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Shale Gas May Not Meet the Hype

The shale gas industry has been booming in recent years, not only fueling growth in stated U.S. gas reserves, but also controversy over its environmental impact. Although high-volume fracking combined with horizontal drilling has allowed producers to get at hard-to-extract shale gas, many argue that the technique’s impact on the environment requires further study. Despite the environmental controversy, the industry still has plenty of supporters. Earlier this week, a bipartisan group of federal lawmakers vocally declared its support for expanding shale gas drilling.

But, is the case for the shale gas industry being exagerrated? It turns out that a lot of people think so, according to recent reporting by The New York Times that analyzed industry e-mails and documents, as well as data from over 10,000 wells located in shale formations.

In the e-mails, energy executives, industry lawyers, state geologists and market analysts voice skepticism about lofty forecasts and question whether companies are intentionally, and even illegally, overstating the productivity of their wells and the size of their reserves. . . The data show that while there are some very active wells, they are often surrounded by vast zones of less-productive wells that in some cases cost more to drill and operate than the gas they produce is worth. Also, the amount of gas produced by many of the successful wells is falling much faster than initially predicted by energy companies, making it more difficult for them to turn a profit over the long run.

According to another Times article, some officials at the federal Energy Information Agency (EIA) also believe that the case for the industry is being overstated.

Activists working to limit or regulate the industry should find the Times analysis a useful counterweight to all the hype about the potential economic benefits of shale gas drilling. And while these findings are clearly relevant from an economic angle, they also have a bearing on the environmental debate over the impact of fracking. As the first cited article explains: "If shale gas wells fade faster than expected, energy companies will have to drill more wells or hydrofrack them more often, resulting in more toxic waste."

But economics may prove more important than environmental concerns in determining the industry's future. Given doubts about the industry’s viability, it will be interesting to see how shale gas drilling performs in the coming years. Producers are operating in an environment where extracting natural gas is not as profitable as it used to be, with simple economics driving petroleum companies to focus on oil at the expense of gas (as covered in this blog in May).

It's also worth noting that producers attempting to extract both oil and gas from shale rock have faced rising costs for fracking services. According to a Bloomberg article published last Friday:

The North American onshore drilling boom, driven by companies rushing to exploit shale-rock formations, sent demand skyrocketing for oilfield services such as hydraulic fracturing that cracks the rock to release gas and oil. . . The swelling backlog of wells to be completed gave oilfield services companies the power to raise prices more than 16 percent last year. . . . Kurt Hallead, an analyst at RBC Capital Markets, said in December that fracking prices that rose 16 percent in the first half of 2010 would continue to climb this year on shortages of equipment.

While producers must contend with higher service costs, technological advances have had a countervailing impact on their bottom lines: “Improved technology has helped producers offset some of the service cost increases by saving money on the drilling phase.”