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Natural Gas: Will Low Natural Gas Prices Stall the Shale
Gas Boom?

by Christina Nagy-McKenna, Enerdynamics Instructor

The U.S. natural gas market is on the verge of a decades-long growth period due to the robust development of shale gas.  While optimism about U.S. gas supplies is not new – it has been a hot topic in the trade press for the past year – data regarding the dwindling number of natural gas rigs raises the question of how this expansion will continue as the actual number of new wells diminishes. 

 

Also, with natural gas prices below $4/MMBtu at the wellhead for a significant portion of this past winter, it makes sense to question if developers have sufficient economic incentive to continue drilling new wells and bringing more supplies on line. The decision hinges in large part on the developers’ cost of production as compared to market prices. However, getting to the true production price is not as straight forward as it may appear, and as such there is some disagreement as to what it will take for shale developers to be profitable.

 

New data concerning Barnett Shale seems to indicate that prices do not have to increase as much as previously thought in order for development of shale formations to continue. 

 

Research-based optimism

The optimism regarding supply growth received a major boost from a recently released study about Barnett Shale by the Bureau of Economic Geology (BEG) at the University of Texas. [1] The study determined that 44 Tcf of natural gas, enough to meet almost two years of demand by the U.S. market, will be produced by the Barnett formation over its lifetime (approximated as 2050). BEG based this forecast on an average market price of $4/MMBtu for the gas, which, while somewhat greater than today’s $3.50/MMBtu, is a far cry from the higher prices natural gas producers grew to love in late 2000s.  

 

The BEG study is the first to look at data from individual wells within the Barnett formation. Data from approximately 15,000 wells drilled in the past decade was examined well by well rather than averaging the production from all wells as other studies have done. BEG found that not all parts of the formation produce equal quantities of natural gas. Many wells were flops, and perhaps only half of the 8,000 square miles of the formation will actually yield an economical product for its developers. 

 

Further studies by BEG regarding other shale formations including Marcellus, Haynesville, and Fayetteville are ongoing, but thus far the researchers believe that U.S. natural gas production will continue to grow until 2040. This suggests that production costs are far enough below $4/MMBtu for developers to drill in the formations and still make a profit. 

 

Added revenues from wet gas

Contributing to producers’ ability to make money at low natural gas prices are revenues from natural gas liquids (NGLs) and associated oil.  Wet gas, the liquid rich gas that contains oil and NGLs such as propane and butane, is worth more money due to the higher values associated with oil and NGLs. The Bakken Shale formation in North Dakota holds shale oil that contains shale gas as well. The average by-product of oil production is almost 1 million cubic feet of natural gas per barrel. Eagle Ford Shale in Texas has yielded 1.5 million cubic feet per barrel.[2

 

Thus, producers in these regions can produce shale gas at a much lower net cost than those that are solely producing dry gas.  At this time, the gas in Bakken Shale is being flared as the infrastructure to capture and market the gas does not exist.  Plans are underway to change this as the State of North Dakota is working with developers to sort out land use issues that make the building of gathering facilities very complicated. 

 

Falling NG rig counts

In the meantime, energy producers who have both oil and natural gas portfolios have already moved some of their rigs to oil producing fields. Data collected by the Energy Information Administration (EIA) shown in Tables 1 and 2 demonstrates the steep drop-off in the number of natural gas rigs from 691 in March 2012 to 420 in March 2013. 

 

 

Table 1 [3]

Number of Rigs in the United States

March 1, 2013

 

 

Fri, March 01, 2013

Change from

 

last week

last year

Oil rigs

1,333

0.30%

3.09%

Natural gas rigs

420

-1.87%

-39.22%

Miscellaneous

4

0.00%

-20.00%

 

 

Table 2 [4]

Number of Rigs in the United States

March 2, 2012

 

 

Fri, March 02, 2012

Change from

 

last week

last year

Oil rigs

1,293

2.21%

57.93%

Natural gas rigs

691

-2.68%

-21.02%

Miscellaneous

5

-16.67%

-14.29%

 

 

This is further enhanced when looking at 2011 data in which up until March 2011 the rig count hovered around 900.[5] The following chart shows the same figures for the six-year period of January 2007 to January 2013 with the average spot price of gas at Henry Hub overlayed onto the rig inventory data.[6

 

 

 

 

The chart clearly shows that as the price of natural gas has fallen, so has the number of rigs drilling for more gas.  But, if enough oil wells also produce associated gas as a by-product then gas production may continue to be robust, even with low gas prices.

 

Conclusion

So, is $4/MMBtu really enough to support a robust shale gas development and production program? A recent study by Bentek Energy [7] says the answer is yes, and it even suggests that, with some cost control by producers, $3/MMBtu could work in some cases.  Meanwhile, the U.S. government is receiving considerable pressure from producers to allow them to export natural gas to other parts of the world where market prices are two to three times higher than in the U.S. Exports should cause prices to rise in the domestic market, meaning the question could become a moot point.  But until prices rise, producers must try to make their operations as efficient as possible and consumers should enjoy low natural gas prices.


References:

 

1. “New Rigorous Assessment of Shale Gas Reserves Forecasts Reliable Supply from Barnett Shale Through 2030,” The University of Texas at Austin web site, February 28, 2013.

 

2. February 2013:  Energy Strategies Report, Dr. Jim Gooding, Black & Vietch.

 

3. Energy Information Administration, Natural Gas Weekly Update, for Week Ending March 6, 2013, Released March 7, 2013.

 

4. Energy Information Administration, Natural Gas Weekly Update, for Week Ending March 7, 2012, Released March 8, 2012.

 

5. Energy Information Administration, Natural Gas Weekly Update, for Week Ending March 9, 2011, Released March 10, 2011.

 

6. Weekly Natural Gas Rig Count January 2007- January 2013 and Average Sport Price at Henry Hub, from Energy Information Administration, Natural Gas Weekly Update, for Week Ending March, 6, 2013.

 

7. 2013-2014 Outlook: Believe the Shale Boom

 

8. “Gas Boom Projected to Grow for Decades,” Russell Gold, Wall St. Journal, February 28, 2013.

 

9. “$8 Natural Gas:  We’re Right on Schedule,” Richard Finger, Forbes Magazine, October 14, 2012.

 

10. “Shale Oil is the Quiet Partner of Natural Gas Reliability,” Dr. Jim Gooding, February 2013: Energy Strategies Report, Black & Veatch.

 

11. “US Dry Gas Production Could Grow for Rest of Decade,"  Raymond James, Bill Holland, Platts, January 22, 2013.

 

12. “How to Capitalize on Shale Gas Trend: Manager’s Favorite Plays,” Gil Weinrich, Advisor One, March 1, 2013.

 

 

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