US Shale Gas Bubble is Set to Burst

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.

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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”.

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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