Ways to inflate/deflate oil and gas reserves – Part 2

In the past, Arthur Berman and his colleague Lynn Pittinger wrote about shale reserve estimates at The Oil Drum.  The 2011 post “U.S. Shale Gas: Less Abundance, Higher Cost” pointed out potential pitfalls from using analogy wells to determine decline curves.

Type curves that are commonly used to support strong hyperbolic flattening are misleading because they incorporate survivorship bias and rate increases from re-stimulations that require additional capital investment.

The authors’ EUR (expected ultimate recovery) estimates for shale plays are generally significantly lower than the estimates provided in operator presentations.

exhibit-15-bermann-EUR-estimates

One commenter notes:

Type curves(as currently in widespread use) are a convenient way of averaging apples and oranges. Type curves are also misleading because they are typically based on widely spaced wells. Zero-time alignment pre-assumes there is no well to well interference. More closely spaced wells will not perform according to type curves constructed from widely spaced wells.

Public traded companies have previously claimed, and may still be claiming in some cases, that for example 8 hz wells can be drilled on a section in the Haynesville. I don’t know that any company has claimed 8X reserves, but such is strongly implied. Unsophisticated investors won’t ‘capture’ the not so subtle distinction.

I’m not seeing type curves pitched about as they once were. The reason is probably obvious – they don’t work.

A caveat

The authors are a little biased against shale.

In general, I would pay attention to things that affect people’s opinions and views:

    1. Incentives.  Whenever you have an oil and gas company trying to sell shares, you’re going to have a lot of ‘optimism’ from the CEO, investment banking analysts, and reserve engineers performing estimates for publicly-traded companies.
    2. Personality.  Some people are permabears; the way I see it, some people are genetically wired to be pessimistic.
    3. Politics.  People have different views about America’s energy independence.
    4. Positions.  I don’t know what Berman’s stock positions are, though he may have owned some stock in EOG.

Because of the factors above, it can be hard to get reliable information.  You should probably apply some skepticism to everything you read on this topic.

Links

Part 1: Ways to inflate/deflate oil and gas reserves

Arthur Berman’s presentations and publications at his new site.

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