One of the few bright spots in the American economy that almost everyone seems to agree on is the energy sector. Advancements in drilling technologies have made it possible to extract vast quantities of oil and gas from shale formations.
The resultant boom in natural gas production drove prices to a decade low back in April, providing U.S. consumers and companies with a cheap source of electricity. In fact, according to some commentators, low natural gas prices have even spawned a "renaissance" in U.S. manufacturing, by way of lower energy and feedstock costs.
The massive growth in shale oil and gas production marks a drastic departure from perceived realities just a decade ago, when most commentators asserted that the U.S. would become a major importer of natural gas. Now, it turns out, we may actually become one of the biggest exporters of natural gas by the close of this decade.
But not everybody agrees with this conventional view. In fact, as an energy conference at the University of Texas last month highlighted, there is a debate raging about the future of shale oil and gas production and its implications for the U.S. economy. Let's take a closer look at the two sides of this discussion.
The debate over the true potential of shale oil and gas
The shale oil and gas story is no doubt a convincing one. Natural gas extracted from shale deposits already accounts for a tenth of the total U.S. energy supply, up from next to nothing just a decade earlier. U.S. crude oil production is the highest it's been since at least 1998. These are facts that most everybody can agree upon. But the potential of shale oil and gas going forward is where we encounter drastically divergent views.
On the one hand are analysts, geologists, and other experts who claim that shale wells suffer from steep decline rates. According to them, shale wells produce massive quantities of oil and gas in the first couple of years but then quickly turn into "stripper" wells -- those that produce only insignificant quantities of hydrocarbon. If these skeptics are right, then the American shale gas revolution should die out just as fast as it was brought to life.
On the other hand are those who argue that decline rates aren't nearly as bad as the pessimists claim. They believe that the sheer quantity of natural gas available in the U.S. will offset the relatively higher decline rates of shale wells.
The two sides of the story
Among the pessimists, Arthur Berman has risen to the forefront as one of the more prominent and widely read shale gas skeptics. Berman, a petroleum geologist and energy consultant based in Houston, has argued that the U.S. will witness a steep decline in gas production because we don't have the capacity or the economic incentive to replace the old, quickly declining wells with new ones at current price levels.
According to Berman, the hype surrounding the shale gas revolution has averted attention from a harsh reality -- the sharp reduction in conventional gas production. But unlike the optimists, he believes the current high rates of shale gas production growth cannot be sustained and will fall sharply in coming years. He told POWER magazine:
It's not a problem for today or tomorrow, but it is coming. Once we work through the current oversupply, if capital is not forthcoming, prices will spike. The gas supply bubble will burst.
The part of Berman's argument that made the most sense to me is how many new shale wells need to be brought on just to maintain a given level of supply. According to his calculations, shale wells decline at rates of between 30% and 40% per year. By contrast, conventional wells have decline rates in the 20% to 25% range. This means a sharply higher number of new wells need to begin production each year just so that supply can stay flat.
Berman's analysis of shale wells in the Barnett Shale, where Chesapeake Energy , Devon Energy , and EOG Resources are three of the leading producers, provides a rather alarming example. According to his calculations, the annual decline in total gas resources in the Barnett is 1.7 billion cubic feet per day. For net production in the Barnett to rise, it would require energy companies to drill nearly 4,000 wells at a total cost of roughly $12 billion, he argues.
On the side of the optimists, Terry Engelder makes another convincing argument. Engelder, a geologist and professor at Penn State, believes that shale wells offer a much longer period of production than conventional wells. He agrees with the skeptics that shale wells produce copious quantities of gas initially, which is then followed by a sharp drop-off in production. But he maintains, unlike the skeptics, that shale wells can keep producing for a much longer period than conventional wells, even after the initial decline.