Shale Gas Estimate Plummets

But production expected to grow despite appraisal falling two-thirds

Pittsburgh Post-Gazette
24 January 2012
By Erich Schwartzel

The shale has shrunk.

At least according to the U.S. Energy Department, which released new reserve estimates for the Marcellus Shale on Monday that severely cut the amount of natural gas estimated to be in the rock formation.

The estimate of 141 trillion cubic feet of gas -- down from the 410 trillion the agency reported last year -- is the latest result of yo-yoing in reserve numbers since drillers started extracting lucrative gas and oil from the formation underneath Appalachia.

The daily rate of Marcellus production doubled in 2011, but that development yielded new data giving what the department's Energy Information Administration says is the truer -- or at least latest -- indication of how much recoverable gas awaits drillers signing leases in the region.

Despite the lower estimate, gas production in the United States is still expected to grow, lessening America's dependence on energy imports and keeping natural gas prices at profit-busting lows.

Nationwide, shale gas production is expected to increase from 5 trillion cubic feet in 2010 to 13.6 trillion in 2035.

Gas is now trading around a decade-low $2.30 per thousand cubic feet, and the EIA expects it to remain below $5 through 2023.

That's sorry news for drillers already trying to figure out how to justify rapid-fire drilling in a market that doesn't promise quick profits.

The lower gas prices -- coming at a time when oil values are rising -- have led to major company portfolio changes in just the past week.

Downtown-based EQT Corp. announced it would suspend drilling operations in the Huron Shale that underlies Kentucky.

And on Monday, Chesapeake Energy of Oklahoma City announced it would cut gas production by 8 percent, effectively freezing the company's gas development.

Chesapeake, which has been one of the Appalachia region's most aggressive lease-signers, said the production cuts would take place in Texas, Arkansas and Louisiana.

Oil prices, meanwhile, will continue to climb, the Energy Department report said, and could hit $120 per barrel in 2016.

That could shift energy firms to more liquid-rich plays like the Utica Shale in Ohio, which contains natural gas liquids whose prices align more closely with oil and is currently estimated by the EIA to hold 16 trillion cubic feet of gas.

As part of its announcement Monday, Chesapeake Energy said 90 percent of new leasehold expenditures would come from liquid-rich regions.

The new Energy Department estimate had been anticipated by the U.S. Geological Survey, which said in August the Marcellus Shale contained 84 trillion cubic feet in recoverable gas.

The USGS estimated in 2002 that the formation held only 2 trillion cubic feet, but that came before hydraulic fracturing technology made drilling in the Marcellus Shale viable.

The drastic changes have led critics to say estimates are premature and as fickle as Goldilocks.

Travis Windle, spokesman for the Marcellus Shale Coalition industry group, issued the following statement:

"EIA's preliminary report underscores the critical and growing role that American natural gas will continue to play in meeting our nation's growing energy needs for decades to come.

And while estimates ebb and flow over time, history of oil and natural gas production always trends upward thanks to new technologies and innovations that even the brightest experts today could never foresee.

"In 2003, then-Federal Reserve chairman Alan Greenspan told a Senate panel that, 'We are not apt to return to earlier periods of relative abundance and low prices anytime soon,' " he said, quoting the chairman during a gas shortage in the pre-Marcellus Shale days. "To think how far we've come in such a short period of time," added Mr. Windle.

Despite this latest decrease in America's estimated reserves, production in the Marcellus and other shale plays is expected to lower electricity prices over the next several years.

Since gas-powered plants typically dictate power prices, low natural gas prices lead to lower electricity prices.

The per-kilowatt-hour cost is expected to fall from 9.8 cents in 2010 to 9.2 cents in 2019.

Increased gas production also will help cut dependence on energy imports by nearly half by 2035, the agency said.

The natural gas push will coincide with a decrease in Appalachian coal production, with regional coal development expected to fall from providing 39 percent of the nation's output to 29 percent by 2020.

The new Energy Department data was published in an abbreviated version; the full Annual Energy Outlook will be released April 26.

Erich Schwartzel: or 412-263-1455.