[ROCKMAN]

At first reports were that Shell was giving up on their kerogen recovery project. Actually unless I’ve missed a more recent post Shell isn’t giving up on the kerogen deposits but the other Colorado shale plays. From: http://www.bizjournals.com/denver/blog/ ... l?page=all

“Royal Dutch Shell’s U.S. subsidiary will keep its oil shale research project going in Colorado, but the company’s other assets in the northwestern and southeastern parts of the state are up for sale, according to the company. The company on Aug. 1 reported a 60 percent drop in second quarter results — largely due to a $2 billion write-down of its North American shale assets due to “the latest insights from exploration and appraisal drilling results and production information.”

And now, so are Shell’s operations on southeastern Colorado, where it’s drilled a well in Huerfano County, Shell spokeswoman Deb Sawyer told me. “We’ve drilled one well and fracked it, and we’ll continue with our program while the assets are marketed,” she said.”

It sounds like they dumping the more conventional unconventional fracture shale plays and not the kerogen deposits which have yet to produce $1 worth of profitable oil. Not sure what fractured shale play they were chasing but it apparently another Eagle Ford or Bakken. Even for a company of that size a $2 billion is a fair bit of change.

[ROCKMAN]

Shales not nice to Shell.

The assertion that Shell came too late and had to buy into acreage from companies that had already realized held little value is true IMHO. Not all shales are created equal and not all leases in any shale trend are profitable. Most of their wells are too recent for the cumulative production to be meaningful. But the average initial production rates for their wells they reported to the TRRC were 73 bbls/day and 970 mcf/day. We’ve seen many press releases from operators bragging about 1,000+ bbls/per initial production. When was the last time anyone saw PR reporting a 50 bbl/day initial test? That’s because the SEC doesn’t require all well results to be outed in press releases. From:

http://www.rigzone.com/news/oil_gas/a/1 ... _Shale_WSJ

Reuters – Royal Dutch Shell plans to sell its 106,000-acre stake in the Eagle Ford shale formation in South Texas. Shell's decision comes after it took a $2.2 billion charge against its U.S. shale business in August. Major oil companies have struggled in oil-and-gas rich regions such as the Eagle Ford, where smaller energy firms have thrived. BG Group and BHP Billiton have also taken impairment charges against their U.S. shale assets.

The stake "offers a valuable growth opportunity for another experienced operator," Shell spokeswoman Kelly op de Weegh told the paper. (What can the Shell spokesman say: “There’s lots of money to be made on these leases even though we couldn’t do it. After all, Shell just doesn’t have the technical expertise as a company that only has as many employees as Shell has janitors at One Shell Plaza.” LOL.)

The company will continue to operate its 150 production wells in the Eagle Ford while allowing potential buyers to review technical data on the holdings, the Journal reported. The value of the assets wasn't clear, it said. Write-downs by Shell and some other majors are a sign they came to the shale boom late in the day, overpaying for lower-quality and less well-explored assets – not that the shale revolution is stuttering, according to a Reuters Breakingviews column published in August.

(They don’t say what the paid for this apparently poor quality acreage but based on when they bought in I would guess it was on the order of $300 million. And while they have 150 wells producing today it appears they drilled at least 182 wells. I would guess they’ve spent at least $1.4 billion on drilling and completion. For what it’s worth IMHO Shell Oil is the most technically competent member of the Big Oil circus. They just got stuck with a pig.)

[ROCKMAN]

Finally a bit of honesty from Saudi Arabia concerning the US shale plays. Still wrapped in a bit of BS IMHO but much better than their earlier reports of “alarm” over growing US oil production. What they are saying (without directly saying it) is that the boom in US oil shale production was caused by the same factor that lead to KSA oil sales revenue increasing from $60 billion/year to over $300 billion/year…higher oil prices. Of course the KSA isn’t concerned if the US shale boom continues: it would mean their income boom would also hang in there. From RigZone:

“A rise in output of North American tight oil will not trouble OPEC, the group's secretary general said on Tuesday, maintaining his view that the new supply source will not significantly impact the group's market share. Abdullah al-Badri, attending the annual Oil and Money conference in London, referred to forecasts of rising production of tight oil, also known as shale, but said that would not be a problem for the 12-member OPEC. The Organization of the Petroleum Exporting Countries, skeptical of information available, has been looking more closely at shale oil this year. It decided in May to carry out its own investigation on shale's potential. "In the next few years we will continue to see growth in U.S. shale oil, which is very good news for the U.S. and the rest of the world," IEA Chief Economist Fatih Birol told Reuters. "But I don't think that this has either the resource base or the economics to replace Middle East oil," he added. The IEA advises industrialized countries on energy policy. Tight oil output would be in decline by 2018 and the cost of such developments means that a sharp drop in oil prices would restrain supplies, Badri said. "This tight oil is hanging on the cost. If the (price) were to drop to $60 to $70, then it would be out of the market completely." Current prices, of $108 a barrel for Brent crude, are at an acceptable level for producers and consumers, he said.”

Well, at least acceptable to producers like the KSA which has seen a 500% increase in revenue in less than 10 years. And that while producing about the same amount of oil as they were in 2005 when oil was selling for 60% less than it is today. Very acceptable, I would say. I can picture the sheiks huddled around the table pretending to tremble with fear as they chant “US energy independence...USA…USA”. LOL.

[KingM]

Well, at least acceptable to producers like the KSA which has seen a 500% increase in revenue in less than 10 years. And that while producing about the same amount of oil as they were in 2005 when oil was selling for 60% less than it is today. Very acceptable, I would say. I can picture the sheiks huddled around the table pretending to tremble with fear as they chant “US energy independence...USA…USA”. LOL.

I suspect you're right in the short term. In the long term, what do you think you'd find if you visited the two regions of the world in a hundred or two hundred years? I suspect there will be industry and culture and civilization in and around the farm lands, ports, and rivers of North America, while Arabia will once again be a sandy wasteland populated by a few violent and scattered nomadic tribes.

[ROCKMAN]

King - I fully agree. In truth I feel PO is as big a problem if not more so for most of the oil exporters as it is for the US. Not that it isn't critical for both the US and Saudi economies but much more so for the KSA. Without oil production they can't feed or water there population as they do today. Which is why the oil exporters need to be frantic in their efforts to diversify their economies as well as develop alternative energy sources. The KSA has to keep selling oil to keep their population docile. But they also need to supply them with ever increasing amounts of energy. ELM is just a big a problem for the KSA as it is for the importers IMHO.

[rockdoc123]

They don’t say what the paid for this apparently poor quality acreage but based on when they bought in I would guess it was on the order of $300 million. And while they have 150 wells producing today it appears they drilled at least 182 wells. I would guess they’ve spent at least $1.4 billion on drilling and completion. For what it’s worth IMHO Shell Oil is the most technically competent member of the Big Oil circus. They just got stuck with a pig.

being technically competent in conventional oil and gas does not make you immediately a competent shale player. Shell is used to big budget, gold plated deepwater projects, LNG projects and fields with large production where opcosts are overshadowed by high returns. Shale is an extremely marginal business and as a result a lot of attention needs to be paid to managing costs at all points in the value chain. Companies like EOG, CHK and Plains are good at this. It is also why companies like Total decided to enter into the shale business by partnering with such companies and letting them operate (this is very unusual, Total is almost always wanting to operate joint ventures). Shell's comment that someone else can realize value here where they cannot is bang on in my experience....small companies who are competent, watch costs and keep their overhead low will win the end game in this business.

[ROCKMAN]

The French seem to have got the butts caught in a crack. If they hold to the frac ban they'll have to pay back at least $1.4 billion they collected for shale leases. http://www.rigzone.com/news/oil_gas/a/1 ... mpensation

But there's even a bigger problem: disruption of "clean energy" from their geothermal frac'ng plans which require using frac fluids that are even nastier then what the oil path uses. http://www.csmonitor.com/Environment/En ... -conundrum

[ROCKMAN]

One of the major shale players continues to try to get their house in order:

•Chesapeake Energy (CHK) lays off 800 employees nationwide, including 640 at its Oklahoma City headquarters, apparently concluding the changes that have led ~1,200 people to leave the company since the first of the year.
•After today's cuts, CHK has about ~11K employees nationwide, including 3,500 in OK City.
•CHK has sold $4B in assets this year in addition to trimming jobs. That's in addition to the $25+ billion it has sold in recent years.

[ROCKMAN]

McClendon gets $1.7B in financing for shale play: A group of private equity firms is backing former Chesapeake Energy chief Aubrey McClendon in his new exploration and production venture in the Utica Shale in Ohio with $1.7 billion in financial commitments. A Utica-focused subsidiary of McClendon’s new American Energy Partners LP plans to lease and drill 110,000 net acres in the southern region of the eastern Ohio shale play, starting with one rig in the fourth quarter. Over the next two to three years, American Energy wants to increase its rig count to at least 12, the Oklahoma City-based firm said Wednesday.

Jumping back into unconventional drilling, McClendon started American Energy in April after departing from the Oklahoma City-based Chesapeake. His exit from the oil and gas producer followed months of controversy surrounding perks he had received and shareholder pressure to shore up the balance sheet.

[ROCKMAN]

Last week as noted here Shell Oil announced a $2 billion write down of US shale assets. I had estimated they paid a huge amount of money for EFS leases and spent over $1.4 drilling about 200 Eagle Ford Shale wells. Now the story has surfaced that Shell is rumored to have made Dan Harrison an Eagle Ford Shale billionaire by paying him $10,000/acre in signing bonuses for his 106,000 acre Piloncillo Ranch.

Yep…Mr. Harrison made $1 billion selling his lease and not drilling a single EFS well. Shell Oil drilled almost 200 EFS wells and appears to have lost the better part of $2 billion. I pulled up the initial average production rate of the Shell wells that have been posted so far: 72 bo/day and 950 mcf/day. As the computer said in “War Games”: The only winning move is to not play the game. In the shales sometimes the winning move is let someone else drill the wells.

[ROCKMAN]

Pstarr - the common hype I recall were press releases of IP's in the range of 800 - 1200 bpd. If the 73 bops never declined it would take 3 - 4 years to just recover the typical well cost. Use the typical decline rate such a well would never recover it's initial cost. Have you noticed we haven't seen many cornucopians throwing out such news lately? They probably just started feeling bad about making the rest of us look bad. Yeah, yeah...that's the ticket.

[rockdoc123]

starr - the common hype I recall were press releases of IP's in the range of 800 - 1200 bpd. If the 73 bops never declined it would take 3 - 4 years to just recover the typical well cost. Use the typical decline rate such a well would never recover it's initial cost. Have you noticed we haven't seen many cornucopians throwing out such news lately? They probably just started feeling bad about making the rest of us look bad. Yeah, yeah...that's the ticket.

OK ...this is the point at which I call BS poker. The typical wells now in Eagle Ford are costing D&C 4 - 5 MM according to EOG and CHK and a bunch of other operators. My experience in this part of the world is that the price is not at a discount to WTI but at a premium for the right product. So what price are you using in your analysis? As well you seem to want to point to some bad well results and then exclude all of the publicly stated results of numerous companies working in this trend who have stated (at the risk of legal sanctions) that their wells are doing much higher IP than you point to. Why are you trying to portray this as something other than what it is? Do I actually need to show all the SEC submissions on this? Are you somehow claiming that all of these companies who are reporting profits are lying?

I am going to go out on a limb here and suggest that your opinions are based on the fact that shale gas/oil competes with your current business interests. This does not put your opinions on this matter in a good light.

I would also question your understanding of this part of the business, you continue to point to your experience with Austin Chalk which is a far call from shale exploration/development. In fact, it isn't even relevant.

Yes, some big companies like Shell and Exxon who normally couldn't find their collective backsides with both hands will screw up in the shale business. It is the companies like EOG and CHK who are making it work. Look at their financials, it is clear that they are doing what is needed to be done to make what is a very difficult business profitable.

And if you want to argue about CHk selling assets etc., no problem. That was their plan from the get go, I have this on authority from one of their senior VPs .

[ROCKMAN]

“Royal Dutch Shell CEO Peter Voser said it will take a longer time than expected for the company to reap benefits from its shale gas projects due to poor short-term results. Weak U.S. shale liquids production contributed to a $2.2 billion charge Shell revealed in August and was a key factor in its decision to abandon its goal to deliver 4 million barrels a day of production by 2017. "We didn't get the results which we were expecting to get in the shorter term and we will therefore have to develop this a little bit more before we can take benefits from it. It was clearly not as successful as thought."

I know I shouldn't tease my Dutch cohorts but this just reminds me of the very old joke: So you lose $2 for every widget you sell…how are you going to stay in business? Easy…we’ll make up it in volume. Know one likes to admit they f*cked up" but sometimes it's better to just say nothing then toss out some silliness.

The average initial production rate of their 180+ Eagle Ford Shale wells was 73 bopd and 950 mcfpd. That’s the rate the better wells are doing after producing for 4 or 5 years. It what world would oil/NG prices be high enough to make such results economic? And if prices were that high how much more would they have to pay than the $1 billion they slapped down for that one 100,000 acre ranch? Their efforts don’t obviously condemn all the remaining shale plays. They just bet on the wrong horse…happens all the time in the oil patch. But generally not on such a large scale.

But this does reveal the variability in these trends. Wilson County was another major bust in the EFS where one operator sank over $300 million. Which makes the speculation of great shale bonanzas in untested areas around the globe just because there are shale rocks present seem a tad foolish IMHO. Going from a delight to a dog in just 100 miles in Texas and then to speculate the extension of that delight 10,000 miles around the globe? A bit overly optimistic IMHO.

[John_A]

Which makes the speculation of great shale bonanzas in untested areas around the globe just because there are shale rocks present seem a tad foolish IMHO.

There is a reason you used the word "speculation". You think it is foolish to speculate in shales, those changing the geopolitics of global oil and natural gas production starting from but one country might disagree.

You pays your money, and you takes YOUR chances. And others will do the same.

Let us not forget, the majority of people who made money during the gold rushes of North America during the last 2 centuries were not usually the miners, but the shopkeepers and salon owners who took advantage of how people spend money, and not where they got it from.

[ROCKMAN]

John - I don't think it's foolish to go looking for those shales. After all that's what we do for a living. What I think is foolish is speculating about big potential of trends about which ones knows almost nothing about the area other than there are shale formations present.

[dcoyne78]

Hi all,

I have attempted to create an interactive spreadsheet that allows the user to vary the number of wells added per month, the number of months those wells are added, and the ability to vary the decrease in new well EUR. See my post at http://oilpeakclimate.blogspot.com/ titled "cool tools for considering future bakken output".

The spreadsheet can be downloaded at the link below:
https://docs.google.com/file/d/0B4nArV09d398ZXNSYjI4VlR1WDA/edit?usp=sharing

Dennis Coyne

[ROCKMAN]

Chesapeake Rumors: The Daily Mail passes along a rumor going around earlier that Chesapeake Energy could be takeover bait for the likes of BP or Royal Dutch Shell at ~$40/share. Early morning strength in the shares may have been attributed to the rumor, but most gains fell away into the afternoon; shares closed +0.3%.

Not much of a shocker. We discussed this possibility well over a year ago on TOD. At the time someone asked what the odds were of CHK going bankrupt. I pointed out that companies in CHK's position (especially with their heavy debt load) seldom go bankrupt. What typically happens is public company will make the major shareholders an offer they can’t refuse. Often a good bit of the swap will be taking over the debt with a big chunk of the exchange being paid in stock from the acquiring company. CHK may still have assets worth developing but they lack the credit to do so. A company like RDS or XOM has a fat credit line and cash reserve so they can step in and develop those assets.

As I said long ago it’s just a question of how long the big shareholder can maintain the faith. CHK might be able to put up a fight but that will boil down to who controls the most stock.

Just caught this: http://seekingalpha.com/article/1754102 ... e_readmore

"On Thursday, October 17, it was reported by the Daily Mail that Oil Majors such as BP (BP) and Royal Dutch Shell (RDS.A) (RDS.B) may be interested in acquiring Chesapeake Energy (CHK). In the wake of the Daily Mails report, I not only wanted to review what was reported, but also highlight a number of the reasons why I still remain slightly bullish on shares over the next 12-18 months."

[rockdoc123]

CHK may still have assets worth developing but they lack the credit to do so.

once again I suggest you review their financials. They are easily paying down their debt, covering their very large capital requirements as well as delivering a reasonable return for shareholders. Their strategic shift is quite apparent as they drill up the acreage they have....sell or leverage farmout what they don't want to concentrate on, use that capital for investments, use cashflow from operations to pay debt carrying charges and retire the principle. They continue to drop operating costs in the plays they are concentrating in.
Their debt ratio is not that unusual for an independent in growth mode, the number is high but so is their EBITDA