[TheAntiDoomer]

http://onlinelibrary.wiley.com/doi/10.1 ... DDE.d03t02

An analysis of the energy return on investment (EROI) of natural gas obtained from horizontal, hydraulically fractured wells in the Marcellus Shale was conducted using net external energy ratio methodology and available data and estimates of energy inputs and outputs. Used as sources of input data were estimates of carbon dioxide and nitrogen oxides emitted from the gas extraction processes, as well as fuel-use reports from industry and other sources. Estimates of quantities of materials used and the associated embodied energy as well as other energy-using steps were also developed from available data. Total input energy was compared with the energy expected to be made available to end users of the natural gas produced from a typical Marcellus well. The analysis indicates that the EROI of a typical well is likely between 64:1 and 112:1, with a mean of approximately 85:1. This range assumes an estimated ultimate recovery (EUR) of 3.0 billion cubic feet (Bcf) per well. EROI values are directly proportionate to EUR values. If the EUR is greater or lesser than 3 Bcf, the EROI would be proportionately higher or lower. EROI is also sensitive to the energy used or embedded in gathering and transmission pipelines and associated infrastructure and energy used for their construction, energy consumed in well drilling and well completion, and energy used for wastewater treatment.

[ROCKMAN]

TAD – A good point to bring up IMHO. Been a while since we banged this idea around. That 3 bcf per well seems a bit high but could ultimately be proven right if not even better. Still a bit early to give a good general characterization of the entire trend IMHO. But it doesn’t really matter a great deal with respect to EROEI. Elsewhere I’ve made the point that many folks overestimate how much energy it takes to drill a well. Even when one tries to account for the elusive energy content of the drilling infrastructure. And even if the peripheral energy bill is estimated at the end of the day it still takes relatively small amount of production to replace the energy expended.

Which is why I’ve repeated pointed out that EROEI has no bearing on what resources are developed or not. The oil patch has never considered EROEI in any drilling decision. In fact, the vast majority of hands couldn’t tell you what “EROEI” stands for. Like the EUR of a Marcellus well, be it 3 bcf or a lot more or a lot less, isn’t critical to the decision making process. It’s the cash flow over time moderated by a risk factor that determines what gets drilled and what doesn’t. Two wells might have an estimated EUR of 5 bcf and one gets drilled and one doesn’t. If the production rate is too slow it won’t deliver an acceptable rate of return. In fact, any production beyond the first 7 or 8 years adds almost nothing of significance to the ROR. The NPV (net present value) of shale production is what makes them viable even though they tend to have a decline rate: the initial high production rates are discounted very little by the NPV analysis and thus add a disproportionate share to the ROR compared to the total EUR. I’ve played with the numbers and depending on the trend the ROR analysis will kill a shale prospect long before it gets to a low EROEI.

OTOH NPV analysis also makes such projects very susceptible to changes in NG prices and costs. Even a short term drop in NG prices could have a significant negative impact in drilling plans. If the prices during the first 2 years or so are too low it will make little difference what the EUR may be because the NPV analysis will produce and unacceptable ROR. And that could represent a big problem for pubcos that need to keep replacing those rapidly de lining reserves in order to keep Wall Street happy with them. Today prices seem adequate to continue developing the Marcellus thanks in some part to the lower transport cost to get it to the end users.

[Keith_McClary]

http://onlinelibrary.wiley.com/doi/10.1111/jiec.12040/abstract;jsessionid=7F84CE61C9872C3B98277514CCF19DDE.d03t02

Total input energy was compared with the energy expected to be made available to end users

I found the statement "Storage and distribution account for 42.5% of the average consumer price" of NG. Amazing that would include so little energy.

[ROCKMAN]

Keith - Good point. I don't have any sense as to how correct that might be when you take into account storage, transport and distribution. Just too far from the well head for me to even make a WAG. But that was my point about EROEI not being a very important parameter in what gets drilled...at least not in a direct manner. As I said the economics will kill any projects long before gets much below 5 to 10 IMHO.

[agramante]

There doesn't seem to be much EROEI info on natural gas, at least separate from crude oil, so comparisons between conventional and fracked gas are tough to make. I did come across an old Oil Drum article which discusses natural gas, and since the estimates of natural gas EROEI span about 40 years from roughly 1967 to 2007, I think it's safe to assume that it describes conventional, and not fracked resources:

http://www.theoildrum.com/node/7062

It's good for a general comparison at least, not only for the high EROEIs involved, but also for the difference in EROEI depending on where you draw the system boundary: including only production or production as well as distribution.

Rock's point is well taken, though: when it comes to production, EROEI isn't even an afterthought. Cash flow trumps everything.

[SamInNebraska]

Which is why I’ve repeated pointed out that EROEI has no bearing on what resources are developed or not.

So....either EROEI is not relevant as you have mentioned before, or it is much higher than has been previously suspected. In either case, we are effectively validating the mind boggling amount of resources available for conversion to reserves. Sounds a bit optimistic to me on a peak oil website, but if those are the facts, then those are the facts.

[ROCKMAN]

Sam - The oil patch doesn't even know of EROEI so it isn't used to make resource development decisions. So from our POV not relevant. To others...perhaps.

"Sounds a bit optimistic to me on a peak oil website". Probably why the site is called peakoil and not peaknaturalgas. LOL. Given that the US is currently producing more NG than ever before I doubt peakNG.com will be popping up anytime soon.

[inglorious]

Although EROEI may not be directly considered when making drilling decisions it must surely still have an effect.

If a particular energy source requires a greater input of energy than another then there will be a cost difference between the two. As the available energy sources increase in cost then the EROEI of a product will reflect the investment required vs the profits to be made - profits will still be possible but there will have been a decrease in the ratio.

[ROCKMAN]

i - True. that's why I added the potential pertinence to others outside the oil patch. There's a relationship with energy input but the economics will always kill a drilling prospects long before you can get even close to an EROEI of one. In other areas it might be worthwhile to make such a calculation but in the oil patch it never has nor ever will be a controlling factor. An inadequate rate of return will make that call.

[ROCKMAN]

Pstarr – “the value of all the lousy crap you chase is dependent on eroei-measures nevertheless”. Nope it isn’t. The value of the crap I chase has only two possible metrics: what I get paid for that crap and what profit do I make by finding that crap.

First, what I get paid. Oil is selling for around $95/bbl. Are you saying the price I’m getting for that oil was determined by the EROEI of that well I drilled? I can’t begin to imagine what connections you might see.

Second, my profit margin. A well cost me $5 million to drill and it produces $10 million of energy. I have a profitable well. I used the equivalent of $500k of energy to drill that well. So an EROEI of 20. Then I drill another well that produces $10 million in energy, used $500k of energy but that well cost me $15 million to drill. And the same EROEI of 20. So both wells have the identical and rather nice EROEI’s and I make a profit on one and lose money on the other.

So exactly, pray tell, how is the value of those two wells (one profitable and one a money loser) determined by the EROEI’s since both are identical. Seems pretty obvious that the value of both wells is determined solely by how much I spent to drill them and the value of the energy each produced. And this is not a hypothetical model. Over 38 years I've drilled a fair number of wells that fall into both categories.

Now show me you economic model that supports your assertion. Go head, punk, make my day. LOL

[Tanada]

dup (do I have a heavy submit finger? or is it the system?)

I think its you Pete, I clear more dup's from you than any other poster lol!

[Beery1]

A well cost me $5 million to drill and it produces $10 million of energy. I have a profitable well...

Yeah, as long as you didn't spend another $5 million beforehand drilling wells that produced nothing. If you did, then you may have a profitable well, but your business is treading water - and EROEI may be part of the reason for that.

I'm not a big proponent of EROEI either - I reckon the oil business will keep pulling oil out as long as they can make money from it, and supply and demand has a lot more to do with that than EROEI. If that weren't the case, no one would bother mining diamonds. But EROEI does have an effect on supply and demand.

[dolanbaker]

I think that EROEI is more for the conversion of low grade energy fuels into high energy fuels, for example corn into ethanol. As ROCKMAN states it has little affect in the production of good quality crude.

But in oil sands and the like, a huge amount of energy is expended first, of course the viability of the operation is more dependent on the costs of the original source fuel (used to enable the extraction) and the sale price of the finished product than the actual energy expended & recovered.

[ROCKMAN]

beery – Folks need to stop confusing what I say with what they think I’m implying. EROEI is a valid concept and may be a critical factor in any number of industrial operations. All I’m saying it has no direct bearing on what oil/NG wells get drilled. I’ll offer one last real life example to prove it. Granted it’s a rather extreme example but it’s an actual case of a company INTENTIONALLY drilling 4 wells with negative EROEI’s.

La. State waters…1994. Small independent pubco producing an old field they bought from Big Oil. Only production they owned. Four NG reservoirs producing at relatively low rates. I drilled 4 horizontal wells at a total cost of $18 million and increased production from 10 million cuft per day to 50 million cuft per day. The 4 wells ultimately recovered the same amount of energy that would have been recovered by the existing wells but did so faster. These wells were drilled using a jackup rig. IOW used a lot more energy that a land rig would use.

So whatever the total amount of energy (actual and embedded) was used not 1 Btu of additional energy was added…a huge negative EROEI. And not one $1 of additional cash flow was added. So why would a company intentionally drill wells that not only lost money flow but also had a negative EROEI?

Easy answer: to boost the company’s stock value. This was a startup company and had little stock value. The field created just enough revenue to pay off the loan that was taken to buy it. But now there’s this company that increased it cash flow by 400% using this new magic bullet: horizontal well bores. Sound familiar? That’s all Wall Street needed to know to run the stock price up 500%. And no one lied: all the details I just gave you could have been gleamed reading the company’s annual report (in fine print, of course. LOL). BTW a WS raider was so impressed by what I did he succeeded with a hostile takeover of the company. And then a number of years later lost his ass when the company filed for bankruptcy and disappeared forever. Sorta like having a mutiny and taking command of the Titanic after it hit the iceberg. LOL.

As I said an extreme example. But now consider a play like the Eagle Ford Shale. I can promise you more money has been made on the stock valuation side of the equation by all the pubcos involved than profit made at the well head. By my estimate the most profitable company in the play to date has been Petrohawk. They took a large acreage position early on (and thus cheaply), drilled a few seed wells (that’s what we actually call them…think of “seeding” an unprofitable gold mine) and sold their undeveloped acreage for $12 billion. Not saying the buyer won’t make some profit from the acreage but they’ll never have a ROR anywhere close to what Petrohawk captured. And the buyer will have to generate income not only beyond the cost of drilling hundreds of hz wells but also needs to recover that $12 billion before the word “profit” can be used. And has the concept of EROEI being a factor popped up in anyone’s thoughts as I described this situation?

Companies are not drilling the EFS to lose money. What value they don’t create at the wellhead they create on Wall Street. There are a number of ways to make a nice profit in the oil patch that don't require producing oil/NG at a positive EROEI or a profit.

[rockdoc123]

As I said an extreme example. But now consider a play like the Eagle Ford Shale. I can promise you more money has been made on the stock valuation side of the equation by all the pubcos involved than profit made at the well head. By my estimate the most profitable company in the play to date has been Petrohawk. They took a large acreage position early on (and thus cheaply), drilled a few seed wells (that’s what we actually call them…think of “seeding” an unprofitable gold mine) and sold their undeveloped acreage for $12 billion. Not saying the buyer won’t make some profit from the acreage but they’ll never have a ROR anywhere close to what Petrohawk captured. And the buyer will have to generate income not only beyond the cost of drilling hundreds of hz wells but also needs to recover that $12 billion before the word “profit” can be used. And has the concept of EROEI being a factor popped up in anyone’s thoughts as I described this situation?

Companies are not drilling the EFS to lose money. What value they don’t create at the wellhead they create on Wall Street. There are a number of ways to make a nice profit in the oil patch that don't require producing oil/NG at a positive EROEI or a profit.

Once more I will correct you .....you've made this authoritative statement previously and I've pointed out that the information available in the public domain suggests you are incorrect.
The major operators and various investment banks have stated that the breakeven price for Eagle Ford is around $50/bbl (averaged across the liquids rich and pure oil producing areas) and with oil selling anywhere from $90 to $100/bbl (depending on where it is shipped) there is a lot of profit there. Low cost drillers such as Conoco Phillips are indicating even lower breakeven costs of $35/bbl. EOG, who arguably has the best acreage and experience saw netbacks from the Eagle Ford of $37/bbl (netback is calculated after all costs including land). You simply need to go to the 10K filings from the companies most active in the play to see that your idea that no one is churning a profit from the play is complete nonsense. Those producing in the liquids rich areas are making lots of profit, those in the gas rich areas are not doing well as a consequence of commodity price drop.

As to the buyer of Petrohawk never seeing a profit, that is BHP Billiton. Their CEO in a presentation at an investment conference in 4th quarter 2012 stated that their Eagle Ford liquids areas are exceeding rates of return of 100% and that individual wells payout in under a year. They did have to take a substantive write down on Petrohawks natural gas holdings because of the drop in commodity price but the liquids portion is claimed by BHP to be the best of its holdings in North America.

[ROCKMAN]

doc - You know your stuff...I'll grant you that. But you have a rather annoying habit of telling folks they are making incorrect statements when, in fact, they never made such a statement in the first. Everyone ready what I said…they can judge for themselves . I never said the buyer of Petrohawk wasn't going to make a profit. What I said was very clear: beyond recovering what ever thet spend drilling their wells they'll have to make another $12 billion before they show one penny of profit. Simple math even for us geologists. LOL. BTW a while back the SEC filed warnings with many of the shale players that they better start including such huge acreage acquisition costs in the PR statements less the SEC start charging them with deceptive trade practice.

As far as what it's costing the EFS players to produce oil you're more than welcome to believe anything the folks who have a vested interest in pumping those stocks up. Consider the often highlighted golden child of the shale plays: Chesapeake. Since the height of the boom their stock has dropped 65%...a loss of over $28 billion in stock value. Rather amazing stats given the great profit potential that’s so often touted. In the meantime I'll just believe what I hear directly from the boots on the ground who are doing the work themselves. And on a personal note just two months ago I evaluated an acreage position in the EFS a company bought for $248 millions, drilled 8 unprofitable wells and threw their hands up and walked away. They aren't even trying to farm out (sublease) the position...just going to walk away and take the write off. You can listen to the members of the board and the Wall Street hustlers and help carry their message…it’s a free country. As I've repeated said in the past the shales plays are making a profit for most of the players. But an insufficient ROR for many private companies like mine.

I never made the statements you've said I made...correct or otherwise. If you have a point to make just make it. You're credible enough IMHO to not have to lean on the straw man crutch.

[SamInNebraska]

"Sounds a bit optimistic to me on a peak oil website". Probably why the site is called peakoil and not peaknaturalgas. LOL. Given that the US is currently producing more NG than ever before I doubt peakNG.com will be popping up anytime soon.

Unfortunate that you both knock down EROEI at the same time as you bring up how much natural gas we have, because sooner or later someone will notice that we can make quite a bit of one from the other.

Worse yet, they even use the term "refinery" when talking about converting one to another, making it seem no different than steaming tar off of rocks and converting it into millions of barrels a day of the same stuff.

http://en.wikipedia.org/wiki/Gas_to_liquids

[rockdoc123]

As far as what it's costing the EFS players to produce oil you're more than welcome to believe anything the folks who have a vested interest in pumping those stocks up. Consider the often highlighted golden child of the shale plays: Chesapeake. Since the height of the boom their stock has dropped 65%...a loss of over $28 billion in stock value. Rather amazing stats given the great profit potential that’s so often touted. In the meantime I'll just believe what I hear directly from the boots on the ground who are doing the work themselves. And on a personal note just two months ago I evaluated an acreage position in the EFS a company bought for $248 millions, drilled 8 unprofitable wells and threw their hands up and walked away. They aren't even trying to farm out (sublease) the position...just going to walk away and take the write off. You can listen to the members of the board and the Wall Street hustlers and help carry their message…it’s a free country. As I've repeated said in the past the shales plays are making a profit for most of the players. But an insufficient ROR for many private companies like mine.

what I believe is based on what is published in 10K and year end reports by companies like EOG and CHK , COPI etc. which must comply with the law. Their investor presentations are also reliable because they are governed by the same level of legal scrutiny that everything else submitted to SEC is. You seem to believe that these companies can get away with lying about their profitability. Nothing could be further from the truth. When a company makes a presentation or press release everything they say is subject to scrutiny by the SEC.

CHK stock price has little to do with their profitability and more to do with the shennanigans of their former CEO, commodity price swing and general market mallaise. The big drop was in 2008 and every oil and gas company suffered similar falls. Some of those companies such as EOG have recovered from the crash. CHK were heavily weighted in gas as the commodity price collapsed and like everyone else in similar circumstances their share price has not recovered. Since then they have heavily weighted to liquids and their profits have increased considerably as can be found in their various submissions. If memory serves EBITDA was $1.9 billion for 2012 after 1 time impairments and they more than funded capex requirements through asset sales.