U.S. Shale Gas Production Outlook Update

For those with more than a sound-bite interest in the topic of tight oil and shale gas, quantitatively supported quality analyses from geoscientists and energy domain experts are great sources to double click on said topic. One example of such experts, in particular, is David Hughes, the one who famously rained on the EIA’s California Dreaming parade decorated with revolution-grade predictions on the Monterey shale oil production by deconstructing the myth with cold, hard field data in his report Drilling California: A Reality Check on the Monterey Shale which resulted in the energy department’s embarrassing re-evaluation of said oil reserve by a jaw-dropping 96% haircut less than six months later (LA Times).

In a later October 2014 report called Drilling Deeper, Hughes dived deep into the US tight oil and gas production and, based on detailed data down to the play-by-play county level, made projections on the country’s productions which sharply challenge the rosy ones made by the EIA.

Hughes has recently issued an update to Drilling Deeper – with a few adjustments – based on the just-in available drilling data from Pennsylvania and West Virginia.

Marcellus Shale Formation

As a refresher and for those new to the shale gas discussion, the so-called US shale gas revolution is made up of three principle plays: Marcellus, Haynesville and Barnett. (check out Deconstructing the 100 Years of Natural Gas Abundance Narrative for more background info).

Largest and fastest growing among all shale gas plays, Marcellus’ growth has been spectacular and has literally single handedly catapulted overall US natural gas production into the stratosphere since coming on stream in 2009.

The other major gas plays, Haynesville and Barnett, have experienced terminal decline since 2012. The production growth of Marcellus has so far more than compensated the declines of the other shale plays. Evidently and barring any new discovery, the growth in natural gas production in the US hinges on the performance of Marcellus. To predict where gas production is heading in the US, look no further than Marcellus.

In other words, the US ‘shale gas revolution’ IS Marcellus.

The portion of the Marcellus formation located in Pennsylvania accounts for 85% of the gas production of the entire formation. West Virginia accounts for 15% of production with other minute amounts coming from New York and Ohio.

Drilling Deeper

As mentioned, the 315 page report takes a deep dive and examines 12 shale plays which account for 82% of tight oil production and 85% shale gas production. Here are the key findings:

  • The report predicts that shale gas production will likely peak by 2018 at 25% above the levels in mid-2014, far ahead of the EIA’s prediction of 2040.
  • Total gas production will be 40% less than the EIA’s reference forecast. Gas production will be front end loaded, resulting in the total projected production only about one third of the EIA’s forecast.

Latest Marcellus observations

The latest report provides an update to the Drilling Deeper report based on the latest data through mid-2014. Here are some highlights:

High concentration. 3 out of 70 counties account for nearly half of the play’s production, 5 counties account for two-thirds, and 12 counties account for 90% of production. The sweet spots yielding the cheapest gas are being drilled while the expensive gas is being left for later.

 

 Marcellus-Production-by-county

 Marcellus gas production by county (credit: Hughes GSR)

 

Marcellus-well-distributionDistribution of wells in Marcellus as of mid-2014 (source: Drilling Deeper)

 

Well productivity. Well productivity has now peaked, most likely as a result of interference caused by wells drilling too close to one another and drilling in less productive locations. Technology is being overcome by the realities of geology.

Field decline rate. With the incessant production decline of existing wells, the overall field decline rate the Marcellus play experiences amounts to 32%, meaning that much of production needs to be replaced each year through more drilling. In Pennsylvania, about 900 wells need to be drilled each year just to maintain production at the current level.

Future production. Based on the latest available data, there is no reason to change the ‘most likely’ projection of future Marcellus gas production in Drilling Deeper. One caveat – if drilling rates decline sharply as a result of the current price slump, peak production in Marcellus will likely accelerate and occur before 2018 while production decline will moderate.

 

 Marcellus-Production-future production

Most likely case of future Marcellus production projection (source: Drilling Deeper)

 

Implications. For policy makers who are making strategic decisions based on decades of gas abundance and for the investment community who are jumping in head first with large scale infrastructure investments such as pipelines, processing plants, LNG export terminals and gas-fired power plants, decisions which are based on rosy predictions from the EIA, the implications of such decision errors could be enormous and far reaching.

 

References:

 

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