does. If the wells are shut down after their liquids play out, it could leave a lot of gas effectively stranded, and a significant chunk of the anticipated reserves would never be produced.

"shale gas operators [like Carrizo and Chesapeake] are simply trying to hold onto their leases long enough to flip them to larger companies at a profit. Flip away! Can no one make an honest living anymore? It's not hard to imagine how all this is going to end. And on that note, I will conclude this overly long analysis. As always, the Latin axiom Caveat Emptor applies—let the buyer beware.

Shale Gas Production Is NOT Profitable At The Current Price

[dinopello]

Wow, we are now talking $2/MMBTU or even $1/MMBTU? I don't understand how these shale gas operators expect to make a profit with gas selling for so little.

Reminds me of the internet boom. My friend was working for one of those (Net2000 I think their name was). As near as I could tell, they bought broadband services from a real company and sold them at a loss but they were growing and getting investors. They had given my friend a BMW corporate lease car. He seemed oblivious to the fact that this couldn't last (probably thought he would cash out his stock options). Anyway they went down in the early 2000's. (of course)

[rockdoc123]

There is a bit of desperation in what is going on. The leases these companies have aren't held forever and they are required to do work or relinquish them. If you are in their shoes and paid a pretty penny to get the land and still think it holds a lot of resource you would almost certainly be willing to spend more to hold the land by drilling a few wells but not going into full scale production. The hope being that eventually domestic gas prices will rise due to a combination of domestic demand along with some diversification of markets (LNG, GTL etc).

Also remember that not all of the shale gas areas are the same economically. High liquids content in the Eagleford make it much more attractive with breakeven costs that are still lower than spot market gas price. This is why a lot of these companies have been announcing their intent to slow down pure gas plays and accelerate expenditure in the more liquid rich areas.

[kublikhan]

Thanks rockdoc, that pretty much matches up with what I have been hearing about these shale plays.

As I understand it, the liquids production usually peters out before the gas production, is that correct? In that case, these companies would lose their cash cow. Any idea how long these wells will continue to produce liquids vs gas?

[rockdoc123]

As I understand it, the liquids production usually peters out before the gas production, is that correct? In that case, these companies would lose their cash cow. Any idea how long these wells will continue to produce liquids vs gas?

It is variable dependent on whether the hydrocarbon is in the gas phase with high liquid content or actually in the liquid phase or between as a volatile oil. It's a bit of a continuum related to depth, pressure and temperature. All of the shale wells have very steep declines but level off at a low rate and seem to produce for long periods of time. As a consequence it is all down to how many wells you are prepared to drill and frac. It's a bit of business not unlike manufacturing where the key is to get enough product on-stream and get your costs down to manageable levels.