Saturday, February 16, 2013

Lessons From Past Natural Gas Import Fiascos Suggest A Cautious Approach to Natural Gas Exports

The U.S. should take a cautious approach to exporting natural gas.

That’s the clear lesson of three decades of bad guesses by analysts about natural gas prices and supplies. If pro-export advocates are wrong this time, consumers and businesses will be the ones who suffer from higher domestic gas prices.

Several recent studies concluded that domestic price increases from exports would be small. This conclusion, however, is based on unrealistic assumptions about the size of U.S. gas supplies and the true cost of producing shale gas.

In fact, supplies are likely substantially smaller than predicted, while costs are higher.

History should provide ample reasons for the U.S. to look before it leaps into large-scale exports. Two cycles of investment fiasco involving natural gas imports to the U.S. have occurred in the past 30 years, first in the 1970s, and again just a few years ago, when more than 47 applications for natural gas import terminals were pending at one point.

Both of these were due to incorrect predictions about domestic supply. The supply models that past gas import decisions were based on had widespread support by experts. But they were wrong.

The lesson: gas supply estimates are much more uncertain than experts and conventional wisdom assumes.

Now, a new supply model has replaced the previous one and analysts again agree upon natural gas abundance at low prices for decades to come. Our analysis - which we plan to publish on in coming days - suggests that they are wrong again.

We do not dispute that the shale gas resource is large; we question the near- to medium-term supply, the amount of shale gas that is available on demand. The number of gas-directed drilling rigs has plummeted in the past year because of low price and we fear that demand may exceed supply unless this trend is reversed.

All oil and gas wells display production decline rates over time. The decline rate is simply the change in flow over time. Shale gas wells have especially high decline rates, meaning U.S. supplies are likely shorter-lived than many are predicting. For example, conventional gas wells decline at annual rates of about 20% per year but the production from shale gas wells declines at rates of at least 33% per year and often higher.

Furthermore, the cost of production is likely more than the prevailing market price based on company filings to the government.

Thousands of wells that have been drilled have not been turned on yet. As these wells come on line, supply rates will be maintained at high levels despite decreased drilling for a while. When this excess capacity is reduced over the next year or so, U.S. supply will decrease unless gas drilling resumes and this will not happen until prices rise.

Production from shale is a new phenomenon and prediction about future well performance is speculative. Recent studies, however, by the U.S. Geological Survey, the University of Texas, Louisiana State University and other industry groups show that commercially recoverable per-well shale gas reserves may be considerably smaller than some believe.

Despite assumptions that gas prices will remain low, ExxonMobil Chief Executive Rex Tillerson says that his company is making "no money" on U.S. natural gas due to low prices that have fallen well below the cost of production.

“We are losing our shirts,” Mr. Tillerson told MarketWatch last June.

In recent weeks, a coalition of gas users that include Dow Chemical Company warned that gas exports would increase domestic prices and that in turn would cause a loss of competitive advantage for U.S. business. They are correct.

Energy from domestic gas is a strategic natural resource and, therefore, should be given special attention before approving its export. Just because we have abundant natural gas, why should we race to use it up as fast as we can?

We recommend allowing spot cargo exports on a trial basis for two years. This pilot project should not contractually bind export volumes of more than 3.0 billion cubic feet per day, approximately 4% of daily U.S. consumption. In two years, we should have a much clearer understanding of the capacity of shale gas to support internal supply.

Past ExxonMobil CEO Lee Raymond cautioned last year, “There is going to be a big debate in the U.S. as to whether or not they’re going to permit the export of liquefied natural gas. Even if you get past the politics, you have to test whether or not the resource base is sufficient.”

We agree. Approving long-term export contracts before confirming the true size of U.S. natural gas supplies would be reckless. Policymakers should take the time to get it right, so the rest of the country does not pay the price for another cycle of bad guesses about the natural gas market.

Arthur E. Berman, Petroleum Geologist
J. Michael Bodell, Oil and Gas Price Stucture Specialist and Petroleum Geologist
Henry Groppe, Chemical Engineer and Founder, Groppe, Long and Littell, Oil and Gas Supply Demand and Price Analysts.
Rune Likvern, Natural Gas and Oil Supply and Demand and Systems Analyst and Economist
Tadeusz Patzek, Petroleum Engineer and Chairman of the Department of Petroleum &
Geosystems Engineering at The University of Texas at Austin
Lyndon F. Pittinger, Petroleum Engineer


Anonymous said...

I don't get it. Given that that multiple companies will have invested billions of dollars in both export and import capacity what would we can by restricting the market? After all couldn't we just import LNG or bring addtional gas from Canada and Alaska or the GOM if the market turns? Why the rush to regulate?

JJ2000426 said...

If you are talking about exporting shale gas, they are better off exporting the rigs that drill for shale gas instead. It makes better economic sense, and it can be done right now, without the expensive infrastructure. The rest of the world has shale gas resources, too.

I hope that they ship away half of the rigs drilling for shale oil/gas in the USA.

Anonymous said...

It doesn't necessarily make better economic sense to ship rigs overseas as other countries do not have the physical infrastructure, and legal and financial infrastructure necessary to make the geology pay.

It isn't just geology you have to have the means for production that go beyond drilling rigs alone.

Anonymous said...

Mr. Berman,

Have enjoyed reading your research, and felt that you were one of the few voices keeping the industry honest. However, a couple recent quotes from you seem to indicate the industry has been straightforward all along -

"Furthermore, the cost of production is likely more than the prevailing market price based on company filings to the government."

Likely?? The market price is $3.50; your studies had full cycle costs at upwards of $8. Have you determined that recent drilling improvements and/or focusing on sweet spots reduced costs to a point where $3.50 might cover costs??

Also, you were quoted in the 2/27/13 WSJ on the recently released report on the Barnett shale. You indicated it was the most "comprehensive study" on the Barnett. That study suggested natgas can be drilled profitably at market price of $4.

Not sure if your soon to be released study will be available to the public,or if it will have updates on your shale gas cost accounting. Would appreciate your clarification on the above. Not sure if there are some misquotes, some misunderstandings...or represent a large change in your findings.

JJ2000426 said...

There are good reasons that shale gas companies may have become so desperate that they outright fabricate well production data.

I noticed a trend that in the most recent well production data from Marcellus shale play, available from PA DEP, some of the most highly productive wells seems to totaly lack of the usual steep initial production decline you would expect from a typical well.

Most noticeable are wells reported by Chesapeake Energy (CHK).

Well No. 015-20673, located at 41.626117°North and -76.439472°West, in Bradford County, operated by CHK.

The reported productions were:

H1-2011: 74406 MCF in 9 days, averaging 6267 MCF/day
H2-2011: 1490468 MCF in 184 dys, averaging 8100 MCF/day
H1-2012: 1441316 MCF in 181 days, averaging 7963 MCF/day
H2-2012: 1508240 MCF in 184 days, averahing 8197 MCF/day

The daily productivity went from the initial 6267 MCF/day up to 8100 MCF/day and it seems to maintain at that level for two years.

How could that be possible? Normally you expect a shale well's productivity to be the highest in the first few days, then it rapidly declines, losing 80% in just the first year.

Did CHK deliberately report fabricated well production numbers?

Bright Heritage said...

I enjoy reading such information. Im being more aware now on how oil market goes in our country at this moment.

Anonymous said...

I personally don't like the word "truth". Better call it FACTS.

Anonymous said...

I personally don't like the word "truth". Better call it FACTS.

Kevin said...

Mr. Berman,

I look forward to your analysis on natural gas abundance.

However, If natural gas is cheap and abundant here in the US, the market will find a use for it. In the mean while, exporting liquefied natural gas may be more profitable. Therefore approving its export at least temporarily shouldn't be a problem. Seems to me what we do with the natural gas is better left to the entrepreneur then policy makers in Washington.

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Anonymous said...

To be so active in the media for years; then to fall silent for months at a time.

What does that mean?

Anonymous said...

Obviously need to add land, lease and other costs to get to full cycle costs, but when you start with these numbers, not sure how one gets to your $8 per MCF.


Sweet Spot's Drilling Economics

"The 18 Bcf EUR assumption and $13-$14 million D&C cost translate in an impressively low ~$1.00/Mcf development cost. Still, this puts the Haynesville behind the Marcellus (where development costs can be as low as $0.60/Mcf in the "best of the best" areas and $0.70-$0.80 in Tier I) and the Fayetteville (where Southwestern Energy (SWN) is targeting ~$0.80 development cost for its 2013 drilling program)."

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royalties said...

Art, I sure hope we can luck up and get it right. I'd love to see high enough price to cause operators to develop shale gas but not so high as to harm consumers.

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