The industry and investment community is all worked up over the various oil and natural gas shale plays in North America, but little attention is given to what could go wrong with these plays.

IN PICTURES: 7 Forehead-Slapping Stock Blunders

The first issue is that not very much drilling has been done in some of the most promising shale plays. Since there is very little development and production history, it is difficult to determine the average estimated ultimate recovery (EUR), initial production (IP) rates and decline curves of wells here. Thus any estimates of the total resource potential are unreliable.

Chesapeake Energy (NYSE:CHK), which has 510,000 acres in the Haynesville Shale, uses an average EUR of 6.50 Bcfe, an IP rate of 14.1 million cubic feet equivalent per day, and a first year decline of 85%. However, the oldest Chesapeake Energy well in the Haynesville Shale is only nine months old, and it is difficult to attribute this data to the entire play.

Experience Matters
On the other hand the Barnett Shale, which has a much longer development and production history than the Haynesville Shale, has a more reliable production and decline curve with which to evaluate the assets of exploration and production companies.

The Marcellus Shale also lacks a long history of development, and thus has the same problem as the Haynesville Shale in regards to the reliability of available data. One unique problem for the Marcellus Shale is its immense size. The shale underlies a huge area in terms of square miles, reaching into New York, Pennsylvania, Ohio, West Virginia, Virginia, Maryland and even New Jersey. Most of the drilling to date has occurred in Pennsylvania, but little is known about most of the other areas.

There is no way to tell currently whether all this acreage will be as productive as the Pennsylvania acreage that has excited the industry. Eventually, the Marcellus Shale will evolve into a core and non-core, or Tier 1, 2 and 3.

Range Resources (NYSE:RRC) is one of the largest players in the Marcellus Shale and has 900,000 acres that are prospective for the Marcellus Shale. Another company that has not moved as far into developing its acreage is Gastar Exploration (NYSE:GST), which has 37,200 net acres under lease. The company plans to drill as many as five wells here by 2010.

Green Protests
Another issue that might cause a problem in the shale plays is the environmental issues associated with hydraulic fracturing, including the use of immense amounts of water and possible pollution when that water is disposed of.

Cabot Oil and Gas (NYSE:COG) recently had two spills of fracturing fluid in the Marcellus Shale that leaked into wetlands and a creek in Pennsylvania. The company was issued a violation notice by the Pennsylvania Department of Environmental Protection for violation of several state laws.

Any permanent restrictive regulation on water use in the high growth shale plays might slow down development by making the permitting process cumbersome, or by making it more expensive to drill.

The Bottom Line
The industry and investors are rightly excited about the large amounts of natural gas in the recently discovered shale plays in North America, but this enthusiasm should be tempered by recognition of potential problems that could erupt. (To learn more, see our Oil And Gas Industry Primer.)

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