A critical look at US Shale Gas Projections

German Institute for Economic Research (DIW Berlin)

Published: February 21, 2014

This work is published as discussion paper: Richter, Philipp M. (2013). From Boom to Bust? A Critical Look at US Shale Gas Projections. DIW Discussion Paper No. 1338. DIW Berlin.

Highlights

This paper provides a critical assessment of current optimistic projections of US shale gas production.
Resource estimates are potentially overestimated due to extrapolation from non-representative production.
Public acceptance and regulation can change due to an increase in the number of well drillings.
Modeling low US shale gas production highlights redirected trade flows and lower than Base Case consumption in Europe and Asia.
US Liquefied Natural Gas export capacity would only be required if US shale gas production continued its fast rise.

Executive Summary

In the last decade, the USA has seen an unexpected increase in natural gas production. Since 2005, annual production has increased by a third, reaching an all-time record in 2012. This rise in domestic production has been led almost entirely by a boom in shale gas extraction, as technological advances and the combined use of horizontal drilling and hydraulic fracturing have allowed for economic production of natural gas from shale formations. Moreover, this recent rise in US shale gas production is generally expected to continue, which has important implications for the US trade balance. Instead of largely relying on foreign natural gas supply, as envisaged less than a decade ago (e.g., EIA, 2005), the USA is now projected to become a significant exporter of Liquefied Natural Gas (LNG; e.g., IEA, 2012a or EIA, 2013a).

Although partly backed by realized production growth, it is in doubt whether the current shale gas boom can continue for three reasons. First, the amount of technically recoverable shale gas resources (TRR) is uncertain. Second, it is unclear to what extent US shale gas can continue to be produced economically. Third, public acceptance may drop, followed by a tightening of regulation.

Estimates of technically recoverable shale gas resources crucially rely upon assumptions on the potential area of shale production, on well-spacing and estimated ultimate recovery per well (EUR) – all factors that are highly uncertain. In essence, historical production data is used to extrapolate the TRR. However, as current production is concentrated at the most productive shale formations, production histories at these sites may be non-representative for extrapolation and hence TRR are potentially overestimated.

Moreover, these estimates describe the technical potential, not the economically producible amounts of shale gas. Recently projected production levels are indeed covered by currently estimated resources, but are highly optimistic. The EIA (2013a) projects that roughly 60% of current shale TRR will be extracted up to 2040, or put differently, cumulative production will be almost three times larger than currently proved shale reserves. Given the global abundance of conventional reserves, it is yet to be determined to what extent US shale gas can compete on the international market. Moreover, the driving forces of the current high production level are of a short-term nature, such as the shift to the most productive shale gas deposits. Prices need to sufficiently increase to maintain large future shale gas production. Hence, US shale gas production may lose its comparative costs advantage to natural gas supply from conventional sources in other world regions.

Finally, even more wells need to be drilled, affecting a large area of land and being accompanied by adverse environmental effects. Applying the average EUR across all US shale gas deposits, up to 360 thousand wells is required over the next three decades to meet projected cumulative production. A fall in public acceptance and a tightening of regulation may impede this development, though. For instance, a reduction of the land area admissible for shale gas production or of permissible well density would directly lower future production possibilities. Regulatory changes obviously would have an increasing effect on the supply costs of shale gas production, and would tend to reduce resource availability. The IEA (2013b, p. 118) acknowledges as much by stating that “[a]ny adverse change in the generally favourable regulatory and operating environment in the United States could have a material impact on the outlook for unconventional gas production”.

Hence, taking this critical assessment into account, this paper further provides two alternative scenarios that depart from the current optimistic projections for US shale gas production. One scenario is defined by a strong reduction in shale gas production as of 2015; the second scenario is derived from maintaining shale gas production at the level projected for 2015. These simulations particularly serve to investigate the implications of US shale gas production on the US market, on international trade of natural gas and subsequent infrastructure expansions. To this end the Global Gas Model (GGM) is used; a large-scale partial equilibrium model that allows the analysis of trade patterns and infrastructure expansions along the natural gas value chain.

A reduction in US shale gas production is partly compensated for by an increase in natural gas production outside the USA. It mainly leads to lower consumption of natural gas, however, in the USA but also in other countries. Instead of bearing the toll of total reduction in domestic production, US consumption stabilizes by attracting an increased amount of imports, while consumption in other countries will be lower than in the Base Case. LNG trade flows from South America and Africa will be redirected towards the USA, which competes with European and Asian countries for international supply. Existing US LNG import capacity will be utilized at higher rates and even extended to meet regional demand.

In conclusion, a critical evaluation is needed on several grounds, both of the estimated shale gas resource potential and projected future production levels. In particular the investment options of liquefaction and regasification facilities are heavily influenced by future US shale gas production. The current expansions of LNG export infrastructure will only be needed if US shale production continues to quickly increase; the licensing process should be adjusted in light of the discussed uncertainties. In contrast to the current debate on US export capacity needs, the US LNG import infrastructure in place will be utilized, and may even be extended if shale gas production cannot meet the hopes pinned on it.

References

EIA (US Energy Information Administration). 2005. Annual Energy Outlook. EIA, US Department of Energy. Washington, DC.

EIA. 2013a. Annual Energy Outlook 2013. EIA, US Department of Energy. Washington, DC.

IEA. (International Energy Agency) 2012a. World Energy Outlook 2012. OECD/IEA, Paris.

IEA. 2013b. World Energy Outlook 2013. OECD/IEA, Paris.

This work is carried out within the scientific project "RESOURCES: International Energy Resource Markets under Climate Constraints - Strategic Behavior and Carbon Leakage in Coal, Oil, and Natural Gas Markets" funded by the German Ministry of Education and Research.