Ponzi Schemes and Bending Light

Blogs
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All of the more recent gas shale plays will not pay out. On a study of 14000 wells, only 10% have reached payout in 7 years -- and with the price of gas, it is going to get worse before it gets better.

Horizontal Drilling is the darling of Wall Street Dollars. The highly touted reserves are the darling of bankers so willing to loan money on additional drilling ventures. For those who cannot remember what happened in 1985, let me summarize it for you.

When the reserves are booked, a value is assigned based on the then price of hydrocarbons, along with an escalation factor and a discount factor and the bank then has a number to base the value of reserves for that company and they will lend that company money based on those assets.

In 1984-85 oil fell from (in today's dollars) $70 per bbl down to $20 per bbl. Almost overnight the value of the underlying asset value on the loans was slashed by about 75%. Now the bankers got nervous and demanded the collateral be replaced and since it could not be replaced, they called the loans. Then the bank ended up with a lot of "special assets" that they sold at fire sale prices, putting scads of explorationists out of work -- and the brain drain continued until the mid 1990's.

This is the Ponzi scheme. Perhaps fraudulently mis-stating reserves and drilling as fast as you can before you cannot bend light any more to hide the truth. Shale Gas, for the most part, is an asset that cannot be produced at twice the price of today and make a profit. There are lots of reasons why, but there is enough empirical data to prove it so.

Shale Oil is a different matter and I will talk on that at a future time.

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This is an amazing and alarming situation - the "over-supply" of natgas. It is an important resource for our country, but it can't be produced at a loss. How can the US move to a less expensive fuel like this that would benefit so many - subsidies? The US needs natgas and shale oil. Of course, as you note there shale oil is profitable and is becoming the focus of exploration and drilling. But can natgas really just sit there. It's low cost is precisely why we'd see a massive movement toward natgas for industry, power generation, transportation. Very interesting situation.

Wilson.

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Dear Wilsontownship,

If you have not done so, read this blog post as well

http://www.mineralrightsforum.com/profiles/blogs/the-beginning-of-the-end-for-resource-gas-plays

Just as a FYI, Cheniere is preparing to break ground on the Sabine Pass offshore LNG terminal. It should be operational by 2015.

http://www.cheniere.com/LNG_terminals/terminals.shtml

Gas's only short term hope (from my research) is converting coal fired power plants to natural gas.

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Mr. Cotten,

I like two things you've said. One was a word. Epiphany, of which after reading your paragraph on industry switching from coal to natgas, I had an epiphany. If I owned a factory using coal, it would cost a heap of money to change over to NG, unless it was a one time expense. My factory would have an NG burner sitting right next to the coal burner. Then I would have the choice of using NG or coal, whichever was cheaper. Same piping, same duct work. Shut off the gas flow, bring in the boxcars, and vice versa.

Your,,,,,,