Shale Gas and Its Impact on Pricing

In this issue, we take a look at shale gas and its impact on pricing. We hope to provide our readers with guidance and actionable information that will be both valuable and useful.

Articles September 21, 2016

Published to LuthINformed- Issue XI

Shale Gas and Fracking…

As you’re undoubtedly aware, natural gas production from shale remains a contentious and growing trend in the United States. Shale gas production is currently occurring in 16 states, many of which had previously seen virtually no activity of this type. Shale is a formation of fine-grained, dense rock in which natural gas, primarily methane, has become trapped. In a conventional reservoir, gas is found in rock which, relatively speaking, has larger, interconnected pore spaces. The “fracking” technique involves drilling and pumping high-pressure liquid into the dense shale to release the gas. This injected liquid contains small, solid particles (usually sand) that fill the newly created fracture. When the injection is stopped, the formation attempts to settle back into its original configuration, but the sand keeps the fracture open. This allows crude oil and natural gas to flow into the wellbore and then to the surface for collection. The process requires huge amounts of water; as much as 10 million gallons of water can be pumped into a single well.

We are well aware of the real environmental concerns that fracking may pose. This has been an issue of public concern, with potentially far reaching consequences such as possible contamination of ground and surface water, pollution and associated potential effects on human and ecosystem health. In this article we are focusing primarily on the abundance of shale gas supply and its impact on energy prices. The discovery of shale gas has produced the lowest natgas prices in ten years, significantly reduced imports, and has almost doubled crude production over the last seven years. According to the U.S. Energy Information Administration (EIA), fracking has allowed the U. S. to increase its oil production faster than at any time in its history – hydraulically fractured wells now make up about half of total U.S. crude oil production. With natural gas exports to Mexico on the rise (see our last issue) and the ramp up of liquid natural gas exports from Louisiana, the EIA announced this past July that “for the first time since 1957, the United States is on track to export more natural gas than it imports; this will occur during the second half of next year”.


How Much and Where?

The EIA estimates in its Annual Energy Outlook 2016, that the 12.3 trillion cubic feet of dry natural gas produced from shale was about 48 percent of total U.S. production in 2014. Unproved, technically recoverable shale gas is estimated at 482 trillion cubic feet. Estimated proved and unproved shale gas resources together amount to 542 trillion cubic feet, or 25 percent, of all U.S. energy resources. Production has increased 12-fold over the last decade and is expected to continue through at least 2035 – rising from 23 percent of total U.S. dry gas production to 49 percent in 2035. The chart above shows historical shale production by state.


Impact of Shale on Prices…

The EIA projects that improvements in technology will result in higher rates of shale gas recovery – at lower costs. Lower natural gas costs translate to lower power costs as well. However, although there is supply availability, there is also a lack of pipeline infrastructure that exists in several parts of the country. We will be discussing pipeline constraints and their impact on pricing in upcoming issues.

The EIA’s 9/17/16 Short-Term Energy Outlook is now forecasting that 2016 will be the first year that natural gas-fired generation exceeds coal generation in the United States on an annual basis. The chart above shows how shale has lowered U.S. natural gas costs relative to the rest of the world. That being said, in New England for example, the amount of gas that could be delivered to the region last winter remained limited by New England’s constrained pipeline system. Natural gas inventories are expected to be 4,042 Bcf at the end of October 2016, which would be the highest end-of-October level on record.

Natural Gas Outlook…

The latest inventory report (above) shows a net increase of 62 Bcf vs. the previous week. Stocks were 184 Bcf higher than this time last year and 299 Bcf above the five-year average. Current natural gas strip prices are listed below:

12 month strip = $3.190

24 month strip = $3.126

Cal Year 2017 = $3.191

Cal Year 2018 = $2.990

(all prices NYMEX only; A/O 9/20/16)

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