The Dash for Unconventional Gas

Today's Financial Times has a generally optimistic article about the vast quatities of unconventional natural gas tht are now apparently within reach around the world:

All across Europe big oil companies are scouring millions of acres of countryside and buying up rights to tap the natural gas trapped in prehistoric shale beds thousands of metres below its surface.

The shale gas rush has made its way over from the US, where breakthroughs in technology have allowed companies to extract gas from reservoirs previously seen as untouchable.

The newly accessible US shale deposits are so big that executives now believe the country has enough gas to last it for a century. This extra supply and the US’s new found self-sufficiency has created a worldwide gas glut that has driven down prices.

It is a remarkable turnround. Just three years ago, most US energy executives were working out how the US could import enough gas from places as far away as Nigeria, Russia and Qatar, while competing with the demands from China and other energy-hungry developing countries.

Now the world’s biggest, richest and most sophisticated energy companies believe that they may be able to repeat the American shale gas revolution in Europe, potentially undermining the power of Russia, the region’s biggest gas supplier.

Not all are convinced. Over the weekend, John Dizard's FT column took a highly skeptical look at the prospects for abundant and cheap natural gas, and is worth excerpting at length:

I try not to get into arguments over other people's religious convictions. Even if you win your point, you make an enemy. That's been a conventional understanding since the Thirty Years War. Sometimes, though, you have to clear your throat and carefully offer a heretical thought, if lives or large amounts of property are at risk.

For example, I think it might not be a bad idea to examine the faith-based assumption that the US has a virtually unlimited supply of natural gas from shale formations that can be extracted at a low price for the indefinite future. Perhaps the few people who think shale gas will be produced at a higher cost, and more slowly, than generally believed should be heard out, rather than be executed or sentenced to work in the salt mines. If you disagree, I will quickly withdraw that comment.

The shale gas religion crosses the usual political boundaries. The environmentalist wing believes that shale gas can displace dirty, coal-fired generation. Liberals believe it will help power the clean energy policy. National security conservatives believe shale gas can end dependence on Middle Eastern or Venezuelan oil. Economic conservatives believe it can close the current account deficit, and drive an economic recovery, at least until even more nuclear power can come on line.

There are environmentalists, rural landowners and health advocates who worry that shale drilling could contaminate water supplies. Most of them, though, want to have more careful regulation, rather than prohibition, of shale gas exploitation.

I was prompted to comment on shale gas again after watching a well known, highly emotional American television stock market commentator suggest that shale gas will be so abundant that facilities for importing natural gas could be converted to export the stuff. This when the present low US price for natural gas is about 10 times the economic value of gas stranded in huge Middle Eastern deposits.

What is the basis for Dizard's skepticism?

Policy should be based on material reality, which is that maintaining, let alone increasing, US use of natural gas will require a very substantial increase in prices over the present spot and futures levels. On that point, the shale gas industry people and I are in agreement. One set of data points might turn out to be revealing. Look up the "balancing item" in the "natural gas navigator" on the US Energy Information Administration's website. This is how the difference between reported gas storage and the net of production and consumption is explained. For the last report, in December, the "item", or unexplained error, is about 100bn cu ft. That is a whole bunch of gas, as they say out there.

The "item" has been increasing steadily from the middle of last year. So production is likely lower, or consumption much higher, than the EIA has been able to count. Given that production is calculated from a sample of producers that is probably overweighted to large companies with access to capital markets, it is probably the case that production is lower than Washington, or most of Wall Street, thinks. Smaller gas producers, who are probably under-sampled, will have had their access to debt or equity proportionately much more restricted than was the case in the boom years.

If that analysis is correct, the US will run short of low priced gas sooner rather than later.

Cheap and abundant natural gas as far as the eye can see? Maybe not.