Financial Times: The True Cost of Shale Gas Production


At John Dizard writes in part:

The true cost of shale gas production

Published: March 7 2010 09:45 | Last updated: March 7 2010 09:45

I try not to get into arguments over other people’s religious convictions. Even if you win your point, you make an enemy. That’s been a conventional understanding since the Thirty Years War. Sometimes, though, you have to clear your throat and carefully offer a heretical thought, if lives or large amounts of property are at risk.

For example, I think it might not be a bad idea to examine the faith-based assumption that the US has a virtually unlimited supply of natural gas from shale formations that can be extracted at a low price for the indefinite future. Perhaps the few people who think shale gas will be produced at a higher cost, and more slowly, than generally believed should be heard out, rather than be executed or sentenced to work in the salt mines. If you disagree, I will quickly withdraw that comment.

The shale gas religion crosses the usual political boundaries. The environmentalist wing believes that shale gas can displace dirty coal-fired generation. Liberals believe it will help power the clean energy policy. National security conservatives believe shale gas can end dependence on Middle Eastern or Venezuelan oil. Economic conservatives believe it can close the current account deficit and drive an economic recovery, at least until even more nuclear power can come on line.

There are environmentalists, rural landowners, and health advocates who worry that shale drilling could contaminate water supplies. Most of them, though, want to have more careful regulation, rather than prohibition, of shale gas exploitation.

I was prompted to comment on shale gas again after watching a well known, highly emotional American television stock market commentator suggest that shale gas will be so abundant that facilities for importing natural gas could be converted to export the stuff. This when the present low US price for natural gas is about 10 times the economic value of gas stranded in huge Middle Eastern deposits. Never mind that you can’t push a button and make those facilities run backward.
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To their credit, gas prophets such as Aubrey McClendon, chief executive of Chesapeake Energy Corp, have been saying that gas at USD 5 per thousand cubic foot is not sustainable. In their laudable enthusiasm for their business, though, they may have understated just how unsustainable the price is.

Ben Dell, of Bernstein Research in New York, who has, so to speak, done some of the deepest drilling into the shale gas industry numbers, believes that the full cost of finding, developing, and operating shale gas wells, and paying an average return on capital to investors, requires a spot gas price of USD 7.50 to USD 8 a thousand cubic foot.

As Mr Dell points out, the horizontal drilling rigs that are needed to drill shale gas wells are in relatively short supply. “We think there will be a 15% to 20% increase in costs from last year to this year. That includes the costs of drilling and fracking [hydraulic fracturing of rock layers holding gas].”

Furthermore, the producers partially insulated themselves from gas price weakness over the past year with hedges that are gradually running off. New hedges have to be put on at lower prices. So revenues will be declining while costs are increasing.

Shale gas is not magic. Production costs are high, and probably underestimated.  An even more gas-dependent policy will accelerate the coming price rise. For the producers’ sake, it better.

On the article, MB comments:
Waaaay back, in the early days of the Marcellus gas rush, we were told over and over again that a key part of the technology was the magical horizontal well, which, though much more expensive than a verticalwell, would produce much more gas. But Arthur Berman has noted that the horizontal wells don’t necessarily produce enough gas to make their much higher cost a bargain: they start out like gushers, but then they have very steep decline curves. Further, I think that by now most of us have noticed that in shale-gas-producing regions, the gas industry ends up infilling the spacing units with a lot of additional wells. Each new well within each unit adds more cost. I don’t know for certain, but it seems to me that the cost of all of that infilling must at least be approaching the cost of simply drilling many old-fashioned vertical wells — in other words, it looks as if they are duplicating the same costly drilling situation that the magical new horizontal wells were supposedly designed to avoid. Oops.

And there are a lot of other problems as well. As mentioned above, it’s going to take a LOT of money to get all of that gas out of the ground, and then there are the costs of converting infrastructure to gas, not to mention the costs involved in cleaning up the mess. All of that is money that could be spent elsewhere–like on coming up with permanent solutions to the energy problem rather than constructing a temporary “bridge” to nowhere.

Unfortunately, a lot of environmental damage has already been done by shale gas drilling, and more is likely to follow before the gas bubble bursts. And when it does burst, a lot of the gas companies will be broke, so don’t look to them for help cleaning up the mess.