Does Shale Gas Make You High?

In my weekend links, I highlighted a much-talked-about paper by Texas University’s Bureau of Economic Geography on the Texas Barnett shale. The paper is currently undergoing peer review, so all we have is a well-publicised preview. The Wall Street Journal, for example, ran a column on the paper here.

Let’s start by taking the key graphic that accompanies the Texas University press release:

Barnett Shale jpeg

The granular data supporting the paper goes up to 2010. The most important prediction coming out of the chart for me is that gas production for the Barnett shale has already peaked. True, it has not collapsed—and it is not forecast to collapse, but it is now in a rather gentle decline.You can roughly see from the chart that production peaked at 2 trillion cubic feet (tcf) in 2012 and is forecast to decline to 0.8 tcf in 2030.

Let us now put this in the context of The Energy Information Administration’s Annual Energy Outlook 2013 Early Release forecast for natural gas production through 2035. In short, the Barnett shale reached around 10% of overall U.S. natural gas production at its peak, but is now a net drag on year-on-year growth. And, of course, traditional natural gas production is also a net drag on year-on-year growth. 

Dry Natural Gas Production jpeg

Nonetheless, the EIA expects shale gas production to drive overall natural gas production through 2040:

The U.S. Energy Information Administration’s Annual Energy Outlook 2013 Early Release projects U.S. natural gas production to increase from 23.0 trillion cubic feet in 2011 to 33.1 trillion cubic feet in 2040, a 44% increase. Almost all of this increase in domestic natural gas production is due to projected growth in shale gas production, which grows from 7.8 trillion cubic feet in 2011 to 16.7 trillion cubic feet in 2040.

But a number of the early shale regions such as Barnett are already showing signs of peaking as the chart below shows:

Shale Gas Regions jpeg

We now have two different measures, which makes comparison difficult. But please note that 25 billion cubic feet per day (bcf per day) translates into 9.1 trillion cubic feet (tcf) per year. And looking at the chart above, it appears that 50% of the existing shale gas fields have already peaked. I am well aware the production is also a function of price, but the chart above tells me that the current price is putting a brake on production.

In addition, we know that monthly shale gas production has been flat-lining for over 12 months:

US Dry Gas Production Dec 12 jpg

And the EIA’s Short-Term Energy Outlook sees flat production out through 2014:

EIA Short Term Energy Outlook jpeg

But ‘no worries’ according to the EIA, because in the year 2015 shale gas production suddenly experiences a massive upswing and production in effect doubles over the course of 25 years. How does this happen? For a start, prices shoot upward (EIA here):

After 2018, natural gas prices increase steadily as tight gas and shale gas drilling activity expands to meet growing domestic demand for natural gas and offsets declines in natural gas production from other sources. Natural gas prices rise as lower cost resources are depleted and production gradually shifts to less productive and more expensive resources. Henry Hub spot natural gas prices (in 2011 dollars) reach $5.40 per million Btu in 2030 and $7.83 per million Btu in 2040.

But what does the Wall Street Journal say:

The most exhaustive study to date of a key natural-gas field in Texas, combined with related research under way elsewhere, shows that U.S. shale-rock formations will provide a growing source of moderately priced natural gas through 2040, and decline only slowly after that. A report on the Texas field, to be released Thursday, was reviewed by The Wall Street Journal.

The research provides substantial evidence that there are large quantities of gas available that can be drilled profitably at a market price of $4 per million British thermal units, a relatively small increase from the current price of about $3.43.

No, the Texas University paper doesn’t really say this. It says that one of the oldest shale gas fields has  already peaked and will show a gradual decline based on natural gas prices of $4 per million BTU. Similarly, the EIA sees flat-lining natural gas production until a significant increase in prices spurs further shale gas production. Moreover, the EIA notes that what we are seeing is a process of relatively cheap natural gas resources being continually replaced by relatively expensive shale gas resources,  a dynamic which needs the continued catalyst of rising prices.

Meanwhile, if we listen to the dominant media meme we believe the following will happen:

  1. Rising natural gas production, spurred by shale, will facilitate a continued increase in U.S. GDP over the coming decades;  energy will not be a constraint
  2. Cheap natural gas will reinvigorate the U.S. petrochemical industry and lead to a return of production from abroad
  3. Natural gas will continue to displace coal in U.S. electricity production and thus mitigate climate change
  4. Natural gas will penetrate the transport section directly through compressed natural gas (CNG) and indirectly through underpinning the electrification of transport
  5. Natural gas will become so abundant in the U.S. that it will allow the installation of export-based LNG infrastructure and, within a decade, ease supply constraints in both Europe and East Asia

Frankly, I just cannot see how any sane person looking at the raw numbers can believe that any of this will come true. What are they smoking?

2 responses to “Does Shale Gas Make You High?

  1. Excellent analysis. The media meme is pure insanity, and a lot of people are in for a rude awakening. It will be interesting, too, to see what happens to natural gas production if the bubble related to land leases for fracking bursts. Seems like that could be a major wrench thrown into the production gears, further messing up the already-sketchy economics and scaring off investment capital for a good stretch of time.

    I’ll be curious to see the full study. Thanks again for the analysis–very helpful.

  2. Joel:

    Yes, it would be good if we get to see the full study for the Barnett shales. We are also about a month of so away from the Potential Gas Committee’s biannual report, which is the gold standard for natural gas reserve accounting.

    I still am very uncomfortable with the EIA’s headline predictive chart showing aggregate gas production exploding upwards in 2015 on the back of shale. After seeing these reports, I think we will get a better insight into whether the EIA’s forecasts are realistic or not. And even if the EIA’s numbers do pan out, they really only allow a change in the energy mix around the margin rather than the ‘revolution’ we all hear so much about.

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