As usual, natural gas continues to dominate energy-consciousness because (a) the story of gas shales is still shocking, as the shift from scarcity to abundance continues to take shape, (b) the cost of natural gas – cheap or expensive – is critical to economic evaluations across the spectrum of energy investment, (c) in a remarkable shift, gas shales have become the means for producers to survive a market downturn, (d) end users have experienced the unthinkable, such as turning the tables on the competitiveness of coal vs. gas-fired electric generation, and (e) stakeholders are gearing up to address the apparent problem of too little demand.
The commentary addresses several of these developments. How things look really depend on one’s time frame. The comments below are largely based in part on research conducted for the Electric Power Research Institute (EPRI).
Excess Natural Gas Supply – An Unavoidable Interim Condition
Too Much Supply! An extended period of U.S. domestic “oversupply” with global consequences has been triggered by the gas shale boom, by the pernicious effects of the Great Recession, and by the momentum of long-fuse investments made in an era of very different expectations (namely, LNG). The shock of this change and its scale are evident in Figure 1 showing quarterly changes in U.S. production since 1999.
Of interest on Figure 1 is (1) the 4-year, gradual decline in production preceding the impacts of Hurricanes Katrina and Rita beginning 3Q2005, (2) the dramatic, sharp turnaround in response to high prices and drilling from 2007 to the present, and (3) the topping out of production in 2009 at even higher levels than 2008, even as rig counts plummeted.
Shale Production Growth in a National Context. Production from gas shales has contributed significantly to the turnaround in production, accounting for 70% or more of net production growth since 2003. For all the attention being given to gas shales, unconventional production to date has been dominated by production from tight sands and, secondarily, coalbed methane (Figure 2). The Barnett Shale dominated shale production growth through 2008. Estimates of future production from shales, while varied, anticipate considerable expansion. One recent estimate (Figure 2) projects 14 Bcf/d from shales in 2014 (somewhat lower than the Navigant Consulting and Tristone Capital estimates issued in 2008 and summarized in the June report to the EMD).1 Unconventional production altogether contributed to 31% of production in 2000 and has been estimated to account for 57% by 2014.
Robust Shale Production Despite Downturn. One of the surprises accompanying the market price and drilling collapses of 2009 has been the apparent economic robustness of shale gas production. The trade literature reports a number of companies have divested or adjusted their asset portfolios to maintain or expand shale activities. While economics of shale production may be obscure, or frankly inaccessible, to those outside the gas industry, confidence in shales from those presumably “in the know” was underscored by Exxon Mobil’s pending acquisition of XTO Energy, Inc. in a $41 billion all-stock transaction (Exxon Press Release, Dec. 14, 2009).2 The tenacity of shale gas production is stunningly portrayed by the uninterrupted, 18-month 3 Bcf/d climb in shale production as of June 2009 (Figure 3), seemingly impervious to the rig collapse. Close and timely tracking of production by play is a challenging analytical and data-gathering exercise, not yet readily available from public sources.
For a complete version of the above, see the Committee’s Annual Report (April 9, 2011) on the EMD Members Only page (log-in required).
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