Frackonomics 3.0

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Shale gas economics in New York
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  NORTHRUP Frackonomics 3.0“The Microeconomics of Horizontal Shale Gas Wells In New York” 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 is economic – when this is not necessarily the case. The DECis estimating the number of jobs created and tax revenues from a form of gasproduction that is not economically viable in New York - and may not be for sometime. 3 Simply put, there is no rush to permit horizontal shale wells in New  York state - despite the industry's push to do so – because the wellsare not likely to be economic at current or projected gas prices.  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 – the notable exceptions being the liquids-rich plays (see Figure 2). Thisanalysis is backed up by a review of current drilling activity, which shows anincrease within the liquids-rich plays, e.g., Eagle Ford, at the expense of the dryergas plays, e.g., Haynesville. The attraction of an additional, valuable, liquidsrevenue stream is rapidly driving up liquids-rich asset prices. This harsh economic reality has been postponed through a combination of thecontinuing flow of new investors, and the ability of operators to hedge gas production at economic prices. Unfortunately, this prop is being removed withcompanies only being able to hedge their gas production at prices ranging fromUS$4.00 to US$5.95/mmbtu 4 .”  1 2 3  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 when themusic stops, as gas prices stay depressed and the supply of “suckers” runs out,the reality of most of these shale fields sets in – they are uneconomic, even with liberal tax treatment. South central New York state horizontal shale gas wells will likely be anextrapolation of the dry gas wells in Northeast Pennsylvania which are currently at break-even economics. Most New York counties will be no better than andlikely considerably less productive than the border counties of Pennsylvania.See Figure 1 below. The horizontal line is the current price of gas. The verticallines are the full cycle cost of producing gas from different shale gas fields. Theclosest analogy to New York would be Marcellus Northeast – such as BradfordCounty, Pennsylvania, the third vertical bar from the right of the graph.Figure 1 Post Tax Effect Economics of Shale Gas FieldsIt is the service companies - Halliburton and Schlumberger, etc. that are makingmoney from these shale gas fields, as Figure 2 illustrates. Because they makemoney even on dry holes financed by overblown stock prices of the explorationand production companies.  Figure 2 Gross Margin of Service Companies vs Gas Production CompaniesOf course, the scenario can change as a function of gas prices.  But gas prices are  projected to stay flat for some time. Based on the Energy Information Agency’sprojections - which came out prior to the current global economic slump - gasprices prices may not recover sufficiently to make the Marcellus economic in New  York until 2020. See page 27 of the EIA’s December 2010 energy forecast. 4 The lack of economic substance for horizontal shale gas in New York underscoresthe fact that there is no need for New York to rush the regulations. New York should make its horizontal shale gas regulations based on sound science,hydrology, geology and topography, not political science  . 5 And soundeconomics, not gas industry hype  .James L. NorthrupCooperstown  4  5
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