Cheap shale gas bubble 'will burst within 2-4 years': Expert

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The current shale gas boom which has bathed the US economy in cheap energy will soon go bust, a former gas industry geologist has told EurActiv.

The future of shale gas in Europe was high on the agenda at an EU summit in Brussels yesterday (22 May), with leaders stressing the “crucial” role that such indigenous energy resources could play in reviving industry.

But according to David Hughes, a geoscientist and former team leader on unconventional gas for the Canadian Potential Gas Committee, the US boom on which many base their expectations is founded on shifting sands. 

“The cheap price bubble [in the US] will burst within two-to-four years,” Hughes said. “At a high enough price, the supply bubble will burst perhaps 10-to-15 years later, when drilling locations become sparse.”

“Supply can be maintained for many years,” he added, “but only at much higher prices with ever-escalating environmental impacts due to the accelerating number of wells that must be drilled.”

The importance of cheap shale gas-fuelled energy prices has become a constant in EU discourse. In his presentation to the European summit yesterday, one of the first slides shown by the European Commission President José Manuel Barroso depicted trends in energy price indexes from 2005-2012.

While gas prices had risen 35% for EU industry, they had plummeted 66% in the US. Similarly, while the electricity price index for EU industry rose by 38% in the seven-year period, it fell for their US competitors by 4%.

An initial boom in US shale gas production slashed prices from about $13.50 per mcf (metric cubic foot) in 2008 to $2 per mcf last year, boosting US industry, but causing a net loss for shale gas extraction companies of at least $9.3 billion in 2012.

“We are losing our shirts,” ExxonMobil’s chief executive Rex Tillerson complained last July.

Prices have since risen to over $4 per mcf but, according to Hughes, ever-increasing supplies of shale gas are not compatible with low prices, because the best 'sweet spots' for extracting shale tend to deplete quickly.

Sweet spots

“The bubble is a result of sweet spots running out of drilling locations at which time drilling must move to progressively lower quality portions of the ‘play’, requiring ever more wells and ever higher prices to justify them,” he said.

With the exception of the very best sweet spots, shale was “not very” profitable in Hughes’ view. His research found that large returns in the industry came from selling assets acquired at low prices early in the boom, and through joint ventures, and mergers and acquisitions. 

The US shale boom then grew so fast because of ‘held-by-production’ lease commitments - sold at values of up to $25,000 an acre - which amounted to an injunction: “Drill or you lose your investment,” Hughes argued.

“After wells are drilled they are put on production to generate cash flow and maintain stock prices, even though they are unlikely to turn a profit,” he said. Some analysts estimate this production decline at between 60%-90%.

Hughes' analysis was based on exclusive access to shale gas production data from 65,000 wells, which he studied for a report published earlier this year by the US-based Post Carbon Institute: Drill, Baby Drill.

But his conclusions are not uncontested.

Bursting the shale price bubble?

Laura Parmigiani, a research fellow in the energy centre of the French Institute for International Relations (IFRI), said that while shale gas prices would probably rise in the next 2-to-3 years, it was impossible to say by how much - or at what point that would burst the shale price bubble.

“It is the key question but even in the US, industry will never answer it,” she told EurActiv. More generally though, “I don’t think that [US shale gas] investment and production are falling,” she said. “The balance between demand and supply in this period is getting stable, as both are rising.”

Poland, Denmark and the United Kingdom could be bringing shale gas to market between 2018 and 2020, Parmigiani said.

The European Council’s conclusions yesterday say that the Commission plans to assess “a more systematic recourse to indigenous sources of energy with a view to their safe, sustainable and cost-effective exploitation”.  

No shale gas transformation

However, few analysts expect a US-style scenario to be replicated on the continent due to factors ranging from less helpful geology and higher production costs, to urban planning and more stringent environmental laws.  

Mónica Cristina, an advisor to Shale Gas Europe, an industry coalition, said that the effect of shale gas on Europe’s energy prices was “not going to be transformational”.

“It is not a panacea and won’t be a revolution as it was in the US because the size of the resource is different here, the regulatory environment is different, and the density of population in Europe is different.”

But it would still have a positive impact in helping wean some countries off gas import dependence. “It will also contribute to lowering gas prices and ensuring that energy intensive industrial sectors keep their competitive levels vis-a-vis their US counterparts,” Cristina said.

A report by the UK's Institute of Directors published yesterday found that shale gas drilling could create 70,000 jobs and a £4-billion-a-year industry

Other recent analyses have been less optimistic. Bloomberg New Energy Finance estimated that UK shale gas extraction costs would be “significantly higher than in the US” at around $7.10-$12.20 per MMBtu (million British thermal units), which is broadly similar to today's EU gas prices.

Timeline: 
  • 2013: European Commission to unveil results of public consultation on unconventional fossil fuels, including shale gas, and decide on regulatory steps.
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