Companies Writing Down Billions in Shale Gas Assets

On Friday shale gas driller Encana Corporation, the largest natural gas company of Canada announced it had written down more than $1.7 billion in shale gas assets on its books, the majority from its U.S. shale gas operations as it posted its ominous 2nd quarter operating results. Encana Chief Executive Officer Randy Eresman went on record saying to expect his company to have to take additional shale gas asset write downs in the near future. Such asset impairment write downs directly affect the industry’s operating credit lines as reduced value assets on their books results in financial lenders lending the companies less cash going forward.
Encana Corporation is also the focus of a U.S. Department of Justice price collusion investigation regarding the allegation it has conspired with Chesapeake Energy to fix prices for shale gas land lease agreements with state of Michigan landowners. The investigation is ongoing.
Other shale gas development companies also wrote down major assets as continued shale gas industry aggressive claims meet the realities of the tough economics the industry never fully anticipated.
English based BG Group decreased the value of its U.S. shale gas operations by $1.3 billion also this past Friday to reflect a weaken outlook for U.S natural gas prices. Exco Resources Inc. of Texas reported a $276 million write down on its assets. Meanwhile Australian based shale gas driller BHP is embroiled in a decision to write down its U.S. shale gas operations by an estimated $US2.5 billion on the shale gas assets it acquired just last year from Chesapeake Energy for $US4.75 billion, more than half what it paid to Chesapeake Energy.
The popular view is the main culprit is the ongoing price of today’s U.S. price for natural gas of $3.08 per million British Thermal Units (MBTU), a price which dipped as low as $1.90 per MBTU back in April of this year. When the shale drilling boom began, the drillers proclaimed aggressive values for the gas held in ground as calculated in land lease agreements with landowners. Back in early 2008, the price of natural gas at the U.S. Henry Hub was being priced at more than $15.00 per MBTU. As the drilling boom took off unabated and natural gas began appearing into storage, the price the market was willing to pay for it declined month by month.
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