Shale Gas Overhyped says Petroleum Industry Analyst Henry Groppe
EDIT: (12/23) For an update on the (un)economics of shale gas production go here, and for an update on the NY Dept. of Environmental Protection’s decision to prohibit hydrofracing, announced on 12/22 go here. And for background, go here.
Henry Groppe – of Groppe Long & Littell is betting that natural gas prices will double by summer. Why? Because like me, he does not buy the shale gas hype, and recognizes that shale gas has entered the seventh fold of production!
But who is Mr. Groppe, and why should we listen to his prognostications? As The Globe and Mail reports:
In 1980, when oil approached $40 a barrel and forecasters predicted $100 oil was inevitable, Mr. Groppe said crude would fall below $15 by the mid-1980s. It did.
In 1998, when crude dipped to barely above $10 and some prognosticators were hailing a new era of cheap energy, Mr. Groppe said oil was set to soar. By early 2000, it had topped $30 a barrel.
And two years ago, when it threatened to reach $150 a barrel and forecasters said $200 and more were just over the horizon, Mr. Groppe predicted we’d be back at $60-$70 in the second half of the year. By October, he was right again.
Now, he says, a slow-but-gradual decline in North American natural gas reserves – regardless of shale – means an average price in the $8 range is inevitable to trigger the “demand destruction” necessary to keep the supply-demand picture in balance. Eventually, he says, that price will creep up toward $10 by the end of the decade, as gas production slowly depletes.
I recommend reading the original article as it gets into some of the (un)economics of shale gas production that I left out of the “Shale Gas is a Giant Loser” post. It sounds like Mr. Groppe has been listening to Art Berman, an independent petroleum geologist, consultant, and (former) columnist for the industry journal World Oil. Mr. Berman has been covering the shale gas story for years. Art recently penned an article titled “Facts are Stubborn Things” which was pulled at the last minute after World Oil received pressure from a top executive at Petrohawk Energy (a major shale gas player). After the article was pulled, Art quit his gig as a columnist, and World Oil editor Perry Fischer was fired. Fortunately, ASPO-USA ran the article – which discusses the (un)economics of shale gas production. Further insight into Art’s arguments are articulated in the presentation (.pdf warning) which he gave at the 2009 ASPO-USA conference.
In short, Art argues (and empirically shows) that:
1) decline rates for hydrofraced shale gas plays are far more accelerated than those of conventional plays, but the models that the industry uses to forecast future production use historic data trends. In this case, the production curve for a conventional gas play is wide and gentle, while hydrofraced shale is very steep and very short.
As Art puts it, “It does not seem logical that type-curve methods should be more reliable than individual well decline-curve analysis. If the pattern of well decline is empirically exponential, it makes no sense that it should be treated as hyperbolic for conceptual reasons or because of a preference based on production from higher permeability reservoirs that are not comparable to those in the Barnett or other recent shale gas plays.”
2) Because the decline rates are inaccurate, the estimation of total reserves is likely far too high. On the economics, Art shares additional insights. Here I am quoting at length the article cited and linked above: “Shale plays typically begin with a leasing frenzy whereby major players accumulate hundreds of thousands of acres, often at astronomical bonus prices. Next, a drilling campaign ensues driven more by lease expiration schedules-typically in the 3- year range-than by science. Only after considerable capital has been destroyed in this manner are the core areas recognized. This “Braille method” is completely opposite to the customary approach to E&P projects, where a cautious approach based on science is used to high-grade focus areas.”
Oddly enough, the so-called ‘Braille method’ is industry ‘best-practice’.