Don Stowers
Editor-OGFJ
While oil prices have recovered from their dramatic plunge, natural gas prices remain extremely low, and nobody is sure when to expect a recovery. As a result, the economic extraction of natural gas under current market conditions can be problematic, especially for shale gas producers in formations where extraction costs are higher and midstream infrastructure is still being built.
In its annual Energy Outlook 2009, the Energy Information Administration, a division of the US Department of Energy that is supposed to know about these things, looks forward all the way to 2030 in an effort to discern which way the industry is headed and what the supply situation will be for the United States. In the Lower 48 states, the EIA projects that wellhead and spot market prices for natural gas will decline in the short run but will show a modest but steady increase for the next 20 years. If the Alaska Gas Pipeline comes on stream around 2020, there will be a brief drop in natural gas prices, according to the EIA, but the market will quickly absorb the additional gas supplies from Alaska and prices will resume their rise.
Henry Hub spot market prices and delivered end-use natural gas prices generally follow the trend in Lower 48 wellhead prices. However, delivered prices also are subject to variation in average transmission and distribution rates and resulting margins, as reflected in the difference between the average delivered price and the average supply price for natural gas. Some new pipelines are being built to bring supplies to market and to reach new customers, but the bulk of the pipeline system is already in place and revenue requirements for those segments will decline as capital is depreciated. Consequently, transmission and distribution margins for natural gas delivered to the industrial and electric power sectors either remain flat or decline.
The EIA believes that the consumption level in the residential and commercial sectors of the gas market will decline over the next 20 years. This includes the transportation sector. The government apparently does not believe that the use of compressed natural gas (CNG) as a fuel for vehicles will become a significant factor in that sector of the economy. Sorry about that, Boone and Aubrey.
If this projection of declining consumption is accurate, there obviously would be a negative impact on unconventional gas drilling and production. There are basically two schools of thought: the optimists and the pessimists. Both refer to themselves as the realists.
First, a few facts from the EIA: Natural gas in tight sand formations is the largest source of unconventional gas production in the United States, but production from shale formations is the fastest-growing source. With an estimated 267 trillion cubic feet of undiscovered, technically recoverably resources, production of natural gas from shale formations is forecast to rise from 1.2 tcf in 2007 to 4.2 tcf, about 18% of total US production, in 2030.
In June, the Potential Gas Committee, led by Dr. John B. Curtis of the Colorado School of Mines, upped the ante in its biennial assessment of the nation’s natural gas resources, which indicates that the US possesses a total resource base of 1,836 tcf. This is the highest resource evaluation in the Committee’s 44-year history and the higher numbers reflect a reevaluation of shale gas plays in the Appalachian basin and in the Mid-Continent, Gulf Coast, and Rocky Mountain regions.
Ziff Energy Group (optimist camp) forecasts that total unconventional gas production will supply 53% of US gas needs by 2020 (see Fig. 2), up from 30% in 2000. In April, Ziff released a report that evaluates shale gas production by major shale gas play. In 2008, shale gas production was over 5 bcf/d (representing about 8% of North American gas production) with about 70% of this attributable to the Barnett shale gas play in Texas.
Simon Mauger, director of Gas Services for Ziff, says, “Growing shale gas production is changing the mix of North American gas supply. Increasing unconventional gas production will comprise 53% of gas supply by 2020, up from 305 in 2000.” The report expects in 2020 that North America will produce 87 bcf/d compared with 70 bcf/d in 2000.
New technology such as horizontal drilling and multi-stage hydraulic fracture stimulation, along with rising natural gas prices through most of this decade will allow shales to produce gas economically, according to the Ziff report. It acknowledges that the current dip in natural gas prices has slowed drilling in most areas as capital budgets are slashed. However, it points out that the prolific Haynesville shale is an exception and drilling there has been relatively unaffected.
The Post Carbon Institute (pessimist camp) has a different outlook. The group’s Energy Bulletin acknowledges the huge potential natural gas resource base in the United States, which represents between 75 and 100 years of supply according to conventional wisdom, but believes there are deterrents to producing these resources.
“The hidden problem with such estimates [of future production] relates to whether the gas is economic to produce,” the group says. “If we are at the beginning of a long-term shale gas boom, it is clear we can put the gas to good use. But that’s a big IF. Before we make a policy commitment to a natural gas future, we must be certain the gas will be there…Let’s return to the real world, a messy place where some potential gas resources may not exist, or may not be economic to produce.”
At this point, it’s difficult for even the most seasoned analyst to know which way the natural gas market will go because abundant supply still depends on demand, which is determined in part by the economy. One thing we do know – conventional gas is being displaced by unconventional gas, and North America’s prolific shale plays will be an important part of the equation.
