Discussion on:

The murky future of U.S. shale gas

Mr. Neider readily admits that gas has sunk to some of the lowest prices in recent history. As he says, it has sunk to under $2.00, but is currently around $3.60. This, he says, is evidence of the ultimate failure of shale gas.

Ridiculous.

First, a little history. In the past ten years natural gas has never been cheaper than the last couple of years. In fact, in 2008 it was at $9.00 per mBTU (million BTUs), spiking at $13.11 (see http://www.scanaenergymarketing.com/en/historical-gas-data/natural-gas-settlement-prices/ ). Not only was the price of natural gas much higher then, the fear was that we would run out. Plans were being made to *import* LNG to the US. Shale gas has changed all that. It does cost a bit more than we originally thought to produce it (i.e., it is indeed harder to drill than originally thought), but nobody in the industry believes we are going to run out or that the cost of production will go anywhere near $9 again.

Mr. Neider needs to review Economics 101, and learn about the laws of supply and demand. Every product has a cost of production. Nobody will supply a product for less than that. It's clear that the price of natural gas has reached that bottom, and we can expect that on the average natural gas will be at least $3.50 to $4.00 per mBTU. So what? There are still enormous volumes of gas available at that price. Drillers may switch to wet gas and shale oil, but that will only increase the price of dry gas until it becomes attractive to produce again. It doesn't mean that we will run out. It most certainly doesn't mean we will see $9 gas again anytime soon. Sure, I'd like to only pay $3 per mBTU to heat my home, but I'll take $5 over the old $9 any day -- especially since there are huge volumes of gas available at that price.

As for the economics of LNG, Japan is currently paying around $18 per mBTU for LNG (see http://ycharts.com/indicators/japan_liquefied_natural_gas_import_price ). Even if it costs producers here in the US $5 per mBTU to produce natural gas, they can easily liquify and ship it to Japan for well under $18 (I saw one estimate of $12 or $13). There's a huge profit potential here. The only problem is building LNG ports in the US and lining up ships. Once that's done, drillers in the US will have an enormous incentive to drill for dry gas again.

There's also the possibility of converting diesel trucks to compressed natural gas (CNG). At current prices, the cost of natural gas is half as much as diesel for equivalent energy (see http://online.wsj.com/article/SB10001424052702304707604577422192910235090.html ). Even at $4 or $5 per mBTU, it's still a lot cheaper than diesel on an equivalent energy basis. Once again, it only takes the development of an infrastructure to open up another huge market for natural gas that will be profitable because the average price of diesel will only go up, not down. And of course, natural gas burns with less CO2, and doesn't produce the particulates and other pollutants of diesel.

Now Mr. Neider might argue that we have to develop infrastructures to make all this possible, but of course he's been arguing that infrastructure is no problem at all when it comes to creating a renewable energy infrastructure out of nothing. The only difference here is that the profit is immediate, obvious, and doesn't depend on any massive government subsidies.

"Mr. Neider needs to review Economics 101, and learn about the laws of supply and demand. Every product has a cost of production. Nobody will supply a product for less than that."
I don't know what article you read, but this is exactly Mr Neider's point.

So the price of natural gas should hover around " around $4 per thousand cubic feet ".

5 years ago, this would have been considered a ludicrously optimistic statement. Yet now Nelder presents this relatively low price prediction as if he were debunking shale gas.

Yes, Chris, it's not free. But it's cheap. That's why it's revolutionary.

Simple enough for you to understand? I can make it simpler for you, if not.

Last night the president said domestic natural gas production from shale was steadily increasing.

Someone please give a straight answer.

"natural gas production from shale was steadily increasing.".

So "conventional" natural gas production is declining, and total natural gas production is at a plateau (at the highest levels in history).

Nelder's own chart shows this plateau (starting in late 2011, not in 2009, as he stated earlier).

Nelder also describes how conventional wells are declining all the time.

So think for yourself. If conventional production is declining, and shale production is NOT increasing, how can total production be at a plateau?

Answer - it can't.

So yes, shale production is increasing, and, at this point, it's just offsetting declines from other sources.

Moreover, total "shale energy" is increasing by a lot. Just looking at natural gas under-estimates things. If Nelder was honest, he would add total BTUs from natural gas, NGLs and oil altogether and show that chart.

Why doesn't he do this? Because he is incapable of giving a straight answer.

I was disappointed with the answers from both candidates. I think neither is willing to state that the cost of producing oil and gas, and ultimately energy, has been rising because the easy sources are depleted. I do not believe the US will achieve energy independence and cheap energy together; not because of politics but because of reality of finite resources that we find harder to extract.

Simple yes or no question. "Is $4 for natural gas cheap?".

That's the energy equivalent of $25 for a bl of oil. Or around a buck and half for gasoline.

Most people would call a gasoline at a buck and a half cheap, but the exact same price/BTU for natural gas (which can be piped directly into your house) is not cheap?

I guess truth is relative.

Fracking threatens the water supply of over 100 million Americans. It is a pending disaster that will make the recent Gulf spill look like a hiccup. It could ruin the ground water across large swaths of America - a disaster that would be permanent on a human scale.

This is not an overstatement, and current policy couldn't possibly be more shortsighted. I just hope people wake up and realize this before it's too late. Clean fresh water, not natural gas, will be the commodity of the 21st century. It's probably the only thing upon which all futurists agree.

The frackers claim that their wells are much deeper than the aquifer, but all it takes is a problem with the casing going down into the well, or a problem with their catchment pond, their waste disposal methods, etc. for their poisons and natural gas to leach into the water table. They can't promise that it won't happen, and it's almost guaranteed that it will, over and over again, as it already has happened many times.

omb,

Exactly! Fracking is an ecological disaster already happening and within a few more years of documentation NIMBY will steamroll the industry with a vengance, as it should. You can have 99 out of a hundred wells working relatively safely, but that hundredth well where stuff happens can devastate the ground water over a whole ecological basin. Multiply that inevitable possibility by the 500,000 new wells projected over the next dozen years and you have a horror. The same revulsion that is starting to happen vis-a-vis GMOs will happen to fracking, as the public starts to realize that the ecological costs are way too high and demands regulation that eventually makes the costs way too high.

I have a friend in Colorado fighting fracking in the mountains there. The locals want nothing to do with it and are willing to do what it takes to stop it. Here's an interesting speculation on his part. He thinks that the biggest energy companies see the writing on the wall and are buying up underground leases, not necessarily to frack, but eventually to control the area's fresh water supply. Isn't it interesting that a state that claims to own the water that comes off your roof is turning a blind eye to this? A not so blind eye, I suspect.

"within a few more years of documentation NIMBY will steamroll the industry with a vengance"

People, to include Nelder, have been saying that for at least 5 years, and yet look at the chart above... natural gas production bouncing around the all time highs.

The US has a long legal tradition of strong mineral rights. Federal land, state land, sure, you can keep fracking out. Private land - it will eventually get adjudicated in the courts as a "holdings" case.

Which way do you think the John Roberts court would rule on whether landowners are allowed to frack on their own land?

The John Roberts' court will be irrelevant sooner or later, now that the rule of law for the moneyed elites has bitten the dust thanks to them. Did Roberts think that Citizens United wouldn't have disgusting consequences? You apparently didn't.

The geologic and supply and demand economic directions and predictions of natural gas are not logically predictable - simply because of the artificial unknowable/"black" affects of our "for profit democracy" political system and the greed that drives it. Chris, you are certainly entitled to defend your analysis processes which are very logically correct - but unfortunately near meaningless considering the politics involved.

For those trying to get to the crux of our energy problem/solutions - you made only one key statement: "The American people will soon need to make a choice between continuing to enjoy some of the lowest grid power costs in the developed world; a resurgence of domestic manufacturing for fertilizers, plastics and petrochemicals..."
Unfortunately, our "for profit democracy" politics negates any chance of the American people of having any real say so in the process - until their individual and personal survival is at painfully and obviously at stake.

Only the uninformed and pathologically patriotic think that any change in the executive office will alter the demonstrably corrupted "influence for sale" political system we have. Based on the last 50 years of politics - their is zero chance that change will come from the media industry driven soap opera politics and the voting booth. Personally, I'm not seeing the obvious logic of keeping critical non-renewable resources at home serving the US population - winning out over corporate and political greed wanting to export them -anymore than the outsourcing our industry was prevented.

I'm also not seeing the American people dealing with their lack of representational government on a pro-active basis, but rather reactionary when their physical survival is obviously at stake - and far too late.

Until environmental impact statements stop excluding disclosure of chemicals used in the process, fracking should be prohibited. Curently, I suspect carbontetrachloride and related environmentally dangerous chemicals are in the mix.

Shale gas development and deliverability are doing well and prospering, thank you. The flattening of the total domestic production curve is inevitable at current NG prices: ALL producing wells, shale or otherwise decline on a continuing basis. The flattening of the production curve merely demonstrates that shale development has slowed to replacement of that decline rather than >100% offset. There is exactly zero surprise in this fact. Energy news organs have been filled in recent months - since that extreme low price back in April - with announcements by various operators of curtailed drilling in these plays. Further, the State of New York has put a big hunk of the Marcellus - the most desirable and economic of the shale plays - on hold.

Within the scope of the potential shale development is an economically healthy mean-reverting mechanism, the greater or lesser presence of natural gas liquids. Priced in line with crude oil, those liquids create a spread of breakeven prices for various shale gas developments. These will act a governor on domestic NG price for decades if we don't allow the export of more than our surplus. Egregiously low energy prices are as bad for us as egregiously high prices. The latter damages the consumer side of the economy, the former the producer side. We require both to be healthy.

As for all the hyperventilating over hydraulic fracturing, been there, done that CORRECTLY, caused zero problems. Many, many industrial processes lead to dire consequences when executed incorrectly (think Union Carbide and Bhopal, India). What we need is good regulation, not bad propaganda. The ability of ignorant alarmists to drive the political agenda has never been greater than currently. YOU JUST DON'T KNOW WHAT YOU'RE TALKING ABOUT. Any number of Matt Damon movies will not alter that truth.

Thanks for gas cloud clarity. You are swimming against a tide of apparently over optimistic and resource challenged individuals and doing very well in our opinion.

EVsRock!

Nelder is well known for lying about shale gas. Look at this article here.

http://oilandglory.foreignpolicy.com/posts/2012/02/12/is_there_really_so_much_shale_gas_in_the_ground?page=full

" Total U.S. gas production has been on an "undulating plateau" since the beginning of 2009, Berman says, as new shale gas output struggles to compensate for a 32 percent-per-year decline in conventional gas production. "

He quotes his pal Art Berman as gospel, but his own chart here shows a significant up-tick from 2009.

So which is it Mr. Nelder. Did the undulating plateau begin in 2009, or at the much higher levels of early 2012?

I doubt Mr. Nelder has the guts to respond to this error, and explain his endoresement (in early 2012) of Berman's " "undulating plateau" since the beginning of 2009" statement.

But until he does, I think everything Mr. Nelder says re: shale gas should be taken with a mountain of salt.

For those people cheering on the possibility of opening up our National Forests, etc. to oil exploration, shale oil, etc. rather than relying on foreign oil sources (aka Romney) this is an insightful confirmation that peak oil is indeed upon us. Continued reliance on a finite resource is a dead end and an increasingly expensive one. If we continue to be blind to this issue and we do not use our remaining cheap oil resources for development of renewables (aka Obama), we will be either like lemmings rushing toward the edge and not seeing it coming....or we will be paying a huge price to scramble and try to convert at the last minute. We cannot afford to be blind to this "E" so prominently discussed by Chris Martenson. The reason Romney feels that it's necessary to arm us to the teeth is indeed a truth if we continue to rely so heavily upon oil for not only energy, but plastics, fertilizers, clothing, transportation, and our whole way of life. As oil becomes scarcer, there will be more wars to defend this resource. Personally, I'd much rather vote for the guy with his eyes wide open about this issue and who has invested in renewable energy than the guy who ALSO sees the cliff, but doesn't want to deal with it and wants to spend our tax dollars on defense rather than on people and green jobs. Yes, defense will create a lot of jobs. Developing oil (and ruining our National Forests) will create jobs. But it is a dead end. Whether Mr. Nelder is right or wrong, are we willing to poison our land, rape our National Forests, and create a dead planet for our greed? There is an end to oil. There is NO end to sun, wind, tides, geothermal, etc. We can sit around and argue about how much is under the ground forever, but whether it's our generation or our children's generation, we need to start converting to something else now....preferably before we have killed everything in our greedy grab for oil.

The wet gas plays will not act as a "governor" for NG prices. NG prices will eventually be set by the marginal MCF - that is the highest cost natgas plays. Liquid rich and oily plays only account for about 1/3 of the 22 BCF we need to come up with each year (see Encanas June/12 investor presentation) to offset declines...so how can wet gas set the price??

This discussion of cost 2 to 3 years out seems a bit premature. Current pricing has NOTHING to do with cost and everything to do with the overbuilding due to the 'Gold Rush' and assuming many past cost are sunk, and drilling to hold, or drilling just to maintain some form of cash flow...while going bankrupt.

Oil&Gas Cos/Wall Street consistently overestimate production. On the oldest play, Barnett, they were forecasting EURs of 2.5 BCF, and the USGS and state agencies indicate it more like .6 BCF. Yikes. The life-time output of these wells is critical because that is the number that is divided in the total cost to get a cost per MCF...and billions of dollars of write-offs will follow.

Also important, as the drillers learn about the areas, they head for the core of these shale deposits (typically 10 - 20%) of the deposit. They always drill/mine/cut/etc. the 'juicy center' to bring results/production forward so they get their bonus, flip the property, stay solvent...

As they move over time from the core to the fringe, lower EUR wells will be drilled at the same cost. That makes today's cost structure as rosy as it gets. Some will say "technology is improving" and so is productivity, but how much of that is due to zeroing in on the core these past few years? What kind of quantum leaps in technology occur every year - changing the slick water formulation a bit to get a few more MCF??

The future tech improvements will have to make up for the enviro regs that are on the way, community push back which will only increase with more drilling activity, increased legal fees as water contamination gets linked to fracking (Dimock, Pavillion...), increased water and waste-water disposal costs...

Not suggesting fracking is worse than coal or securing 'our' M.E. oil - just that true DRY GAS costs are not widely accepted - the higher cost plays NEEDED TO MEET DEMAND (the marginal MCF) will SET THE PRICE - and they have FULL CYCLE costs on the order of $6 - $7 per MCF...today!

...remember, the cost story gets worse as drillers move toward the fringe.

Almost all my investment dollars are in 2018-19 natgas futures contracts. I would be interested in green tech, but it's not like us to do something that altruistic - better to leave the medicare, social security, national budget, and environmental...deficits to the next generation. The buck stops 20 years from now, right?

Why do you think the futures market is correct for 5 years out? You do realize those prices will change as more info comes in and and market dynamic change, right?

I believe there is downward pressure on those prices from drillers that are almost bankrupt and who sell production forward to get more assets on their books.

There is also A POSSIBILITY that nefarious forces are at work - it could just be that there is pressure to keep current pricing and the forward curve low until desired regs get passed on LNG exports, natgas transportation infrastructure and vehicle incentives, lax enviro regs to the degree possible....and perhaps most importantly - industry consolidation (Exxon just snapped up another property today for $3B). I have no proof, but it sure is interesting how long and how low natgas pricing has been. Stranger things have happened.

I am guessing we see the $6-$7 number in 2 -3 years. By that time, the effects of the 'Gold Rush' will be over and the issues above will be resolved.

Don't believe everything you read from the govt, oil & gas industry, industry rags, institutional research, tv, etc. I am sure you realize how big money can marshal a lot of resources to paint a reality that is just not there (eg., dotcom, housing, tulips).

I explained in my original post why I think the cost for the marginal MCF is $6 - $7. If you are making investments based your your $5 number, I would suggest you keep up the data coming out for independent sources - esp. on EURs.

Here's an interesting presentation - not on EURs but marginal costs to meet demand - notice these are HALF cycle costs - they do not include LAND and GSA costs. This is Encana's investor presentation from this summer - specifically the graph on the bottom of page 9.

http://www.encana.com/pdf/investors/presentations-events/investor-day-market-fundamentals.pdf

What's that? $6 to meet marginal demand based on 2011 prices. ...And this is coming from a producer - someone who has an interest in underestimating costs.

Going to have to add $1 - $2 per mcf for Land and GSA - let's be conservative and go with $7 based on 2011 costs. You gave a forecast for the next 5 years - that takes us to 2017 - which means 6 years of inflation from the Encana 2011 study.

Let's assume Bernanke can devalue the dollar 4% per year against energy assets...that gets us to $8.86 pesos - assuming demand does not increase - assuming present production from the core is representative of future production which will increasingly involve the fringe. You might be wrong about your projection.

You are correct in guessing I lean toward environmentalism - a long-term view of things - caring about the welfare of not just spotted owls but our children...as opposed to trying to figure how we can pull hydro-carbons out of the ground as fast as we can, and burn them so we can drive around 5,000 lb high riding vehicles. I think we will ashamed when we look back on this time given the facts we already know.

I have made an over 1,200% return these last 10 years in my IRA. This is last my last bet - a bet we will 'connect' the price of natgas to oil and/or the world natgas markets - OR - we will find that there are big problems with carpet-bombing the countryside with shale gas wells. All or one of these will lead to much higher natgas pricing - no conspiracy required...and provide me more time to focus on sharing the msg of my website:

http://www.ArrestIndustrialDisease.org

Exxon has been trying to stop natural gas for as long as possible. It has been buying up natural gas companies for several years. It may be building a dam, and keeping smaller companies from profiting while it continues to make money on gasoline and diesel, including exporting it. At some point it will be forced to join the natural gas fuel bandwagon and the flood of their cheap gas might enable them to buy up more companies on the cheap. They may be wanting to control natural gas prices, as the Rockefellers did with oil. I doubt it is possible. What do you think?

Nothing says a company and its leader don't want to be richer so its all possible after all that is the name of the game. Monopoly is what every company wants even if they don't have it as their slogan.

It appears that coal will control the price ceiling for natural gas, at least for awhile. If Romney is elected, he will let coal continue with upgrades to coal plants. Obama will be much harder on coal plants with stricter regulations. Some plants can switch back and forth by changing nozzles from coal to natural gas. Maybe that is the way to go for future plants, but I prefer gas.

our friend brazil_83 has some funny ideas, it seems obvious that coal will control the "ceiling" for natural gas for sometime, if natural gas becomes (much) more expensive the utilities will switch back to coal.

so unless you think the price of coal is going to skyrocket (and why would it? peak coal is hundreds of years away) than gas will be $5 or less for quite some time.

Obvious, no?

But I too prefer to switch the infrastructure away from coal mining and towards fracking, and down the road, underground coal gasification.

If you read brazil_83 second post carefully you will see that his money is on $5 or less for the next 5-6 years, almost the exact same prediction as mine. In other words, he won't put money on futures that are less than 6 years out, meaning he won't bet against the futures market for less than 6 years.

That's fine, it's possible there is a futures spike and he makes his money, but the spot price is still going to be muted for the next half-decade.

And so, Chris Nelder has now decided that a spot price of $4 or more "debunks" shale gas. That is pretty funny, because 5 years ago, a spot price of $4 was wildly optimistic. It is Nelder whose history has been debunked by the recent glut, he is just showing some chutzpah here by claiming credit where none is due. Typical Nelder, really.

Yes,coal is affecting natgas short term because electrical generation is one of the ways natgas can be used without the infrastructure changes and/or large capital investments.

I was not writing about price ceilings - that's a tough subject esp. with volatile natgas. I was writing about cost floors. The full-cost of the highest cost dry shale gas needed to meet demand, and how that cost is $6 - $7 now, and will likely increase as drillers move from core to fringe areas of the plays.

I am mostly invested in 2018 - 19 contracts not because I don't foresee natgas hitting my $7 - $9 price targets before then, but because I don't want to take the risk of trying to time the market and I don't want to compete against HFTs and floor traders in rolling contracts forward in a market that is generally in contango.