Shale Gas: cheap domestically produced natural gas or nothing but hot air?

Shale gas has been seen as the saviour of the US energy market, delivering large volumes of cheap natural gas.  This has upset many of the incumbents, including coal power stations and wind energy farms.  There are a number of environmental issues with shale gas, including the large amount of water needed and chemicals that can pollute ground water, but the underlying assumption that the US will see decades of low cost indigenous natural gas has not been challenged.  Until now.

A few weeks ago ASOP, the Association for the Study of Peal Oil & Gas, a network of experts discussing peak oil and gas, had its 10th Annual conference in Vienna.  Some of the slides and presentations were particularly fascinating.  One of the key messages is that while shale gas production has been increasing dramatically, once a well is tapped production falls off very quickly.  That means that in order to keep up with existing production shale gas companies need to drill even more wells.

Reserves are overstated

Arthur Berman gives a great presentation on shale gas in the US, using some specific fields.  On the Haynesville Shale basin they are seeing a decline rate of 53% per year.  This is clearly unsustainable as the amount of capital required to keep up with “increased” production every year will soon exceed all of their future revenues from new fields.

If this analysis is widespread there are number of conclusions that you can draw:

  • Cheap natural gas prices in the US will not last long and so policies in place that assume cheap natural gas will cause significant disruption when the change occurs.
  • Investing in shale gas companies could be dangerous to your portfolio.
  • As the decline is so rapid the shift from increased production to declining production, and thus increased natural gas prices, will happen very quickly.

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Many thanks to Jeremy Leggett, Chairman of Solar Century, for bringing this to my attention.


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