The economics of shale gas development are fundamentally different than conventional resources, requiring a longer time line to reach profitability, according to Terry Engelder, the Pennsylvania State University geosciences professor who helped prove the value of the Marcellus Shale.
"The economic models that are being run by the major players in these gas shales, particularly the Marcellus for example, recognize an eight- to 10-year payout," Engelder said during a conference call hosted by the American Petroleum Institute (API) on Wednesday.
By contrast, Art Berman, a consultant "known for casting rain clouds all over the North American gas shale play," as Engelder put it, and the subject of a recent New York Times article questioning the profitability of shale, claims that most of his clients require a two- to three-year payout at most, meaning that most of the expected ultimate recovery of each well is too far in the future to have any value (see Shale Daily, June 28).
So while Berman believes shale must pay off quickly, the industry believes shale is a longer-term investment, Engelder said. "Unfortunately, in the Sunday Times, the author of that particular report chose Berman's point of view without giving industry a chance to rebut it."
The New York Times briefly quoted Engelder in one of its articles as saying that the debate over well performance was far from resolved.
That longer road to profitability includes leasing, drilling and infrastructure costs, Engelder said (see Shale Daily, July 5).
"This is an opportunity for America that's not going to make anyone instantly rich. It's a process -- the production of gas shale -- that's going to go on for a long, long time," he said. "Yes, you can see the immediate effect in places like Williamsport [an epicenter of production in northeastern Pennsylvania], but in terms of the long-term profitability of this, it will take a bit longer, as industry has made very, very clear in the past."
The relatively short history of shale development clouds economic projections even further, Engelder said, noting that companies only began drilling horizontal wells in the Barnett Shale around 2004, making it impossible to know the ultimate life of shale wells with any certainty.
"These wells have not gone through their full lifetime," he said.
The wells are even younger in the Marcellus, where operators began drilling in Pennsylvania in 2008, and even later in West Virginia and Ohio, and are just considering drilling in New York with news that the state government eventually plans to issue permits there (see Shale Daily, July 5).
Because the Marcellus gets shallower as it heads north, eventually surfacing just south of Rochester, NY, Engelder expects initial drilling in New York to follow a corridor around Interstate 86 along the Pennsylvania border with results similar to those in the prolific counties of northeastern Pennsylvania, "but moving northward from there I think the economics will probably work against drillers moving at any rapid pace," he said.