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New York state shale gas: Not so much

New York state shale gas: Not so much thumbnail

A drilling foreman once told me, “Don’t believe ANY reserve number unless it’s linked to a price.” And, that is just what petroleum geologist and consultant Arthur Berman and his colleague Lyndon Pittinger have done in a new report on the viability of shale gas in New York state.

Not surprisingly, when Berman and Pittinger considered what it would cost to extract the shale gas beneath New York state at a profit, the mammoth claims about recoverable reserves made by the oil and gas industry appeared heavily inflated.

Cropped portion of image from USGS report showing extent of en:Marcellus Formation shale (in gray shading). http://pubs.usgs.gov/of/2005/1268/2005-1268.pdf U.S. Geological Survey Open-File Report 2005-1268] via http://commons.wikimedia.org/wiki/File:Marcellus_Shale_USGS.png
Source: USGS report by Robert C. Milici via Wikimedia Commons

The stunning conclusion of the report is that at current prices–in the mid-$4 range per thousand cubic feet (mcf)–NONE of the natural gas trapped in the New York portion of the Marcellus can be profitably extracted. It’s possible, of course, that someone would try. But, the economics look very shaky at current prices given what we know about the nature of the underground deposits.

Shale gas, you’ll recall, is found in deep shale layers, in this case more than 4,000 feet below New York state. The shale formation the two authors studied is called the Marcellus which stretches from Tennessee to New York.

The natural gas in the Marcellus is deep, and it does not flow in commercial quantities on its own after a well is drilled. A new variant of an old technique called hydraulic fracturing–namely, high-volume slickwater hydraulic fracturing–combined with horizontal drilling has made this resource available for the first time. The fractures that result allow the gas to flow out of the formation, and the horizontal wells provide a relatively economical way to do a lot of fracturing or fracking from just one drilling pad.

Industry spokespersons, analysts and reporters often quote the total technically recoverable natural gas resource when discussing the Marcellus. Berman and Pittinger note a 2009 estimate of 489 trillion cubic feet (tcf) of which about 71 tcf were thought to be under New York state.

There are two problems with this estimate. First, just because something is technically recoverable doesn’t mean that it will be profitable to bring out of the ground. Second, these estimates (and they are only estimates) keep going lower as actual drilling reveals just how little of the Marcellus is turning out to be amenable to extraction.

The U.S. Energy Information Administration (EIA) now believes that the entire formation across all states contains only about 141 tcf of technically recoverable gas.

But, just how much of this gas could actually come out of the ground at a profit at a given price? Berman and Pittinger first had to consider New York’s rules about setbacks from public and private buildings and protected natural areas such as parks, streams and rivers. They then extrapolated actual drilling experience from Pennsylvania along the border with New York because the prospective drilling areas in New York have many similarities but no track record. New York currently has a moratorium on natural gas development using fracking.

We already discussed the authors’ conclusion about the viability of shale gas in New York at current prices in the mid-$4 range. There is none. But at $6 per mcf the report details three scenarios based on what land turns out actually to be available under New York’s rules. The range of recoverable reserves is from 0.8 tcf to 2.4 tcf. At $8 the range is 2 tcf to 9.1 tcf.

Compare these to the original estimate of technically recoverable resources of 71 tcf for the New York state portion of the Marcellus, and you’ll understand why the industry doesn’t like to talk about just how little shale gas might turn out to be profitable to extract.

Berman and Pittinger’s work calls into question the industry promise of cheap, abundant domestic natural gas for decades to come. The $8 price tag for the highest estimated recovery from New York state is 300 percent higher than the average price that Americans paid for natural gas in the 1990s ($1.92 per mcf) and almost 80 percent higher than what they are paying today.

But at these higher prices, won’t natural gas be abundant? Abundance is in the eye of the beholder. Certainly, there will be more natural gas available for extraction at higher prices. But, there are two issues. First, claims that the United States has 100 years of natural gas at current rates of consumption are completely overblown. The actual statistics on which the claim is based give a number of 92 years.

And, as the report points out, only the so-called “probable” portion of the American natural gas resource has even been drilled to show that it actually is recoverable, and that area represents about 25 percent of the total estimated resource. Of that it is unlikely that more than half will actually ever become reserves–that is, accessible and profitable to extract. That would bring us down to just 12.5 percent of the technically recoverable resources ultimately turning into reserves. And, that would imply a figure of just 17.6 tcf of recoverable natural gas reserves for the entire Marcellus based on the EIA estimate of 141 tcf in resources. The report, however, does not make any such estimate. For comparison, the United States consumed 26 tcf of natural gas in 2013.

So what is Berman and Pittinger’s estimate of years of total U.S. natural gas reserves at current rates of consumption? Just 26 years.

Anticipation can be very, very exciting all by itself. And, the oil and gas industry has filled the nation with excitement over an anticipated bounty of domestic natural gas. But with reality setting in, it turns out that natural gas isn’t going to be as cheap or as abundant as the industry promised.

Will this disappointment register when New York state considers whether to lift its moratorium on fracking? This is what the League of Women Voters of New York, sponsor of the report, is going to find out. Is this much smaller than anticipated resource with its many admitted drawbacks and risks worth extracting? Should New York and other states consider a different path to a viable energy future?

Perhaps the most important questions to ask are these: What will New York and other states do when the gas runs out? What will they do when all that’s left is the mess that shale gas development will inevitably leave behind in the form of disturbed landscapes, disrupted neighborhoods and farms, polluted surface water, abandoned gas wells, long-term dangers to aquifers from injection wells used to dispose of fracking wastewater, and the failure to build a renewable energy infrastructure in advance of this inevitable day?

I wonder if these last two questions will even come up.

Resource Insights



24 Comments on "New York state shale gas: Not so much"

  1. Newfie on Sun, 27th Apr 2014 6:56 pm 

    “Should New York and other states consider a different path to a viable energy future?”

    If by viable energy future they mean never ending growth then they are dreaming in technicolor.

  2. Plantagenet on Sun, 27th Apr 2014 8:23 pm 

    Funny how shale gas is booming in Pennsylvania, but just across the border Berman and his cronies want folks to believe its not economic.

    I wonder if Berman is just trying to buy up those NY leases himself on the cheap.

  3. Kenz300 on Sun, 27th Apr 2014 8:46 pm 

    Quote — ” First, just because something is technically recoverable doesn’t mean that it will be profitable to bring out of the ground. Second, these estimates (and they are only estimates) keep going lower as actual drilling reveals just how little of the Marcellus is turning out to be amenable to extraction.”
    —————————-

    It gets more expensive to recover fossil fuels every year.

    Wind and solar get cheaper every year………..

    No wonder the fossil fuel industry is doing all they can to suppress alternative energy competition.

    The clean energy transition is unstoppable, so why fight it? – SmartPlanet

    http://www.smartplanet.com/blog/the-take/clean-energy-transition-unstoppable-so-why-fight-it/?tag=nl.e662&s_cid=e662&ttag=e662&ftag=TRE383a915

  4. Nony on Sun, 27th Apr 2014 9:25 pm 

    open it up and see if anyone comes. If it’s uneconomical, no one will.

  5. FloridaGirl on Mon, 28th Apr 2014 12:44 am 

    I’ve looked at the SEC filing for several companies that specialize in Bakken oil and gas and they aren’t even making a profit. Some show a profit but the trick is they are depreciating the very expensive ($9-10 million/well) drilling cost like they are conventional wells. This depreciation rate doesn’t reflect the high production decline rate shale oil and gas. Their drilling and production expenses are more than there oil and gas sales income. If they stopped drilling, they would not be able to pay off their debt. They get by selling stock and bonds and using credit lines. One of their listed risks is the inability to raise funds which says they are dependent on new funding. I thought about why they would continue with a losing business and realized that the people working there are making salary and bonuses and cashing in on stock options. So if they can’t turn a profit in the best Bakken oil areas, it seems unlikely that companies could make money on fracked gas at anywhere near the current prices.

  6. tahoe1780 on Mon, 28th Apr 2014 1:35 am 

    “at current rates of consumption” Oh, wait. You want to run trucks, rail, and autos on natural gas and back up those solar and wind farms with gas turbines? And bring back those chemical firms that use it as a feed stock? 26 years – N = ?!

  7. Nony on Mon, 28th Apr 2014 7:12 am 

    FloridaGirl:

    What an amazing discovery. Wow. Oil wells have an upfront cost and later pay back. Notify Wall Street.

    Please investigate biotech stocks next and do a compare/contrast versus dividend-paying chemicals stocks.

  8. Pops on Mon, 28th Apr 2014 7:22 am 

    “What an amazing discovery. Wow. Oil wells have an upfront cost and later pay back. Notify Wall Street.”

    The point is, due to higher depletion rates, LTO wells have no “later.”

  9. rockman on Mon, 28th Apr 2014 8:04 am 

    Everyone is making valid points IMHO. But let’s not

  10. rockman on Mon, 28th Apr 2014 8:34 am 

    Crap…clumsy fingers. LOL.

    Let’s not forget THE driving forces behind the efforts of the PUBLIC companies chasing the shale: stock value growth via deserve base growth. After that they’ll focus on an even more simplistic metric: company production rate. As the discussion shows defining profit it difficult. Which is one reason Wall Street doesn’t tend to focus on that metric. You will never seen “profit” of any drilling effort in a company’s SEC filing: what’s posted is revenue vs expenditures which doesn’t tend to indicate how drilling is going.

    FL Girl: you might not have heard the my story before: I once spent $20 million drilling 4 horizontal wells that increased the total company production rate 400%. And WS rewarded this very small pubco with a 600% increase in stock value. But we didn’t add $1 of increased proven reserves: we simply increased the production rate of already booked reserves. In reality if you analyzed the wells from a net present value standpoint the company actually lost money on the effort.

    And no one lied: the facts were there to be seen in the company’s annual report (in fine print, of course). But WS didn’t care: the stock brokers just hyped our use of the new “magic bullet”: horizontal drilling. And the sheep just ran right over the cliff: within a few years the company went bankrupt and disappeared forever.

    So it doesn’t really matter what the shale profits are or aren’t: no one in the know is buying those stocks for the “profits”. They are buying in just to ride the hype up. The profit comes from buying low/selling high. The obvious trick is the timing. $billions have been made by some folks on many of the shale companies and little if any of that return came from the drill bit…it came from sell orders.

    Instead of trying to figure out the dynamics of the play from production stats folks might want to focus on the stock stats. I still consider Petrohawk one of the most successful Eagle Ford Shale players: they took a lot of cheap leases early on, drilled a number of “seed wells” and then sold the company for $12 BILLION. They walked away and never looked back at S Texas. And guess what: they reinvented themselves as Halcon (a Mexican hawk) and are putting together another shale play in east Texas. Like the say: if the plan ain’t broken don’t fix it. LOL.

  11. kuidaskassikaeb on Mon, 28th Apr 2014 8:45 am 

    This really isn’t news. The sweet spots don’t reach into New York,as has been known for a long time. Or if they do only a little bit near I think Delaware county. The shale is too shallow and thin. In the great debates I don’t think this really matters.

  12. shortonoil on Mon, 28th Apr 2014 9:19 am 

    “I’ve looked at the SEC filing for several companies that specialize in Bakken oil and gas and they aren’t even making a profit. Some show a profit but the trick is they are depreciating the very expensive ($9-10 million/well) drilling cost like they are conventional wells.”

    In the words of the FT columnist John Dizard, “Wall Street should have provided reality checks to the shale gas people. Instead they provided cashiers checks cheques with lots of zeroes at the end”. Dizard’s statement mirrored an article that had appeared in the Wall Street Journal, and he found it very reminiscent of the subprime mortgage fiasco that almost pushed the world’s financial system into oblivion.

    Of course the same entities that conjured up MBS, and synthetic CDOs have played the same role in shale, and for the same reasons. Profit from transaction fees, and of course when the shale revolution implodes, leaving pension funds, and widows and orphans holding the bag they don’t expect to be held accountable anymore than they were the last time around. This time, however, things could turn out very differently?

    10% of US liquid hydrocarbon consumption comes from shale; about 2 mb/d. If drilling stopped most of that 2 mb/d would disappear within a year, and there is no secondary source to fall back upon. The US could find itself in a critical liquids shortage position very quickly. Such lack of aversion to systemic risks seems to have become the new normal in the TBTF financial sector. Private profit, and public risk is the new financial model.

    http://www.thehillsgroup.org

  13. Davy, Hermann, MO on Mon, 28th Apr 2014 10:01 am 

    SHORT Said – 10% of US liquid hydrocarbon consumption comes from shale; about 2 mb/d. If drilling stopped most of that 2 mb/d would disappear within a year, and there is no secondary source to fall back upon. The US could find itself in a critical liquids shortage position very quickly. Such lack of aversion to systemic risks seems to have become the new normal in the TBTF financial sector. Private profit, and public risk is the new financial model.

    I have mentioned this before about the Lobby of plenty psychopathic Wall Street Parasitic traders and lobbyist, they are distorting the markets to the disadvantage of the whole country in the name of greed and profits. We are drifting away from oil import sources that are quickly being taken by other countries. If we see a situation where shale supplies dry up or prices shoot up for whatever reason we will see significant hardship. This will be a global phenomenon as far as price since oil is a fungible global commodity. Yet, the biggest impact could be with the US when it is scrambling to make up the supply difference. This same legalized criminality of lying, deceiving, and market distorting activity is happening with the electric power industry. We should be very careful with the switch over from coal and nuk to gas. We have seen the instability of gas as a reliable growing energy supply source. Gas is particularly important to end user residential market for heat/cooking and the agricultural markets for fertilizer/chemicals. We are at a point where energy is facing limits of growth yet, society is still playing the same games with markets to regulate supply and demand. It is a dangerous game today allowing markets that are purely in the game for greed and profits to influence strategic decision making. Energy decisions should be based upon risk management not greed and profit. Not only are the markets rigged, corrupt, and manipulated the government is being deceived and contributing to the market distortions through regulations and subsidies. I agree with those who want Nuk and coal diminished as power sources for environmental reasons but be honest with this reduction. Renewables cannot scale up in time and gas is potentially an energy source in decline or facing higher production costs. We are playing a fools game with ourselves that will not end well

  14. Steve Piper on Mon, 28th Apr 2014 10:57 am 

    It’s an excellent study, but the assumption of pure dry gas is pretty material. It would only take 1-2 GPM of natural gas liquids to cut the break-even price by 35%. Berman & Pittinger caveat that the E&Ps might have better data, but it seems like the study would benefit from exploring this question.

  15. Pops on Mon, 28th Apr 2014 11:05 am 

    “Of course the same entities that conjured up MBS, and synthetic CDOs have played the same role in shale, and for the same reasons.”
    “It is a dangerous game today allowing markets that are purely in the game for greed and profits to influence strategic decision making. ”

    These are important points. I think there is little to be surprised about in the boom of shale speculation following directly on the bust of real estate, which followed on the bust of dot.com etc.

  16. Nony on Mon, 28th Apr 2014 3:24 pm 

    Chesapeake did some exotic financing but even that was pretty well understood that they were doing it. All the other players really haven’t had a hard time getting investment by pretty standard routes: common stock, conventional debt, minority interests, and investments by majors (e.g. Exxon). There are a lot of people investing in this spaces with a fair amount of buyer sophistication (e.g. European oil companies). They might be wrong, but they are sophisticated investors and are looking for returns on capital. It’s a lot safer than investing in the Putinsphere or Argentina. And my money market returned 33 cents last year on $3,000.00. 😉

  17. Nony on Mon, 28th Apr 2014 3:31 pm 

    And the risks are probably a LOT more on the commodity price than they are on unrecognized aspects of the geology or depletion rates or infilling. If you’re a real “peaker”, you believe in high price outlook.

    What would end this oil boom pronto would be if prices dropped below 50. And don’t say it can’t happen. Look at what we thought about oil and outlook for pricing in 70s and early 80s and then how they crashed for the next 20 years! You never know how the worm can turn. Even this huge US surge (not predicted by TODsters) is something I was hoping for all the way back in 2005 (since I was familiar with what happened in the US in early 80s).

  18. Davy, Hermann, MO on Mon, 28th Apr 2014 5:01 pm 

    Nony said – There are a lot of people investing in this spaces with a fair amount of buyer sophistication (e.g. European oil companies). They might be wrong, but they are sophisticated investors and are looking for returns on capital.

    Noony, the trend is stagnating does that tell you anything or is that just a minor bump?

  19. J-Gav on Mon, 28th Apr 2014 5:03 pm 

    I’ve been following Berman for some time and he’s always sounded reasonable to me – but then what do I know? I’m just a (sort of) retired teacher.

  20. Nony on Mon, 28th Apr 2014 6:00 pm 

    Berman said shale gas was a flash in the pan in 2009 when it was 7% of US volume. Now it’s over 40%. Scoreboard: Shale 1, Berman 0.

  21. FloridaGirl on Tue, 29th Apr 2014 12:09 am 

    Rockman, I appreciate your real world stories. And I got a kick out of your first post: let’s not make valid points. 🙂

  22. Davy, Hermann, MO on Tue, 29th Apr 2014 7:52 am 

    Noony, Whats up with Energy Future Bankruptcy? The shoes begin to fall from the “Gas Gold Rush” The bubble is bursting buddy!

  23. Northwest Resident on Tue, 29th Apr 2014 10:24 am 

    “..Wall Street Parasitic traders and lobbyist, they are distorting the markets to the disadvantage of the whole country in the name of greed and profits.”

    It is almost as if those traders and lobbyists know that the ship is sinking and will soon go under, so they are raiding the storage and grabbing everything that isn’t nailed down in one last final desperate attempt to position themselves for survival.

    And as that good ship Global Economy goes under with all the financial/lobbyist rats commandeering the lifeboats throwing weaklings overboard to make more room for their last-grab booty, the final sound that will be heard is dependable crew member Nony standing alone at the helm yelling, “Fear not!! NG futures, dead ahead!!”.

  24. Steve Piper on Tue, 29th Apr 2014 10:26 am 

    “Whats up with Energy Future Bankruptcy?”

    I don’t share Nony’s resource optimism, but your suggestion is a bit off base. EFH has a heavy coal portfolio in a world where fracking has crashed nat gas prices, and power prices as a result. EFH is collateral damage in the ‘Gas Gold Rush’ you refer to.

    Peak oil has impacted consumer demand for energy, gasoline as well as electricity. EFH has been squeezed by lack of consumer demand as well as cheap nat gas.

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