Will a US shale bust save Australian LNG?

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Bloomberg has a credible assessment today of US shale longevity that is worthwhile vis our own LNG boom:

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The problems arise when you look at how quickly production from these new, unconventional wells dries up. David Hughes — a 32-year veteran with the Geological Survey of Canada and a now research fellow with the Post Carbon Institute, a sustainability think-tank in California — notes that the average decline of the world’s conventional oil fields is about 5 percent per year. By comparison, the average decline of oil wells in North Dakota’s booming Bakken shale oil field is 44 percent per year. Individual wells can see production declines of 70 percent or more in the first year.

Shale gas wells face similarly swift depletion rates, so drillers need to keep plumbing new wells to make up for the shortfall at those that have gone anemic. This creates what Hughes and other critics consider an unsustainable treadmill of ever-higher, billion-dollar capital expenditures chasing a shifting equilibrium. “The best locations are usually drilled first,” Hughes said, “so as time goes by, drilling must move into areas of lower quality rock. The wells cost the same, but they produce less, so you need more of them just to offset decline.”

That’s a tall order when prices are low. Currently, natural gas is moving at about $4.50 per MMBtu — a welcome uptick, but by no means ideal for producers. Even if that climbed to $6, Hughes estimates that shale gas growth would last only another four years or so, at which point even-higher prices would be needed to maintain production, let alone keep it growing.

Not everyone thinks this sort of pessimism is warranted. With funding from the Alfred P. Sloan foundation, Scott Tinker, a professor of geosciences at the University of Texas at Austin has been leading one of the most comprehensive, well-by-well analyses of the four biggest shale gas reserves in the U.S., including the contentious Marcellus formation in the Appalachians. Tinker doesn’t quibble much with Hughes’ and Berman’s observations about well depletion rates, though he interprets the implications differently.

“Just like conventional drilling, the broad message here is that these basins are going to continue to be drilled and there will be money made by some and lost by others,” Tinker said. He prefers to call the shale boom an evolution rather than a revolution, and he suggests that while new wells must consistently be plumbed to address the shortfalls of old ones, this has always been the case. Newer drilling technology that allows several well paths to proceed from a single surface installation will help minimize local impacts, Tinker says — adding that with higher prices, the shale gas boom could remain healthy as far out as 2040.

My view is that in the long run (through 2030) US shale prices will rise to $7-$8 and that will still bring the price of Asian LNG down to $12-$14 range. That will leave Australian production very marginal:

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After that, we could all be dead!

About the author
David Llewellyn-Smith is Chief Strategist at the MB Fund and MB Super. David is the founding publisher and editor of MacroBusiness and was the founding publisher and global economy editor of The Diplomat, the Asia Pacific’s leading geo-politics and economics portal. He is also a former gold trader and economic commentator at The Sydney Morning Herald, The Age, the ABC and Business Spectator. He is the co-author of The Great Crash of 2008 with Ross Garnaut and was the editor of the second Garnaut Climate Change Review.