[h2]

rockdoc, rockman, this is an interesting exchange, but I'm wondering one thing, it's not clear to me. When rockdoc talks about profitability it sounds to me like he's talking about your basic yearly income / costs, the extra being 'profit', but it sounds to me like rockman is talking about the bigger picture, ie, what did the company cost, what income has it generated, and can that income ever match the actual full cost of the company, even with yearly operating 'profits', particularly within the fairly short time period that the company has to get back its costs, including the purchase price of the company.

This is as near as I can come to getting what you are both saying and having it make sense, it sounds to me like rockman, having lived in this world a long time, has learned to ignore yearly income/cost statements that ignore the actual cost of the company.

To put it simply: I decide, wisely, to give up my current career, and to open up a lemonade stand. Because it's a hot location, both in terms of traffic and temp, I pay the kid down the block 150k for the rights to the location, and for the physical stand. Now I'm set, and I get ready to make my fortune, so I sell $1 cups of lemonade which cost me only 28 cents each. This gives me excellent profits in terms of my income/costs, but I will never actually pay for the true cost of the enterprise, so the stuff I dutifully file with the SEC after incorporating and doing everything right, correctly notes that my income is much greater than my costs, and thus makes my stock a very attractive option for those wishing to break into this niche of the lemonade stand market, except that they, too, when they try to buy me out, at $225k, will also never actually make any money in any real sense, though their SEC filings will also consistenly show high profits from their lemonade sales.

I'd have to get into the specifics of what rockdoc is talking about in terms of the actual papers and what they do and do not include when they value a company, but my feeling is that this is roughly what is being said as to why these companies for the most part are in fact frauds that will never recoup their actual price/costs.

That would be perfectly in tune with the true scum that run wall street, their public track record is filled with such games and manipulations and lies, so citing those industries as anything other than mere data points is not something I would trust at all as a source, it's not valid and the so called 'regulation' was routinely mocked and openly scorned by wall street, so rockdoc I'd have to say you slightly discredit your point by actually citing those sources as truly reliable, they simply are not. You are aware that ratings agencies were total frauds, still are, right? And stock / bond prices were directly governed by those fake ratings, not by some seriously great regulations that prevented fraud from happening.

So I think pulling away from general statements that rely on stock manipulations etc and reporting standards that are still not fixed does not do anyone's argument or point any credit at all, in fact, it makes it suspect. Now, if you have worked at a company, and can state, our company cost this much to purchase or build up, it generates this cash flow per well, and our total costs / income have long since paid for our company purchase price, etc, then it's a different story.

It's always interesting to see different viewpoints exchanging views, from their perspective, but then you have to at some point go, how credible is the source of the data? Wall street, SEC, is not credible, otherwise 2008 would never have occurred, and those issues have not been fixed, which you as the person citing those types of sources, should be well aware of, and if you aren't, then you'd have no credibility at all. This is not saying that one can't make money flipping stocks, mind you, that's an unrelated game, funded by free gov money at this point, also totally unreal of course...

[rockdoc123]

$this->bbcode_second_pass_quote('', 'r')ockdoc, rockman, this is an interesting exchange, but I'm wondering one thing, it's not clear to me. When rockdoc talks about profitability it sounds to me like he's talking about your basic yearly income / costs, the extra being 'profit', but it sounds to me like rockman is talking about the bigger picture, ie, what did the company cost, what income has it generated, and can that income ever match the actual full cost of the company, even with yearly operating 'profits', particularly within the fairly short time period that the company has to get back its costs, including the purchase price of the company.

[ian807]

Isn't this whole claim a little meaningless without time data? Even if true, I'm skeptical that any well or field has a constant EROEI over time. Where's the curve? And where's the correlating cost curve over time that would answer the question "Is it worth getting?"

[oilfreeandhappy]

I would agree with this. I sure don't think the oil companies thing of emissions as inputs, when it comes to profit.

$this->bbcode_second_pass_quote('', 'I') don't see how measures of carbon dioxide and nitrogen oxides emitted from the gas extraction processes area are considered "inputs?" Pollution is an externality, not a cost to production. Inputs are typically considered process energy costs (energy embodied in field development, energy lost in delivery etc.) weighed against energy profits, i.e. "energy return on energy input".

But that is a minor criticism. The real problem with this story is that 85:1 has no meaning without noting the EROEI from other more conventional gas plays. What is their EROEI's? It would be safe to be that (repeat) fracturing of hard rock incurs energy costs, and lowers the final net energy returned.

[Pops]

Not following this closely but I'd have to say that externalities should be included in eroei because they are a cost - born by the public if management is doing it's job but a cost nonetheless.

Isn't that the idea of eroei? It isn't a gauge of profitability but of sustainability. Ponzi made profits they just weren't sustainable, some low eroei number probably implies unsustainability.

[ROCKMAN]

Pops – “…eroei? It isn't a gauge of profitability but of sustainability.” A gauge…I like that. In this manner it could have some usefulness but more as a trend line than a control IMHO. Obviously the sustainability of any commercial operations is its profitability. Except when the govt steps in and financially supports unprofitable operations. LOL. The shale plays will remain sustainable as long as there are locations left to drill which create positive value for the pubcos. Tracking EROEI may allow a hint as to how far ahead that brick wall might be but so would tracking profit margins. As has been pointed out before an unacceptable rate of return will kill any play long before the EROEI gets close to 1:1.

Also, it occurred to me that I’m making an assumption that probably isn’t valid: folks think that when the cost of producing oil from shale play X is $45 or $50 per bbl that this a great profit. First, when such stats are offered they typically aren’t fully quantified. Does that $X/bbl include the huge land and seismic costs? Does it include the overhead as well as the interest payments on the $billions borrowed by the shale players? Does it include the cost of acreage that won’t ever be drilled? And one would hope it’s been adjusted to net bbls to account for royalty payments and production taxes.

But let’s assume it is a complete and honest number. Producing oil at $45/bbl and selling it for $90/bbl is generally not considered a very attractive proposition. As you know there’s a very involved and accurate way to calculate the rate of return on any drilling venture. But there’s also a less accurate but very easy metric to calculate: $90/$45 for instance is simply a 2:1 deal. Of course it doesn’t take into account all those variables between projects and, more important, the time factor of the cash flow stream. But it’s real easy. And it does very roughly correspond to ROR. But from my conversations with many EFS players is that the trend is a little better: maybe ranging from 2.5/2.8 to 1. For a pubco trying to increase/maintain its stock value that may be acceptable. But I’ve mentioned that my private company (as well as many others) don’t find such metrics delivering an acceptable ROR. Our target is around 5 to 6 to 1. IOW for my owner to get interested in developing reserves in the EFS the costs has to get down to $15 to $18 per bbl. He wouldn’t bend over to pick a 2:1 deal off the ground. LOL. He can make a better return on his investment sitting at his desk and not paying exorbitant salaries to the Rockman and his cohorts.

Perhaps I should have gone over this before. If we were a pubco we would have been all over the shales from the start. Trust me: my owner is even better than the Rockman at rolling up trash, pumping stock and walking away with many tens of $billions in his pocket. But, believe it or not, he doesn’t enjoy such a process. A very long time ago he reached a point where he didn’t have to make any more money to live a lifestyle many dream about. But he likes to create things. Like a 180’ sailboat, the greenest island in the Caribbean, one of the most successful trading business in the history of Wall Street (he only trades his family’s money), some of the most significant medical breakthroughs in my lifetime, etc.

Making $20 billion flipping some oil acreage? What fun is that? LOL

[rockdoc123]

$this->bbcode_second_pass_quote('', 'B')ut let’s assume it is a complete and honest number. Producing oil at $45/bbl and selling it for $90/bbl is generally not considered a very attractive proposition. As you know there’s a very involved and accurate way to calculate the rate of return on any drilling venture. But there’s also a less accurate but very easy metric to calculate: $90/$45 for instance is simply a 2:1 deal. Of course it doesn’t take into account all those variables between projects and, more important, the time factor of the cash flow stream. But it’s real easy. And it does very roughly correspond to ROR. But from my conversations with many EFS players is that the trend is a little better: maybe ranging from 2.5/2.8 to 1. For a pubco trying to increase/maintain its stock value that may be acceptable. But I’ve mentioned that my private company (as well as many others) don’t find such metrics delivering an acceptable ROR. Our target is around 5 to 6 to 1. IOW for my owner to get interested in developing reserves in the EFS the costs has to get down to $15 to $18 per bbl. He wouldn’t bend over to pick a 2:1 deal off the ground. LOL. He can make a better return on his investment sitting at his desk and not paying exorbitant salaries to the Rockman and his cohorts.

[Keith_McClary]

Here is a non-paywalled paper from 2011 (PDF):
http://www.mdpi.com/2071-1050/3/10/1986/pdf‎
(can't find mention of it on PO.com)
They show:

Compare with

from the OilDrum page agramante mentioned:
http://www.theoildrum.com/node/7062