Shale-Gas Skeptic’s Supply Doubts Draw Wrath of Devon (Update2) Share Business ExchangeTwitterFacebook| Email | Print | A A A
By Edward Klump and Jim Polson

Nov. 17 (Bloomberg) -- Arthur Berman runs a one-man energy consulting firm out of his home near Houston, producing research that says forecasts for natural-gas production in the U.S. are flawed. He’s won the industry’s attention and its anger.

Since last month, Chesapeake Energy Corp. and Devon Energy Corp., two of the five largest gas producers in the U.S., attacked Berman’s claims. Berman, 59, had his monthly column pulled from the November issue of World Oil after gas companies complained, prompting him to quit the trade journal.

Oil geologist Berman, who worked two decades for Amoco Corp., says company production projections for so-called shale gas in the U.S. are at least double what drill results justify. At issue are the rates of production decline in shale wells, where water, sand and other materials are injected to fracture rock and make gas flow.

“I think that the wells decline at a much higher rate than the operators think they do,” Berman said in an interview in Houston. “They’re being overly optimistic.”

Companies such as Chesapeake, which had climbed 55 percent this year before today in New York stock trading, say their shale wells will produce for four or more decades. In an Oct. 12 speech at a conference in Denver, Berman said data he’s seen filed with the Texas Railroad Commission suggests the life of shale-gas wells is 10 to 20 years.

Credentials Challenged

“There’s a huge vested interest in the status quo because if these wells do not work, there’s going to be hell to pay,” said John E. Olson, who manages $50 million at Houston Energy Partners. Olson left his analyst job at Merrill Lynch & Co. in 1998, after being told he was too critical of Enron Corp., which collapsed in 2001.

Chesapeake fell 84 cents, or 3.3 percent, to $24.30 today on the New York Stock Exchange. Devon dropped 37 cents to $70.62.

Questions about Berman’s research were so frequent that investment bank Tudor Pickering Holt & Co. in Houston put out an e-mail to clients rejecting claims by shale skeptics, said Dave Pursell, a managing director at the firm.

“If you read his stuff, he’s basically said there’s fraud being committed by Wall Street, E&P companies and reserve engineers all in collusion,” Pursell said. “When you start calling companies out by name and you start insinuating and implying very strongly that there’s a degree of fraud going on, you get our attention.”

Berman said he’s not alleging fraud; rather, he disagrees with how producers are interpreting well data.

‘Game Changer’

Berman doesn’t have the experience in unconventional gas projects to validate his assertions, Pursell said. U.S. shale- gas output will climb to about 22 billion cubic feet a day at the end of 2013 from 8 billion at the end of last year, Tudor Pickering said in August.

If exploited properly, shale formations will be a “game changer” to boost U.S. energy supplies and help cut carbon emissions, said Porter Bennett, chief executive officer at consulting firm Bentek Energy LLC near Denver.

“There’s a preponderance of evidence that suggests that those shale plays are very real,” Bennett said in an interview.

David Hager, exploration chief at Oklahoma City-based Devon, took on Berman’s claims with an Oct. 19 op-ed piece in the Oklahoman newspaper. Hager likened shale-gas development to a home run to win the World Series and said Berman “is in the stands speculating on whether the slugger is on steroids.”

Chesapeake, also based in Oklahoma City, ignored Berman’s arguments until it learned of speeches the geologist gave calling shale production a speculative bubble, Chief Operating Officer Steve Dixon said in a telephone interview.

Chesapeake Responds

“He called us out,” said Dixon, who devoted part of Chesapeake’s analyst and investor meeting in New York on Oct. 14 to rebutting Berman. “He left me no choice.”

Berman, who looked at data for thousands of wells, projects average output at less than 1 billion cubic feet per horizontal well in the Barnett Shale of Texas. Chesapeake, XTO Energy Inc., Devon and Quicksilver Resources Inc. have estimates more than double that, such as XTO’s 3.3 billion.

Berman said his interest in geology started in his hometown of Cincinnati, “where you can’t hardly kick a rock without finding fossils.”

After getting a history degree at Amherst College in Massachusetts, Berman moved to Colorado and found work in land surveying before enrolling in 1974 at the Colorado School of Mines, where he received a master’s degree in geology.

He joined Amoco in 1978 and traveled the world for the company until 1999, when it was acquired by BP Plc.

Amoco Geologist

He was “one of the up-and-coming stars” at Amoco, said Vince Matthews, who worked with Berman at the company in the early 1980s as a division exploration manager. Matthews, now the state geologist in Colorado, called Berman a “good scientist.”

Berman, who has advised clients such as Exxon Mobil Corp. and Total SA, said he became interested in shale gas after researching the Barnett Shale for a 2007 speech.

Output from a typical shale well drops sharply in the first two years, then falls so slowly that Chesapeake estimates economic production will last 65 years, Dixon said.

James Halloran, a consultant with Financial America Securities in Cleveland, said Berman’s research made him “more guarded” about producers involved in shale formations. “I’m a lot less sanguine toward that area longer term as an investment,” he said.

Column Canceled

John Royall, chief executive officer of Gulf Publishing Co., pulled Berman’s November column from World Oil because of producer complaints, said Perry Fischer, who was fired as the trade journal’s editor on Nov. 5. Fischer said he believes Berman’s column contributed to his firing. Royall didn’t respond to messages seeking comment.

Oklahoma City-based Devon declined to comment on Berman beyond Hager’s article in the Oklahoman. The company said yesterday that it will sell all of its Gulf of Mexico and overseas assets to focus on onshore fields in the U.S. and Canada, including shale formations.

XTO spokesman Tom Covington declined to comment.

“We’re ignoring Mr. Berman,” said Brad Sylvester, a spokesman for Southwestern Energy Co., the Houston-based company that pioneered development of the Fayetteville Shale in Arkansas. Southwestern was he only oil and gas producer in the Standard & Poor’s 500 that rose last year.

Rick Buterbaugh, a spokesman for Quicksilver of Fort Worth, Texas, said Berman underestimates the company’s Barnett Shale production by using figures from the Railroad Commission that don’t include natural-gas liquids.

Berman said he’s glad companies and analysts are starting to discuss his shale research. “I think it’s very encouraging that people are disagreeing with me because what that suggests is that we’re going to get to an answer eventually,” he said.

To contact the reporters on this story: Edward Klump in Houston at eklump@bloomberg.net; Jim Polson in New York at jpolson@bloomberg.net.

Last Updated: November 17, 2009 16:06 EST