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
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
.”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
. 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.
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,
the DEC’s lack of a full set of rules and regulations for shale gas wells and theDEC’s chronic lack of adequate staffing.
And bring its gas tax regime into the20
, if not the 21