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Rising Projections Of North American Shale Gas Production

Projections of annual production for calendar year 2040 has moved upwards from ~14TCF in 2009 to ~19TCF in 2011.
On June 25th, the New York Times published a story regarding the viability of shale gas as a domestic source of supply for the U.S. A presentation I made at the Federal Reserve Bank of Dallas in May 2010 was cited in that story. The Baker Institute is a non-partisan public policy institute at Rice University. Our research is publicly available and intended to inform the public and policy makers about important issues of public policy related to important trends that influence the quantity and security of energy supply. The Dallas Fed presentation is in line with this activity.

During the presentation at the Dallas Federal Reserve Bank, I showed a projection for U.S. shale production by region that indicated production from the Barnett shale would decline slightly for a period of time as investors temporarily shifted priority to larger and less costly plays in places like the Haynesville and Marcellus shales. This shift, as I explained, was a matter of economics, not geology, since all of the plays have large resource potential but different production costs and proximity to market.  It is the assessment of the relative development costs, as well as the proximity to end-use market, that leads to a prediction of a flattening of Barnett production (see Figure 1) against a backdrop of stronger growth in other large shale regions. Again, this is not related to the size of geologic resources or their geological performance.  As opportunities have emerged to produce natural gas from shales that are closer to end-user markets, such as the Haynesville and Marcellus, emphasis has moved away from the Barnett region. However, as the Figure 1 shows, the projection is not one of sharply declining production in the Barnett, just a flattening profile for a period of time as investors shift attention to plays that offer better profitability.

More recent geologic and economic data about emerging technologies and the relative size and costs of resources in various parts of the United States has allowed us to update our projections.  As seen below in Figure 2 (used in a more recent presentation I gave at the annual meeting of the American Association of Petroleum Geologists (AAPG) in Houston), Barnett production actually rebounds later this decade as demand grows.  In both Figures 1 and 2, production in the Barnett shale is ultimately surpassed by production from the Haynesville and Marcellus shales, which are assessed to be much larger resource plays with a substantial amount of resource available at low cost.  Thus, the relative economics of the shale gas plays is a critical part of the projected trends.

Figure 1: Shale gas production in North America – A view in late 2009 presented at the Dallas Fed

Figure 2: Shale gas production in North America – A view in early 2011 presented to the AAPG

Knowledge about shale is evolving rapidly. In fact, shale gas production in the United States has increased from virtually nothing in 2000 to over 15 percent of U.S. supply currently. This tremendous change in volume has turned the conversation in the U.S. natural gas industry from one of increasing imports to one of potential exports.

In our work at Rice, we rely on peer-reviewed, scientific assessments of the properties of shales to develop technically recoverable estimates and associated finding and development cost curves. We distinctly avoid non-technical publications such as investor relations reports. Much of the data we use comes from writing in the annals of the AAPG, the Potential Gas Committee and the U.S. Geological Survey.  To that point, geologists have been writing about shale resources for decades, and only recently, innovations enhancing the technical feasibility of shale have occurred.  The fact that geologists have been writing about the properties of shales since the at least the early 1970 is indicative of the fact that, to many of them, shale becoming technically and commercially exploitable was largely an issue of technology, not necessarily geology.  Indeed, innovations continue at a pace that is, on average, raising the initial production rate and expected ultimate recovery of wells drilled every year.  These two things combined drive down the per unit cost of development, thereby making more resource economically viable at a given price.  The importance of this cannot be understated, from a geopolitical, environmental, and market development perspective.  Numerous links to various studies are available on the Baker Institute Energy Forum website, which includes even more detailed information about the assessments used in our own modeling.

At the Dallas Fed workshop, I remember two questions specifically related to the Barnett shale because there was obvious concern related to the Texas economy.  After all, the Barnett shale had been a great source of wealth expansion for the previous five or six years and was generally viewed as an important part of the economic base in the area. I explained in my answer the points made above. This has of course been exacerbated by the recent recession and the shift of production activity to shale plays with higher liquids content – such as the Eagle Ford shale in South Texas – due to the large differences in natural gas prices and oil prices.  Again, these are economic forces, not geologic ones.  In fact, our recent work indicates that as demand for natural gas continues to increase, particularly in Texas, the Barnett shale will remain an important contributor to the overall natural gas market balance.  The full presentation I gave at the Dallas Fed is available online.  The presentation, and many others I have since made, describes our research and shows that the U.S. is unlikely to become a major importer of LNG as a result of the robust developments in shale that have been occurring over the last decade.

This post was written by Kenneth B. Medlock III, the James A. Baker, III, and Susan G. Baker Fellow in Energy and Resource Economics at the Baker Institute Energy Forum

Fuel Fix, 27 June 2011