Why US Shale May Fizzle Rather Than Boom
The Shale Revolution may not really end up being a revolution after all. A new study in Nature finds that the estimates for shale gas production could be vastly overblown, and that production could peak within the next decade.
It is first important to note that forecasting energy production years into the future is always difficult, and pinpointing the trajectory of oil and gas production years out is an impossible task. However, many forecasters, including the closely watched Energy Information Administration (EIA), have highly bullish projections on the ultimate recoverability of natural gas trapped in American shale.
For example, in its latest Annual Energy Outlook, the EIA predicts that shale gas production will continue to climb upwards over the next several decades. By 2040, the agency forecasts the U.S. will be producing 56% more natural gas than in 2012, largely driven by a doubling of natural gas production from shale.
Writing in Nature on December 3, Mason Inman reports that such predictions could be wildly optimistic. Using data from a team of researchers from the University of Texas, which studied the topic for three years, Inman concludes that the shale story is not nearly as revolutionary as everyone thinks.
Inman says that shale gas production from the big four shale plays — the Marcellus, Barnett, Fayetteville, and Haynesville — which account for two-thirds of the country’s shale gas output, will peak in 2020, declining thereafter. If that is true, even the EIA’s most downbeat scenario for shale gas production could be overly optimistic.
Obviously, the UT researchers could be wrong, but Inman says that they have produced the most authoritative forecast on shale gas production to date. That is because they analyzed figures from individual blocks, whereas the EIA simply extrapolates from county data. That means that the UT researchers are working with “a resolution at least 20 times finer than the EIA’s,” Inman writes in his article. Even EIA researchers have acknowledged problems with the agency’s methods.
The repercussions for the U.S. would be enormous. Billions of dollars of investment are pouring into shale gas production, refineries, factories, petrochemical facilities, and natural gas export terminals — all based on the assumption that the shale gas revolution has decades of life left in it. But in reality, it could all peak within the next decade or so, after which “there’s going to be a rude awakening for the United States,” Tad Patzek, a researcher with the UT team, told Nature.
If that ends up being the case, shale gas may look more like a blip rather than a monumental revolution for the United States. When production declines in the 2020s, natural gas prices will rise. That could raise the prices of everything from electricity to plastics and fertilizer. It could also make LNG export terminals uneconomical.
“The bottom line is, no matter what happens and how it unfolds,” Patzek said, “it cannot be good for the US economy.”
Again, it is important to emphasize the difficulty in forecasting — the UT team could be wildly off base. For now, it is hard to see over the peak. Natural gas production has been rising since 2005, with no end in sight. In November, the U.S. produced 2.1 trillion cubic feet of natural gas, the seventh consecutive record-breaking month for natural gas production.
One uncertainty that is always challenging to incorporate into forecasts is the rate of technological innovation. Maybe oil and gas companies will find new drilling techniques or cheaper ways of extracting hydrocarbons in the coming years. After all, the surge in shale gas production caught everyone by surprise a decade ago because no one predicted the substantial progress that would be made in horizontal drilling and hydraulic fracturing.
On the other hand, after missing the Shale Revolution, analysts may be making the same mistake by predicting several more decades of increasing output. “[W]e’re setting ourselves up for a major fiasco” Patzek of UT said to Nature.
Considering the staggering amount of money that is currently being invested in drilling, refining, petrochemical manufacturing, and export facilities, we should welcome any contribution that can be made that can shed light on where we are heading. In that context, Nature’s article raises some red flags that policymakers and investors should be paying closer attention to.
Originally written for OilPrice.com, a website that focuses on news and analysis on the topics of alternative energy, geopolitics, and oil and gas. OilPrice.com is written for an educated audience that includes investors, fund managers, resource bankers, traders, and energy market professionals around the world.