Two Stories Side-By-Side

Updates

October 11, 2013: with regard to the first story below, at the original post -- when anyone talks about the Red Queen phenomenon and the Bakken, remember this, from the September, 2013, Director's Cut:

"The drilling rig count decreased slightly from June to July, but the number of well completions jumped 102 to 251, resulting in a 6.4% increase in oil production. That number of completions is almost three (3) times the threshold needed to maintain production." 

Original Post

I am rushed for time so I will do this quickly. I wish I could post these stories side-by-side, but I don't have the "know-how" so they will be top story and bottom story.  I will post/link them now, and I won't make many comments. Maybe I will come back to these two stories.

I wasn't going to post the "top" story until this weekend when I got caught up. I saw a similar story within the past few days so it appears this story is making the rounds. So, here's the first story, posted by friend of President Obama, BloombergBusinessweek:

Chesapeake Energy’s Serenity 1-3H well near Oklahoma City came in as a gusher in 2009, pumping more than 1,200 barrels of oil a day and kicking off a rush to drill that extended into Kansas. Now the well produces less than 100 barrels a day, state records show. Serenity’s swift decline sheds light on a dirty secret of the oil boom: It may not last. Shale wells start strong and fade fast, and producers are drilling at a breakneck pace to hold output steady. In the fields, this incessant need to drill is known as the Red Queen, after the character in Through the Looking-Glass who tells Alice, “It takes all the running you can do, to keep in the same place.”

The U.S. is producing 7.8 million barrels of oil a day, more than it has in a quarter-century. Crude from shale formations has cut reliance on imports and put the U.S. closer to energy independence than it’s been since 1989. The International Energy Agency predicted last year that the U.S. would overtake Saudi Arabia by 2020 as the world’s largest producer.

Whether current production can hold up is the subject of debate. David Hughes, a geoscientist and president of Global Sustainability Research, has examined the life span of shale wells. “The Red Queen syndrome just gets worse and worse and worse,” he says. “The higher production goes, the more wells you need to offset the decline.” 

The U.S. Energy Information Administration estimates that about 29 percent of U.S. oil production today comes from so-called tight oil formations. These dense layers of rock and shale are cracked open by blasting water, sand, and chemicals deep underground, creating fissures that allow the oil to flow into horizontal pipes, some of them thousands of feet long.

Production from wells bored into these formations declines by 60 percent to 70 percent in the first year alone, says Allen Gilmer, chairman and chief executive officer of Drillinginfo, which tracks the performance of U.S. wells.

Traditional wells take two years to slide 50 percent to 55 percent, and they can keep pumping for 20 years or more.

In North Dakota’s Bakken shale, a well formally known as Robert Heuer 1-17R put out 2,358 barrels in May 2004, when it went live. The output proved there was money to be made drilling in the Bakken and kicked off an oil rush in North Dakota. Continental Resources, the well’s operator, built a monument to it.

Production declined 69 percent in the first year.

“I look at shale as more of a retirement party than a revolution,” says Art Berman, a petroleum geologist who spent 20 years with what was then Amoco and now runs his own firm, Labyrinth Consulting Services, in Sugar Land, Tex. “It’s the last gasp.”

 Now, the second story. This one is from Reuters.

Pipeline operators Regency Energy Partners LP and Crestwood Midstream Partners LP announced plans to buy peers to expand their pipe networks as infrastructure companies seek bigger stakes in the U.S. shale oil and gas boom.

Regency Energy, controlled by billionaire Kelcy Warren's Energy Transfer Equity LP, agreed to buy PVR Partners LP for about $3.8 billion. Crestwood Midstream is buying privately held Arrow Midstream Holdings for $750 million.

Burgeoning production has left the United States awash in cheap oil and gas but a shortage of pipelines has put a premium on the infrastructure that moves production to refining hubs.

Pipeline companies have also been attracting investors as they are mostly structured as master limited partnerships (MLPs). They pay virtually no corporate taxes and have a lower cost of capital, giving them the opportunity to hunt for less attractively valued assets.

"It's a seller's market for MLP-qualifying assets. The market's desire for MLP-qualifying assets is enormous," said Robert W. Baird & Co analyst Ethan Bellamy.

The deals announced on Thursday come a few months after Crestwood, Inergy LP and Inergy Midstream LP merged to form a $7 billion entity to cater to a spurt in Bakken shale production, which has made North Dakota the most prolific oil-producing state after Texas.

Other partnerships such as Southcross Energy Partners LP and Eagle Rock Energy Partners LP could also benefit from deals, Bellamy said.

In North Dakota's Bakken shale field, Crestwood Midstream will process about 18 percent of crude oil output after it buys Arrow Midstream, making it one of the largest pipeline and storage providers in the lucrative shale formation.

"This is a perfect example of how we are going to aggressively commercially develop and look for bolt-on opportunities ... ," Crestwood Chief Executive Robert Phillips said on a conference call with analysts.

There are a lot of story lines in these two articles. Maybe I will "attack" them this weekend.