On the first of this month I mentioned reading an article from Oil Drum on the Marcellus shale play. The article suggested that shale gas would only be profitable when the market price is above $7 mcf. Now other analysts are saying that 7.50-8 mcf is needed to cause shale gas to break even. In an article by Dave Cohen, the words “bubble”, “sleight of hand”, “shenanigan”, “magic tricks” and “fraud” are terms that are being applied to shale gas. The bottom line is that drilling takes place in order to increase reserves so that the play seems to increase in value but the reserves are overstated because they require decline rates which are much less dramatic than they have proven to be. Cohen summarizes (emphasis his):
The shale gas boom has been the sole bright spot in America’s energy picture, and maybe the only bright spot in the economy as a whole. And what does that bright spot turn out to be? An asset play whereby shale gas producers, conniving with bankers, inflate their own value, hoping to get out while the getting is good.
I’ve now completely emptied my portfolio of Enerplus Resources which is seriously invested in the Marcellus shale play. Enerplus has a lot of other great things going for it, and a fat dividend, but when you see an investment that doesn’t make sense then it is time to get out.
(Hat tip: Devon Shire, “Can Shale Gas Companies Who Drill Uneconomic Wells Make Good Investments ?“)