Down in my estimation

We were struck by two different exercises in estimation today.

Firstly, AJ Lucas, Cuadrilla’s parent company had to publish a response to the Australian Stock Exchange regarding their “historically publicly reported Cuadrilla’s internal Gas Initially In Place (“GIIP”) estimate of the Bowland Prospect in England”.

The regulators had asked them some specific questions and the answers are rather interesting. ( (Point 4 is the very interesting one but do read 1-3 first for context)

“Dear Sir,

AJ Lucas Group Limited (Company)
The questions in your letter dated 11 April 2017 and the Company’s responses are as follows.

1. Has the Company retained or commissioned any independent company or person to assess or analyse and report on the Company’s GIIP in relation to the Bowland Prospect?

The Company retained an independent consultant in early 2015 to evaluate early stage work by Cuadrilla and others relating to the potential gas-initially-in-place (GIIP) in the Bowland-Hodder Mudstone shale sequences within Cuadrilla’s PEDL-165 / EXL – 269 onshore UK licences.
2. If the answer to question 1 is “yes”, please confirm whether the Company has received a completed or final report in relation to the analysis of the Company’s GIIP for the Bowland Prospect.

No. The Company refers to its answer to Q4 below.

3. If the answer to question 2 is “yes”, please explain why this report or the results of the report have not been previously disclosed to the market, commenting specifically on whether it is in compliance with the Listing Rule Requirements, and if not, why the Company believes the report is not in compliance with the Listing Rule Requirements?

Not applicable. The Company refers to its answer to Q4 below.

4. If the report referred to in question 2 is not in a form that is capable of being disclosed to the market or otherwise does not comply with the Listing Rule Requirements, please confirm whether anything in the report is inconsistent with or varies materially from previous statements made to the market in relation to the Company’s GIIP for the Bowland Prospect.

The work referred to in Q1 above concerned the potential GIIP (the estimate of gas believed to be physically in place). It did not concern (recoverable) resources or reserves (the amount of gas, if any, that may ultimately be produced, having regard to technical, and, in the case of reserves, regulatory and economic considerations).

(the amount of gas, if any, that may ultimately be produced, having regard to technical, and, in the case of reserves, regulatory and economic considerations).

The consultant provided the Company with interim feedback, for discussion, on Cuadrilla’s estimates. Its work was incomplete. The consultant has stated that its interim work product does not necessarily reflect its final position, and does not consent to publication of any part of it. No completed or final report was issued and the interim work product is not compliant with Listing Rules 5.25 to 5.28.

Based on the work it had undertaken, the consultant’s interim feedback was that using a different approach, which it preferred, to calculate one of the key input parameters, it estimated a still very large but significantly reduced GIIP resource compared to that estimated by Cuadrilla. The consultant did not rule out Cuadrilla’s estimated range, but expressed a view that it might be considered a maximum or near maximum value. Further, the consultant found that the in place gas values estimated by Cuadrilla could be replicated within acceptable limits based on Cuadrilla’s input parameters and using a different model.

Continues…”

So without wishing to sound uncharitable it loooks rather as though Cuadrilla and AJ Lucas have paid a consultant in 2015 to estimate the amount of gas in place in their licence area, and not liking the “significantly reduced” answer, have buried the report and not taken it through to publication.

This did not impress the investors on the AJ Lucas Hot Copper stock board. Here is the very first comment :

The second sort of estimation that interested us today was by our old pal Peeny, who masquerades under various IDs on pro-fracking boards. Here he is as “Jim Georges” on Backing Fracking.

He points here to an article which he seems to think supports the viability of fracking in the UK. In fact the article suggests that US shale operators have got costs down to a level where, in the US, they can be profitable and attractive investments with oil at about $60 a barrel.  UKOOG on its website acknowledged that costs may be up to 3 times higher in the UK than in the USA , so the break even line has to be a lot higher here.  The problem for UK frackers is that even at $60 a barrel most would suggest an equivalent gas price of around 45p a therm, and not one published study of the costs of UK extraction that we have seen suggests UK shale gas can be extracted for less than 48p a therm. It isn’t hard to see why this is problematic is it?

So it seems there just may not be that wonderfully tempting 200 tcf of gas in place  under Cuadrilla’s licence area after all and in spite of the apparent optimism from anonymous American shills, it may be not be financially viable to extract what there is of it.

Oh dear!