Production is at record levels. Doesn’t this prove the success of shale gas?

No. Shale wells produce their greatest quantity of gas in the first year of production. It then typically drops off quite significantly and never regains its former levels. So it is logical that we are at record capacity at present since thousands of new shale wells have been drilled only in the last few years, all of which are producing their greatest quantity at the beginning of their lives.

The more important question to ask is whether shale wells can sustain adequate levels of production without resort to a frenzy of additional drilling. Looking at production histories of the older US plays, it can be seen that these plays cannot keep production at prior levels. The wells decline too quickly.

A good example of this can be seen by comparing the Barnett play to the younger Haynesville play. The Haynesville surpassed the Barnett in total production over a year ago in spite of the fact that there are 15,000 producing wells in the Barnett and only 1,500 in the Haynesville. So ten times the number of wells cannot keep production above the the levels seen in the younger Haynesville play.

Has economic stability been as good as operators promised?

No. In the Barnett shale region of North Texas, median household income increased in Texas by 21.2% for the period 2003-2010 (U.S. Census Bureau, and the Bureau of Labor Statistics). In the four counties, however, which constitute the “core” area of the Barnett play, median household income increased only an average of 14%, significantly lower than the state average of 21.2%.

Further, during the same period, there was an increase in the average unemployment rate for the same four “core” counties of 2%. This is higher than the state average of 1.5%.

And finally, the poverty level increased in percentage terms in those same four “core” drilling counties.

Is this peculiar to Texas? No. In PA, the StandardSpeaker reports similar trends:

“Shale-gas development also had minimal impact on Susquehanna County income, even though the region is among the state’s most-heavily drilled. The county’s average income decreased from 2008 to 2010, its unemployment rose by 3.2 percentage points and poverty increased from 2000 to 2010.”

These are statistics from two of the most heavily drilled areas of the country.

How many jobs have been created?

According to the Bureau of Labor Statistics, the low point of direct industry employment in the oil and gas extraction sector which includes all workers in oil and gas and not merely those employed by shale extraction, occurred in 2003 with approximately 118,000 jobs. Between 2003 and 2011, job growth in the sector amounted to about 56% to reach 186,000 jobs by yearend 2011. But this merely constitutes a net gain of 67,900 jobs over nearly a decade. To put this into perspective, this job creation amounted to 1/20th of 1% of overall employment figures in the US. There are currently 12.8 million unemployed. A growth of 67,900 jobs in the entire oil and gas sector, onshore and offshore, during a period of self-proclaimed “game changing”, “revolutionary” activity in the natural gas markets demonstrates beyond a shadow of a doubt that jobs creation is overhyped to the extreme.

We hear a lot of talk about a 100 year supply of gas. Is this true?

When people refer to a 100 year supply of gas they are referring to resource numbers rather than reserves. Resources are the potential amount of all gas that exists in a play. But that does not necessarily mean that it is available. Some of this gas, for instance, may exist in such small pockets that it will never be viable to extract it.

The Society of Petroleum Engineers defines reserves as as “potentially recoverable but not yet mature enough for commercial development due to technological or business hurdles.”

This is why the U.S. Geological Survey (USGS) has downgraded the reserve estimates for the Marcellus by 80% with the Department of Energy confirming that the entire Marcellus play will only provide a mere 6 years worth of gas at current consumption rates. They estimated reserves that are potentially recoverable using today’s technology and today’s business climate. It is also interesting to note that the USGS was invited to
assess Poland and India’s reserves. Poland slashed its reserve estimates by 85%. Industry had origianlly announced the incredible figures of 300-2100 Tcf for India’s shale potential. The USGS revised thesse numbers down to 6.1 Tcf which Indian officials referred to as a “significant” revision.

Prior erroneous estimates in each country were provide by industry.

Are reserve independently verified?

No. Und the new rule change for Oil and Gas, the SEC has allowed the operators to expand the definition of reserves to include what are called proved undeveloped reserves (PUDs) and they do not have to be independently verified. This is controversial because investors simply have to take the operators word for it that the reserves exist and are viable. This, of course, is problematic as the operators have a significant financial incentive to make such claims.

If shale is not viable, why are the Majors buying up assets?

Natural gas prices are indexed to crude prices in most of the world. Crude prices hit record highs in 2011 which drove the price of natural gas up in global markets. While Americans currently pay about $3/mcf, the Chinese are paying approximately $16 for the same amount of gas. So operators can extract, pipe and ship the gas to Asian markets for about $9/mcf total and get paid $16 for it. This is a substantial and lucrative spread.