The shale slide

Year-end statistics on the state’s oil and gas production are starting to trickle out from the Texas Railroad Commission. Gas production in Denton and Wise Counties, where the Barnett Shale boon was born, continues to drop.

Analysts have been concerned for a few years that Barnett Shale production hasn’t held up to the promise that came with the marriage of horizontal drilling and hydraulic fracturing a decade ago.

We have studied the boom using mineral values, which are a simple way to explore worth. (Most people and businesses will fuss if they think they are being asked to pay more taxes on their property than its worth. Denton County contracts with an outside firm to determine the values of oil and gas wells and their associated equipment; royalty owners pay on about 1/8, and the operators on the other 7/8). Mineral values peaked in Denton County in 2006, when the county had about half as many wells as it does now. (You can click on the spreadsheet images to enlarge them on your computer screen.)

From 2006 to 2009, it was difficult to know how much of that drop in values was exacerbated by the drop in the market value of gas. Since then — with the exception of a price spike in 2010 — the price has hovered around $4 per Mcf for several years, becoming less of a variable. (It’s important to remember that many Barnett Shale operators have said that shale gas needs to sell between $5-$7 per Mcf to be profitable.)

In 2012, the gap between the number of Barnett Shale wells drilled and the Bcf being reported widened in a new way. More and more wells appeared to be coming on line just to sustain a fairly flat level of production (see below).

Look closely at 2012. The gap appears to be widening with a DROP in production even as well counts continue to rise. Note, the December 2012 numbers are estimated. The Texas RRC released a total well count through January 2013, and a total Barnett Shale gas production through November 2012. I estimated the average number of new wells each month and subtracted 91 to get an estimate of the well count for December 2012. I also took the monthly average of Bcf reported in 2012 to add production for December.

Below is another way to look at the production data. In this chart, the gap isn’t as important as the numbers behind them (but you can better visualize the drop in production for 2012). Early Barnett Shale wells, the vertically fracked ones, were reporting more Bcf per well. The reporting of Bcf per well since 2005 (selected for the Energy Policy Act of 2005) has never approached the levels reported in the 1990s.

Let’s go back a look closer at the gap since 2006. Next year could be really telling for production in Denton and Wise Counties.

Many operators have already sold their interests in the Barnett in a move to raise cash. With drilling slowing, overall production numbers are likely to slide further down. The question is: how fast?