follow us like us subscribe contact us
Loading, please wait

Will Rising Natural Gas Prices End the US Shale Revolution?

By Kurt Cobb | Mon, 25 March 2013 23:39 | 6

As U.S. natural gas prices flirt with the $4 mark, some skeptics of the so-called shale gas revolution think prices are headed much higher. Such a move would, not surprisingly, seriously undermine the official story that the United States has a century of cheap natural gas waiting for the drillbit.

Several years ago when natural gas began flowing in great quantities from deep shale deposits beneath American soil, it seemed to be the beginning of the end of America’s troubled journey into dependence on energy imports—a journey marked by frequent worry, occasional war and enormous expense.

But, to some people this supposed solution to America’s energy needs has begun to seem as costly to the environment and human health as the country’s dependence on imported energy has been in terms of mental distress, money and blood. It turns out that this new kind of natural gas requires the industrialization of the countryside in order to extract it. And that, say those closest to the action, risks tainting air, land, and drinking water and compromising the health of humans and animals alike.

Well, at least we can say that shale gas is plentiful, cheap, American, and much easier on the climate than coal or oil. It didn’t take too long before people started looking into whether shale gas really was that much easier on the climate. A Cornell University researcher came to the conclusion that shale gas was probably worse for climate change than coal. His conclusion hinged in part on what are called “fugitive emissions”—unintentional, but unavoidable releases of unburned methane into the atmosphere during the hydraulic fracturing operations performed to extract the gas. Methane is some 20 times more potent than carbon dioxide as a greenhouse gas.

Related article: Dow Chemical is Enthusiastic for Cheap Shale Gas

Naturally, the oil and gas industry responded vigorously to the researcher’s findings with its usual ad hominem attacks. But, it also highlighted uncertainties that are always part of any scientific study. This industry is, of course, the same one that has consistently denied the existence of climate change and continues to spend millions trying to convince the public that climate change either isn’t happening, or if it is, it won’t be that bad or if it is, it may actually be good for us.

The industry’s response to the study has, not surprisingly, been met with skepticism. That is befitting an industry that, having spent the last two decades denying climate change, now suddenly embraces it as a reason to produce more natural gas. So, despite the industry’s best efforts, the meme that shale gas is worse than coal is out there and being repeated again and again by opponents of shale gas drilling.

Well, at least we can say that shale gas is plentiful, cheap and American. But, then came the industry campaign to end federal limitations on the export of natural gas. What had been touted by the industry as a fuel that would help lead America to energy independence would henceforth be treated as just another world commodity seeking the highest bidder—even if that bidder is in China, Japan or Great Britain. The industry’s aim, of course, is to get higher prices for its product than customers in the United States can provide. As noted above, natural gas trades at around $4 per thousand cubic feet (mcf) in the United States. That compares to about $17 per mcf for liquefied natural gas delivered to Japan. The price in Europe is around $12.

Well, at least we can say that shale gas is plentiful and cheap. As natural gas prices declined from double digits in 2008 and the shale gas boom proceeded apace, the industry convinced Americans that cheap, plentiful natural gas was the country’s future for a century to come. And, when natural gas prices plunged briefly to $1.82 per mcf last April, even the oil and gas industry began to wonder whether cheap natural gas was really such a great thing. At that price or anything below about $2.50 really, almost no wells were profitable.

Last year independent petroleum geologist Art Berman, while reviewing the financial wreckage of the once flourishing, but now fallen shale gas drillers, noted that the industry was based on:

Related article: BOLIVIA: LNG Investments Move Forward Despite Nationalization Risk

An improbable business model that has no barriers to entry except access to capital, that provides a source of cheap and abundant gas, and that somehow also allows for great profit. Despite three decades of experience with tight sandstone and coal-bed methane production that yielded low-margin returns and less supply than originally advertised, we are expected to believe that poorer-quality shale reservoirs will somehow provide superior returns and make the U.S. energy independent.

As Berman noted back then: “Improbable stories that great profits can be made at increasingly lower prices have intersected with reality.” The industry proceeded to abandon shale gas plays in favor of tight oil plays which have proven to be profitable with oil prices consistently crisscrossing $100 a barrel in the last two years.

Apparently, price does matter when it comes to natural gas. And so, it seems natural gas won’t be endlessly cheap in America after all. As Berman foretold in an earlier piece, prices would have to rise to between $5 and $6 to make currently paid-for leases profitable from this point forward and between $7 to $8 to make new leases worth pursuing. For comparison, back in the heyday of cheap natural gas, the decade of the 1990s, the average annual U.S. price was $1.92 per mcf, according the U.S. Energy Information Administration.

So what exactly has happened to U.S. natural gas production as reality has set in and companies have withdrawn drills to await prices that might actually be profitable? The answer ought to be troubling to those who are counting on endlessly escalating supplies large enough to displace the majority of oil and coal used in our economy. To wit, U.S. marketed natural gas production has been flat for the last two years.

The trend is so ominous that two industry insiders I know believe that U.S. natural gas production could actually start declining soon and send prices soaring. They say drillers have fallen so far behind that it will be impossible to make up for production lost from existing shale gas wells. Those wells typically see production decline rates of 85 percent after two years. (Translation: Some 85 percent of existing production from shale gas wells must be replaced every two years BEFORE production can grow.)

The future is, of course, unknown to us. But, the present and the past suggest that the so-called shale gas revolution is about to be laid to rest. Yes, shale gas might prevent total American natural gas production from dropping off a cliff even as conventional natural gas production continues to decline. And, at some point shale gas might even allow U.S. production to rise modestly above current levels. But, two things are now abundantly clear: It won’t be easy and it won’t be cheap.

By. Kurt Cobb

About the author

More recent articles by Kurt Cobb

Mon 15 December 2014
The Hidden Costs Of Cheap Oil
Tue 09 December 2014
How The US Could Beat OPEC But Won’t
Tue 02 December 2014
Will OPEC’s Decision Lead To The End Of The American Shale Dream?
Tue 18 November 2014
Russia-China Deal Could Kill U.S. LNG Exports
Mon 03 November 2014
Why The Current “Oil Glut” Could Lead To A Price Spike

Leave a comment

  • Philip Andrews on March 26 2013 said:
    Finally, someone else to provide a reality check abouut shale.

    Thank you Kurt Cobb.
  • RDS on March 26 2013 said:
    "those closest to the action, risks tainting air, land, and drinking water and compromising the health of humans and animals alike." Al Gore could not have spewed more artfully worded propaganda. Please do service to the public and give us a scientifically documented case where any of the above has actually happened. The public should also know who "those closest to the action" actually are. I have circulated your artical around to the engineering and earth science community. The response from people with actual expertise as to the actual risk you speak of is negligible, but I guess I could type an article that states I'm 9 foot tall and run a 4.3 40 yard dash and some people will believe it if they are so inclined.
  • Kojiro Vance on March 26 2013 said:
    You reference the bogus "Howarth Study" on fugitive emissions of some 20%. Lawrence Cathless, one of Howarth's colleagues at Cornell debunked Howarth's findings as nonsensical. Even the EPA has come up with a just 2.4% fugitive losses, a figure that industry vigorously disputes. Devon walked out of a cooperative agreement with EPA over misuse of data that Devon had supplied. Most believe natural gas fugitive losses are around 1%, probably less.

    Concerning LNG exports, read the Centrica sales contract. Prices will NOT skyrocket in the US. Centrica will pay HH plus 15%, plus $3 per million BTU for the LNG, then they have to ship it to the UK, offload to a regas terminal and turn the LNG back into nat gas. All of that costs Centrica Henry Hub plus $5-7 depending on prices. If the Henry Hub price rises and NBP (the UK import price) falls so that Centrica looses money exporting LNG to the UK, it has the right to suspend deliveries (paragraph 5.7) by just paying the $3 liquefaction fee. This provision essential keeps a lid on US prices relative to the UK price.

    The same thing happened with US import terminals. LNG exporting countries like Qatar negotiated the right to divert cargos away from the US, provided they pay the US LNG import terminal fees. The fear back when US import terminals were being built was that US natural gas prices would "skyrocket" too. Didn't happen then, won't happen with exports.

    Taken a look at the EIA data on Texas crude production lately? Texas produces about 2 million barrels per day, the same as in 1978. How is that peak oil theory working out these days?
  • Brad Bellamy on March 26 2013 said:
    Obviously Mr. Cobb is very anti oil and gas. All of his previous articles sited here are negative to the oil and gas industry. As to his speculation that companies are going to stop drilling he needs to subscribe to Rig Data so he can get a weekly rig count. His article is mostly his opinion and very losely fact based.
  • Kojiro Vance on March 26 2013 said:
    The problem with peak oil theorists is they just won't let reality get in the way of their theory. We have abundant amounts of energy just waiting to be discovered. The reason they haven't been discovered yet is because we don't need to. We have lots and lots of oil, gas, coal, oil sands, bitumen, etc. that we can produce at today's prices with today's technology. We are more likely to hit peak demand as the devices we use become more efficient and require less energy inputs.

    Yes, some day we might run out of energy. And the sun will eventually run out of fuel and grow dark. I am pretty sure that me, my children, my grandchildren and probably their grandchildren won't have to worry about it.
  • Kurt Cobb on March 27 2013 said:
    I'll respond to comments out of their original order:

    Mr. Vance claims that we have lots of energy "waiting to be discovered." It is phrases like these which ought to make us worry. It's understandable with Brent Crude over a $100 for two years running and now staying there so far for a third that he must speak of oil which hasn't yet been discovered.

    But, if I were in the oil business, I'd be trying very hard to discover it and bring it into production at these prices. But, wait, the industry has been spending record amounts to do just that and so far all they've been able to achieve is a bumpy plateau in the worldwide production of crude oil including plus lease condensate (which is the definition of oil) from 2005 onward between about 72 and 75 million barrels per day. I can see why he runs away from the known trends and data.

    He also tells us that on two different dates Texas produced 2 million barrels per day of oil. I cannot verify this, but I do notice the recent upswing in production in Texas. What Mr. Vance fails to note is that worldwide production hasn't budged. So, that means production is falling elsewhere.

    Strangely, he tells us that peak oil is a theory when we know that it is an empirical fact. Every well and every field peaks in its rate of production and then declines. Many countries have already peaked and are in decline, some of which ought to distress us: Venezuela 1970, Libya 1970, Kuwait 1972, Iran 1974, U.K. 1999, Norway 2001. Mexico 2004. This is not the entire list. Yet, more facts which Mr. Vance runs away from.

    The United States peaked in its production of crude oil including lease condensate in 1970. While that production is growing again for now, it seems unlikely that it will breach the 1970 number (so long as you don't add things which are so obviously not oil such as natural gas plant liquids).

    He also doesn't seem to believe in supply and demand as a principle in the market place. He tells us that placing more demand on American natural gas production won't raise prices from what they would otherwise be. This is just contrary to common sense.

    While we don't know how much demand might come from LNG export purchases because we don't know how many export terminals will be built nor how much customers abroad will want and at what price, I think we can safely say that supply and demand have not been repealed.

    RDS tells us that the risk of contamination for hydraulic fracturing are "negligible" without telling us what he means by that. He does at least admit that there is some risk. What he doesn't want to talk about, of course, is the integrity of the well casings over decades and centuries, casing that will be abandoned by the operators once the gas is gone. Ultimately, they will deteriorate and leak and we will be left with water that is undrinkable. But that's somebody else's problem in the future so I can see why he doesn't care about it.

    Still, there is the issue of injecting the wastewater into injection wells, wells that are poorly regulated and have a history of leaks. We pretend to know what's under the Earth at depth, but are being surprised again and again as a recent Pro Publica series outlined.

    Mr. Bellamy claims I wrote "companies are going to stop drilling," but no such words appear in my piece. I simply noted the shift from emphasis on shale gas drilling to tight oil drilling. But for the record, active natural gas rigs in the U.S. numbered 1606 in the last week of August 2008. For the week of 3/22/13, they stood at 418 which confirms my observation that rigs have been leaving the gas fields.

Leave a comment