The Oil Drum | U.S. Shale Gas: Less Abundance, Higher Cost

Arthur E. Berman and Lynn F. Pittinger

Lynn Pittinger is a consultant in petroleum engineering with 30 years of industry experience. He managed economic and engineering evaluations for Unocal and Occidental Oil & Gas, and has been an independent consultant since 2008. He has collaborated with Berman on all shale play evaluation projects since 2009.

Introduction

Shale gas has become an important and permanent feature of U.S. energy supply. Daily production has increased from less than 1 billion cubic feet of gas per day (bcfd) in 2003, when the first modern horizontal drilling and fracture stimulation was used, to almost 20 bcfd by mid-2011.

There are, however, two major concerns at the center of the shale gas revolution:

• Despite impressive production growth, it is not yet clear that these plays are commercial at current prices because of the high capital costs of land and drilling and completion.

• Reserves and economics depend on estimated ultimate recoveries based on hyperbolic, or increasingly flattening, decline profiles that predict decades of commercial production. With only a few years of production history in most of these plays, this model has not been shown to be correct, and may be overly optimistic.

These are not purely technical topics for debate among petroleum professionals. The marketing of the shale gas phenomenon has been so effective that important policy and strategic decisions are being made based on as yet unproven assumptions about the abundance and low cost of these plays. The “Pickens Plan” seeks to get congressional approval for natural gas subsidies that might eventually lead to conversion of large parts of our vehicle fleet to run on natural gas. This might commit the U.S. to decades of natural gas exports at fixed prices in the face of scarcity and increasing prices in the domestic market. Similarly, companies have gotten permits from the government to transform liquefied natural gas import terminals into export facilities that would commit the U.S. to decades of large, fixed export volumes. If reserves are less and cost is more than many assume, these could be disastrous decisions.

Executive Summary

Our analysis indicates that industry reserves are over-stated by at least 100 percent based on detailed review of both individual well and group decline profiles for the Barnett, Fayetteville and Haynesville shale plays. The contraction of extensive geographic play regions into relatively small core areas greatly reduces the commercially recoverable reserves of the plays that we have studied.

The Barnett and Fayetteville shale plays have the most complete history of production and thus provide the best available analogues for shale gas plays with less complete histories. We recognize that all shale plays are different but, until more production history is available, the best assumption is that newer plays will develop along similar lines to these older plays. There is now far too much data in Barnett and Fayetteville to continue use of strong hyperbolic flattening decline models with b coefficients greater than 1.0.

Type curves that are commonly used to support strong hyperbolic flattening are misleading because they incorporate survivorship bias and rate increases from re-stimulations that require additional capital investment. Comparison of individual and group decline-curve analysis indicates that group or type-curve methods substantially over-estimate recoverable reserves.

Results to date in the Haynesville Shale play are disappointing, and will substantially underperform industry claims. In fact, it is difficult to understand how companies justify 125 rigs drilling in a play that has not yet demonstrated commercial viability at present reserve projections until gas prices exceed $8.68 per mmBu.