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Shocked By Poor Quality of NY Times Shale Gas Article


Swizzled
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Thought I'd pick the brain of a few folks around here.

 

I wrote the following trying to get my head around the issue:

 

http://seekingalpha.com/article/277306-who-should-an-investor-believe-the-natural-gas-industry-or-the-new-york-times

 

I have no exposure to shale gas producers or much natural gas period.  Mainly because there is so much of the damn stuff.  Point being I have no agenda.

 

So is it just me, or does that Times article consist of virtually no substance ?  Because it sure got a lot of coverage.

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I was really curious about the motive of the NYT: was it to truly report the facts of the industry, or was the motive to cause an uproar and encourage others to discourage shale gas production?

 

How many emails in total did they examine?  What proportion of them discussed potential negatives of the shale gas industry?  How did they get the emails?  If there are accounting discrepancies, who's doing something about them?

 

 

 

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If I remember correctly, Tom Ward (CEO, Sandridge), had something to say about the shale plays at our FFH dinner.  The specifics escape me, but I recall him saying something to the effect that years down the road the market will look back at the shale plays and see them for house of cards (my term) that they are.

 

Can someone with a better memory confirm this, or add any detail?

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So is it just me, or does that Times article consist of virtually no substance ?  Because it sure got a lot of coverage.

 

It's not just you. A number of CEOs (Chesapeake's Aubrey McClendon and Quicksilver Resources' Glenn Darden) and sell side analysts have issued rebuttals/responses. More importantly, futures prices far out on the curve have barely budged since the article came out - Mr. Market has spoken, as some would say.

 

The CHK letter: https://www.facebook.com/note.php?note_id=10150305143547565

 

The Darden letter (highly amusing, worth a read even if you don't follow energy): http://blogs.star-telegram.com/files/dardenletter.pdf

 

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Seems fairly clear that there are some shaky shale firms out there.  Bronte is short a few.  (He's not well loved around these parts for his past history with FFH.) 

 

The enviro side seems to be blow out of proportion.  The gas land documentary is apparently disreputable. 

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http://www.realclearmarkets.com/articles/2011/06/30/exposing_the_demonizers_of_shale_gas_99107.html

 

You're Ian Urbina, a senior New York Times reporter. In February and March you write that hydraulic fracturing, a method of natural gas extraction, is contaminating Pennsylvania drinking water. Your accusations are subsequently disproved by government tests.

 

What do you write next?

 

You write a three-part series in the Times saying that shale gas production is "inherently unprofitable" and a giant Ponzi scheme, as well as loosely-regulated by the Securities and Exchange Commission.

 

No matter that many emails you cite quoting industry managers, geologists, government officials, and market analysts are two years old. No matter that two of your supposedly objective sources are environmental activists.

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Guest FFHfan

The realclearmarkets.com article is right on. The US and all other Western and Asian countries have to get of OPEC oil.

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Guest Hester

Seems fairly clear that there are some shaky shale firms out there.  Bronte is short a few.  (He's not well loved around these parts for his past history with FFH.) 

 

The enviro side seems to be blow out of proportion.  The gas land documentary is apparently disreputable. 

 

It's true, there are a ton of questionable shale companies. Any time there is a boom in investor demand in an industry, like there has been with the excitement over shale, and difficult to determine fundamentals, as possible shale reserves are difficult to estimate, it will bring in fraudsters by the hordes.

 

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The article was pretty poor and the emails were fed to the NYT Journalist by some green groups according to CHK CEO McClendon.

 

Shale reserves may be overstated in a lot of companies.  The key issue is price, and also decline rate.  We went from very little shale reserves in this country to huge volumes in a few years.  The gas has always been there, companies have known about it, and the technology has been incrementally improving over decades, not overnight. 

 

The price run up in 2007/08 led to a huge land grab and the SEC rule change in late 2009 made it easier to book proved reserves (you are no longer limited to "adjacent" well sites).  So reserves bookings have been huge.  The gas is obviously there and producible.  At $20 gas price reserves are massive, at $15 less, $10 less, $5 etc.  The actual reserves are very sensitive to gas price and also to decline rate which will vary with reservoir quality.  The article focused on one side of a natural, to be expected, debate on decline rates among technical experts.  But didn't say much about price and the fact that higher prices will offset under-estimated decline rates. In fact over the long term, and since gas price is so much lower than oil and other alternatives right now, there is an industry wide positive feedback.  If the decline rates are under-estimated then lower volumes will increase the price over time.  True commodity pricing for sure.

 

From a national perspective I have no doubt we have a great resource that will produce for many decades.  From a company perspective I can imagine that many companies are over promising and have over-booked "proved" reserves which are supposed to be based on current price (12 month average).

 

Imagine you booked 10 BCF proved reserves at $6.50 gas and a year later gas is $4.00 and oh by the way the decline rates are looking a little steeper than you thought.  Proper proved results might now be 4 BCF (even though the 10 BCF is still there and will most likely be produced eventually).  You would be under tremendous pressure not to drop proved reserves by 6 BCF.

 

I've been out of the industry for a few years but I can imagine this tension going on behind the scenes in  some producers.  It's easy to get over optimistic and over promise, very difficult to reverse course.

 

Aubrey McClendon and Tom Ward founded CHK together and almost went bankrupt in the 1990's with a big push into the Austin chalk (similar to shales).  Very interesting now that McClendon is the "chief cheerleader" for the shales and Ward (SD CEO) says they are over-hyped.

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"The top chief of Leucadia Energy also believes shale gas production economics are over-blown and believes natural gas could be in the $6-$7/mmbtu range over time."

 

I don't think anyone including McClendon dispute that at $4 the economics on the shale plays suck.  But the Times is basically implying that the production curves used to book reserves are bogus.

 

In time as the large landholders get all of their acreage positions held by production a lot of the forced drilling will cease, and more capital will move to oil.  I would think that this should at least get prices up to a reasonable IRR for these plays.

 

I think the most important transaction was Exxon by XTO.  This was purely for their shale position and you just can't convince me that XOM would make such a long term investment if there was ANY doubt about the production curves.

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