The beginning of the end for resource gas plays

First, go here and read a Chesapeake position news release:

There is now enough history coming onboard to show that the gas rich plays are just not paying out. In the Eagleford oil window, there is only one county out of 14 that has oil, rich gas potential.

The newer shale plays are beginning to show results from earlier drilling that does not meet expectations. The Haynesville is a loser, as are many. NOW, the empirical data does not support the projections. Thousands of landmen will be out of work. It is already happening in Pennsylvania.

There are estimates of 2.50 MT (million Trillion) cf of gas in reserves in the shale play. This will not be recoverable at current gas pricing. $2.50 gas does not make the play economic. Will wells continue to be drilled?

Sure they will, for the wrong reasons. Not to add reserves. Not to make a profit. To prevent the bloodletting.

For example, a 640 acre section at an average bonus of $3000 per acre bonus and $500 per acre acquistion costs and another $300,000 for legal, land and surface owners. Then add in $8,000,00 to drill and complete a well and get it to sales. All of the sunk costs (down the drain costs to obtain production, in this case) total $10MM dollars. HOWEVER, any revenue over $8,000,000 (net of royalties) will not return a profit necessarily. It will only go to reduce sunk funds in land acquisition.

The funky nature of shale geology means the risks are high that an investment made in a sparsely drilled prospect will go bust. Rock density, porosity and pressure levels vary widely within each field, which means one parcel may hold enough hydrocarbons to justify prices of $30,000 or $50,000 an acre, while the adjacent land is almost worthless to drillers. (Reference Michigan and CHK)

The only reason to do this math is to help offset the sunk funds in the investment.

The US shale bubble will not pop until the 2008 leases expire in various parts of the country, which should start as early as next year.

Shale plays are the darling of wall street and helped kill conventional exploration.

However, once the bloodletting is done, the resource plays will be evaluated in much the same way as conventional drilling. I look at resource gas drilling as being very analogous to green energy. Costs are too high, return is too low and the only way to make money is in the tax breaks, which the oil companies, their lobbyists and forward thinking businessmen have lobbied their representatives for years to keep.

Green energy is feel good energy, but until the market determines that it is a viable alternative to cheap fossil fuel energy, it has no future until the market decides that it does.

Wish you could tell me what county out of the 14 is the rich oil and gas play. I have family there that has leased some land. Hoping for a real fortune for them.


Dear Louise,

so far the winner is Karnes, right in the middle of what industry refers to as the "Goldilocks" area.

thanks, Buddy, unfortunately my families land is in Three Rivers. At least they did get some good money on the leases.

Once again, thank you.



To give a scary example, in the LaSalle County oil window, my client leased for $3000 per acre and 1/4 royalty, no deducts, all the bells and whistles. They did not own a full interest, but they were not pooled either.

There are two wells drilled on the property. Extrapolating out the decline curve after 1 year production, in two years their income is estimated (before tax) to be $4250 per acre, so they received nearly 50% of the asset value in the bonus.

Before anybody says that these wells will produce for 40 years, you may be right, but the cumulative production, on pump, is 15 BOPD for both wells total. Stripper for both.

Be still my beating heart. They are now averaging 22 BOPD each for reported January production.


I like Three Rivers.

Is Nolan Ryan's Catfish Place still there on Choke Canyon Reservoir?

Last I heard, Nolan was still in business. Doing well too. At least LIve Oak joins Karnes at an angle.


UPCOMING: The Resource Gas Plays are the scourge of conventional gas exploration.