Shale Loses 9 Billion Barrels of Reserves After SEC Inquiries

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.


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R.J. Spoley  |  June 16, 2016
All the hubbub is about reserves and the dollars they represent either in finding costs, cash flow or collateral to back debt. It all hinges on reserves that are real and actually producible. The best way to evaluate reserves is to understand the reservoir containing them and the trapping mechanism. The reservoirs in every case are very fine grained, shale with very low porosities, very high water saturations, extremely low permeability and are extensive in area. Most contain far more gas than liquid oil and the oil is usually condensate of 50 degrees or better API. Recovery factors are rarely more than a few percent of the hydrocarbons in place. The trapping mechanisms are usually not described in geologic or engineering terms. I think I know what the trapping mechanism is and something about the reserves that can be captured. The trapping mechanism is relative permeability. Once this is fully understood in the engineering sense the reserve picture comes into focus. Relative permeability is the permeability of the wetting fluid relative to the non-wetting fluid. As the perm of one goes up, the other goes down. The breaking point is usually about 30%. Thus with 70% water saturation, there is little or no permeability to hydrocarbons and they are trapped by the water saturation. In fine grained shale rocks, water is tightly held by flat shale minerals with very small spaces between them making the water immovable. Production is obtained by fracking and enlarging the intra-granular spaces and de-watering the formation. This changes the relative permeability by lowering the water saturation and allowing permeability to the non-wetting fluids to increase and results in production. Reservoir energy is provided by the over-compressed gas created by the fracking process. Since liquids and solids are non-compressible, the only thing that can be compressed is the gas. As the gas is depleted, reservoir energy is also depleted and the relative permeability swings back to a higher water saturation. This explains the very steep decline curves of all these kinds of traps. High porosity reservoirs lost their hydrocarbons early in their life as permeability to the non-wetting fluids was high enough to allow for migration into standard traps. Reserves that can be captured are a function of what was initially in place (porosity and water saturation), reservoir energy and relative permeability. Porosities and permeability were low to start with while water saturations were very high. Technology changes those parameters for a short time but can not change the volume of non-wetting fluids initially in place. Those volumes steadily decrease during production thus raising water saturations resulting in lower to perm to O&G. As I understand it, most of the reservoirs in these plays have porosities of less than 7% and water saturations greater than 85% leaving very little room for hydrocarbons. The fact that these formations have high shale content with large surface areas relative to their volumes means that they cant really be effectively be de-watered. All this results in low recovery factors of probably less than 10% of the in place non-wetting fluids. The net result in all this, is that good wells with high reserves and long lives are a pipe dream. When compared to dollars to accomplish the inevitable results, especially with an overproduced commodity, this looks like a Ponzi Scheme to me.