Farewell to Overhyped Gas Wells?

Last month, I told you that the Eagle Ford shale play in South Texas is the "play du jour." Industry participants are piling into this play like crazy -- from big boys like BP (NYSE: BP  ) and Chesapeake Energy (NYSE: CHK  ) to small fries like Rosetta Resources (Nasdaq: ROSE  ) and Swift Energy (NYSE: SFY  ) .

Encouraging early results are now being reported regularly. But before we start scoping out the latest numbers, let's revisit the theme of well test PR hype.

I took a stand against 24-hour well test reporting last year, when blowout numbers were being reported in the Haynesville shale. In many cases, those numbers are highly misleading, as these flow rates tend to decline dramatically.

Take the case of Devon Energy (NYSE: DVN  ) , which reported a 30.7 million-foot-per-day stunner late last year. On its fourth-quarter conference call in February, Devon disclosed that after 90 days, the well was flowing at "a little over three million cubic feet per day."

I'm a little less worried about these sorts of stunts going forward, now that the industry seems to recognize that lower initial flow rates should help to maintain pressure, avoid formation damage, and increase ultimate recovery. Petrohawk Energy (NYSE: HK  ) , for example, announced in its fourth-quarter release that the firm is expanding its use of "restricted rate production practices" in the Haynesville.

I'm still not crazy about 24-hour rates, and vastly prefer to see 30-day or peak-calendar-month rates, but I suppose there's also an argument to be made for getting new information to investors quickly. I think I will back off my hard line against relaying this information, but I will also try to put it in its proper context for you. That's something the companies themselves are not always eager to do.

Chesapeake Energy is a Motley Fool Inside Value recommendation. Try any of our Foolish newsletters today, free for 30 days.

Fool contributor Toby Shute doesn't have a position in any company mentioned. Check out his CAPS profile or follow his articles using Twitter or RSS. The Fool owns shares of Chesapeake Energy. The Motley Fool has a disclosure policy.


Read/Post Comments (7) | Recommend This Article (14)

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  • Report this Comment On March 23, 2010, at 5:36 PM, madmilker wrote:

    "a little over three million cubic feet per day.".....

    well...it had a 28/64" choke at the continuous 24-hour flow rate of approximately 30.7 million cubic feet...

    what was the choke rate at the three.....?

  • Report this Comment On March 23, 2010, at 5:38 PM, madmilker wrote:

    "a little over three million cubic feet per day.".....

    well...it had a 28/64" choke at the continuous 24-hour flow rate of approximately 30.7 million cubic feet...

    what was the choke rate at the three.....?

  • Report this Comment On March 23, 2010, at 5:39 PM, madmilker wrote:

    oops!

  • Report this Comment On March 23, 2010, at 7:50 PM, tmerrif wrote:

    Very common for shale wells to have 70%-90% decline rates. Decline is hyperbolic early then slows to a much lower linear decline at much lower rates. Typical Devonian shale wells on the east coast have produced at very low rates for 50 years. They were all drilled vertically and had only minor stimulation compared to todays horizontal wells. The key is getting enough cash back early and building long life reserves in most of these shale gas plays.

  • Report this Comment On March 23, 2010, at 7:50 PM, carbonates wrote:

    Its important to understand the released Initial Production test for what it really is. Even a 24 hr rate is often only an extrapolated rate from a much shorter period of testing the well. If they have to flare the gas they may not be able to run the test for very long. Besides, who wants to waste 30 million cubic feet of gas? ($150,000 roughly) Also, it helps to understand the possible motivation behind the IP numbers that are released. Some companies want to hype the numbers and impress investors, others want to downplay the test and release low numbers in order to keep the competition away. I'm always suspicious of IP rates, and wait until there is at least a months production (or 3 months) to decide how good some of these wells really are. Some hold up, some don't. It would be interesting to see how much these press releases of big IP's actually affect the stock price over the following days.

  • Report this Comment On March 25, 2010, at 4:19 PM, Personal0Foul wrote:

    New blog by the folks ar drillinginfo. The Haynesville blog talks about restricted rate wells, shows some interesting data. http://info.drillinginfo.com/urb/haynesville/

  • Report this Comment On April 12, 2010, at 5:40 PM, mapboys wrote:

    per Carbonates 03/23, none of the initial rates that are published really mean much. If your goal is to understand what future reserves maybe or EUR, 100 days of daily production is a good forecasting tool and then since daily production is not available to most of us at least 4 months of gas/oil/water is really much safer.

    Also comparing any of these reservoirs to others is dangerous especially in the resource plays of shales, tight limes and tight sands.

    I suspect the reason for reporting these initial 'high' flow rates comes from a metric that some folks used in the past to estimate the EUR of a well based on the first 24 hour flow; not a bad practice if you are working with a lot of data and a reservoir with native permeability. But it is a terrible one where permeability is 'created' with MHF and long laterals

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