Clifford Krauss and Eric Lipton continue the excellent New York Times coverage of the shale gas boom and bust. (NYT) There are some fascinating revelations in the article:
1. The drilling companies were forced under contract to keep drilling, even as the price of natural gas collapsed:
The land that the natural gas companies had leased, in most cases, came with “use it or lose it” clauses that required them to start drilling within three years and begin paying royalties to the landowners or lose the leases... and as with so many other shale gas players, Chesapeake struck so many complicated financial deals that it couldn’t stop ramping up the gas factory.
“At least half and probably two-thirds or three-quarters of our gas drilling is what I would call involuntary,” Mr. McClendon (of Chesapeake) acknowledged at one point.
2. Valuing gas producers off of known reserves incintivized more drilling even it it was already unprofitable to pull it out of the ground:
The industry was also driven to keep drilling because of the perverse way that Wall Street values oil and gas companies. Analysts rate drillers on their so-called proven reserves, an estimate of how much oil and gas they have in the ground. Simply by drilling a single well, they could then count as part of their reserves nearby future well sites. In this case, higher reserves generally led to a higher stock price, even though some of the companies were losing money each quarter and piling up billions of dollars in debt.
It appears that the pain for drilling companies will continue for some time.
In separate news, investors in Ohio's Utica shale formation should beware that drillers succeeded in getting legislation passed that requires only annual disclosures about well extraction rates and volumes, as opposed to the quarterly reporting required in almost every other state. (Reuters)
By this spring, a new energy bill being crafted by lawmakers initially included a clause that would have allowed regulators to publicly disclose quarterly energy production data. The current requirement calls for annual reporting.
But the clause was struck from the bill after discussions with the industry, a Reuters investigation has found. Instead the law, which took effect in August, explicitly bars the government from publishing the quarterly figures it now obtains.
Almost every other energy-producing state releases production data and drilling results on a monthly basis; even Saudi Arabia now self-reports its once-secret production volumes once a month. The latest Ohio figures for 2011 provide information on only five wells. The volume of oil and gas pumping out of dozens of new wells drilled this year will not be available until April 2013, as much as 15 months after they were drilled.
This greatly reduces the transparency in Ohio investments. Furthermore, because of the typical shale gas extraction rate decline (where the majority of the gas is extracted in the first year), this could lead to some nasty surprises.