Energy In Depth Makes Massive Mistakes

Energy In Depth Makes Massive Mistakes by Deborah Rogers, August 24, 2012, Energy Policy Forum
Energy in Depth (EID), a site funded by the Oil and Gas industry, published a series of articles written by Dr. Scott Cline in an effort to discredit my presentations on shale gas economics. I found EID’s articles perplexing. Perplexing because Dr. Cline and EID offer extraordinarily weak expositions which contradict their premise, demonstrate an acute misunderstanding of their own industry and advocate for actions which are not considered “best practices” in the oil and gas field.
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EID’s next mistake was my personal favorite.
EID mistake #6: “…even if a natural gas play is in production decline, it does not necessarily mean the play is over..it simply means the well development rate is not keeping up with current production declines…so where is that treadmill?”
DR: Dr. Cline is clearly unaware that he just defined the drilling treadmill.
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EID mistake #9: “The greatest fear for a CEO, and top management in general, is the impairment charge where reserve values are written down and charges against income occur. Therefore, companies tend to be very conservative with their volume estimates to avoid such an embarrassment.”
DR: Dr. Cline and I are both in agreement that impairment charges are “embarrassments”. And yet impairment charges are being taken by shale gas companies at alarming rates currently. Reuters recently stated “huge write downs on natural gas fields point to cuts to come in oil and gas producer’s reserves from untapped fields at the end of this year, which will constrain their ability to borrow more money and may herald asset sales.”Dr. Cline took great pains with his exposition, blinding the reader with esoteric definitions. I will make it simple. The bottom line is that the asset must be “marked to market” after a ceiling test. In other words, if the assets were greatly overvalued on company books or reserves were vastly overestimated to their actual value, this shows up as an impairment. They are indeed an embarrassment. If the companies, as EID would have us believe, have truly been “very conservative with their volume estimates to avoid such an embarrassment” and yet are now taking billion dollar plus impairment charges then it boggles the mind to think what a “liberal” estimate by these companies might have produced. In closing, I feel compelled to address one last statement by Dr. Cline and EID. It is as follows: “I don’t know of anyone that could have predicted this price collapse…” This is an astonishing statement!
Are we to understand that Dr. Cline and his colleagues at EID had absolutely no inkling that prices were collapsing? Current supply is four times greater than current demand. The rest of us have been aware of oversupply in the natural gas market for years now. It is an unfortunate fact that if you glut a market with supply, prices ALWAYS go down. It must be noted that even as long ago as 2009 several shale companies announced production cuts in an attempt to shore up declining prices in natural gas. Production cuts, however, never materialized in any meaningful way due to high levels of debt and the price has continued to erode for the last three years. It is very curious indeed that EID was wholly unaware of such price declines. And yet, perhaps it is not so curious after all. Given the myriad mistakes which Chesapeake Energy made in its public filings with the State of Pennsylvania recently, it is perhaps not so surprising that an entity funded by Chesapeake Energy might also make many, many mistakes.