Big Oil and Gas industry writing down billions in U.S. shale gas assets

Source: http://www.examiner.com/article/big-oil-and-gas-industry-writing-do...

 

Big Oil and Gas industry writing down billions in U.S. shale gas assets

 

 On Friday shale gas driller Encana Corporation, the largest natural gas company of Canada announced it had written down more than $1.7 billion in shale gas assets on its books, the majority from its U.S. shale gas operations as it posted its ominous 2nd quarter operating results. Encana Chief Executive Officer Randy Eresman went on record saying to expect his company to have to take additional shale gas asset write downs in the near future. Such asset impairment write downs directly affect the industry’s operating credit lines as reduced value assets on their books results in financial lenders lending the companies less cash going forward.

Encana Corporation is also the focus of a U.S. Department of Justice price collusion investigation regarding the allegation it has conspired with Chesapeake Energy to fix prices for shale gas land lease agreements with state of Michigan landowners. The investigation is ongoing.

Other shale gas development companies also wrote down major assets as continued shale gas industry aggressive claims meet the realities of the tough economics the industry never fully anticipated.

English based BG Group decreased the value of its U.S. shale gas operations by $1.3 billion also this past Friday to reflect a weaken outlook for U.S natural gas prices. Exco Resources Inc. of Texas reported a $276 million write down on its assets. Meanwhile Australian based shale gas driller BHP is embroiled in a decision to write down its U.S. shale gas operations by an estimated $US2.5 billion on the shale gas assets it acquired just last year from Chesapeake Energy for $US4.75 billion, more than half what it paid to Chesapeake Energy.

The popular view is the main culprit is the ongoing price of today’s U.S. price for natural gas of $3.08 per million British Thermal Units (MBTU), a price which dipped as low as $1.90 per MBTU back in April of this year. When the shale drilling boom began, the drillers proclaimed aggressive values for the gas held in ground as calculated in land lease agreements with landowners. Back in early 2008, the price of natural gas at the U.S. Henry Hub was being priced at more than $15.00 per MBTU. As the drilling boom took off unabated and natural gas began appearing into storage, the price the market was willing to pay for it declined month by month.

This was perhaps the best true “free market” signal to the industry which it continued to ignore until market prices all but collapsed.

 

Left out of such supply discussions are what appears to be the significantly higher extraction costs for shale gas when compared to conventional drilling into large pockets of natural gas. The costs for the armies of men, machines, water tankers, pumpers and frack operations along with all the diesel fuel required to drive all this heavy metal in out of the hills and mountains of Pennsylvania day in and day out has been quietly taking its toll in the form of high extraction costs. Pennsylvania Marcellus’ deeper drilling depths compared to Ohio and New York State play yet another significant cost factor.

 

The unavoidable hit or miss process of exploration resulting in dry or unproductive wells is significant when individual wells cost between $3.5 million to $5 million from the industry’s own public releases. Encana for example hit a number of dry wells in Pennsylvania’s Marcellus before it pulled back. Frack water tailing pond construction and related disposals costs are significant and in constant need to maintain the integrity of such ponds while trucking out the toxic frack water for disposal.

As lenders tighten up cash lending, all of these factors take on new and more challenging dimensions.

Perhaps the most baffling issue which receives little public attention remains the strange and unusual production output curves of a typical shale gas well. It’s now been extensively documented shale gas wells produce their greatest output of gas product within their first 12 to 24 months of operation and then begin rapidly and aggressively declining. As the industry attempts to decrease extraction costs by drilling more wells closer together and to drill them faster, it appears more gas is inadvertently put on the market than it can absorb.

In the 1980s, the term, “Drilling to exhaustion” first appeared when describing the industry penchant for more drilling in face of whatever ails it.

Many claim the answer lies in higher natural gas prices. More now believe it’s to mandate the use of natural gas by electric utilities and for U.S. industrial transportation in order to drive demand and raise natural gas pricing even though the industry’s central promise to the country was cheap and abundant natural gas through hydraulic fracking.

Senior U.S. electric utility executives remain wary of the natural gas industry and its long history of volatile pricing. Many in the electric utility industry refer to natural gas as the ‘crack cocaine of the power industry’. According to leaked industry emails as published by The New York Times, one energy company official stated this fear when he said, “They get you hooked and then they raise the price.” Investment in a natural gas based transportation structure is going to take billions of dollars to deploy.

The shale gas industry continues to reel under the unrelenting economic realities of today’s price for natural gas from their own self-inflicted mad rush to get as much shale gas out of the ground as possible over the last 5 years. Now this is resulting in major shale gas asset write offs. Incredibly some here in Pennsylvania now believe the answers lie in yet more taxpayer dollars to drive demand under Senator Bob Casey’s “STATE Natural Gas Act” to mandate more use of natural gas while Gov. Corbett vows to fight on for PA ACT 13 provisions to strip local townships of their ability to enact zoning restrictions against shale gas drilling in their local municipalities.

 

Disclaimer: The writer holds no U.S. securities in any shale gas company nor is he a member of any environmental group or anti-fracking group. He holds no financial arrangements with any of the entities and/or individuals listed in the article. He is not being paid to write by any shale gas industry group, pro or con.

To see Encana's 2Q financials, go to: http://www.encana.com/

To learn more about Pennsylvania's ACT 13 legislation, go to: http://www.portal.state.pa.us/portal/server.pt/community/act_13/20789

 

Suggested by the author:

•           Our energy future? 'Too Much Magic & Wishful Thinking'

•           Near drought conditions impacting Marcellus shale gas drilling

•           Shale gas drilling depths might argue against Pennsylvania’s Marcellus

 

 

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2pwt9ru4672sqPermalink Reply by 2pwt9ru4672sq on July 29, 2012 at 3:54pm

Not a real big surprise here Jack.  I have been preaching that low commodity prices are a harbinger for losses for O & G companies but that of course is greeted with a rousing chorus of... you lying scum landmen are all just trying to beat down landowners and promote your agenda for lower bonuses and royalties.  Well , guess what, as I have stated many times, this is a business, and right now, business ain't too good.

I can only imagine the grief I will catch for this one, but that proposed Ohio legislation that was posted on this site today to "regulate lying landmen"... that's likely to be the coup de gras that chases O &G gas companies out of Ohio.  It won't be a function of trying to hold landmen accountable or ensure that accurate representations are made to property owners... everybody deserves to have those assurances.  The more important issues are the proposed set backs from property lines and the mandate for testing of water wells after stimulation/fracturing.  I highly doubt such legislation would pass the constitutional sniff test in the first place but if it were to pass, it would be a joke.  There is no timing on the well testing.  In theory the post stimulation well testing could be done the day after a frac is completed which would be LONG before any potential water contamination would even show up in any of the offset water wells.  This proposed legislation was clearly written by people that have close to zero knowledge of the oil and gas business. 

Permalink Reply by Jack Straw on July 29, 2012 at 5:15pm

The Boom/Bust cycle has been part and parcel of the industry since the days of the illustrious Col. Edwin L. Drake.

I have lived the oilman’s prayer (more than a couple  times):

“Please lord, Just Give Me One More Oil Boom. I Promise Not to Blow It Next Time.”

RE: "This proposed legislation was clearly written by people that have close to zero knowledge of the oil and gas business."

Sadly, that is indeed the case. Elect an individual to public office (one who likely got an A- in Social Studies and a D in Science) and they think that they are qualified to legislate complex technical issues effecting all of us.

Never-the-less, from a technical perspective, a 750' property line set back from a fracked horizontal well track is quite defensible to prevent subterranean tresspass (though in my opinion 500' would likely suffice).

And, in self defense. the industry should be prepared to pay for independant testing of well water within a half mile of a well track prior to drilling and (perhaps 6 months after fracking and completion). This well testing should be repeated over intervals of increasing delay (soemthing like two years, five years, and every five years - until the well is P&A) should the respective landowners insist. Paying this nominal expense would be a type of "insurance" protecting the industry from spurious claims.

RE: "proposed Ohio legislation that was posted on this site today to "regulate lying landmen"... that's likely to be the coup de gras that chases O &G gas companies out of Ohio."

As far as the industry is concerned, landmen are very low on the totem pole. Regulating landmen would not drive the O&G industry out of Ohio - just as regulating car salesmen would not result in Ford or GM ceasing to produce vehicles.

All IMHO,

               JS

 

 

 

Permalink Reply by Bluflame on July 30, 2012 at 1:14am

Jack,

 A well-reasoned response.

BluFlame

Permalink Reply by George Ballou on July 30, 2012 at 4:07am

Part of the gas-price cycle, to be survived by "the Efficient",

to whom "the Future belongs"...

...from AGA motto of the 1970's.

Ancient Gassers remember.

2pwt9ru4672sqPermalink Reply by 2pwt9ru4672sq on July 30, 2012 at 4:40am

You are absolutely correct Jack, this has always been a boom and bust/cyclical industry, and I too have lived that same prayer.

A 750 foot setback is an arbitrary number that neither corresponds to the current science of fracing nor does it necessarily protect against subsurface trespass in the future if that science were to progress to the point that a frac could extend out 1000' from a well bore.  I have already addressed the fallacy of the set back on the other posting on this legislation.

The far more practical and cost effective method of ensuring against water well contamination is to simply allow for the operator to place one, perhaps two monitor wells within 100 yards of the pad... contaminants, if any, would be noticed there long before any migration to offsetting water wells. 

I wasn't saying that the landman restrictions in and of themselves would be problematic, its the entire package of proposed legislation that is likely to chase companies away.  And I do object to the characterization that landmen are very low on the totem pole.  They are as integral to the process any geologists, engineers and accountants. 

0i7okn54zwbdoPermalink Reply by 0i7okn54zwbdo on July 30, 2012 at 2:31am

Shale gas has not been economical for several years now.  The fact that companies are tanking isn't a surprise to anyone.  That's why CHK put their entire company's future into the liquids rich part of the Utica.

Permalink Reply by Frank Nesmith on July 30, 2012 at 12:25pm

If CHK put all their money into liquids, then why are they drilling for dry gas in Northern Beaver County? Not trying to be a smart a**, but the McRoberts well is supposed to be dry, as is the Brighton Twp. well. Just looking to find out if they are pulling one over on people, or if they think the gas might be wet there.

Permalink Reply by Bluflame on July 30, 2012 at 1:26pm

Not familiar with this particular real estate, but could it be an HBP thing?

BluFlame

0i7okn54zwbdoPermalink Reply by 0i7okn54zwbdo on July 30, 2012 at 4:10pm

They're drilling dry gas because they have to get a sense of what geology they're dealing with in every area of the play.  They'll still drill uneconomic wells in dry gas, just not at the rate of the wet areas.  Look at activity in eastern Jefferson county versus Carroll county.  CHK is the undisputed king of chasing good money after bad and I somehow doubt they'll change that formula any time soon.

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