Industry experts and analysts contend that companies may have overstated their shale reserves as a new reserve reporting and accounting methodology came into effect last year. With gas prices at their lowest in 10 years, it appears many of the projects may be uneconomical.
Recent concerns stem from low natural gas prices. At the heart of the issue though is how the Securities and Exchange Commission has revised the rules for reporting oil and gas reserves and allowed companies to take a more liberalised approach in determining reserves compared to how they were reported under the old rules.
The SEC's rules allow companies to book reserves if it is planned to develop the resource within a five-year period. Low natural gas prices are calling those development plans into question.
Many say that even as companies go about adding reserves estimates to their portfolio and spruiking them on roadshows to potential investors, the altered development plans due to low natural gas prices and, by extension, the change in economically recoverable reserves are perhaps not being adequately shared with investors.
In light of low natural gas prices, the SEC is questioning the impact of this on the project development plans of shale gas companies, and how well investors are being informed of those plans.
Press reports say the agency already has issued subpoenas to at least five shale companies questioning them on some of their assumptions for reserve forecasting as well as investor disclosure.
In a legal brief, law firm Sullivan and Cromwell said the rules allowed the inclusion of undeveloped reserves "if there is reasonable certainty of economic producibility, regardless of whether the reserves are located in development spacing areas immediately adjacent to the development spacing area containing a producing well or a greater distance from productive units".
As a result, companies have booked as much as 50% in excess reserves since the rules came into effect.
The adopted rules also allow for a development plan that exceeds the five-year time frame if "specific circumstance" justify longer term development.
Legal experts say that while a definition of "specific circumstance" has not been developed, a drop in commodity price that affects project economics and potentially delays or scuttles development cannot be used as an excuse for non-development.
More than reserve reporting and accounting methodology, many are also questioning the reserve modeling companies are using in booking reserves.
The amount of shale gas in the US has been the subject of intense debate and controversy. In fact, the US Energy Information Administration earlier this year slashed its shale estimates by 40%, pegging it at 482 trillion cubic feet.
It also lowered its estimation of the highly-prospective Marcellus shale formation by a whopping 60% to 141 trillion cubic feet.
Even industry experts have questioned the methodology used to calculate reserves and estimate in place resource, saying the use of the hyperbolic curve model is not borne out by the actual field data.
Some say grouping wells into "type curves" could lead to gross overestimation of the estimated ultimate recovery and that the US shale gas reserves could have been overestimated by as much as 100%, with true break-even costs at $US7 per million cubic feet.
With the SEC investigation underway, industry experts say any significant write downs could potentially make companies vulnerable to shareholder litigation.
