The natural-gas and oil price run-up since hurricanes Katrina and Rita has subsided somewhat following a warmer than usual winter, record natural-gas storage levels, and successful conservation...
Betting on Shale
Will unconventional gas assure plentiful supplies?
shale plays can be exploited profitably, even at average prices well below $6/MMBtu. On the other hand, some argue that the true marginal cost for shale plays is well above $7/MMBtu and that the actual netback price for production that producers are realizing in many of the plays is around $3/MMBtu.
Beyond the Boom
Ultimately, a number of factors will influence the economics of shale gas production and how much shale gas actually is produced from the massive technically-recoverable resource base. While it seems reasonable to expect that, given the large resource base, a scaling up of shale gas production to 20 or 30 Bcf per day (about four or five times current production levels) is manageable, a number of technical, environmental, and economic challenges will make scaling up rather difficult.
Shale gas plays aren’t identical, and in many ways each one is unique. While all shale gas production requires reservoir fracturing, and nearly all require horizontal drilling, the application of a specific drilling and fracturing process is often different and requires a degree of trial and error. Even within a particular shale play there’s often a wide range of cost and performance between core areas and non-core areas of the play. All of this adds to the complexity of scaling up production, and it may take time—and money—for producers to find the right combination of technologies that provide good results in a particular location.
Shale wells also have rather notorious initial decline rates. It’s common for a shale well to see its production rate drop by 60 percent over the first year. Many models assume or predict that there will be a long tail on individual shale-well production as the decline rates flatten out after a few years. Even if this is true, the steep initial decline rates mean that producers need to continuously bring on new wells to maintain overall production levels, let alone increase production. Given how new many of the shale plays are, and the lack of well performance data for any length of time, it might prove that the projected long tails on shale well production are a myth.
Increasingly, shale gas producers are facing environmental concerns dealing with the impact of hydraulic fracturing on local water supplies. Each shale well requires 2 million to 4 million gallons of water, and accessing the required water and then disposing of it poses a challenge in some shale plays. While most regulation is at a state level, there have been recent attempts to introduce federal regulation, which could increase costs.
In addition, the intensive drilling and industrial-like activities that are involved with developing shale gas resources may cause conflicts in more populated areas. Addressing these concerns likely will add costs.
While the integrated oil companies have started showing interest in shale gas production, the leading companies still are relatively small independent natural gas producers. These smaller companies may face greater challenges going forward in accessing capital to fund drilling expansions. In addition, they’re vulnerable to downturns in natural gas price levels, which deprive them of cash flow to fund