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Frackonomics 3.0 The Microeconomics of Horizontal Shale Gas Wells In New York The DEC paid for and published a socioeconomic study that failed to state any shale gas reserve estimates, but that clearly overstates shale gas reserves by a factor of 5 or more. 1 This grossly overstates the potential macroeconomic impact of shale gas development in the state while almost completely ignoring the downside such as the loss in home values.2 The DEC fails to address the microeconomics of horizontal shale gas drilling, it just assumes that it is economic when this is not necessarily the case. The DEC is estimating the number of jobs created and tax revenues from a form of gas production that is not economically viable in New York - and may not be for some time.3 Simply put, there is no rush to permit horizontal shale wells in New York state - despite the industry's push to do so because the wells are not likely to be economic at current or projected gas prices. As stated in this recent article from an oil and gas investment banking firm: "Supply economics support this financial picture with the majority of shale gas plays failing to break even on a full-cycle basis3 at prevailing gas prices the notable exceptions being the liquids-rich plays (see Figure 2). This analysis is backed up by a review of current drilling activity, which shows an increase within the liquids-rich plays, e.g., Eagle Ford, at the expense of the dryer gas plays, e.g., Haynesville. The attraction of an additional, valuable, liquids revenue stream is rapidly driving up liquids-rich asset prices. This harsh economic reality has been postponed through a combination of the continuing flow of new investors, and the ability of operators to hedge gas production at economic prices. Unfortunately, this prop is being removed with companies only being able to hedge their gas production at prices ranging from US$4.00 to US$5.95/mmbtu4.
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Meaning, exploration continued as long as share prices were up, and production could be sold on a greater fool basis to new investors, foreigners and other companies in a gas bubble economy. And production could be hedged at prices that would insulate temporary downturns in gas prices for awhile. But when the music stops, as gas prices stay depressed and the supply of suckers runs out, the reality of most of these shale fields sets in they are uneconomic, even with liberal tax treatment. South central New York state horizontal shale gas wells will likely be an extrapolation of the dry gas wells in Northeast Pennsylvania which are currently at break-even economics. Most New York counties will be no better than and likely considerably less productive than the border counties of Pennsylvania. See Figure 1 below. The horizontal line is the current price of gas. The vertical lines are the full cycle cost of producing gas from different shale gas fields. The closest analogy to New York would be Marcellus Northeast such as Bradford County, Pennsylvania, the third vertical bar from the right of the graph. Figure 1 Post Tax Effect Economics of Shale Gas Fields

It is the service companies - Halliburton and Schlumberger, etc. that are making money from these shale gas fields, as Figure 2 illustrates. Because they make money even on dry holes financed by overblown stock prices of the exploration and production companies.

Figure 2 Gross Margin of Service Companies vs Gas Production Companies

Of course, the scenario can change as a function of gas prices. But gas prices are projected to stay flat for some time. Based on the Energy Information Agencys projections - which came out prior to the current global economic slump - gas prices prices may not recover sufficiently to make the Marcellus economic in New York until 2020. See page 27 of the EIAs December 2010 energy forecast.4 The lack of economic substance for horizontal shale gas in New York underscores the fact that there is no need for New York to rush the regulations. New York should make its horizontal shale gas regulations based on sound science, hydrology, geology and topography, not political science. 5 And sound economics, not gas industry hype. James L. Northrup Cooperstown

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