Tuesday, November 3, 2009

Arthur Berman leaves World Oil magazine

This is just a short note, since Tuesday's tend to be my busiest days in class, but I could not help but put up the news best reported by quoting from Arthur Berman's Petroleum Truth Report
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.
For those of you who do not understand the import of this, Arthur Berman has been writing for some time about the credibility of long-term natural gas well production claims from the gas shales around the United States.

There has been a considerable hype about these shales (hence the tech series that I am starting to post on Sundays) and the wealth of natural gas that they are adding to the nations reserves. However, through examination of some of the records Arthur has shown that the performance of individual wells is not holding up to the original promise.

For example the industry relies on a decline model for well production that, over time, allows one to make a certain prediction for the recovery of natural gas from that well. Thus, for the sake of example, integrating over time the amount of gas might suggest that a field might ultimately yield 2.5 billion cubic feet of natural gas.

However, by examining records that show that the declines rates are much faster than predicted (see my post on his paper at ASPO) he has shown that the reserve from these wells might come in at only half, or less, that predicted.

Given that the wells are extremely expensive (at around $8 million or so) Arthur calculates that the industry needs a price of $9 /kcf to make a profit on a well with about 2.5 bcf in reserve. What he is seeing is that with the more rapid decline rates that are being experienced in the Barnett and Haynesville, and the current drop in natural gas prices, that neither of these conditions is being fulfilled. Thus he is strongly questioning the financial underpinning to the health of those that are heavily engaged in these gas plays.

Of these, Chesapeake and Petrohawk are the largest, though I have largely confined most of my posts to Chesapeake, since it was their testimony before Congress that suggested that they could operate with a price of $4/kcf. Obviously Petrohawk feels threatened by his commentary, and has acted accordingly. It is disturbing that World Oil seems to have folded so easily to that pressure.

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