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Shale production flattens gas prices

September 23, 2010
TOPICS: Natural gas
Booming shale gas production has flooded the market and given the U.S. a virtually-untapped energy source. But the rapid expansion of shale gas has also outstripped demand, and prices are expected to remain at around $5 per MCF through 2020.

From Forbes:

Oil production may have peaked in the U.S. in the early 1970s but fears of dwindling natural gas reserves, which were prevalent even a few years ago, have been demolished by the discovery of huge new shale-gas deposits. Gas prices will likely remain flat at around $5 per 1000 cubic feet through 2020, changing assumptions about everything from the viability of green-energy projects to the prospects of a pipeline to bring stranded gas from Canada to the U.S.

The Marcellus Shale formation alone, spreading from New York to West Virginia, is believed to contain at least 700 trillion cubic feet of economically accessible gas, a 30-year supply at U.S. rates of consumption.

“You can’t in that time frame come up with enough demand to soak this up,” said Robert Ineson, a gas expert with IHS CERA, speaking at the IHS Global Pacesetters energy conference in Greenwich, Conn.

Globally, shale could double current known reserves of 6,000 trillion cubic feet of gas, Ineson said, a sea of gas that mocks the idea of peaking production, as some oil bulls believe will happen soon. This has profound implications for equilibrium gas prices, including the idea that gas should sell for some fixed proportion to oil based on the Btu value of the two fuels. The majority of technological advancements have been applied to gas, including Mitchell Energy’s revolutionary combination of horizontal drilling and hydraulic fracturing of rock that made it economically feasible to unlock gas reserves from underground shale beds. And switching industrial uses between oil and gas “is dead” in the U.S. So it might be that gas stays at 1/16 the price of oil, as it is now, instead of rising to 1/8 or equivalency on a Btu basis.

Expectations of continued cheap gas have led to a spate of recent deals such as Mitsubishi Corp.’s C$250 million joint venture with Penn West to develop a shale field in British Columbia. The gas can be shipped by pipeline to liquefied natural gas terminals and shipped to Asia for attractive returns.

The rising supply in the U.S.  could doom plans for a pipeline to ship gas from Canada and Prudhoe Bay to Chicago, Ineson said. “Why would you spend $40 billion to bring gas into a market that just accessed 10bcf of shale gas priced at $4?” he asked. Congress is unlikely to allow the gas to be shipped overseas as LNG, he added, so it will probably remain stranded for decades.
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