The Red Queen, Rigs and Shale Gas

“Well, in our country,” said Alice, still panting a little, “you’d generally get to somewhere else — if you run very fast for a long time, as we’ve been doing.”

“A slow sort of country!” said the Queen. “Now, here, you see, it takes all the running you can do, to keep in the same place. If you want to get somewhere else, you must run at least twice as fast as that!” 

Lewis Carroll’s “Through the Looking Glass” captures the challenges of shale gas production well: technology must advance ever faster purely in order for production to stand still. Why? Because you are for ever depleting relatively easy-to-exploit resources and replacing them with ever more difficult-to-exploit resources. Yet the US government’s Energy Information Agency says we will run faster. Here is their long-term forecast from the Annual Energy Outlook 2013.

Nat Gas Production 2040 jpeg

But notice that  the EIA sees production moving sideways for a few years. From their Short-Term Outlook:

US Natural Gas Production Oct 13 jpeg

I’ve reproduced these charts before, but a couple of weeks ago the EIA produced a fascinating report (composed of charts but no text) showing production of new and legacy shale gas wells. It also covered tight oil but I wish to leave that discussion to another time. Now the shale gas producing areas have entered the business lexicon if you ever read the financial press, but as an aide-memoire here they are geographically (click for larger image):

Shale gas regions jpeg

And they are important; in the EIA’s words:

The six regions analysed in this report accounted for nearly 90% of domestic oil production growth and virtually all natural gas production growth during 2011 and 2012.

The production pecking order for the regions looks like this, with the Marcellus in prime position and Haynesville the runner-up:

Natural gas regional production rates jpeg

Now let’s focus in on the Marcellus shale gas region:

Marcellus jpeg

In 2010, production took off. Moreover, the production increase was not just due to a greater rig count. Following the core message of this EIA report, the correlation between rig count and new well production has broken down as rigs have grown far more efficient due to technological advances. In short, each rig gives more bang for the buck:

Marcellus New Well jpeg

Yet Haynesville shows us just how difficult it is for the Red Queen to keep running faster: production peaked in mid-2011 and has been grinding down since. Keep in mind that shale gas production is a young story. The Haynesville commencement to peak can be measured in just a few years, not the decade plus increases seen for traditional fields in the past.

Haynesville jpeg

Further, the rig efficiency story was just the same in Haynesville as Marcellus, but it was not enough to stem the decline:

Haynesville New Well jpeg

Indeed, all wells do eventually deplete but shale gas depletes especially fast. Of course the application of technology—in this case through the efficiency of rigs— can offset some of this depletion; and should natural gas prices rises, this would give an economic incentive to apply more rigs in more marginal areas, or perhaps open up virgin regions. Nonetheless, the Big Six shale gas regions highlighted above are those regions with the most-forgiving geological characteristics.

So the Red Queen must run real, real fast just to stand still, let alone produce the massive production hike forecasts that have so beguiled both the media and even President Obama himself. Personally, I don’t think she can, but let’s look at how the production numbers unfold and see.

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