Will Shale Gas Bring on the Next Collapse?

June 25, 2019

The dodgy finances of the oil and gas fracking industry are a big story, much too big to summarize here, but there’s a lot being written on this, which I’ll be delving into in coming months.


Steve Schlotterbeck, who led drilling company EQT as it expanded to become the nation’s largest producer of natural gas in 2017, arrived at a petrochemical industry conference in Pittsburgh Friday morning with a blunt message about shale gas drilling and fracking.

“The shale gas revolution has frankly been an unmitigated disaster for any buy-and-hold investor in the shale gas industry with very few limited exceptions,” Schlotterbeck, who left the helm of EQT last year, continued. “In fact, I’m not aware of another case of a disruptive technological change that has done so much harm to the industry that created the change.”

“While hundreds of billions of dollars of benefits have accrued to hundreds of millions of people, the amount of shareholder value destruction registers in the hundreds of billions of dollars,” he said. “The industry is self-destructive.”

Schlotterbeck is not the first industry insider to ring alarm bells about the shale industry’s record of producing vast amounts of gas while burning through far more cash than it can earn by selling that gas. And drillers’ own numbers speak for themselves. Reported spending outweighed income for a group of 29 large public shale gas companies by $6.7 billion in 2018, bringing the group’s 2010 to 2018 cash flow to a total of negative $181 billion, according to a March 2019 report by the Institute for Energy Economics and Financial Analysis.

But Schlotterbeck’s remarks, delivered to petrochemical and gas industry executives at the David L. Lawrence Convention Center in Pittsburgh, come from an individual uniquely positioned to understand how major Marcellus drillers make financial decisions — because he so recently ran a major shale gas drilling firm. Schlotterbeck now serves as a member of the board of directors at the Energy Innovation Center Institute, a nonprofit that offers energy industry training programs.

His warnings on Friday were also offered in unusually stark terms.

“The technological advancements developed by the industry have been the weapon of its own suicide,” Schlotterbeck added, referring to the financial impacts of shale gas drilling on shale gas drillers. “And unfortunately, the industry still has not fully realized how it’s killing itself. Since 2015, there’s been 172 E&P company bankruptcies involving nearly a hundred billion dollars of debt.”

“In a little more than a decade, most of these companies just destroyed a very large percentage of their companies’ value that they had at the beginning of the shale revolution,” he said. “It’s frankly hard to imagine the scope of the value destruction that has occurred. And it continues.”

At the Friday conference, he displayed a slide showing the stock prices of eight major Marcellus shale gas drillers: Antero, Range Resources, Cabot Oil and Gas, Southwestern Energy, CNX Gas, Gulfport, Chesapeake Energy, and EQT, the company that Schlotterbeck ran until he resigned in March 2018. Seven of the eight companies saw their stock prices fall between 40 percent and 95 percent since 2008, the slide showed.

“Excluding capital, the big eight basin producers have destroyed on average 80 percent of the value of their companies since the beginning of the shale revolution,” Schlotterbeck said. “This is not the fall from the peak price during the shale decade, this is the drop in their share price from before the shale revolution began.”

Mr. Schlotterbeck credited the shale rush with lowering power and natural gas bills nationwide and offering significant economic benefits since 2008, when he said the shale revolution began.

“Nearly every American has benefited from shale gas, with one big exception,” he said, “the shale gas investors.”

Residents of communities where shale gas drilling and fracking have caused disruptions and health issues might take exception to Mr. Schlotterbeck’s categorical description of the beneficiaries of shale gas, as might climate scientists who have warned that the shale industry’s greenhouse gas emissions are so severe that burning gas for power may be worse for the global climate than burning coal.

More recently, shale gas producers have begun to feel the heat from investors who are pushing to see signs that the gas can be produced not just in high volume, but also at a profit.

As a result of investor pressure, all these companies have committed to lower growth rates and to live within cash flow,” said Schlotterbeck. He noted that the drillers had slashed their gas production growth forecasts from over 20 percent down to 11 percent this year. “Yet both the gas commodity market and the equities market are saying this is not nearly enough of a cut.”

He noted that the at-the-wellhead price of natural gas in the Marcellus region was around $8/MMBtu back in 2008, and had plunged to less than $2/MMBtu today.

That price plunge was caused by a massive glut of shale gas production as drillers raced first to hold acreage by producing gas, then competed to see who could make individual wells produce at higher rates by using tactics like drilling longer horizontal well bores and experimenting with the proppants used during fracking.

“And at $2 even the mighty Marcellus does not make economic sense,” he said, later clarifying that that included both “dry” gas wells, which produce mostly methane, and “wet” gas wells, which also produce the natural gas liquids (NGLs) that can be used by the petrochemical industry as raw materials for making plastic and chemicals. “Wet gas is better, but nobody’s making money at $2 gas.”

“Over the past year or so, most of the producers have shifted away from the phenomenal growth rates of the past to more moderate growth projections,” Schlotterbeck said. “The market is clearly telling them that they haven’t slowed down enough.”

“Now I tell you all this because I think it has long-term implications for the end users of natural gas. This situation cannot continue indefinitely,” Schlotterbeck continued. “There will be a reckoning and the only questions is whether it happens in a controlled manner or whether it comes as an unexpected shock to the system.”

J David Hughes for Post Carbon Institute:

Shale gas and tight oil from low permeability reservoirs have provided a new lease on life for U.S. oil and gas production. Tight oil has allowed U.S. oil production to double from its 2005 lows, and shale gas has similarly allowed a major increase in U.S. gas production. However, the nature of these reservoirs is that they decline quickly, such that production from individual wells falls 70–90% in the first three years, and field declines without new drilling typically range 20–40% per year.

Continual investment in new drilling is therefore required to avoid steep production declines. Older fields like the Barnett, where drilling has nearly ceased, are in terminal decline. Shale plays also exhibit variable reservoir quality, with “sweet spots” or “core areas” containing the highest quality reservoir rock typically comprising 20% or less of overall play area. In the post-2014 era of low oil prices drilling has focused on sweet spots which provide the most economically viable wells.

This analysis finds that EIA projections of production through 2050 at the play-level are highly to extremely optimistic, and are therefore very unlikely to be realized. EIA play forecasts count on recovering all proven reserves plus a high percentage of unproven resources—in some cases over 100%—by 2050. (Proven reserves have been demonstrated by drilling to be technically and economically recoverable. Unproven resources are thought to be technically recoverable but have not been demonstrated to be economically viable; as such they are much less certain than proven reserves.) Furthermore, most of these play-level projections assume that production will exit 2050 at high levels compared to current rates, implying that there are vast additional resources to be recovered beyond 2050.

Key findings:

– Well productivity

o Better technology—including longer horizontal laterals, a tripling of water and proppant injection since 2012, and more fracking stages—has resulted in increased average well productivity in most plays.

o A significant portion of the increased average well productivity is a result of “high-grading” sweet spots: focusing drilling on the highest quality reservoir rocks (which form a relatively small portion of most plays).

o Average well productivity in some counties and plays has declined in 2017, indicating technology there has reached the point of diminishing returns. This is a result of drilling outside of sweet spots and/or drilling wells too close together, resulting in “frac hits” and well interference which compromises individual well production.

– Tight oil plays

o The Permian Basin plays are the main driver for tight oil production growth. In Permian plays such as the Wolfcamp and Spraberry production is increasing rapidly, although Bone Spring production has flat-lined recently. EIA estimates for production through 2050 for these plays are rated as highly to extremely optimistic.

o Production in older tight oil plays like the Bakken and Eagle Ford, which were among the first tight oil plays developed, is down substantially from peak. EIA projections for these and other tight oil plays, including the Niobrara and Austin Chalk, are rated as highly to extremely optimistic.

– Shale gas plays

o The Appalachian plays are the main driver for shale gas production growth – the Marcellus and Utica now account for 48% of U.S. shale gas production. EIA forecasts for the Marcellus and Utica, which project these will provide 52% of cumulative production of U.S. shale gas through 2050, are rated as extremely optimistic.

o Production in older shale gas plays—including the Barnett, Haynesville, and Fayetteville, which were among the first to be developed—is now down more than 40% from peak. EIA projections for these plays—along with the Woodford, which is down 25% from peak—are rated as highly to extremely optimistic.

– All plays

o The EIA AEO2017 reference case projects that 1.29 million wells will be drilled to recover oil and gas from both conventional and unconventional reservoirs in the period 2015–2050. At $6 million per well, this amounts to $7.7 trillion. Shale plays reviewed herein, which account for 88% of the EIA’s estimated shale oil and gas production through 2050, would require 1.04 million wells using EIA assumptions—at an estimated cost of $5.7 trillion. Recovering the remaining 12% of shale resources would require an additional .68 million wells at a cost of $4.1 trillion. Given the EIA’s overestimates of future shale production and recoverable resources, it is unlikely that all of these wells will be drilled.

There is no doubt that the U.S. can produce substantial amounts of shale gas and tight oil over the short- and medium-term. Unrealistic long-term forecasts, however, are a disservice to planning a viable long-term energy strategy. The very high to extremely optimistic EIA AEO2017 projections impart an unjustified level of comfort for long-term energy sustainability. As sweet spots are exhausted, the reality is likely to be much higher costs and higher drilling rates to maintain production and/or stem declines.

The “shale revolution” has provided a reprieve from what just 13 years ago was thought to be a terminal decline in oil and gas production in the U.S. It has sparked calls for “American energy dominance”2—despite the fact that the U.S. is projected to be a net oil importer through 2050, even given EIA forecasts. This reprieve is temporary, and the U.S. would be well advised to plan for much-reduced shale oil and gas production in the long term based on this analysis of play fundamentals.


12 Responses to “Will Shale Gas Bring on the Next Collapse?”

  1. Abel Adamski Says:

    We don’t want wars and loss of millions of lives as the US invades countries to steal their oil and gas because of their addiction to fossil fuels

  2. jerrydogood Says:

    Gas prices have dropped. That is reality, all the rest is BS.

  3. jimbills Says:

    test – trying to post something, it keeps disappearing

  4. Bryson Brown Says:

    Unsustainable in so many ways, yet it keeps on going– for how long and to what end?

  5. rsmurf Says:

    More unsustainable activities by stupid humans! With the added benefit of destroying the climate. Maybe that whole bible/religous thing is true. Something about a certain number of people will be spared when the day or reckining comes. Could that day be the last day of liveability for humans on earth. Maybe they (they being aliens that have bread with the humans) just leave and go to another planet. HMMMMM

  6. jfon Says:

    ‘..aliens that have bread with the humans’ is where two species share food. ‘ .. aliens that have BRED with the humans’, on the other hand, is where they share ..other things.

    • dumboldguy Says:

      And let’s hope the aliens showed some character and human consent was given before “other things” were shared—-we have enough humans that think “grab ’em by the p***y” and “you can do whatever you want to them” is proper behavior.

    • rsmurf Says:

      are u sure? they are aliens! and plus it appears you UNDERSTOOD what I MEANT so does it REALLY matter. and yes i know the difference. But I Really don’t care! If you want a job correcting spelling and grammar I’m sure there are editor jobs you could get, to relieve your itch to correct people. Maybe you could edit the yam’s tweets. dont waste my time! Ant the spelling and grammar were for you!

  7. Bryson Brown Says:

    Unsustainable in so many ways, yet it keeps on going– for how long and to what end? Shell is trying to buy acquiesence with pro-environment gestures as they plan more and more exploration and development of new gas and oil into mid-century. Either they go out of business or we all do (with apologies to Oscar Wilde…).

    • dumboldguy Says:

      Yep, and it will keep on going until the climate SHTF and the world goes crazy as it tries to deal with the mess. Shell is not alone in its gaslighting and smoke-blowing. We here in the DC area are inundated with TV and newspaper ads from BP (touting such things as composting garbage to make biofuel) and Chevron and the fossil fuel-enabled “doers” (who are doing nothing substantial).

      And to what end? The same “end” as always—-enrich the few at the expense of the many

Leave a Reply

Please log in using one of these methods to post your comment:

WordPress.com Logo

You are commenting using your WordPress.com account. Log Out /  Change )

Facebook photo

You are commenting using your Facebook account. Log Out /  Change )

Connecting to %s

%d bloggers like this: