On a back table in my office is a small pile of colour-coded maps that I don’t talk about much because they make me look like a madman. They are maps of Pennsylvania, documenting a semi-pathological and dogged fascination with US shale gas production.
One pile shows all of Pennsylvania’s counties; the counties are colour-coded by either the number of producing gas wells or the cumulative gas produced since the start of the Appalachia shale revolution. The second, deeper level shows the townships within the counties, coded similarly.
Prior to this obsession, all I knew about Pennsylvania was that it was home to the Steelers and Penguins and Fallingwater and Trent Reznor, and that the place can’t be all that pastoral if Nine Inch Nails is a product.
These days, I know enough PA trivia to annoy any normal person a great deal. I know that Springville Township in Susquehanna County is 31 square miles and has produced 1.3 trillion cubic feet of natural gas. I also know that Colley Township in Sullivan County is 5 miles ESE of Springville, is 59 square miles, and has produced one-thirteenth that amount of natural gas.
I also know that Rush Township in Susquehanna County is about 3 miles NE of Springviille, is 39 square miles, and has produced 30 percent of the gas Springville has, despite being just a hoot an’ a holler away.
I know that 15 miles north of Springville Township in Silver Lake Township, Susquehanna County, there has been virtually zero natural gas production, and that a literal zero has been produced 15 miles south in Davidson Township, Sullivan County.
Three of Pennsylvania’s 67 counties account for 83 of the top 100 well pads.
The point of all these statistics isn’t just to annoy, although there is that. The point is that the Appalachia natural gas juggernaut is huge, but that it has incredible sweet spots, and those sweet spots are not massive.
Consider that Susquehanna County is kind of the mothership of Appalachia production, having produced 13 TCF of gas. More than half of that gas has come from seven townships in the SW of the County. These seven townships cover an area of 240 square miles – roughly 24 miles by ten miles.
Still awake? Hope so, because here’s the interesting part: modern horizontal shale wells are often three miles long laterally. How long does it take to chew up 240 square miles with 3 mile-lateral wells? Not very long, and these prolific areas have seen active drilling for a decade. On top of that, at current production rates, Appalachia produces 13 TCF per year. In other words, that potent sweet spot’s entire historical output needs to be replaced, every year. And there are few sweet spots.
Technically savvy people will point out correctly that the Marcellus formation still has a lot of gas outside these sweet spots, and that is true, and it is also true that the marginal areas become economic at $7+ gas.
But barely. Furthermore, the Appalachia field cranks out about 36 bcf/d. It takes quite a few great wells to keep that production flat, and a huge amount of crappy ones.
Sweet spots are becoming exhausted, and a significant amount of drilling activity is now taking place in some pretty marginal areas (like, even, South Buffalo Township in Armstrong County – can you imagine? What are they thinking? What on earth is wrong with these people?) Initial production rates for these marginal areas are a small fraction of the prolific areas – and that is with modern, long-reach wells, each developing miles of reservoir.
Shale IR presentations of the big players speak of thousands of locations, yet when they are brave enough to show a map of said locations, the image is one of a well on every square foot of their owned land. It looks silly. They aren’t wrong necessarily, but an important parameter is missing: Some of those locations will be drilled at $3 gas, some at $5, and some will have to wait for $10+ gas. And they won’t add a lot to the production total.
That production total is massively important. Consider that the lower 48 US states produce about 95 bcf/d. Three fields – Appalachia, Permian, and Haynesville – account for 70 of those bcf’s, or 74 percent of lower 48 production (in case you’re wondering about the other two states, Alaska produces significant natural gas but re-injects most of it; Hawaii’s gaseous production consists of volcanic belches that would take some corralling to get into a pipeline).
Long reach horizontal wells often have significant decline rates, often exceeding 50 percent in the first year. But let’s assume that overall shale gas decline rates are 20 percent. That means that these three fields have to come up with 14 bcf/d of new production each year.
That is the equivalent of almost all of Canada’s entire production, that needs to be added every year. Or, put another way, a new Haynesville-sized field needs to be added every year.
Up until a year or so ago, North American producers reacted to price cycles as they should – prices go up, cash flow goes up, and producers drill more until the market finds equilibrium again. Prolific shale plays made that easy, in fact so easy that the market was flooded for a prolonged period.
This was an unusually sustained period of overproduction, for a number of reasons: improving productivity, longer laterals, plentiful capital, cheap debt, and management incentive structures built around production growth.
But recently most of those pillars have been wiped out. Productivity is not growing as it once was, and may be falling as sweet spots are exhausted. Debt and equity markets are not helpful, and the investment community is in the exact opposite mind-frame of injecting capital – they want capital to be coming out of producers. They want shareholder returns – more dividends, share buybacks, paying down of debt.
There is also a massive, dominant black cloud over the industry – the relentless hostility of policy makers and hydrocarbon opponents that see a moral imperative in damaging the supply base. Their efforts are working. There is a huge sense of exhaustion in the industry; everything is harder than it used to be, there are not enough workers, and public animosity takes a toll. That animosity is being indoctrinated into children, the elderly, and everyone in between that pays more attention to the news flow than energy reality.
US and Canadian shale plays have performed a North American miracle – we enjoy the benefits of natural gas at a price that is a fraction of what the rest of the world pays. North America has been, up until recently and to a certain extent still, an isolated natural gas market. Massive production growth over the past decade has had nowhere to go, and has ballooned the continent and kept prices down.
That appears to be changing with the advent of massive US LNG export capabilities and growing exports to Mexico. These developments have allowed any surplus to exit the continent. But the North American gas market has still seen prices far lower than world averages, with the expectation hanging on relentlessly that huge numbers of rigs will return as soon as prices rise enough.
That’s not happening. US gas prices have hit levels not seen since 2008, and for a whole bunch of reasons as outlined above, production is not rising to the occasion. The market keeps adding fuel to the fire, but nothing.
Things took an ominous turn the other day, or at least speculation thereof. A report from a respected US investment firm speculated that never before has natural gas production been concentrated in so few fields, and that production growth in these fields is about to slow dramatically. They point to similar peaks and plateaus in the Barnett and Fayetteville Texas shale formations.
Regardless of whether the mighty Appalachia field is peaking geologically, we know it is peaking physically, due to the inability to build more pipe to get gas out of the region. The last big project on the books, the Mountain Valley Pipeline, is almost complete, yet activists have managed to halt completion for several years. Cost estimates have doubled, and there is serious doubt that the project will ever be completed at all.
Activists even killed off a project to liquefy LNG and ship it by truck from Pennsylvania to New England. While all these export projects slow or die, the beat goes on, and the sweet spots get more and more drilled.
There is therefore a very real possibility that US gas prices could link to global ones, and you don’t even want to think about what that might mean. US and Canadian gas prices are now in the $7-8 USD/mmbtu range. Global gas prices are 4 times that, with LNG bidding wars happening on a global basis.
If you think things are tough now, they will be unimaginable if North American gas prices get to even half of global levels. At $15/mmbtu or GJ, businesses start to close. Heating costs become paralyzing. These fuel costs aren’t “optional” in the sense that if gasoline prices get too high, we don’t take a 6-hour road trip.
Consider the comment in the BOE Report the other day from the head of the Western Equipment Dealers Association trade group, stating that “last winter’s heating bills were unsustainable.” Yikes, who’s gonna tell him. Last winter Henry Hub prices averaged $4.56 US/mmbtu. Forward prices for next winter are $7.83. The cost squeeze is going to be unbearable for many businesses.
With natural gas, whether for industrial or residential purposes, scaling back has serious consequences, either in industrial output or in the temperature of your home.
Global fuel shortages don’t always show up explicitly in lines at gas stations. They can show up quietly and more deadly in the form of shuttered businesses, unliveable utility bills, and soaring inflation for anything that relies on natural gas as an input. The potential problems are jaw-dropping in North America, and simply unthinkable in the developing world.
The divest fossil fuels campaign is bearing ghastly fruit. There will be nowhere to hide.
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Read more insightful analysis from Terry Etam here, or email Terry here. PS: Dear email correspondents, the email flow is welcome, but am having trouble keeping up. Apologies if comments/questions go unanswered; they are not ignored.