shale plays after the gold rush

7/30/2019 Shale Plays After the Gold Rush

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Slide 1Labyrinth Consulting Services, Inc. Houston SIPES Continuing Education Seminar

After The Gold Rush:

A Different Perspective on Future Gas

Supply and Price

Arthur E. Berman & Lynn F. Pittinger

Labyrinth Consulting Services, Inc.

Houston SIPES Continuing Education Seminar

Halliburton Conference Theater

October 19, 2012

U.S. Shale Gas


2/26


After The Gold Rush: Shale Magical Thinking

It is doubtful that shale gas will meet supply expectations except at much higherprices: high shale gas decline rates & non-shale depletion are the main factors.

Decline-curve analysis indicates lower reserves than operators claim.

Natural gas demand has increased & supply is flat: EPA regulations will increasedemand further.

Shift to liquid-directed drilling & flight from dry gas will decrease gas supply. Capital expenditure necessary for supply maintenance is not supportable.

All difficulties arise from what seems easy.

All great things arise from what is minute.One who thinks that everything is easywill encounter much difficulty.

Tao Te Ching

(If something sounds too good to be true,It probably is!)


3/26


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BillionsofCubicFeetofGasPerD

ay

Lower 48 States Gross Natural Gas Withdrawals

Lower 48 Texas Other States Federal OCS GOM Louisiana Wyoming New Mexico Oklahoma

U.S. Production is Flat

Source: EIA


4/26


An Industry Self Destructs By Over-Production

Shale gas made some sense while gas prices were increasing (2007-2008).

Failure/inability to see the new market reality after mid-2008 price collapsedoomed shale gas.

Entry of major E&P companies and foreign investors misunderstood asvalidation of shale economics.

McClendons losses reflect the condition of Chesapeake that, in turn, reflectsthe commercial failure of the shale gas business.

Source: Natural Gas IntelligenceSource: Reuters

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DollarsPerMillionBTU

Henry Hub Natural Gas Spot Price


5/26


Haynesville Shale Production: The Onset of Declining Production

12% of U.S. natural gas production. Current production is in decline despite adding new wells. The mystery of efficiency: spare-capacity wells (drilled but not connected

to sales).

Data from DI

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BillionsofCubicFeetofGasPerDay

Haynesville Shale Gas Production

Gas Production Number of Wells Rig Count


6/26


Haynesville Shale annual base decline rate is ~53%, which translates into ~3.8 Bcf/d ofgas production that needs to be replaced annually (ITG, 2 February 2012).

Our work indicates 48% annual decline rate & 3.3 Bcf/d annual production replacement.

Data from DI

Reserves are Over-statedDecline Rates are Higher than Anticipated

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Haynesville Shale Base Decline

Gas Production Number of Producing Wells

48% Annual BaseDecline Rate


7/26Slide 7Labyrinth Consulting Services, Inc. Houston SIPES Continuing Education Seminar

The Number of Wells & Cost to Replace Base Decline in theHaynesville Shale

Data from DI

More wells are required to replace the same gas volume every year. For 2012, 3.3 bcf/d base replacement will require drilling 956 new wells & cost $9.6billion. Falling rig count and evaporation of capital mean that supply cannot be replaced.

This is true for all shale gas plays.

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Haynesville Shale Base Annual Replacement

885 Wells

$2.7 Billionper Bcf/d

Total Cost:$8.9 Billion

Jan 2008 - May 2010 2012 Replacement

956 Wells

$2.9 Billionper Bcf/d

Total Cost:$9.6 Billion



Overall Average EUR = 3.7 Bcf forHaynesville Wells: ~1,000 wells w/ avg 26 months

of data, Development drilling cost ~

$3.25/Mscf assuming $9 MM

well cost and 75% NRI. Petrohawk and EXCO are

outperforming: Chesapeake improving, passing

Encana. Fetkovitch type curve used to

calibrate b factor: EUR ~20% higher this year than

last years for the same wells. Unable to account for shut-in or

curtailments due to low gas prices.

Haynesville Shale Decline Curve Analysis

EUR 8/12 DCA EUR 6/11 DCA NUMBER OF WELLS

Chesapeake

CHK 2008 2,335 2,059 23

CHK 2009 2,971 2,436 110

CHK 2010 3,543 Insufficient Data 191

CHK 2011 3,538 207

CHK WTD AVG 3,370 2,371 531

Petrohawk

HK 2008 7,543 3,761 3

HK 2009 4,873 3,998 46

HK 2010 Rate Controlled Insufficient Data 75HK 2011 Rate Controlled 67

HK WTD AVG 5,036 3,963 191

Encana

ECA 2009 3,341 2,555 34

ECA 2010 3,112 Insufficient Data 82

ECA 2011 3,022 60

ECA WTD AVG 3,126 2,555 176

EXCO

EXCO 2009 4,965 4,059 30

EXCO 2010 5,113 Insufficient Data 87

EXCO 2011 3,921 118EXCO WTD AVG 4,496 4,059 235

Overall Average 3,676 3,001 263



Haynesville Shale Decline Curve Analysis: Chesapeake Energy



Barnett Shale Decline Curve Analysis: Chesapeake Energy DFW



Total Barnett play production estimate based on improvement in type wellfrom 1.0 bcf pre-2009 to 1.4 bcf post-2009

Data from HPDI



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CumulativeProduction,

Mscf

Average Months Online

Marcellus Shale Production

Cumulative Production and Months Online Through 12/2010

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Bradford Cty

Tioga Cty

Greene Cty

Washington Cty

Fayette Cty

Lycoming Cty

4.2 Bcf Type Well

Outperforming Type

Well

UnderperformingType Well



Marcellus Shale Relative Performance Map



Shale Gas is not Commercial below $5/mmBtu point forward.

Full-Cycle Point-Forward Full-Cycle Point-Forward Full-Cycle Point-Forward

$8.75 $5.63 $8.31 $5.06 $8.68 $6.80

1.34 1.34 1.19 1.19 3.00 3.00

$3.50 $3.50 $2.80 $2.80 $9.50 $9.50

22.5% 22.5% 22.5% 22.5% 22.5% 22.5%

$5,000 $0 $5,000 $0 $5,000 $0

$1.50 $0.75 $1.50 $0.75 $1.50 $0.75

7.50% 7.50% $0.11/mcf $0.11/mcf 7.50% 7.50%

$4.92 $3.37 $4.78 $3.04 $4.87 $4.17

$6.41 $4.12 $6.42 $3.93 $6.37 $4.92

* Land cost assumes 169-acre spacing and 50% of leasedlanddeveloped

Severance Tax

F&D ($/net mcf)

Overall Average EUR- Calculated Break-Even GasPrice for8% DiscountRate

Total Cost ($/netmcf)

Barnett Fayetteville Haynesville

Break-Even Gas Price, $/mmBtu

EUR/Wel (Bcf/Well)

Well Cost ($mm)

Royalty

Land* ($/acre)

Expense (LOE, G&T., G&A ($/net mcf)

SCI Barnett B.E. Price at our EUR (1.34 vs. 2.45bcf ): $5.63

SCI Fayetteville B.E. Price at our EUR (1.19 vs. 6.5bcf ): $5.51

SCI Haynesville B.E. Price at our EUR (3.00 vs.2.45 bcf ): $6.04

Simmons & Company International, September 2012



The Demand Side of The Equation

2011 consumption was 1.5 Bcf/day higher than in 2010.

So far in 2012, consumption has increased > 2.5 Bcf/d compared to 2011.

Most of this increase is from coal-to-gas fuel switching for electric power generation.

EPA regulations of power sector will result in an additional 6.6 Bcf/d by 2020:

58 GW coal plant retirements through 2015.

Additional ~10-20 GW based on retrofitting costs.

Data from EIA

Data from Brattle Group



The Demand Side of The Equation

Rising natural gas price will not save producers in the near-term because of therelationship of price to fuel switching. Critical price points at $2.50, $2.75, $3.00, $3.25 and $3.50/mmBtu based on recenthistory. Power producers may switch to coal just to work through excess stockpiles.

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HenryHubMonthlyAverageGasPrice(DollarsPerMillionBTU)

2012/2011MonthlyChangeinGasUsage

ForPowerGeneratioin(Bcf/PerDay)

Natural Gas Price & Usage For Electric Power Generation

YOY Monthly Gas Use HH Gas Price

Jan-July 2012/2011= +2.7 bcf/d

Data from EIA



The Shift To Liquid-Prone Shale Plays

The percentage of oil- to gas-directed rigs has increased from 21% to 339% since

2008. Haynesville Shale rig count is now 28, down from 221 in November 2008. Every additional oil-directed rig means less gas will be produced (average Eagle Ford

IP is 2 mmcf/d vs. Haynesville 8 mmcf/d).

Source: Smith BitsSource: Smith Bits

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SB US GAS RIGS SB US OIL RIGS PCT Oil/Gas

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Haynesville Operator Rig Count

CHK EXCO ECA XTO HK

The current rig count is 28, down 1 from last week. The maximum rig count was 221 in theweek ending 11/7/2008. CHK is down 36 rigs from the week ending 3/12/2010. The listedoperators were flat this week.



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Bcfperday

Steepening Decline Curves

Increasing Drilling Productivity is Required to Grow Top Line Production

23% annualdecline rate

32% annualdecline rate

Total U.S. Decline Rates Have Increased Since the Advent of ShaleGas Plays

In 2001, annual decline rate for U.S. natural gas production was 23%. Now, annual decline rate is 32%.

Gas consumption has increased from 54 to 65 bcf/daymore to replace.

Source: ARC Financial Research



Gas Supply Maintenance Capital and Cash Flow Generation

Analysis of top 34 publicly traded gas producers indicates that the cost ofsupply replacement is $22 billion per quarter.

2010 cash flow for those companies was $12 billion per quarter so thereis a $10 billion quarterly cash flow deficit.


22/26


Capex-to-Cash Flow Ratios

Unsustainable capital expenditures will limit capability to deliver on supply. Further constraints on cost-of-capital will limit options.

Ticker

Share Price

asof

04/10/12 MktCap($B) EV($B)

1-Year

Change in

Price Production4Q11(kboepd)

Gas as% of

Production

Cash

Margin

($/boe)

Debtto

Total Cap Capex-to-Cash Flow

(Yahoo Finance)

CRK $15.45 $0.70 $1.90 -48% 46 92% $17.32 54% 769%

CRZO $26.09 $1.00 $1.70 -28% 22 86% $21.32 59% 542%

ATPG $6.63 $0.30 $2.70 -60% 25 34% $28.70 96% 417%XCO $6.02 $1.30 $ 3.10 -71% 92 98% $15.19 55% 336%

UPL $19.51 $3.00 $4.90 -60% 121 97% $22.10 54% 318%

KWK $4.41 $0.70 $ 2.60 -67% 69 82% $7.82 65% 304%

PVA $3.95 $0.20 $ 0.90 -75% 19 63% $32.75 45% 302%

MUR $51.98 $10.10 $9.60 -31% 192 42% $46.50 6% 286%

PXP $40.50 $5.20 $8.40 16% 105 50% $26.70 54% 282%

FST $11.35 $1.30 $ 3.00 -68% 57 70% $18.99 59% 282%

MMR $8.83 $1.40 $2.10 -50% 28 66% $24.17 22% 214%

SM $64.58 $4.10 $5.00 -10% 93 56% $29.21 40% 203%

PQ $5.66 $0.40 $0.50 -35% 15 83% $14.51 40% 196%

RRC $56.79 $9.00 $10.90 1% 104 79% $23.80 46% 195%

NBL $93.16 $16.50 $19.50 -2% 233 60% $34.47 36% 189%

CXO $96.29 $9.90 $12.00 -7% 71 38% $48.55 41% 186%

BBG $22.74 $1.10 $1.90 -45% 53 90% $24.62 42% 186%

GDP $15.35 $0.60 $1.10 -29% 18 86% $11.01 80% 181%

CHK $20.69 $13.20 $28.20 -38% 599 82% $21.65 37% 180%COG $30.63 $6.40 $7.30 17% 99 94% $18.91 31% 176%

DNR $17.80 $6.90 $ 9.40 -24% 67 6% $62.47 36% 173%

ROSE $47.03 $2.50 $2.70 3% 32 51% $28.00 27% 164%

SFY $27.12 $1.20 $ 1.60 -34% 29 49% $34.55 42% 161%

SWN $29.30 $10.20 $11.50 -26% 242 100% $16.39 25% 146%

EOG $104.00 $28.00 $32.40 -8% 442 58% $33.96 28% 144%

NFX $33.09 $4.40 $7.30 -54% 144 56% $32.26 43% 144%

XEC $69.19 $5.90 $6.30 -39% 100 56% $30.94 11% 136%

CWEI $72.99 $0.90 $1.40 -26% 15 24% $73.10 61% 132%

BRY $44.20 $2.40 $3.80 -13% 36 28% $37.92 62% 126%

CPE $5.52 $0.20 $0.30 -20% 5 42% $46.56 57% 124%

PXD $105.12 $12.90 $15.10 3% 137 44% $31.02 31% 122%

DVN $68.94 $27.90 $30.60 -23% 680 65% $23.07 31% 100%

OXY $89.61 $72.70 $74.80 -11% 749 28% $50.89 13% 96%

WTI $18.54 $1.40 $ 2.10 -16% 50 52% $35.73 57% 80%

APA $93.50 $35.90 $44.10 -26% 759 50% $45.21 20% 66%APC $74.63 $37.70 $52.30 -8% 683 57% $31.18 46% 52%

WLL $51.17 $6.00 $7.40 -28% 71 16% $51.16 31% 5%

CNQ $31.29 $34.20 $42.70 -31% 580 35% $43.16 27% N/A

CVE $33.38 $25.10 $30.40 -11% 231 47% $28.06 27% N/A

ECA $18.19 $13.30 $19.00 -43% 600 96% $17.29 33% N/A

TLM $12.18 $12.50 $17.30 -47% 362 59% $31.72 33% N/A

Source: Bernstein Research

& Yahoo Finance


23/26


Natural Gas Price Scenarios

Considerable uncertainty inprice forecasts.

Credible forecasts put average2012 gas price at $2.40-$2.70/mmBtu.

2013 average gas price in$3.40-$4.50/mmBtu range.


24/26


After The Gold Rush: Conclusions Demand is increasing and production is beginning to decrease. High decline rates & need for continued drilling/high capex have not been factored

into supply & price forecasts. Cognitive distortion is rampant about U.S. energy supply and price. Shale gas is not commercial at prices below $7/mmBtu full-cycle cost. Government is now on the natural gas band wagon: regulation & legislation will

effectively mandate increased gas demand. Natural gas will be there when we need it but historical supply & price volatility will

be part of the future. Beware of what you read and hear: the change in supply & price may occur faster

than many now forecast!


25/26


Once You Pass Through The Looking Glass

Strange Thinks Look Normal.

Everything about natural gas

fundamentals in North Americasupply, demand, seasonality, storageand priceis now extreme.Peter Tertzakian


26/26

After The Gold Rush:

A Different Perspective on Future Gas

Supply and Price

Arthur E. Berman & Lynn F. Pittinger

Labyrinth Consulting Services, Inc.

Houston SIPES Continuing Education Seminar

Halliburton Conference Theater

October 19, 2012

U.S. Shale Gas

shale plays after the gold rush

Documents