Energy Returned on Energy Invested Thread pt 2 (EROEI) (merg

[John_A]

Nice summary! According to the original article, we seem to have some good EROEI stuff in shale gas. ...

Thanks! I penned it to highlight the complete vapidity of your source.

Certainly an interesting claim when you didn't refute a word he said, but 'tis alright. Some people say EROEI sucks, some people say it is fantastic, undoubtedly the truth is somewhere in between. Certainly T Boone, a certified peaker himself, seems to think that natural gas isn't all bad, and would make a good transportation fuel. Do you like him as a source, or do you want to dismiss his comments out of hand because you can't refute a word he has said either?

[kublikhan]

Again, this is invalidated by three years of market experience. These natural gas formations are generating positive cash flows, which means that unless the natural gas companies are getting some sort of discount on the energy they're using to drill these wells, the production costs are less than $4/mcf.

Are you sure about that? I heard they are losing money under $4:

The producers are cash flow negative and (given the depletion rates and reasonable ultimate recovery estimates) need a price of $6.50 to $8.50 in order to turn a real profit. While some producers were able to get those prices because of hedging programs they no longer have that option given the current price levels for natural gas. When I see the prophet of shale gas, Aubrey McClendon, announce that Chesapeake is converting itself from a shale gas to an oil company the alarm bells should start to ring for all those who bought into the hype.The bottom line is that until I start to see positive cash flows from operations I will treat shale gas as just another potential source of abundant and cheap energy that will be developed some time in the future.

Check the 10-K filings with the SEC. It is not a profitable endeavor. High production and reserves do not generate profits but can be used as the basis of selling properties to conventional producers needing to show that their reserves are not falling. It makes sense for Exxon to play games by buying shale producers and book reserves because it has profits from other activities to mask the losses from shale gas production. The bottom line is that the producers are not making money. Many of them show capital expenditures running at several hundred percent of cash flow. Most of them have little in the way of shareholder value with their asset value being lower than their debt. If there is another dip in the works or QE2 is ended without a replacement in the works about half the producers could be looking at bankruptcy.

Ridley and Dyson on shale

One driller I know says it's nonsense to tell the public that we will have extensive supplies of natural gas from shale without saying what it will actually cost. He said that natural gas selling for $5 mcf implies a much smaller exploitable resource than gas above $10 mcf, a level hit only briefly twice in the last decade.

The report cites estimates of what price it might take to get large volumes of shale gas out of the ground. Some of the easiest and highest flowing wells may make a profit at current prices around $4 mcf. But harder-to-get gas will likely cost more than $7 mcf and possibly as much as $11.50 mcf. What's clear is that ramping up shale gas production won't be cheap. As my driller friend opined, "We can have cheap natural gas or we can have plentiful natural gas, but we're not going to have cheap, plentiful natural gas."

Shale gas: Not a 'game changer' after all

[kublikhan]

A Ponzi scheme like this will go on for years: as crude oil becomes more scarce, resources like shale gas will appear more alluring to clueless investors ... so more investors will come on board, thereby assuring the perpetuation of the pyramid scheme.

It seems even some well informed investors are willing to buy a seat at the shale gas table, even knowing current gas prices are below production costs. The big oil majors are more interested in purchasing the equipment and expertise that the independent producers have, as they plan to take the fracking boom global. They also want to pad their declining reserve numbers. And they have the cash to weather several years of low gas prices. Big oil seems to know what they are doing, but I feel for the small investor getting fleeced.

many independents are looking for ways to exploit their large investments in natural gas shale acres without increasing their capital requirements. Along come the big energy companies with their vast amount of capital. The large companies are exchanging their capital for access to horizontal drilling and hydraulic fracturing technologies. Big oil wants to develop their expertise in shale exploration and production to take it globally. Exxon’s purchase of XTO at a 25% premium indicates that the major oil companies believe that shale has a future. The major oil companies have the financial resources to weather lower gas prices. By acquiring the expertise that the independent’s posses in developing gas shale, the majors are looking to find and produce gas from U.S. Canadian and other international plays. Therefore, we should look for additional acquisitions and joint ventures in the months to come.

Big Oil Entering the Shale Natural Gas Arena

[pstarr]

In your last three incarnations you dismissed net-energy analysis as pointless. Which is it shorty?

[OilFinder2]

And (moderate assumption) if we can assume that the energy to pump the natural gas out of the ground is generated from natural gas at the wellhead ...

Something to consider: Natural gas isn't even "pumped" out of the ground. You drill a hole and it flows of its own accord, just like any other gas. If you look at a completed gas well you'll notice there are no nodding donkeys or anything like that. It's pretty much just a series of valves and pipes.



This is one reason why a gas well - even a shale well - can have a good EROEI. Once you drill the hole and complete the well, there's little additional energy used in producing the gas.

[Pops]

The days of $1/mcf natural gas of the '90s are probably permanently over. Still, I'm thrilled that we have this extra opportunity- especially with much of the drilling occuring in less environmentally-sensitive areas of Texas, though I wish it was more like $7/mcf instead of $4 extraction costs.

As I mentioned in the other thread:

The numbers on major shale companies financial statements do not add up, said Deborah Rogers, advisory council member for the Federal Reserve Bank of Dallas.

"They basically corroborated and said that when you count in and factor in all the costs, the lease costs, everything, that shale gas, they can't really pull it out of the ground at $3.50. It's really about $7.50 to $8.00 mcf and that's a substantial difference," said Rodgers.

CS Monitor

Basically she is saying it's a Ponzi scheme.

[TheAntiDoomer]

^too bad for her actual production numbers and wholesale price say exactly the opposite.

[Daniel_Plainview]

Basically she is saying it's a Ponzi scheme.

No matter how obvious the Ponzi scheme, investors won't believe you until it's too late. Even Madoff's victims were in disbelief up until the pyramid collapsed.

[GoIllini]

Basically she is saying it's a Ponzi scheme.

Not really. She is just saying that there is some gas- perhaps even a majority- that lies at $7-8/mcf on the supply curve. Right now, the S&D curves intersect at ~ $4-5/mcf with natural gas production up, shale gas supplying 15% of the market, and most importantly, net positive cash flows from drilling operations. Bernie Madoff couldn't say the same thing.

[pstarr]

Basically she is saying it's a Ponzi scheme.

Not really. She is just saying that there is some gas- perhaps even a majority- that lies at $7-8/mcf on the supply curve. Right now, the S&D curves intersect at ~ $4-5/mcf with natural gas production up, shale gas supplying 15% of the market, and most importantly, net positive cash flows from drilling operations. Bernie Madoff couldn't say the same thing.

$7-8/mcf can not sell or compete in an open free market with $4/mcf free gas. Why? The Law of Receding Horizons or Diminishing Returns.

You may ask yourself; why are these companies still in business? The product is not price competitive. Answer is subsidies
--free advertising (in places like this),
--government handouts,
--and especially new crops of oblivious newbie investors looking to be fleeced. That is the definition of a ponzi.

[GoIllini]

$7-8/mcf can not sell or compete in an open free market with $4/mcf free gas.

Sure, but $4 shale gas can. And we will probably get to the $7-8/mcf gas when nat gas prices get to $9-10/mcf. (Some of the production costs are obviously in the form of energy.)

You may ask yourself; why are these companies still in business? The product is not price competitive. Answer is subsidies
--free advertising (in places like this),

LOL, natural gas is the textbook example of an efficient commoditized market. Advertising doesn't make a difference here.

--government handouts,

Natgas gets $1 billion worth of subsidies to produce 20% of our country's energy. Assuming all of it went into shale production, the subsidy amounts to about 20 cents per mcf.