Will Low Natural Gas Prices Stall the Shale Gas Boom?

by Christina Nagy-McKenna, Enerdynamics Instructor 

The U.S. natural gas market is on the verge of a decades-long growth period due to the robust development of shale gas. While optimism about U.S. gas supplies is not new – it has been a hot topic in the trade press for the past year – data regarding the dwindling number of natural gas rigs raises the question of how this expansion will continue as the actual number of new wells diminishes.

 Also, with natural gas prices below $4/MMBtu at the wellhead for a significant portion of this past winter, it makes sense to question if developers have sufficient economic incentive to continue drilling new wells and bringing more supplies on line. The decision hinges in large part on the developers’ cost of production as compared to market prices. However, getting to the true production price is not as straight forward as it may appear, and as such there is some disagreement as to what it will take for shale developers to be profitable.

New data concerning Barnett Shale seems to indicate that prices do not have to increase as much as previously thought in order for development of shale formations to continue.

A recently released study about Barnett Shale by the Bureau of Economic Geology (BEG) at the University of Texas [1] determined that 44 Tcf of natural gas, enough to meet almost two years of demand by the U.S. market, will be produced by the Barnett formation over its lifetime (approximated as 2050). BEG based this forecast on an average market price of $4/MMBtu for the gas, which, while somewhat greater than today’s $3.50/MMBtu, is a far cry from the higher prices natural gas producers grew to love in late 2000s.

The BEG study is the first to look at data from individual wells within the Barnett formation. Data from approximately 15,000 wells drilled in the past decade was examined well by well rather than averaging the production from all wells as other studies have done. BEG found that not all parts of the formation produce equal quantities of natural gas. Many wells were flops, and perhaps only half of the 8,000 square miles of the formation will actually yield an economical product for its developers.

Contributing to producers’ ability to make money at low natural gas prices are revenues from natural gas liquids (NGLs) and associated oil.  Wet gas, the liquid rich gas that contains oil and NGLs such as propane and butane, is worth more money due to the higher values associated with oil and NGLs. The Bakken Shale formation in North Dakota holds shale oil that contains shale gas as well. The average by-product of oil production is almost 1 million cubic feet of natural gas per barrel. Eagle Ford Shale in Texas has yielded 1.5 million cubic feet per barrel.[2]

Thus, producers in these regions can produce shale gas at a much lower net cost than those that are solely producing dry gas.  At this time, the gas in Bakken Shale is being flared as the infrastructure to capture and market the gas does not exist.  Plans are underway to change this as the State of North Dakota is working with developers to sort out land use issues that make the building of gathering facilities very complicated.

Read the full article that includes a discussion on falling gas rig counts and the relation to gas prices in our latest issue of Energy Insider.

References:

1. “New Rigorous Assessment of Shale Gas Reserves Forecasts Reliable Supply from Barnett Shale Through 2030,” The University of Texas at Austin web site, February 28, 2013.

2. February 2013:  Energy Strategies Report, Dr. Jim Gooding, Black & Vietch.

About Enerdynamics

Enerdynamics was formed in 1995 to meet the growing demand for timely, dynamic and effective business training in the gas and electric industries. Our comprehensive education programs are focused on teaching you and your employees the business of energy. And because we have a firm grasp of what's happening in our industry on both a national and international scale, we can help you make sense of a world that often makes no sense at all.
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