Investors targeting shale plays

Energy investors are fond of resource plays, and they seem to love shale assets best. At least that's the conventional wisdom I hear regularly from E&P companies. Bruce Vincent and Terry Swift of Houston-based Swift Energy told me recently that all the analysts want to hear about is the Eagle Ford shale play in South Texas, where Swift has staked out a pretty decent position right in the heart of the play's "sweet spot." However, as of this writing, Swift has yet to drill a well in the Eagle Ford.

Pete Stark, a leading gas analyst with IHS Cambridge Energy Research Associates, said something similar during last month's IHS Herold Pacesetters Energy Conference in Greenwich, Conn. Speaking during the opening panel discussion on Sept. 22, he said he believes investment dollars will go to tight sands, coalbed methane, and shale gas developments, but that shale will command the lion's share of investments.

"There's going to be a huge shakeout in investing, and shale is going to be the winner," said Stark.

Experienced operators employing up-to-date horizontal drilling technology with multi-stage hydraulic fracturing can earn a 10% rate of return from shale plays even at prices less than $4 per Mcf, he added. Because of the tremendous upside of new production from gas shale wells, this more than offsets production loss from wells that have been shut-in.

Some shut-in production has been voluntary, but at other times it has been due to pipeline issues, including lack of capacity. This problem seems to be particularly acute with regard to natural gas from the Mid-Continent and Rocky Mountain regions.

All the new shale gas will have a detrimental effect on LNG imports, predicts Stark, who says LNG won't have a significant role in the United States until around 2020.

Up until 2007, the average gas well in the US showed a decline in productivity over 10 years. However, after that time, US wells suddenly showed a gain in productivity with an average increase of 282 Mcf/day, an increase he attributed to shale wells. Production efficiencies also increased with the longevity of the operator in the play. As an example, Stark pointed out that Southwestern Energy, the key player in the Fayetteville shale, has shown production gains and declining costs during that span.

In virtually all the shale plays in North America, producers are increasing their estimated ultimate recovery figure for their wells and reducing the number of days it takes to drill, thus reducing per-well costs dramatically.

Gas production is increasing rapidly from reservoirs once considered economically and technically impossible to develop.

Harold Hamm, CEO of Continental Resources, recently discussed the company's position in the Bakken shale play in North Dakota. He said that shale activity had enabled his company to weather the current challenging period of low commodity prices and reduced demand. Even with the price volatility, Continental's holdings in the Bakken and the Three Forks/Sanish formation just below the Bakken have produced excellent operating and financial results in spite of the downturn.

Continental Resources is the largest leaseholder in the Bakken, with more than 600,000 net acres, and also has valuable acreage positions in the Arkoma Woodford, Anadarko Woodford, Atoka, Haynesville, and Marcellus/Rhinestreet/Huron plays.

Stark believes that the Haynesville, Marcellus, and Horn River plays will gain a dominant position among North American shale areas. Chesapeake Energy is the major player in the Haynesville and is also the top leaseholder in the Marcellus. Canada's EnCana Corp., which claims to be the largest natural gas producer in North America, is among a group of companies developing the Horn River shale play in northeast British Columbia.

Stark added that demand for natural gas will return as the economy in the United States and Canada improves.

The recent increase in natural gas supplies is the largest in at least 40 years. Estimated natural gas reserves rose to 2,074 tcf in 2008 – up from 1,532 tcf just two years prior. Natural gas accounts for about a quarter of the total energy use in the US and fuels 22% of electrical power generation.

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