Cheap shale gas: Considerations

The International Energy Agency has created the term “Golden Age of Gas” to describe a scenario characterizing the potential of producing immense amounts of shale gas in the U.S. and in a number of other countries. Estimated shale gas resources in the U.S.  amount to 860 trillion cubic feet (equiv. to 40 years of gas consumption at current rates). China has somewhat higher estimated amounts, with Argentina and Mexico having amounts in line with but somewhat lower than those in the U.S.  Russia, Central Asia and the Middle East shale resources have not been estimated.

High crude prices juxtaposed against very low natural gas prices has created a situation where the energy value of gas is extremely attractive relative to that of crude oil. One barrel of crude oil has about six times the energy content of 1000 cubic feet(mcf) of natural gas. At that ratio, and at what might be considered reasonably typical relative crude oil and natural gas pricing the two lines on the chart would coincide. Currently, it costs about four times as much in terms of energy content to buy crude oil versus natural gas.

Source: The Rational Walk

The  strong positives of our domestic shale gas bonanza are by now well known: An abundance of natural gas at possibly very low prices for a period of time. Regained competitive advantage in petrochemicals production. Strong job creation in drilling and in supply of piping and other materials.

Nevertheless, we should maintain some perspective. So, here are some things to think about. First there is an overarching environmental issue. I am not referring to the “chemicals in drinking water” issue since that will be largely solved through regulation and supervision. The big problem relates to the massive quantities of water required for each well and the disposal of the spent water. With water resources slated to become scarcer, this will put brakes on exploitation in some areas.

The second isssue is pure supply and demand: (a)  With gas prices as low as they are, drillers are moving their rigs to formations where more oil and less gas is produced, since the returns are much higher with oil, (b) Coal-burning utilities are switching substantial generating capacity from coal to natural gas, (c) Several companies have already received permits for export of liquified domestic natural gas (LNG), slated to begin in 2016. (d) We can expect a big push for greater use of compressed natural gas in trucks and even cars, partly for direct use and partly in fuel cells.

Finally, states where shale gas is being produced are increasing the cost of regulation. Pennsylvania is considering a fee of $ 160,000 per well as additional cost to drillers as well as income for the state. Other states are bound to follow.

With water and state taxes/fees and (a) above acting to reduce supply, while (b), (c) and (d) are increasing demand, it is clear that natural gas prices will not stay at current levels of $2-3 per million BTU. and that our economic system will not allow a “glut” of cheap natural gas (as currently exists) to last forever.

On top of all this is the fact that “fracking” releases a not so small amount of gas to the atmosphere. Methane is an important greenhouse gas and it has been argued that the negative effect on this methane “leakage” will offset the gains in greenhouse gas emissions when some utlities switch generating capacity from coal to natural gas. If the EPA develops rules that inhibit fracking because of methane releases, the political implications will be dramatic during this election year.

Stay tuned…..

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2 Responses to Cheap shale gas: Considerations

  1. jvporcelli says:

    Peter – I agree with you on all counts. I am sure we will see increasing natural gas prices soon thanks to less drilling and more consumption. One point – I heard a presentation, I believe from Nalco, talking about working on methods to recovery and recycle most of the fracking watter. I’ve not seen anything more about this lately.

  2. Pingback: People Find Ways And Means And Hope | Living History

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