One of the most puzzling aspects of what’s going on in the oil and gas patch is the misunderstanding by so many investors and analysts about the profitability and sustainability of shale oil and gas.
We’ve written about the topic a lot – covering both the pros and cons of the argument.
The reason we do so is simple. The sustainability of natural gas is critical.
After all, we don’t want you to make the mistake of investing in the wrong plays – for the wrong reasons.
More often than not, consumers (and investors alike) are confused by three main myths in particular. I’m going to clear things up, so you can make the best decision possible…
Myth #1: 100 Years of Natural Gas Power
When a consumer sees a commercial about how there’s enough natural gas in the United States to generate power for 100 years, it’s important to realize that this doesn’t mean we can actually access all of that supply.
Heck, with drilling prices so high, it may ultimately be cheaper to import gas at twice the current price than to actually drill for it ourselves.
Now, that’s obviously an exaggeration. But just consider that natural gas prices need to stay well above $4 per thousand cubic feet (mcf) for drillers to make money.
So in short, we may have gas, but if it’s too expensive to get out of the ground and to consumers, who’s going to drill for it?
Myth #2: All Shale is Created Equal
No matter what you hear, not all shale is created equal.
In fact, not all shale in the same place is created equal.
For example, two wells in two different locations of the prolific Haynesville Shale can be more than $1 apart when it comes to cost per mcf.
The same goes for shale oil. The Sanish well in the Bakken produces oil for around $34 per barrel, while oil from the Montana well costs more than twice that amount.
Myth #3: Drillers Believe in the Dream, Too
Now, when you hear about shale, you usually only hear about the benefits of energy independence.
Of course, the people telling you this have a vested interest and are usually lobbyists in disguise!
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What you don’t hear is that many big companies are actually walking away from shale plays.
Indeed, they’re writing down huge losses on properties they’ve purchased, since they now realize that these plays either aren’t economically feasible, or that there isn’t as much gas or oil as they initially thought.
The list of losers on shale properties includes energy giants like Shell (RDS), BHP Billiton (BHP), Encana (ECA) and even Chesapeake (CHK), which has switched to fields that produce oil and natural gas liquids.
Now, these companies aren’t getting rid of all their properties. But they are writing down billions, which will end up being an opportunity for buyers at some point.
The main problem is that many of these companies paid too much for the land to begin with.
But there are exceptions – which is exactly what I’m going to cover in the next issue… along with our continued analysis of the costs associated with different regions.
And “the chase” continues,