I've been looking at shale gas in the US for over three years, long enough to have seen every enviromental objection disproved, but even more interesting is how every prediction about shale gas economics has been disproved in spectacular fashion. For example
Dec. 21 (Bloomberg) -- Booming U.S. natural gas production from shale formations and slowing demand from households, factories and power plants are poised to send prices down for an unprecedented fifth year in 2012.
Gas may tumble 8.2 percent from its 2011 average next year, as output rises 2.8 percent to a record 67.72 billion cubic feet a day, according to the Energy Department. Demand will probably climb 1.7 percent, after a 1.8 percent increase this year, the department said in its Dec. 6 Short-Term Energy Outlook.
"It's been practically impossible to turn off the shale- gas tap," Adam Sieminski, chief energy economist at Deutsche Bank AG in Washington, said in a telephone interview Dec. 14. "Industrial demand has been rising, but it's not enough."
Adam S also said something interesting earlier this month:
Adam Sieminski, Chief Energy Economist, Global Markets, at Deutsche Bank, questioned whether advances in shale and tight oil drilling, which are building on technology developed for natural gas shales, might open up so many new oil resources that they would upend everyone's expectations in a couple of years, as the technology did for gas.
The key word here is advances. Shale is effectively a once in a generation game changer in energy, built not only on luck but also on technology. The increase in computing power of this century is what really made the technology possible. But those whose idea is of a future as model based, i.e. the future is simply a continutation of the past, are not able to handle inflection points.
We've been here before: Conventional energy wisdom is as relevant as Blockbuster Video, any Post Office in any country, bookstores, the music industry and any number of indestructible models that were too big to fail - but did thanks to technology.
Back to the US this year:
The drilling of longer horizontal sections of wells and fracturing of rocks in multiple locations have helped producers increase output from formations such as the Marcellus shale in the U.S. Northeast even as prices fell, Sieminski said. Production from shale deposits, where water and chemicals are pumped underground at high pressure to break apart rock and release gas, more than doubled from 2007 to 2009, according to the most recent Energy Department data.
"While our previous outlook anticipated a slow decline in gas-well completions and connections in 2012, we now believe they will come to market at about the same pace as in 2011, resulting in supply growth through 2012 and 2013," Michael Zenker, an analyst at Barclays Capital in New York, said in a Nov. 1 note. Prices will average $3.80 per million Btu next year, down from a previous forecast of $4.55, he said.
I've had people telling me six months ago that Henry Hub is headed to $2.50 in 2012, but there are still those who use past models to make predictions. One is rig counts:
A drop in drilling rigs and rising exports to Canada may stop the price declines in 2012, said Dan Rice, managing director of BlackRock Inc.'s global resources team in Boston, who oversees more than $5 billion in assets. Prices may average $4 next year, rising to $4.50 in the second half of 2012, he said in an interview on Dec. 14.The number of rigs drilling for gas in the U.S. dropped two to 818 in the week ended Dec. 16, the lowest amount since Jan. 15, 2010, according to data from Baker Hughes Inc. in Houston.
The number of drilling rigs is one of the old drivers that traders used to look at. Two others were long term winter weather forecasts, generaly worthless and the impact of hurricanes on US Gulf Coast production. This trinity of drivers is now meaningless in the the face of surging actual production. Rig counts meant something in vertical conventional universe, but each time the rig count goes down and production still soars that theory is rendered meaningless. The theory by now was that shale was going to be expensive and that drillers would shut in wells in the face of low prices. But reality is different.
Production from the Haynesville shale in Louisiana has averaged 6.8 billion cubic feet a day in 2011, or 11 percent of total U.S. marketed production, Scott Hanold, an analyst at RBC Capital Markets in Minneapolis, said by phone Dec. 15. Marcellus gas is contributing about 3 billion a day, he said.
"The Haynesville shale is growing at an incredible rate and has become a meaningful part of overall supply," he said. "The bottom line is that it's going to be tough to absorb this supply with incremental demand growth in the short term,"
The Haynesville story is instructive. Rig counts are down, prices are down and all the experts models are wrong: production is surging. But this also provides indicators about how the next few years will pan out. The largest shale play is the Marcellus is less than half of Haynesville production this past year, but going forward we know the potential size of not only the Marcellus, but also the Utica is going to make future years simply astounding. Technology and geology will combine to make 2012 one amazing year for the US economy.
Suddenly Europeans are going to have to ask themselves what is happening to the US, and more to the point, why isn't it happening in Europe.
