Bulls Beating Bears in Shale Gas Inquiry

By Kennedy Maize

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As the resource gets increased and more sophisticated scrutiny, natural gas from shale looks increasingly like a revolutionary force in energy markets. Most recently, the Washington-based environmental and energy think tank Resources for the Future (RFF) rolled out a serious analysis of the new method of developing gas, and the issues it presents. The preliminary results look very positive for gas.

Economist Alan Krupnick, director of RFF's Center for Energy Economics and Policy, put the issue on the table at a November meeting describing the preliminary results of the group's inquiry into the future of gas from shale. "Is this the rock that can power the world?" Krupnick asked. "Should it power the world?"

Krupnick outlined the areas of contention surrounding shale gas: How much gas can be found? What are the economics of production? What are the impacts on the environment from developing the gas? What are the impacts on the climate from burning the gas? Does this national resource fundamentally change U.S. natural security and dependence on foreign oil?

So far, the results of RFF's inquiry are largely positive or neutral. There appear to be no show-stoppers for shale.

Sheila Olmstead, whom RFF hired from the Yale economics faculty to direct its study, explained the origin of the inquiry, "Managing the Risks of Shale Gas: Identifying a Pathway Toward Responsible Development." RFF, she noted, has a $1.2 million grant from the Alfred P. Sloan Foundation for an 18-month project digging down into the issues surrounding shale. The purpose, she noted in economics lingo, is to examine shale's "externalities" as a guide for public policy.

In analyzing the tension between the gas "bulls" and "bears," the optimists and pessimists about the results of applying horizontal drilling technology and hydraulic fracturing to produce gas where it has not been produced before, Krupnick first looked at the issue of how much gas is available. The optimists seem to have a grip on the truth, according to Krupnick. The earlier flap involving Energy Information Administration (EIA) resource estimates and those of the U.S. Geological Survey, which appeared dramatically at odds, is a result of confusion of terms, not of resource magnitude. The two agencies, he noted, "are essentially measuring the same thing" but "using different methods and data." Indeed, he added, the EIA data are more recent; the two estimates are actually additive, not in conflict. Since the uproar last summer and fall, the two agencies have agreed on a common resource definition that establishes that the shale gas resource is enormous, Krupnick said.

Additionally, said Krupnick, the gas industry is on a steep learning curve that will bring more gas to market faster, and in wells that produce longer than original estimates. Using data from Chesapeake Energy, one of the major shale gas players, Krupnick said companies are now drilling longer "laterals," the horizontal shafts that yield gas from the tight shale, up from 2,000 feet to over 8,000 feet. Wells are coming into production faster, down from 80 days to 20 days. Two years ago, according to Chesapeake, yields were running about 4.1 billion cubic feet per well. Today, said Krupnick, the Chesapeake wells are yielding 7.1 bcf.

All that means that natural gas prices are under pressure to fall, not rise. In 2009, the EIA's forecast for the Henry Hub natural gas price in 2030 was in excess of $9/million Btu. Last year, the EIA's 2030 Henry Hub estimate was just over $6.