The Data That We Cannot Get

I would like to clarify what I mean about operators not showing their data.

Anonymous says that there is no data to show because we only disagree about how to project existing data. That is partly true, but some of the rebuttals to our work dispute the reliability of Texas Railroad Commission production data for the Barnett Shale play. They claim that they have "other data" that somehow leads them to different conclusions, but will not show it.

That's a really interesting tactic that I remember from the elementary school playground as "I know something you don't know".

I think that questioning Railroad Commission data is a red herring since production taxes and royalty payments are based on what operators report to the Commission. Those who claim that this data is no good imply that operators are improperly reporting production to the state. I would very much like people that doubt the reliability of Railroad Commission data take this issue to one of the Commissioners.

Beyond the "data" issue is the larger question of how the operators and financial advisory companies arrive at such high reserves. I can reproduce these high reserves by using absurd hyperbolic exponent b values, no terminal decline rate, or no economic limit.

When I use group vs. individual well-decline methods and b factors somewhat greater than 1.0, I can get to higher average EURs (more detail on this in a few days) than what I have published, though these reserves are still marginally commercial. Since I assume the integrity of the people who claim reserves that are 50-100% more than my most generous projections, I would like to understand how they reach those reserves.

In addition, we have always cautioned that without pressure data that only operators have, we may be too pessimistic in our EUR projections. Decline-curve analysis is only a part of the EUR evaluation process. Other factors include calculating a drainage area and running reservoir simulations to match production history with reservoir properties. These require data that we cannot get.

Operators are not required to report water production to the state of Texas. Water disposal can be a considerable cost, and the onset of water production may result in catastrophic production rate decline. This is data that we cannot get.

Some readers point out the current decline rates are much lower that we predict in some cases. This may be true because of the frequent workovers and re-fracs done in the out years of many shale years. In order to evaluate the result of lower decline rates due to human intervention, we need to know the cost. This is data that we cannot get.

Some operators claim that natural gas liquids provide uplift to their Barnett Shale economics. NGLs are not reported to the state because they are separated during gas treatment and processing in a plant. Only operators know the volume of NGLs and the gas shrinkage that results from their extraction. This is data that we cannot get.

While it is true that much of the EUR debate focuses on how to project future production from exiting data, it is hardly the entire story. A respectable EUR does not necessarily mean that the well is commercial.

From Perry Fischer, former World Oil Editor

November 5th, 2009

When I got up this morning, I decided not to pack my usual snack lunch--I thought that it would be my last day. I was right--I was fired.

On Oct 22, I received two emails forwarded to me via the World Oil Circulation Department. They were from DS and KR at two Houston oil and gas companies, and they both said that they were canceling their free subscriptions due to Art Berman's columns on shale plays. DS went further by faxing and then phoning to the president his feelings about Art Berman.

Let me be clear: The decision to pull Art's column was due to pressure from these two companies.

The next day, the president stopped by to tell me that we had to stop Art from writing about shale plays.

I said, "I'm surprised that there haven't been at least a dozen complaints. I've seen worse on other topics."

It was no use arguing. Ironically, I had already decided that Art should take a break from the shale plays for a while anyway, just because he was running out of new things to say, having written 8 (I'm guessing) columns on that one subject.

It was the 23rd of October and we usually have all of the columns in by the 15th of the month, but we have been so understaffed--just myself and 1.5 other people (we share one)--that we are now often late. So I called Art to see where he was at on his column. I quickly realized that Art's mind, and some of the work, were already committed. He felt that he owed it to his readers to comment on some of the recent rebuttals to his positioins on shale plays, so I decided that we'd go ahead and print what he had for the November issue.

Again ironically, Art agreed that going forward he was going to take a break from the shale topic, mostly because as he put it, "I'm not sure what more I can say."

Immediately after I hung up the phone with Art, the Publisher walked in, slapped down a fax from DS, and said, "We've got to stop Art from writing about these shale plays, we're getting too many complaints!"

I replied that I was aware of the complaints and said that the president was just in to discuss it, but that it was too late in the cycle to stop the November column but, in December, we would take "a little break." He said "Fine."

Normally, the magazine would be going out the door by then, but insufficient staff in both Editorial and Production departments caused further unforeseen delays. On Nov. 2, the magazine had been shipped, the "bluelines" were back (proof sheets), and they were about to go to press; we were minutes from being done done, when the Publisher walked in and said we had to pull Art's column.

I said, "I can't, I won’t; it’s finished, plus, we agreed that we'd leave November alone."

He said that it wasn't his decision, and that I was welcome to talk it over with the President, which I did. That conversation went nowhere. In his mind, there had been too many complaints (2), including 2 phone calls, and the column had to be pulled.

After three protests, including the fact that it would delay printing, I finally said, "This is a really bad decision, the best thing that you could do is nothing; there is no compelling reason to pull this; just let it go to press; the idea that we can please all of the people all of the time is impossible, unless we are careful to say nothing, print pabulum."

Obviously, I lost that battle. The last thing that I wanted to do Monday night (along with the Production Department person) was to write a quick column to replace Art's in two and-a-half hours; it was a step down in quality from his, and betrayed an incredibly thin skin on the part of World Oil management. I certainly would never have pulled it. A spineless Editor isn't an Editor at all.

It's important to know that Art left voluntarily. The decision was his alone. In my opinion, he was pissed. But then, if I worked my ass off on a good column, asked my friends for their counsel, opinion, and proofing, had the editor question a graph and ended up changing it, and then had it pulled and just set aside for the crummiest of reasons... well, I'd be pissed off too. If Art had stayed, he would have been under a magnifying glass. It's like breaking a pencil in half and then trying to put it back together.

I got through the night, emailed/talked to Art, and took two days of vacation. A minor brouhaha ensued on this blog and elsewhere and, when I returned, I was fired. I wasn't told why. Neither was I surprised.

In my 11 years at World Oil, I tried to take the "trade" out of "trade journal." The current management is trying to put it back in. Increasingly, decisions are being made for the sake of advertising. Unfortunately, the last vestige of “the separation of church and state,” meaning, between corporate and editorial, is gone. The marketing folks have won. Dilettantes’ meddling in day-to-day operations is now the norm.

I dare say that the last President, RM, who was summarily fired in April without explanation (so that's how he felt!), would have handled the situation much more deftly. (By the way, when you fire a president, aren't you supposed to trade up? I'd bet that not one employee feels that that is the case). But RM was old school (probably why he was fired). And so am I. My field experience and physics background will probably make me the last editor of World Oil with a technical background; part of a line of technically qualified Editors going back decades.

World Oil Editor Fired Over Shale Columns

World Oil Editor Perry Fischer was fired today by John Royall. While no reason was given, it is clear that this was related to his role in allowing me to publish a different view of the shale plays. Perry did a lot to elevate World Oil above the level of a trade magazine since joining the staff in 1998.

It is particularly unfortunate to see this behavior from the management of an old and respected publication like World Oil (it was first published in 1916).

As John Dizard recently wrote in the Financial Times about shale plays, "...along with the technology you can also thank the advanced American ability to extract money from investors. The key element of this national characteristic is the willingness to listen carefully to determine what people with money want to hear, and then tell them that. Again and again."

I wish Perry all the best in his job search.

A Call from John Royall

I got a call today from John Royall, President and CEO of Gulf Publishing, the company that owns World Oil magazine.

John told me that I "need to get my facts straight". He claims that he did not cancel my November column as I was told. Rather, he said, he, Editor Perry Fischer, and Publisher Ron Higgins agreed three weeks ago that I would write no more shale articles. He also claims that there was no pressure from Petrohawk.

I offered to post his comments on my blog, and now I have.

I have never been an employee of World Oil, and have never spoken to John Royall before today. I find it wholly inconsistent with my three-year history with Perry Fischer that he would keep a decision on what I should or should not write from me. My work relationship with the magazine has been contingent from the beginning on my right to choose content. When the magazine broke its commitment to our agreement, I decided not to write for it anymore.

Another bit of interesting information: when Houston Chronicle energy reporter Tom Fowler asked Petrohawk's Investor Relations VP Joan Dunlap about the alleged pressure from her company she said:

"It is doubtful that his termination was a direct result of comments made by Petrohawk. We suspect it was more likely a result of Berman's history of inconsistent data gathering and poorly supported opinions."

If there had been no pressure, why wouldn't she just say that?

I leave it to my readers to decipher the truth.

Pressure from Petrohawk helps cancell World Oil column

In an act of extraordinary courage, a top Petrohawk executive threatened to cancel his free subscription to World Oil if the magazine continued to publish my column. Today, John Royall, President and CEO for Gulf Publishing, cancelled my November column.

I have accordingly resigned as contributing editor.

I greatly enjoyed the nearly three years that I have written for World Oil. I especially appreciated working with Editor Perry Fischer who never questioned the content that I chose for my columns, and always emphasized accuracy and intellectual honesty. I know that he got a lot of pressure because of my position on shale plays but never wavered in his support. Thanks, Perry.

Thanks also to my many readers for their interest, willingness to write and call, and to both challenge and support. Special thanks to Lynn Pittinger for his incredibly valuable collaboration during the past few months.

Shale gas numbers may not add up by John Dizard

There is an interesting article on shale gas plays by John Dizard in the November 1, 2009 Financial Times:

http://www.ft.com/cms/s/0/b4240cf4-c585-11de-9b3b-00144feab49a.html

Facts are stubborn things

Several rebuttals to our position that shale gas reserves may be overstated have surfaced in recent weeks. This development is welcomed and positive because it elevates the important discussion of shale reserves and economics to a higher level of public awareness and dialogue. Although these rebuttals have been directed at me, I am not the only one with doubts. Ben Dell at Bernstein Research has published several reports recently that express similar, independently determined concerns about the cost, efficiency and reserves of shale plays. These doubts are shared among many petroleum industry scientists and financial analysts despite the enthusiasm for these plays by large public companies.

Critics of our position on shale gas plays have focused on methods of decline-curve analysis, and the projections of estimated ultimate recovery (EUR) that result. The problem with this debate from all sides is that we are uncertain about how to apply decline models to newer shale plays because there is insufficient production history to satisfy all of our questions. I will, therefore, focus on some stubborn facts about Barnett Shale cumulative production and approaches to play development.

(Click figures to enlarge)

Major operators claim that their average Barnett EUR will reach 2.2-3.3 Bcf/well. Figure 1 shows that those levels of EUR are unlikely to occur in an economically meaningful time frame based on cumulative production to date. Figure 2 shows that well performance has been erratic since operators began drilling horizontal wells, though the trend has been improving in recent years. This is probably due to drilling in areas outside of what are now known to be the core areas. The manufacturing paradigm that is prevalent in shale plays has lead many companies to assume that all areas in the Barnett Shale and other plays are uniformly attractive. Shale plays typically begin with a leasing frenzy whereby major players accumulate hundreds of thousands of acres, often at astronomical bonus prices. Next, a drilling frenzy ensues driven more by lease expiration schedules than by science. Only after considerable capital has been destroyed in this manner are the core areas recognized. This “Braille method” is completely opposite to the customary approach to E&P projects, where a cautious approach based on science is used to high-grade focus areas.

The methods used to obtain decline rates and reserve estimates for shale plays presented in this column employ best practices in the petroleum industry. Yet a group of professionals believe that some shale plays are exceptions to the methods of decline-curve analysis established by the Society of Petroleum Engineers (SPE). They should take this dispute to the SPE. It does not seem logical that type-curve methods should be more reliable than individual well decline-curve analysis. If the pattern of well decline is empirically exponential, it makes no sense that it should be treated as hyperbolic for conceptual reasons or because of a preference based on production from tight gas sand reservoirs that are not comparable in performance to shale gas reservoirs. We recognize that it may take many years before true steady-state flow is reached. But in the Barnett, decline trends are well developed in thousands of wells, and we must forecast reserves based on those trends, and not on some future, model-driven expectation of flattening decline rates.

Let me be clear. We do not dispute the volume of gas resources claimed by operators. We do question the reserves that, by definition, must be commercial on a full-cycle economic basis.

The time has come for the companies that operate in the shale plays to show the data that supports their optimistic forecasts for natural gas supply in the U.S. The economic viability of shale gas is a serious issue with profound implications for policy, alternate energy research funding, and national security. To simply say that those that have doubts about shale plays are wrong will no longer satisfy the many intelligent people who follow this debate.

Data provided courtesy of IHS Inc. However, the analysis and opinions expressed here are solely those of the authors and do not represent those of IHS or any other organization.