This is the first of a two stories on shale gas. Today I will put the Shale Gas Boom in proper context. Tomorrow I will explain why I think there is a bubble in shale gas production.
Penn State professor Frank Clemente, testifying before a Senate hearing on natural gas in October, 2009, had this to say—
Natural gas price in the next decade is one of the most important U.S. energy questions. Steadily increasing U.S. dependence on gas poses risk to higher energy prices and electric reliability and national energy security, especially because the Energy Information Administration (EIA) projects natural gas supply to decline 4 percent through 2020...Where Will We Get the Gas?
Despite our starkly negative experiences with higher natural gas prices and the debilitating volatility of those prices, optimism for the fuel appears to be a contagion.
Several groups have suggested that natural gas can be substituted for coal as the primary fuel for generating electricity. Others have proposed that natural gas can provide fuel for vehicles, and yet even others have argued that we can continue to build wind turbines at a frenetic rate because natural gas will be there to back up this highly intermittent supply.
When one objectively examines the data, however, these questions are moot. The real question is: Can natural gas production even meet existing demand, let alone incremental demand? As Figure 3 shows [below], the EIA has projected that by 2020 conventional onshore natural gas production in the U.S. will decrease more than 34 percent, and supplies from Canada will drop 60 percent.
These declines will be only partially offset by two highly questionable new sources: shale gas and liquefied natural gas (LNG) imports. It is important to consider the limitations and unknowns of each in turn.
And you thought I was a pessimist! However, here Frank relies on an EIA forecast, and such forecasts are notorious for containing mountains of bullshit. The EIA's preliminary 2010 Annual Energy Outlook (AEO) is a case in point. Nonetheless, I will quote it below. Clemente's Figure 3 shows that we will get a little over 3 trillion cubic feet (Tcf) of gas from shales in 2020, but another excellent report puts the number at 4.5 Tcf. Both numbers come from the EIA! No doubt the two analysts are using EIA outlooks from different years.
Here's the EIA's 2010 gas outlook—
You can clearly see that natural gas production is lower than it's historical peak (black line) in 2020. That's not good. And you can also see that the shale gas share must get bigger & bigger for us to achieve this unhappy outcome. Let's get back to Frank—
Shale gas production. This is the only bright spot in the domestic supply picture, and substantial reserves exist. There are questions, however, along four key lines:
- Deliverability at scale. Although the shale gas resource is extensive, even the relatively optimistic EIA projections indicate increases in shale gas will offset only about half of supply declines in other key sources (e.g., Canada). Decline rates in shale gas wells can approach 70 percent the first year, creating a constant treadmill to find additional resources and drill new wells.
- Environmental and water impact. The impact of the fracturing process is a matter of growing concern, particularly in New York and Pennsylvania regarding the Marcellus shale play. The Congressional Research Service, for example, recently reported, “The hydraulic fracturing treatments used to stimulate gas production from shale have stirred environmental concerns over excessive water consumption, drinking water well contamination, and surface water contamination from both drilling activities and fracturing fluid disposal.” In the Marcellus shale region, for example, the Delaware River Basin Commission, responsible for a watershed that serves more than 10 million people, has identified three major areas of concern: reduction of stream flow, pollution of ground and surface water and proper disposal of “frac water.”
- New regulations. These regulations emerging from environmental concerns could significantly impact production and price. IHS Global Insight estimates that simply subjecting hydraulic fracturing to the federal underground injections control requirements in the Safe Drinking Water Act would result in a 20 percent reduction in the number of new wells drilled and a 10 percent loss of natural gas production.
- Cost and sustainability. The eventual cost and sustainability of shale gas production are open to question. Geologist Arthur Berman has argued that the high decline rates will make shale gas wells far more costly than projected, and the current rush to shale gas is a “speculative bubble.” Dow Chemical Co. echoed these concerns in 2009 testimony before the U.S. Senate on the role of natural gas. “Although increased supply from shale gas appears to have changed the production profile, we have seen similar scenarios occur,” Dow testified. “In each case, the initial hopes were too high and production increases were not as large as initially expected.”
America has Bet the House on a big shale gas boom over the next decade (and to a limited extent, LNG imports—see Clemente's testimony). Tomorrow I will focus on the cost and sustainability issues that lie at the heart of the current debate on shale gas production.
Also see Part II — Shale Gas Shenanigans