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by Beth Little | 2012

The Economics of Shale Gas Energy

At a special Pocahontas County Commission meeting on November 17, someone accused the county commission or maybe the hydrogeologist — it wasn’t clear who was being accused — of using scare tactics. The hydrogeologist was Paul Rubin, who gave a presentation on the dangers of drilling and fracking in karst, which is the limestone cave geology underlying much of Pocahontas County.
Aubrey McClendon, CEO of Chesapeake, said, “Natural gas prices, if they went through the roof because they couldn’t extract shale gas in this country, then 70 percent of American homes on natural gas heat will be cold; 35 percent of American homes, businesses and factories that use electricity from natural gas will be dark; and crops that require natural gas fertilizer will not be grown.” (Talk about scare tactics!) McClendon refers to opponents of frackin gas environmental zealots or “fractivists.”
This tactic is used to support the argument for continuing the advancement of drilling for natural gas with “fracking” (horizontal hydraulic fracturing) in the Marcellus shale and other shale plays around the country. The argument goes on with assertions that shale gas is cheap and abundant, and the Pickens plan calls for the mass conversion of power plants and truck fleets to natural gas. T. Boone Pickens is on TV frequently touting this plan, and the rest of the time he is in Congressional offices lobbying Congress to support it. The idea is that since shale gas is a domestic resource, we will be able to free ourselves from dependence on foreign oil and the threat of international terrorism. (More scare tactics.)
But here are some background facts that put this argument in question.
At present, natural gas is trading at about $4 per thousand cubic feet. That is cheap. Arthur Berman,  a Houston-based geoscientist who is a consultant to the gas industry, says that a well head price of over $7 per thousand cubic feet is needed for shale gas drillers to make a profit. The price from 2005 to 2008, when the Marcellus shale gas play took off, peaked at over $12, but the drilling frenzy has created an oversupply, and the price has gone through the floor.
So why are operators continuing to drill? The traditional approach to low prices for the industry has been to shut in wells. But the new technology is expensive, and operators have had to borrow heavily. With all the hype, Wall Street has been happy to comply, but shale wells are depleting so quickly that wells have to be drilled continuously to maintain cash flow. Given the very heavy debt burdens of many shale gas operators, drilling is the only way to meet debt service. Fi-
nancial analysts and journalists began referring to this in late-2009 and early-2010 as a drilling treadmill they could not get off.
The quick depletion of shale wells refers to the fact that the supply of shale gas drops steeply after the first year or two of production. Even refracking the wells doesn’t help much. Tax revenues also drop. An excellent example of this can be seen by examining the audited accounts of the city of Fort Worth, which is in the Barnett shale play. In 2008 the city received approximately $50 million in revenues from gas. This dropped precipitously in 2009 to about $19 million. There is also a question about the claims of abundance, since shale gas is replacing the production of conventional natural gas, which is declining sharply. However, that would take more space than I have, and this is already long. (All data come from industry or government sources, which I will be glad to provide to anyone who contacts me —
Meanwhile, gas industry lobbyists have been going to Washington and asking to convert six LNG (liquid natural gas) import terminals (see map below) to export terminals, and they have received the first permit for an export terminal at Sabine Pass, Louisiana. In the past, the US has been a net importer of natural gas. (Some of the land for the import terminals was acquired by eminent domain, which is legal for importing LNG, but not for exporting, so there is a legal question here that may be challenged.)

The move to exportation is because of the price in Asian markets. Natural gas in Asia is indexed to the price of crude oil. While gas trades here for around $4, it’s trading at $12 to $15 in Asia. So operators can extract, pipe, refine and ship to Asia for about $9, and sell their product for a very nice profit. The  Oil & Gas Financial Journal says, “The Chinese are willing to pay a premium to secure North American resources necessary to feed the growing Asian economy.” If you have kept up with shale plays in the news, you will note that quite a number of joint ventures have been done with the Chinese, the Indians, the Australians, and others (see map again).

Let’s say shale operators convince Congress to legislate the Pickens plan and we begin mass conversion of power plants and truck fleets to natural gas. We now become much more dependent on natural gas because we think, having been told, that it is a cheap and abundant source of energy. In the meantime, gas operators begin to export American natural gas to Asian countries to grow their economy. So the gas industry is now being paid handsomely for that gas, much more than can be paid in America. So the domestic prices are inevitably going to rise, and operators will be making money hand over fist.
But what about the American consumer, who, thanks to the genius of Congress, has had their electricity converted to be dependent on natural gas. Plastics manufacturers are right now ramping up produc-tion because they claim natural gas is a cheap and abundant source, so they are going to use it as feed stock for plastics and bring jobs back to the US. (How many of you caught the story about how WV legislators are upset that Chesapeake signed a contract to pipe gas to Louisiana in-stead of a cracker plant in WV)? Truck fleets will be dependent on natural gas to supply inventory around the country, only now, natural gas prices have gone through the roof due to exportation and Asian demand. So Aubrey McClendon’s prediction may come true BECAUSE of the shale boom.
Nobody knows for sure what could happen with shale gas drilling — how much water will be contaminated or whether our homes will be cold and dark — because the future is always uncertain. But the shaky finan-cial picture on top of the frantic rush to drill raises the question: Is this really the highest and best use of our beautiful West Virginia land, water, and air?

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