Monday, March 01, 2010

Shale Gas, looming train wreck?

In this month's E&P Magazine there is an article by Allen Brooks of Parks Paton Hoepfl & Brown which is an energy Investment Banking Firm, that indicates that the current rage in the oil and gas world, shale gas plays, may not be the panacea that it is made out to be and that there may be a looming time bomb ticking in the O&G markets. This article asserts that there is some controversy in estimates of the true long term production from (and therefore the valuation of) shale gas leases. Conventional wisdom and reservoir assessment has indicated that large initial gas production (IP) is associated with and is indicative of large Economic Ultimate Recovery (EUR) values. Or in layman's terms, if you get a lot of gas initially, you probably will have a well that lasts a long time before it plays out. And new Hyro-frac techniques have enhanced the IP's from these plays which makes them look even more prolific. But the production decline from these wells has been faster than the historical norm, which means the long term EUR values are most likely overstated. This has the effect of causing the companies that hold these leases to overstate their value and therefore the value of their portfolios.

To add insult to injury, these wells are bringing too much gas to market for the market to absorb, causing the price of natural gas to fall. The companies are overdrilling for the current market conditions, but they are being forced to do so in order to recoup the investment in these fields.

I forsee a very bumpy road ahead for the natural gas markets in the near term which combined with the faster than expected depletion of these wells will send aftershocks through the E&P markets.

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