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Natural Gas: Is It Already Time To Discuss Peak Shale Gas?

by Bob Shively, Enerdynamics President and Lead Instructor

If I have learned one thing in my 30 years in the natural gas industry, it's that the market situation is never quite as clear cut as it seems. 

 

Less than 10 years ago, the industry consensus was that natural gas was becoming scarce in the U.S.  Based on this belief, gas and oil majors spent billions building liquefied natural gas (LNG) facilities to import gas supplies into the U.S. Now, they are spending hundreds of millions more to convert these facilities into export terminals to ship LNG from the U.S. to Asia and Europe. Consumers are enjoying the benefit of low-cost natural gas, and large industries such as chemical plants are building new facilities guided by the assumption that cheap gas supplies will last for many years.

 

 

 

 

There is good evidence to suggest that the U.S. is in a fortunate spot with many years of supply available. But often when the commotion of markets gets too loud it can be a signal to listen for contrarian voices (remember the dot-com and housing bubbles?). One such voice in the gas business is Canadian geoscientist David Hughes.

 

In a recent series of studies, Hughes suggests that our expectations of long-term plentiful supply are based on inaccurate interpretations of gas drilling and production data. It may seem Hughes is another anti-fossil fuel naysayer. However, soon after Hughes released his analysis of the EIA’s estimate of shale oil available in California’s Monterey basin, the EIA reduced its estimate of available supply in the basin by a stunning 95 percent.

 

To develop his own forecast, Hughes performs an assessment of actual well production data from the major shale fields, and then “determines future production profiles given assumed rates of drilling, average well quality by area, well- and field-decline rates, and the estimated number of drilling locations.”[1] According to the analysis, maintaining our existing shale gas production, let alone increasing it significantly, will be difficult. 

 

The issue is that the output from shale gas wells declines rapidly after initial production.  For instance, output from a well drilled in the Barnett shale basin will decline by 75% in just three years[2]. Thus the only way to keep production up is to keep drilling more and more wells. And unfortunately the more you drill, the more you end up going into areas with less attractive geology meaning higher costs and lower output. 

 

Just looking at the Barnett shale basin, Hughes’ analysis suggests that even increasing drilling rates from the current level of 400 wells to 2,000 wells per year will still result in gas production in the basin dropping by two-thirds by 2030. Meanwhile, the EIA forecast suggests that Barnett production will fall by 25% by 2030 and then will again increase to eventually exceed current production in the year 2040.

 

 

 

 

In conclusion, Hughes states that his forecast for cumulative production from 2014 to 2050 for the top seven shale gas plays is 230 Tcf while the EIA’s forecast is 377. He suggests that the flush of shale gas is likely to peak by 2020, then decline. If true, the bust will hit right after many capital projects — the funding for which was based on long-term robust gas supply — are completed. This would sadly repeat the history of the many LNG import projects built in the 2000s. 

 

Will I bet my own money on shale gas drying up? No, but then I’m not betting my own money on long-term robust supplies either. And I will invest some of my long-term strategic planning time thinking about business strategies that will work if Hughes proves to be correct.

 


 

Footnotes:

 

[1] Drilling Deeper, p. 161, available at http://shalebubble.org/drilling-deeper/

[2] Ibid, p. 175

 

 

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