Wednesday, September 16, 2009

Response to the Skeptic

A haynesvilleplay reader forwarded me a paper written by Drilling Info Energy Strategy Partners that addresses point-by-point the August column written by Arthur Berman that suggest shale gas finds are largely uneconomical based on his analysis of the Barnett Shale. The paper is very interesting, even for us non-geologist types. Although it's 14 pages, as we said in high school, there are lots of pictures and not so many words.

Not being a geology professional, I can only weigh the competing points at the surface level, but I've been struggling to reconcile why so many companies would be investing billions of dollars in something that, according to Berman, is be so uneconomical. You can read the specific points if you're interested, but there were a few takeaway points for me:
  1. The authors contend that Mr. Berman's analysis was superficial and based on data that was not properly parsed. They dig a little deeper based on information from their company's internal database.
  2. "The cost of superficial analysis has very real consequences in terms of energy policy today like never before." That line really struck me. Previously I didn't pay a whole lot of attention to the argument, assuming it was largely theoretical and the truth would be apparent in new wealth (or losses) to investors in a few years. But the stakes are so much higher at this time, given what is going on in Washington.
  3. "Unlike conventional reservoirs, the economics of shale plays highly favor operators that invest in engineering and ongoing experimentation in optimizing their drilling, completion, and stimulation practices." The authors state that the best operators produce 40% more than the average operator from equivalent quality acreage and four to five times more than inefficient operators. That's a strong statement. I'll bet that there are lots of people out there who knew this before they signed their leases. There will definitely be some winners and some losers.
  4. Because of the technological and skill differences between operators, there might be an opportunity for the better operators to acquire leases that lesser operators release once the original terms expire.

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