Sunday, June 26, 2011

Shale Gas Exposed?

You can't follow the Alaska Gas Pipeline without following the story of shale gas. On one extreme you'll hear tales of plenty, gas too cheap to meter. The average news story on the Alaska Gas Pipeline would have you believe that shale gas killed all hopes of a gasline. On the other extreme you will hear the occasional doubter - they doubt the reserve estimates, the productivity of the wells over time and the over all economics of shale gas wells.

This week the New York Times has a story titled "Documents: Industry Privately Skeptical of Shale Gas" which falls plainly on the side of the doubters. The story contains a lot of insider documents and the investor presentations of shale gas leader Chesapeake.

As the shale gas story develops some facts are bearing out - at $4/MMBTU you'll need plenty of natural gas liquids (NGL) to make a profit. For the past year or so Chesapeake has made it clear that their goal for 2016 is wells with 38% (NGL + oil) and a NGL+oil production of 250,000 BOE (see page 16 of the Chesapeake June Investor Presentation (LINK)).

The trend away from dry gas wells to wet gas wells is a clear indication that $4/MMBTU won't pay cost of drilling and completing a dry shale gas well. Based on Chesapeake's liquid production goal I estimate that $8/MMBTU is needed to justify drilling a dry gas shale well.

I don't think the Times article spells the end for shale gas but it highlights the possibility that every boom precedes a bust. Tough times for shale gas would glean out the dry gas shale production and make room for Alaska gas.

Update - ExxonMobil/XTO responds (LINK) and Chesapeake responds (LINK) the the New York Times article. As you might guess they are not pleased by the Times story.

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