Those who are concerned the U.S. might run out of natural gas in the years ahead ignore estimates made by government and industry experts that this country has enough shale gas to meet domestic needs as well as export opportunities through the rest of this century and beyond. (The Washington Examiner, November 2017).
There’s a fine line, sometimes indistinguishable, between saying things no one wants to hear and being the crazy guy on the corner shouting at governments or mailboxes. The weird part, consistent with both roles, is that people don’t necessarily disagree; they just pretend they don’t hear anything.
So it’s been for anyone that doesn’t subscribe to the prevailing wisdom about the state of global petroleum production. There is a juggernaut of common opinion that shale resources, primarily US ones, are all that matters any more. Oil and natural gas prices are low, and they will stay low indefinitely, because any uptick in prices will see a flood of new product hit the market from the prolific US shale fields.
The opinion is as close to universal as you can get. It is shared and propagated by even the likes of the International Energy Agency (IEA) whose recent World Energy Outlook spawned headlines such as this on Bloomberg’s site: “U.S. To Dominate Oil Markets in Biggest Boom in World History.” I could find another dozen similar headlines in a minute, and so can you. These wacko stories morph into something else, like what happens in the children’s game of telephone, and out the other end come quotes like this from one of Bloomberg’s famous editorialists: “…the US now has the largest reserves on the planet.” Not quite. That erroneous statistic is a direct result of how the hyperbolic messaging gets adapted by the public. This latter commentator’s output goes to thousands of fund managers worldwide, who are getting this message in one ear and into the other comes news that pension and other huge funds are shunning oil and gas stocks. The message then is loud and clear: stay away from the industry, it has no future because prices can’t rise, and it has no future because green energy plans will render it valueless.
This whole commonly-accepted narrative rests on a key tenet as an overarching truth: that shale resources are so vast that not only will they provide production for a century, but that their production will grow rapidly in the current price environment.
It’s a circular load of rubbish that exists because almost no one understands petroleum reservoirs. Those that do are often employed by shale drillers, so they keep their mouth shut and let the IR departments do the talking – about thousands and thousands of homogenous locations, decades of drilling inventories, and superb economics regardless of commodity prices. Don’t take my word for it, check out any IR presentation from a leading shale producer. It will be evident that any one of them could supply the entire US market if they so chose, but, ah, they don’t feel like it.
The messaging has been so relentless that one almost sounds crazy to consider that it might not all be true, just like it sounded crazy when Warren Buffett sidestepped the dot-com boom. He sounded like a crank that had been left behind. I don’t know if he appreciated the irony as much as he should have.
I’m no Warren Buffett, and the only voices that can shed any sanity on this conversation have to come from someone inside the machine. Lo and behold, one finally showed up, and not any sort of peripheral entity – it was from one of the most prominent and successful shale players, one who’s own IR presentations and comments display the loopy enthusiasm that can only be afforded by well-crafted “Beware of Forward Looking Statements” advisories.
The pioneer of this new disclosure is Range Resources, a huge Marcellus producer. In the most recent quarterly conference call, the management team didn’t shy away from their claim to have thousands of locations capable of IP rates of more than 25 million cubic feet per day (or, as noted before, the equivalent of two-thirds of the nation’s total output), and how could they. But what they did do was utter a phrase that the whole world needs to hear: sweet spot exhaustion.
Why is that such a big deal? Well, consider the hopes that the whole world has now placed on US shale’s shoulders, as reflected in five-year forward prices that are flat or falling. The assumption is not just that the production is significant, but that it can grow at will, at ever lower prices. It’s all based on a lack of knowledge of petroleum reservoirs, and a blind faith in producers’ IR material.
It took decades to knock the notion out of people’s heads that oil doesn’t exist in vast underground swimming pools, although many still don’t know what exactly it resides in or how it gets out. A far smaller subset would then understand that the rock in question is far from homogenous and that results can and will vary wildly. This is where the sleight of hand of producers appears, where they drill a 4 well pad with great results and then announce that they “have thousands just like it.” What grounds does a Wall Street investment banker or Paris-based IEA analyst or a Bloomberg prophet have to doubt them, when the actual proof won’t be known for a decade, if ever?
The analysts who asked questions on the Range conference call did a masterful job of missing the point (the phrase was used 3 times), like Wile E. Coyote running straight past the “cliff ahead” sign. They rained down questions about lateral lengths, IP rates, and other key inputs for their nonsense machines. They offered congratulations on spectacular results, and were like kids at bedtime who wanted just one more story.
To be clear, none of the above is to imply that the US is in any sort of production trouble. Natural gas output may indeed climb further with a limited number of rigs in use. But those statistics have more to do with the fact that wells are now up to 3 miles in lateral length, which of course is going to impact productivity in a positive way.
Consider this from the US Energy Information Agency – Pennsylvania production has increased 80 percent in the past 5 years to over 15 billion cubic feet per day, which is most of the Marcellus production. However, in the past two years, half the drilling permits and three-quarters of rigs in use were in three counties – Washington, Greene and Susqehanna – which have a combined total area of 2,271 square miles. At aggressive 300 ft spacings, it would take 6 wells to develop each square mile. Even assuming all of that is developable, which it most likely is not, how long will it take to develop those counties when each well is 3 miles long? And is the zone as good across all this area? I don’t know, but I do know that at present rates there won’t be much in 10 years never mind a hundred. And in the US, there is nothing like the Marcellus. Once these prime sweet spots are developed, it’s downhill from there.
This isn’t really news; there are pictures that make this obvious that have been shown here before. What is new is to hear one of the shrillest proponents of the “shale gas is the whole story” story admit that the days of unbridled optimism will soon be behind us.
Hmm, the next time I hear the guy going off on the mailboxes, I’m going to pay attention. He might be on to something.
Read more insightful analysis from Terry Etam here. To reach Terry, click here