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Shale oil reserves questioned too

The USGS recently released new EUR numbers for all shale gas plays in the country and the numbers were significantly lower than operator claims. (See previous post.)

Interestingly, this same phenomenon is playing out in shale oil as well.

The Eagle Ford in south Texas has been touted to be perhaps even bigger than Prudhoe Bay as far as potential. But after careful scrutiny of shale oil, it looks to be little more than a shale gas makeover: same girl, different shade of lipstick.

As with all shale plays, whether dry gas or liquid rich, the hype is tremendous. That is because this exercise appears to be about drilling for dollars in the capital markets more than drilling for natural resources. It would be nice to see the hyperbole toned down and a more circumspect analysis forthcoming. I am not hopeful.

Just to give some color, read the following statements taken from various pro-industry publications:

“The long and short of the Eagle Ford is that all liquids window acreage is extremely valuable. Mineral interest to all depths and horizons is incredibly valuable.”[emphasis mine]

“EURs are going up substantially. Operators have rushed in…It’s going to take a very, very long time to develop all that acreage, perhaps a century…” [emphasis mine]

“The Estimated Ultimate Recovery of all Eagle Ford Shale wells continues to go up substantially…making it impossible to predict with any certainty how much above $100,000 per acre we will see. One thing is certain though, we are very early in the game and recovery factors are being improved by leaps and bounds.”[emphasis mine]

Not according to the Society of Petroleum Engineers!

In a recent paper issued by SPE (Society of Petroleum Engineers) on the Eagle Ford shale, we are once again confronted with the specter of overestimation of reserves.

As SPE notes:

“…nearly all the quoted figures [for EUR], which range up to 850,000 BOE (barrels of oil equivalent) or 8.5 billion cubic feet, are from companies active in the trend.”

They also note that very little of company data backing such claims is made available. Like disclosure of fracking chemicals, it appears conveniently proprietary.

Further, the SPE report examines production data up through early 2012 so their numbers are timely. SPE’s conclusion?

“…the mean EUR per well [for the Eagle Ford] is 206,800 BOE and the median is 160,500 BOE”

That is four times less than operator claims of 850,000 BOE, a significant difference.

So what are we to make of such industry claims?

It is stated that “EURs are going up substantially.” Well, yes, in company press releases designed to entice investors.

“One thing is certain though”, they assure us, “we are very early in the game and recovery factors are being improved by leaps and bounds?”

I’d like to examine that comment.

An industry website states:

“Newfield Exploration Company estimates that wells drilled with super extended laterals into the Eagle Ford Shale will have an estimated ultimate recovery (EUR) of 500,000 barrels…The company has become more efficient at drilling these wells and reported that a recent super extended lateral well was drilled and cased in 12 days”.

But according to the actual production data that SPE examined:

“The data is scattered but a clear trend can be seen for better results with larger frac jobs…then the trend seems to disappear…and may even show decreasing EUR results with larger jobs.”

I believe that “super extended lateral wells drilled and cased in 12 days” constitutes a “larger” job. I am fully expecting the term “über-laterals” to be forthcoming shortly.

This segues nicely into one of SPE’s prudent comments, which are all too often missing from industry’s giddy public relations messages:

“The study’s whole database of Eagle Ford production included nearly 1,200 leases, but only 843 leases (1,041 wells) were considered established enough to make a EUR projection. The rest were considered too early to make a reasonable decline forecast.”

This has certainly not stopped operators from claiming massive EUR’s calling the Eagle Ford “the biggest play since Prudhoe Bay” or the “greatest oil discovery of the last 40 years.” How can one make statements like these when the very petroleum engineers of your own industry state unequivocally that it is “too early to make a reasonable decline forecast”?

Not only are reserves apparently being overinflated yet again but we are also being inundated, just as in the shale gas plays, with “unbelievable” IP (initial potential) rates. “Unbelievable” may turn out to be a very appropriate word.

As recently as July, 2012 Mark Papa, CEO of EOG, stated:

“what can I say about the Eagle Ford except that it is an 800 lb. gorilla developing into a 1000 lb. gorilla”.

Mr. Papa went on to boast of EOG’s “monster wells”, which apparently number 16, discovered in the Eagle Ford.

According to PLS:

“One of those “monster wells,” as Papa called them, set a new company record…”

As I have stated over and over again, “monster wells” are the darlings of industry PR departments, not to mention CEO’s. But we now know that high IP in shale gas wells, unlike their conventional counterparts, does not guarantee a long lived well. In fact, high IP shale wells tend to play out more quickly on average. And this is a fact based on actual production history, not company press releases.

SPE confirms this:

“Initial potential (IP) is a widely quoted figure that certainly gives an indication of instantaneous well productivity…IP may not be a reliable indicator of EUR, however.”

In short, SPE concluded that average EUR’s for the Eagle Ford are 206,800 BOE/well, significantly less than many operator claims of as much as 850,000 BOE. The decline profiles suggest high initial decline rates and little hyperbolic nature. In fact, the decline rates are very high indeed with some in excess of 90% in the first year. The per well EUR has not shown any general increase since mid-2010 in spite of heady comments by industry such as “we are very early in the game and recovery factors are being improved by leaps and bounds”, a comment made a mere two weeks ago in late summer 2012, a full two years after the historical production data “has not shown any general increase since mid-2010″. Frac size and perforated length turn out to have only a rough correlation to EUR rather than the certainty promised by industry. And SPE states that any reference to BOE should include better explanations than operators are currently providing.

Like I said: same girl, different shade of lipstick. But hey, take heart: everybody looks good at 2am.

What do you think? Leave a comment below.

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