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Page added on June 15, 2016
Why Billions in Proven Shale Oil Reserves Suddenly Became Unproven
Ultra Petroleum Corp. was a shale success story. A former penny stock that made the big leagues, it was worth almost $15 billion at its 2012 peak.
Then came the bust. Almost half of Ultra’s reserves were erased from its books this year. The company filed for bankruptcy on April 29 owing $3.9 billion.
Ultra’s rise and fall isn’t unique. Proven reserves — gas and oil resources that are among the best measures of a company’s ability to reward its shareholders and repay its debts — are disappearing across the shale patch. This year, 59 U.S. oil and gas companies deleted the equivalent of 9.2 billion barrels, more than 20 percent of their inventories, according to data compiled by Bloomberg. It’s by far the largest amount since 2009, when the Securities and Exchange Commission tweaked a rule to make it easier for producers to claim wells that wouldn’t be drilled for years.
Wider Effort
The SEC routinely questions companies about their reserves. Now, agency investigators are also on the hunt for inflated reserves estimates, according to a person familiar with the matter.
“Reserves make up a large share of the value of these companies, so it really matters,” said David Woodcock, a partner at Jones Day in Dallas who served as the SEC regional director in Fort Worth, Texas, from 2011 to 2015. “They’re looking even more closely at how companies are booking reserves, how they’re evaluating the quality of those reserves and what their intentions really are. They’re not accepting pat answers.”
For more on proved reserves, click here.
Drillers face pressure to keep reserves growing. For many, the size of their credit line is tied to the measure. Investors want to see that a company can replace the oil and gas that’s been pumped from the ground and sold.
Find More
There are two ways to increase reserves: buy more or find more. Fracking made it easier to do the latter, and the industry lobbied the SEC to count more undeveloped acreage as proved reserves, arguing that shale prospects are predictable across wide expanses.
The SEC agreed, with two key limits. First, the wells must be profitable to drill at a price set by an SEC formula. The companies got a temporary reprieve for 2014 because the SEC number was about $95 a barrel even though crude had plummeted to less than $50 by the time results were reported in early 2015.
That advantage has disappeared. When companies reported their 2015 reserves this year, the SEC price was about $50. Wells that vanished this year may return if prices rise.
The SEC also requires that undeveloped wells be drilled within five years of being added to a company’s books. The five-year plan can’t just be wishful thinking. “The mere intent to develop, without more, does not constitute ‘adoption’ of a development plan,” the SEC explained in 2009.
Despite those limitations, reserves surged 67 percent in the five years after the 2009 rule change, according to 53 companies that have records going back that far. Almost half the gains came from wells that existed only on paper.
Fix Estimates
By the end of 2014, undeveloped properties accounted for 39 percent of proved oil and gas reserves, up from 33 percent at the end of 2009, an increase of nearly 8 billion barrels.
In its first letter to Ultra, in July 2014, the SEC said it would take about 13 years for the company to drill its backlog. About two months later, Ultra raised $850 million in debt. The SEC letters weren’t yet public. Over the next 19 months, the regulator twice told the company to revise its estimates.
Falling Prices
Ultra responded that its drilling plans changed due to falling prices and the shrinking availability of financing. The company sometimes delayed or canceled certain wells in favor of more profitable locations, the company wrote.
Ultra ultimately agreed to a small revision to its 2011 reserves booking. It was disclosed in a footnote to its 2015 annual report, after the SEC completed its review in February. In the same report, Ultra deleted all of its undeveloped reserves because of uncertainty about financing.
The letters were made public in mid-March. By then, Ultra’s shares had plummeted to 58 cents, and the bonds issued less than two years before were selling for about 8 cents on the dollar. Prices have since rebounded.
Sandi Kraemer, Ultra’s director of investor relations, declined to comment. So did Judith Burns, an SEC spokeswoman.
Other companies have also drawn SEC scrutiny. The agency said in correspondence with Goodrich Petroleum Corp. that the company drilled only 4 percent of its undeveloped reserves each year, a slower pace than necessary to comply with the five-year rule. Linn Energy LLC kept undeveloped reserves on its books at the end of 2014 even after cutting its drilling budget by 61 percent. Both companies have gone bankrupt in recent months owing a combined $8.1 billion. Neither would comment for this story.
For many drillers, “development plans weren’t realistic,” said Julie Hilt Hannink, head of energy research at CFRA, an accounting advisory firm in New York.
Rising Bankruptcies
Penn Virginia Corp., a company in which billionaire George Soros had a stake, booked paper wells in natural gas prospects where it hadn’t drilled in years, according to letters from the SEC.
“Your actual drilling has consistently failed to follow schedules,” the SEC wrote in an April 2015 letter. Penn Virginia responded that it had intended to get to the wells within five years but its plans changed when prices fell.
That’s not what company executives told investors, according to conference call transcripts. H. Baird Whitehead, Penn Virginia’s chief executive officer, said in a November 2012 call that “under almost no scenario” would the company resume gas drilling. Yet, when Penn Virginia filed its report with the SEC three months later, the prospects accounted for more than 40 percent of its reserves.
During an April 2013 call, Whitehead said, “We don’t plan on drilling natural gas wells.” Still, the undeveloped natural gas wells comprised 19 percent of the company’s reserves at the end of that year. Patrick Scanlan, a spokesman for Penn Virginia, declined to comment.
The company intended to follow the SEC’s five-year rule, according to a person familiar with Whitehead’s thinking.
Penn Virginia erased most of its undeveloped reserves this year. The company filed for bankruptcy May 12 with $1.2 billion in debt. Records show Soros sold his six million shares in the first quarter.
26 Comments on "Why Billions in Proven Shale Oil Reserves Suddenly Became Unproven"
Boat on Wed, 15th Jun 2016 10:32 am
Not all shale can be painted with the same brush.
“In STACK, we have now drilled nearly 70 wells and have seen strong well results across our acreage,” said Newfield CEO Lee Boothby. “With each well, we gain increased confidence in the play. Although the primary focus of our STACK drilling program today is to HBP [hold by production] our acreage, we are learning about well spacing both on the surface and sub-surface and we will be ready to enter full field development in 2017.”
At the beginning of 2015, Newfield’s estimate to complete a well was $8.5 million. By November, the cost had fallen to $7.5 million or less. Drilling days to depth were averaging about 16 days, with some drilled in 12 days. Other operators reported drilling & completion costs of $7.0-$7.5 million during the 3Q15 earnings season as well.
From 22 new extended lateral wells, Newfield had 68 in the STACK dataset covering more than 1,500 square miles and spanning more than 50 miles from corner to corner. Average 30-day rates from the 22 new wells exceeded wells completed in 2Q2015 by 100 boe/d. On a wellhead basis, the oil percentage averaged nearly 80% over the first 30 days of production. By the end of 2015, Newfield expected to have drilled about 100 STACK wells.
Much of the activity in the STACK so far has been centered on the Meramec, not only because of its economics, but also because it is shallower than the Woodford, and therefore a bit less expensive to drill in order to hold acreage positions. But as Cimarex Energy observed on its 3Q15 conference call, it still remains to be seen whether it will be more efficient to develop the Meramec and Woodford intervals simultaneously, or one then the other.
NGI estimated that there were 25 rigs working the STACK in early October 2015, versus 17 rigs a year prior. That makes the STACK one of only two U.S. unconventional formations to see a year/year increase in rigs, and the only one that we believe is statistically significant. The other formation, the Arkoma-Woodford, came off an extremely low starting base. We believe the majority of those 25 rigs were targeting the Meramec.
http://www.naturalgasintel.com/oklahomaliqinfo
GregT on Wed, 15th Jun 2016 10:50 am
“Not all shale can be painted with the same brush.”
Absolutely Boat, you’re starting to catch on. It isn’t the individual plays that matter, it is the sum of all of them added together.
It isn’t the amount of oil available in numbers of barrels that matters, it is the overall cost to produce that oil, and the overall energy available to our economies.
Apneaman on Wed, 15th Jun 2016 11:05 am
Boat, if an oil company CEO said it is so then it is so. These are among the most honest a trustworthy people on the planet – like Aubrey McClendon – B.I.H.
Apneaman on Wed, 15th Jun 2016 11:13 am
Look boaty, we’re saved by technology again….hooray
Nikola Motor Logs 7,000 Pre-Orders For Nikola One Electric Semi Truck
http://insideevs.com/nikola-motor-logs-7000-pre-orders-for-nikola-one-electric-semi-truck/
ghung on Wed, 15th Jun 2016 11:58 am
Thanks, Ap. Looks pretty cool from a techucopian point of view. Gas-turbine/electric hybrid….
https://nikolamotor.com/one
“Free CNG for your first million miles” (they own their own wells).
Boat on Wed, 15th Jun 2016 12:00 pm
greggiet,
“It isn’t the amount of oil available in numbers of barrels that matters, it is the overall cost to produce that oil, and the overall energy available to our economies.”
I will never understand the way you word supply, demand, price and the interplay between. But hey I don’t understand the way rockman does either.
At the end of the day maybe I think the world can handle a higher price of oil than you do and still grow demand.
In a few years oil will peak but btu growth will continue.
Boat on Wed, 15th Jun 2016 12:22 pm
ape,
Thanks for the post. I wasn’t aware that truck was being built.
PracticalMaina on Wed, 15th Jun 2016 12:36 pm
Boat you should pay more attention, I have mentioned Nikola multiple times.
rockman on Wed, 15th Jun 2016 12:44 pm
Boat – Have you seen any numbers that might represent the average of the actual first 12 months production? I suspect not since there may not be many that have produced for more then a year.
Every little bit of new production helps. But so far it’s still a little bit. And not just the STACK, SCOOP, etc. but for the entire state: all of OK has increassed its share of total US oil production from 2.2% to still less ther 5%. But while the new play has only added about 3% to our total production the current rig count will like!y lead to a further increase.
Not enough details yet to judge the real economic value of STACK, SCOOP, etc. But the lack of movement in Newfield’s stock doesn’t indicate much enthusiasm by the market: back to where it was 24 months ago despite the OK “miracle” and currently trading at 25% less then it was 5 years ago.
And the economics will hang on more then just the drilling cost: Newefield just bought 42,000 acres in the play from Chesapeake for $470 million. That’s more then $11,000/acre…a heck of a prermium. Given the probable unit sizes the land cost will add $1 to $1.5 million per well. And that’s only if all the acreage is drilled…not likely given how all trends have sweet and court spots.
But bottom line it’s the only bright spot in the US oil patch days. It will take several years of production history to see if any dimness develops in the play. In the early days of the Eagle Ford play there were very optimistic projections of URR that eventually failed to materialize.
Boat on Wed, 15th Jun 2016 12:47 pm
PracticalMaina,
Depending on my work schedual I sometimes don’t make it to peakoil.com for days at a time. Just the way it is.
PracticalMaina on Wed, 15th Jun 2016 1:01 pm
Just giving you shit. Between that truck which pre orders are valued at over 2 billion, Teslas pre orders, demand for Tesla and its all electric competition like Faraday Future the market has certainly shown it has sufficient demand for high end ev, now it’s just about living up to the promises.
Another tech development I have scene recently is a company in Connecticut making a very lightweight 3 hp rotary engine that weighs only 4 pounds, couldn’t find the article again to link it. Would be a good range extender for a cheaper ev possibly.
makati1 on Wed, 15th Jun 2016 6:22 pm
1,000,000,000+ cars in the world.
And at least half that many trucks.
“Alternates” will never be more than single digit percentages of those numbers.
Reality is a bitch. Nuff said.
Boat on Wed, 15th Jun 2016 7:45 pm
17.5 million new cars and trucks added in 2015. About 700,000 were electric. 2016 projections are 1 million. So yes mak the percentage of electric transportation is very small. 20 million a year electric out of 1.2 trillion total cars and trucks by 2030, I say yes. 2025? No.
GregT on Thu, 16th Jun 2016 4:41 am
“20 million a year electric out of 1.2 trillion total cars and trucks by 2030, I say yes.”
It might be easier for you Boat, if you stick with the numbers that don’t have all of those zeros behind them.
makati1 on Thu, 16th Jun 2016 4:56 am
1,000,000,000 divided by 20,000,000 = 50 years. Simple math.
rockman on Thu, 16th Jun 2016 11:44 am
Of put in terms of $’s: in 2015 over $400 BILLION was spent in just the US for pickup tuckzs and SUV’s. That samevyear Ford alone sold over $20 BILLION of F-150 pickups.
$2 billion? Co!or me very unimpressed. LOL. It’s easy to QUALITATIVE hype any dynamic. The problem develops when it’s analyzed QUANTITATIVELY.
rockman on Thu, 16th Jun 2016 11:48 am
Also: I suspect the majority of all electric cars will source their energy from fossil fuel generated electricity for many years into the future. And some even from coal fired plants.
Boat on Thu, 16th Jun 2016 3:21 pm
That gentlemen and those with no specific sex designation is when peak oil happens. When electric cars match new demand. Somebody explain it to mak and greggiett. They will be confused.
Boat on Thu, 16th Jun 2016 3:39 pm
That gentlemen and those with no specific sex designation is when peak oil happens. When electric cars match new demand. Somebody explain it to mak and greggiett. They will be confused.
Nat gas is tougher to guess the last peak. Solar and wind will start to grow much faster but electric cars needing juice will grow the market faster?
Apneaman on Thu, 16th Jun 2016 4:24 pm
Boat, will we see ev’s boom in Houston or will the charging stations not work once they are submerged 3-4 times per year?
Apneaman on Thu, 16th Jun 2016 4:32 pm
Can Houston Learn From Another Gulf Coast City Drowned By A Catastrophic Storm?
Houston has a problem with flooding. April’s Tax Day Flood led the city to appoint a “flood czar.” But what can Houston — or any flood-prone city — do differently to reduce flooding when a foot-and-a-half of rain falls in just 12 hours?
https://www.houstonpublicmedia.org/articles/news/2016/06/16/157006/can-houston-learn-from-another-gulf-coast-city-drowned-by-a-catastrophic-storm/
What’s to learn? You looking at the new abnormal. Houston you have a problem and it’s just getting started. Learning the definition of nonlinear climate change the hard way. Houston’s in hospice.
Apneaman on Thu, 16th Jun 2016 4:42 pm
Boat looks like that Texass rugged independent, small gov, individualism loner talk is all bullshit. Y’all suckhole up to Obama and the BIG GOV tit just like those “Socialists” and “Liberals” you can’t shut the fuck up about. Phony pricks with your stupid fucking myths.
Obama approves federal money for flooded Texas counties
http://www.houstonchronicle.com/news/houston-texas/houston/article/Abbott-seeks-another-round-of-federal-money-for-8008224.php
Obama Obama, please please help us. My McMansion and F-250 done got flood damaged again.
BIG GOV subsidized flood insurance and BIG GOV disaster bailouts. Whaa whaa whaa
Apneaman on Thu, 16th Jun 2016 4:45 pm
Houston flooding is a perfect storm of climate change and bad urban planning
http://grist.org/climate-energy/houston-flooding-is-a-perfect-storm-of-climate-change-and-bad-urban-planning/
Practicalmaina on Thu, 16th Jun 2016 5:33 pm
Rockman, for spent over 1 billion retooling their assembly lines for aluminum bodies on f-150 ect. They have had a better year than their competitors fiscally, they spent the money on a lighter body that won’t rust, still didn’t meet Obamas mandate on fuel efficiency with all of the f-150 line. Spend the money on efficiency and performance and the market will reapond. In the meantime I will work on getting 60 mpg out of my cheap relatively old ice until the tech progresses more. Musk says 5% annual increase on lithium battery power density is what he expects.
Boat on Thu, 16th Jun 2016 7:55 pm
ape,
Apneaman on Thu, 16th Jun 2016 4:42 pm
Boat looks like that Texass rugged independent, small gov, individualism loner talk is all bullshit. Y’all suckhole up to Obama and the BIG GOV tit just like those “Socialists” and “Liberals” you can’t shut the fuck up about. Phony pricks with your stupid fucking myths.
You’ve been believing way to much MSM I guess and have become brainwashed.
Whites are 50 percent of the population and the rest are a very diverse group from all over the globe.
Houston was the first mega city in the nation to elect a gay mayor. You gonna hate on that to?
The more you read the more you learn. Try it.
Due to changing demographics in 2014
Republicans held a 3.9 percent advantage over Democrats for the State.
Locals know this shyt, foreigners, not so much.
Apneaman on Thu, 16th Jun 2016 8:11 pm
Boat, that fits with what I have been saying all along about texass cock sucking climate deniers.
Texas Climate Change
http://www.huffingtonpost.com/news/texas-climate-change/