Geological consultant and energy expert, Arthur Berman, has an interview with Oilprice.com with some frightening observations. (Oilprice) The most sobering may be the following:
A lot of investors from other parts of the world, particularly the oil-rich parts have been making somewhat high-risk investments in the United States for many years and, for a long time, those investments were in real estate.
Now these people have shifted their focus and are putting cash into shale. There are two important things going on here, one is that the capital isn't going to last forever, especially since shale gas is a commercial failure. Shale gas has lost hundreds of billions of dollars and investors will not keep on pumping money into something that doesn’t generate a return.
The second thing that nobody thinks very much about is the decline rates shale reservoirs experience. Well, I've looked at this. The decline rates are incredibly high. In the Eagleford shale, which is supposed to be the mother of all shale oil plays, the annual decline rate is higher than 42%.
They're going to have to drill hundreds, almost 1000 wells in the Eagleford shale, every year, to keep production flat. Just for one play, we're talking about $10 or $12 billion a year just to replace supply. I add all these things up and it starts to approach the amount of money needed to bail out the banking industry. Where is that money going to come from? Do you see what I'm saying?
Readers of this blog will know that we have been following the bubble in shale gas for a while now. See our coverage here.
For those of you in broker-dealer or investment advisor compliance, heightened diligence as to both reasonable basis and customer specific suitability is advised. Rigorous due diligence should be prepared on these deals before being offered to any clients. See our coverage of this here and here.
For individual customers, exposure to shale gas limited partnerships and other investments should be at very low percentages and only for the most speculative of clients.