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New York Shale Gas Frackonomics

New York Shale Gas Frackonomics

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No fracking rush in New York
No fracking rush in New York

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Categories:Business/Law
Published by: James "Chip" Northrup on Nov 03, 2011
Copyright:Attribution Non-commercial

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03/01/2014

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1
The Economics of Shale Gas In New York 
No Fracking Rush
The DEC paid for and published a socioeconomic study that failed to state any shale gas reserve estimates, but that clearly overstates shale gas reserves by afactor of 5 or more.
1
This grossly overstates the potential
macroeconomic 
impactof shale gas development in the state while almost completely ignoring thedownside – such as the loss in home values.
2
The DEC fails to address the
microeconomics 
of horizontal shale gas drilling, it just assumes that it iseconomic – when this is demonstrably not the case. The DEC is estimating thenumber of jobs created and tax revenues from a form of gas production that isnot economically viable in New York - and may not be for some time.
3
Accordingto the Energy Information Agency’s 2011 projections, dry shale gas, of the typefound in the Marcellus and Utica formations in New York, will not beeconomically viable until late in the decade – around 2018.
4
 
 Simply put, there isno rush to permit horizontal shale wells in New York state - despite theindustry's push to do so – because the wells are not likely to be economic at current or projected gas prices.
1
 http://www.scribd.com/doc/68519448/NY-Gas-Reserve-Estimates 
2
 http://www.scribd.com/doc/65070417/SGEIS-Socioeconomic-Hype 
3
 http://www.ogfj.com/index/article-display/7473377105/articles/oil-gas-financial-journal/unconventional/playing-a_smart_shale.html 
4
 http://www.eia.gov/forecasts/aeo/MT_naturalgas.cfm 
 
2 As stated in this recent article from an oil and gas investment banking firm:"Supply economics support this financial picture
with the majority of shale gas plays failing to break even on a full-cycle basis
 3
at prevailing gas prices ($4.50 mcf)
– the notable exceptions being the liquids-rich plays (seeFigure 2). This analysis is backed up by a review of current drilling activity, whichshows an increase within the liquids-rich plays, e.g., Eagle Ford, at the expense of the dryer gas plays, e.g., Haynesville. The attraction of an additional, valuable,liquids revenue stream is rapidly driving up liquids-rich asset prices.
This harsheconomic reality has been postponed through a combination of the continuing flow of new investors, and the ability of operators to hedge gas production at economic prices.
Unfortunately, this prop is being removed with companies only  being able to hedge their gas production at prices ranging from US$4.00 toUS$5.95/mmbtu
4
.”Meaning, exploration continued as long as share prices were up, and productioncould be sold on a “greater fool” basis to new investors, foreigners and othercompanies – in a gas bubble economy. And production could be hedged at pricesthat would insulate temporary downturns in gas prices – for
awhile
. But whenthe music stops, as gas prices stay depressed and the supply of “suckers” runsout, the reality of most of these shale fields sets in –
they are uneconomic, even with liberal tax treatment.
South central New York state shale gas wells willlikely be similar to the dry gas wells in Northeast Pennsylvania. Most New York counties will be no better than and likely considerably less productive than the border counties of Pennsylvania.
 Meaning they will not be economic for shalegas until late in the decade based on the after tax production costs of similar wells in Pennsylvania and the EIA’s December 2011 projections for gas prices.
See Figure 1 below.This, of course, presupposes that shale gas wells in New York will be asproductive as the wells in NE Pennsylvania. Well tests of the Utica and Marcellus by Gastem USA in Otsego County indicate that will not be the case. Similarly,Norse Energy’s wells in Chenango County do not look economically promising.
5
  Which begs the question – what is the rush in New York to issue drilling permitson wells that are demonstrably uneconomic ? Why not take the time to addresssome of the state’s shortcomings, such as the atrocious standards for gas wells,
6
 the DEC’s lack of a full set of rules and regulations for shale gas wells and theDEC’s chronic lack of adequate staffing.
7
And bring its gas tax regime into the20
th
, if not the 21
st
Century.
8
 
5
 http://www.scribd.com/doc/74614768/Norse-Energy-and-Gastem-USA- Voodoo-Frackonomics 
6
 http://www.scribd.com/doc/72545747/Worst-Fracking-Regs 
7
 http://www.scribd.com/doc/76085928/Worst-Practices-at-the-DEC 
8
 http://www.scribd.com/doc/63145742/New-York-State-Gas-Production-Tax 
 
3The horizontal line in the graph is $4.50 mcf. The vertical lines are the full cyclecost of producing gas from different shale gas fields in mcf. The closest analogy toNew York would be Marcellus Northeast – such as Bradford County,Pennsylvania, the third vertical bar from the right of the graph. At current prices(around $2.70 mcf), none of these fields are economic.Figure 1 Post Tax Effect Economics of Major Shale Gas FieldsIt is the service companies - Halliburton and Schlumberger, etc. that are makingmoney from most of these shale gas fields, as Figure 2 illustrates. Because they make money even on dry holes and uneconomic wells - financed by theoverblown stock prices and junk bonds of the exploration and productioncompanies. Until that runs out – and the drilling rigs are stacked away.

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