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US Shale Gas Bubble is Set to Burst

By Post Carbon | Wed, 24 October 2012 22:14 | 10

For the past three or four years media sources in the U.S. trumpeted the “game-changing” new stream of natural gas coming from tight shale deposits produced with the technologies of horizontal drilling and hydrofracturing. So much gas surged from wells in Texas, Oklahoma, Louisiana, Arkansas, and Pennsylvania that the U.S. Department of Energy, presidential candidates, and the companies working in these plays all agreed: America can look forward to a hundred years of cheap, abundant gas!

Some environmental organizations declared this means utilities can now stop using polluting coal—and indeed coal consumption has plummeted as power plants switch to cheaper gas. Energy pundits even promised that Americans will soon be running their cars and trucks on natural gas, and the U.S. will be exporting the fuel to Europe via LNG tankers.

Early on in the fracking boom, oil and gas geologist Art Berman began sounding an alarm (see example). Soon geologist David Hughes joined him, authoring an extensive critical report for Post Carbon Institute (“Will Natural Gas Fuel America in the 21stCentury?”), whose Foreword I was happy to contribute.

Here, one more time, is the contrarian story Berman and Hughes have been telling: The glut of recent gas production was initially driven not by new technologies or discoveries, but by high prices. In the years from 2005 through 2008, as conventional gas supplies dried up due to depletion, prices for natural gas soared to $13 per million BTU (prices had been in $2 range during the 1990s). It was these high prices that provided an incentive for using expensive technology to drill problematic reservoirs. Companies flocked to the Haynesville shale formation in Texas, bought up mineral rights, and drilled thousands of wells in short order. High per-well decline rates and high production costs were hidden behind a torrent of production—and hype. With new supplies coming on line quickly, gas prices fell below $3 MBTU, less than the actual cost of production in most cases. From this point on, gas producers had to attract ever more investment capital in order to maintain their cash flow. It was, in effect, a Ponzi scheme.

Related Article: Following the Natural Gas Roller Coaster Ride

In those early days almost no one wanted to hear about problems with the shale gas boom—the need for enormous amounts of water for fracking, the high climate impacts from fugitive methane, the threats to groundwater from bad well casings or leaking containment ponds, as well as the unrealistic supply and price forecasts being issued by the industry. I recall attempting to describe the situation at the 2010 Aspen Environment Forum, in a session on the future of natural gas. I might as well have been claiming that Martians speak to me via my tooth fillings. After all, the Authorities were all in agreement: The game has changed! Natural gas will be cheap and abundant from now on! Gas is better than coal! End of story!

These truisms were echoed in numberless press articles—none more emblematic than Clifford Krauss’s New York Times piece, “There Will Be Fuel,” published November 16, 2010.

Now Krauss and the Times are singing a somewhat different tune. “After the Boom in Natural Gas,” co-authored with Eric Lipton and published October 21, notes that “. . . the gas rush has . . . been a money loser so far for many of the gas exploration companies and their tens of thousands of investors.” Krauss and Lipton go on to quote Rex Tillerson, CEO of ExxonMobil: “We are all losing our shirts today. . . . We’re making no money. It’s all in the red.” It seems gas producers drilled too many wells too quickly, causing gas prices to fall below the actual cost of production. Sound familiar?

The obvious implication is that one way or another the market will balance itself out. Drilling and production will decline (drilling rates have already started doing so) and prices will rise until production is once again profitable. So we will have less gas than we currently do, and gas will be more expensive. Gosh, who da thunk?

The current Times article doesn’t drill very far into the data that make Berman and Hughes pessimistic about future unconventional gas production prospects—the high per-well decline rates, and the tendency of the drillers to go after “sweet spots” first so that future production will come from ever-lower quality sites. For recent analysis that does look beyond the cash flow problems of Chesapeake and the other frackers, see “Gas Boom Goes Bust” by Jonathan Callahan, and Gail Tverberg’s latest essay, “Why Natural Gas isn’t Likely to be the World’s Energy Savior”.

Related Article: Clinton Thinks Azeri Gas is Important and so Should You

David Hughes is working on a follow-up report, due to be published in January 2013, which looks at unconventional oil and gas of all types in North America. As part of this effort, he has undertaken an exhaustive analysis of 30 different shale gas plays and 21 shale/tight oil plays—over 65,000 wells altogether. It appears that the pattern of rapid declines and the over-stated ability of shale to radically grow production is true across the U.S., for both gas and oil. In the effort to maintain and grow oil and gas supply, Americans will effectively be chained to drilling rigs to offset production declines and meet demand growth, and will have to endure collateral environmental impacts of escalating drilling and fracking.

No, shale gas won’t entirely go away anytime soon. But expectations of continuing low prices (which drive business plans in the power generation industry and climate strategies in mainstream environmental organizations) are about to be dashed. And notions that the U.S. will become a major gas exporter, or that we will convert millions of cars and trucks to run on gas, now ring hollow.

One matter remains unclear: what’s the energy return on the energy invested (EROEI) in producing “fracked” shale gas? There’s still no reliable study. If the figure turns out to be anything like that of tight “fracked” oil from the North Dakota Bakken (6:1 or less, according to one estimate), then shale gas production will continue only as long as it can be subsidized by higher-EROEI conventional gas and oil.

In any case, it’s already plain that the “resource pessimists” have once again gotten the big picture just about right. And once again we suffer the curse of Cassandra—though we’re correct, no one listens. I keep hoping that if we’re right often enough the curse will lift. We’ll see.

By. Richard Heinberg

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  • bmz on October 25 2012 said:
    What a bunch of poppycock! This article is almost identical to those presented by the climate change deniers: it cites the arguments of a couple of outlier naysaying geologists, and quotes articles out of context(one of which,Gail Tverberg’s, I have already criticized for quoting the EIA out of context). The best example of this is the concluding sentence from its primary authority "After the Boom in Natural Gas,":
    “These shale assets are forever,” he said. “They are going to produce for a hundred years.” (the "busts" complained about in these articles is the fact that there is so much gas that the price had fallen below fully distributed costs (a temporary and irrelevant factor)).
  • Charlie Bronson on October 25 2012 said:
    Yet another silly article riddled with opinions dressed up as facts. I haven't looked into your background, Richard, but I'd suspect it would be one of near-zero experience in natural resources. Protesting "dirty oil" with greenpeace activists doesn't count...
  • Ron Wagner on October 25 2012 said:
    The article is not based in reality.

    Natural gas is available at one eighth the price of gasoline or diesel per energy unit. Engines, and vehicles of all kinds are being converted to use this cleaner, cheaper, better fuel. Executives and accountants know that they can make greatly increased profits, and be more competitive, by spending less on fuel.

    Natural gas is the future of energy. It is replacing dirty, dangerous, expensive coal and nuclear plants. It is producing the electricity for electric cars. It will directly fuel cars,pickup trucks, vans, buses, long haul trucks, dump trucks, locomotives, aircraft, ships etc. It will help keep us out of more useless wars, where we shed our blood and money. It lowers CO2 emissions. Over 2,300 natural gas story links on my blog. An annotated bibliography. The big picture of natural gas. Ron Wagner
  • duffolonious on October 25 2012 said:
    These comments seem to be talking past the article. The main point being that "the price will rise."

    1) Sweets spots hit first
    2) High decline rates (very high)
    3) Lower price than production cost (so less drilling, meaning less new production).
    4) Not mentioned in the article, but more resistance from communities to fracking (whether you agree with them or not)

    All those add up to less gas, and thus higher prices. How high is a good question. But unlimited future of nat. gas is doubtful and the market will probably be volatile, I'd certainly be careful.
  • David Blackmon on October 29 2012 said:
    So, there will be ups and downs in natural gas supply, and ups and downs in the price as a result?

    Such revolutionary vision! Who could ever believe such a thing could happen in any commodity market?

    Oh, wait...

    The author boldly predicts that the consequence of current low natural gas prices will be a lower rate of drilling. Wow! Who couild have imagined that?

    Oh, wait...

    The reality is that the natural gas rig count has steadily declined for FOUR YEARS now, from a high of 1600 in 2008, to the low 400s today. Despite that steady and drastic decline in rig count, overall natural gas supply has only this year begun to slightly decline. Why? Because all of these "unprofitable" companies have become better and better over time at maximizing production from the wells they are drilling. Who could have guessed that would happen? Why, it's never happened before in any other oil or gas boom, has it?

    Oh, wait...

    The author cites two rogue geologists out of a U.S. population of tens of thousands of such professionals. You have these two saying one thing about the natural gas supply and demand situation, and tens of thousands others saying something else. Why, it's only natural that you'd believe the 2 over the tens of thousands, right?

    Oh, wait...

    Yes, we will have somewhat less gas and somewhat higher prices in the near term. That is obvious. What is also obvious is that as soon as the nat gas prices gets above $4, the industry will activate several hundread more nat gas rigs in short order, overall supply will begin to increase as a result, and guess what will happen to the price of natural gas? It will come back down. Who could have guessed that, right?

    Oh, wait...

    Art Berman is a complete fraud, and any author who relies on his work to compile a piece like this is either an ignoramus or an agenda-driven writer. The author of this piece can take his pick, but neither option is particularly attractive.
  • Tom White on October 29 2012 said:
    Its not just Berman saying the wells aren't producing. compare the USGS figures with the company predictions.
    Fracking is based on the land rush model .. where co.s rushed out to lease acreage, and made more money from flipping leases than actually producing/selling gas. Many have managed to flip the leases to the likes of the Chinese/BHP/BG group all of which are proving a pig of an investment. You can put lipstick on a pig - but its still a pig. The whole issue of PUDs has yet to work its way through the system. No independent verification was required for the estimates given. Be interesting to see the impairment charges when they're due.
  • Bill on November 10 2012 said:
    Do any of the commentators have any experience in the oil industry? I am a petroleum engineer with 30 years of experience and I agree with Art Berman and Hughes. I have reviewed his technical data and I really don't seem how one can argue with production data. Perhaps folks should check out the latest USGC report on shale reserves. They say that reserves are 1/2 to 1/3 the level reported by the likes of Chesapeake.

    Tom, Ron, David et al. Respectfully, you are making emotional arguments. Look at the production data and tell me why you think its wrong. Your arguments are pretty poor quality as they stand. I will give you the benifit of the doubt and assume that you can do better or perhaps you don't know very much about reservoir engineering. Please prove me wrong and give me some better quality arguments.I love informed opinion that differ than mine, because we call learn from that type of discussion.
  • Billk on November 14 2012 said:
    To add to the comments by "Bill" and "Tom White", most of the shale wells were drilled to "hold the lease" and were not economical.Yes, production continued to increase although working rigs declined. That was and is due to the release to the market of gas behind the pipe from previously drilled wells. Also there is gas being produced from "wet" wells where the low gas price is offsetby the "wet' products.From my perusal of the data, the breakeven price for shale gas is $6.00 to $8.00.
  • Bill on November 15 2012 said:
    I would agree with Billk and Tom White. Shale gas is most certainly abundant,but it ain't cheap. When the Finding and Development (F+D)costs per mcf are adjusted to reflect most realistic reserves estimates based upon production history, the F+D of the sweet spots will be $6 to $8 per mcf as stated by Bill K. However, most of the shale gas is contained in low grade deposits and those have F+D costs in the double digits.
  • Max on November 26 2012 said:
    I've looked at Berman's report carefully and it looks solid.

    shale gas investors can say bye bye to their funds as shale gas will never make any money; not in this market.

    Unless Russia runs out of its gas all of sudden, US shale gas will never be profitable.

    Shale gas investment is truly a ponzi scheme. Yes, I know it's shocking & it's sad. But it's time to face the truth.

    It's not going to end well for shale gas investors & companies alike.

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