Sustained Outrage

DOE slashes estimate of Marcellus Shale reserve

In this July 27, 2011 file photo, Range Resources site manager Don Robinson stands near the well head by the drill that goes into the shale at a well site for natural gas in Washington, Pa.  (AP Photo/Keith Srakocic, File)

Significant news out this morning from the U.S. Department of Energy’s Energy Information Administration:

… The estimated unproved technically recoverable resource (TRR) of shale gas for the United States is 482 trillion cubic feet, substantially below the estimate of 827 trillion cubic feet in AEO2011. The decline largely reflects a decrease in the estimate for the Marcellus shale, from 410 trillion cubic feet to 141 trillion cubic feet.

Now, this comes after last summer’s fairly confusing release of a new U.S. Geological Survey analysis of the Marcellus Shale reserve, and in the wake of other reports that have warned the Marcellus is not nearly as huge as some hopeful reports from the media, industry and political leaders have said.

In today’s early release of a summary of its 2012 Energy Outlook, the EIA explained its new figures this way:

Both EIA and USGS have recently made significant revisions to their TRR estimates for the Marcellus shale. Drilling in the Marcellus accelerated rapidly in 2010 and 2011, so that there is far more information available today than a year ago. Indeed, the daily rate of Marcellus production doubled during 2011 alone. Using data though 2010, USGS updated its TRR estimate for the Marcellus to 84 trillion cubic feet, with a 90-percent confidence range from 43 to 144 trillion cubic feet—a substantial increase over the previous USGS estimate of 2 trillion cubic feet dating from 2002. For AEO2012, EIA uses more recent drilling and production data available through 2011 and excludes production experience from the pre-shale era (before 2008). EIA’s TRR estimate for the entire Northeast also includes TRR of 16 trillion cubic feet for the Utica shale, which underlies the Marcellus and is still relatively little explored.

Interestingly at about the same time the EIA was briefing the media on its new report, Chesapeake Energy announced this news, what it called an update on additional steps it is taking to continue creating shareholder value in response to the lowest natural gas prices in the past 10 years:

Chesapeake plans to further reduce its operated dry gas drilling activity by 50% to approximately 24 rigs by the 2012 second quarter from 47 dry gas rigs currently in use and by 67% from an average of approximately 75 dry gas rigs used during 2011 … Specifically, during the 2012 second quarter, Chesapeake plans to have reduced its drilling activity in both the Haynesville and Barnett shales to six operated rigs each and to 12 operated rigs in the dry gas area of the Marcellus Shale in northeastern Pennsylvania.

And even in the so-called “wet gas” areas of the Marcellus like West Virginia (those areas where the natural gas reserves also contain significant amounts of potentially profitable other materials like ethane, butane, propane, and pentane), Chesapeake said:

Chesapeake plans to further reduce its undeveloped leasehold expenditures, the majority of which have been focused on liquids-rich plays during the past three years. The company is now targeting to invest approximately $1.4 billion in undeveloped leasehold expenditures in 2012 (net of joint venture partner reimbursements), of which approximately 90% will target liquids-rich plays and 100% will be in plays where the company is already active. This compares to undeveloped leasehold expenditures, net of joint venture partner reimbursements, of approximately $3.4 billion and $5.8 billion in 2011 and 2010, respectively.

Chesapeake CEO Aubrey McClendon said:

We have committed to cut our dry gas drilling to bare minimum levels that are likely to be maintained until expected drilling economics on dry gas plays return to levels competitive with expected returns in Chesapeake’s lineup of liquids-rich plays, which we believe is the best in the industry. As in previous natural gas pricing downturns, Chesapeake is promptly responding to rapidly changing market conditions, and we hope today’s announcement helps disprove the view held by some industry observers that producers fail to act rationally in times of unusually low natural gas prices.