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Analysis Finds Uncertainties in Shale Outlook

A study commissioned by the state of Alaska paints a picture of rising costs in North American shale gas plays and higher gas prices in the years ahead that lend support to the case for a gas pipeline from the state's North Slope to serve Lower 48 markets.

The study, which was conducted by Black & Veatch and submitted to the Federal Energy Regulatory Commission late last month, projects that prices at the Henry Hub in 2010 dollars could climb to $8.00/MMBtu by 2020 and $9.00/MMBtu by 2030 in its high-price scenario. The low-price scenario projects $6.00/MMBtu at Henry by 2020 and $6.20/MMBtu by 2030.

The firm's analysts -- in their report "Growing Shale Resources: Understanding Implications for North American Natural Gas Prices" -- acknowledge a number of uncertainties on both the supply and demand sides that make predictions difficult.

"The combination of these uncertainties results in potentially large variations in the costs, and indirectly in the volumes of natural gas that can be expected to be produced from North American shale gas," the report said.

For one, finding and development (F&D) costs vary widely among shale basins and among producers, they said. "Except for the Barnett [Shale], cumulative production from any given basin is too small to indicate the evolution of future costs. That said, the Barnett's history is indicative and it suggests that costs will rise as a given shale resource is explored."

Factors that have the potential to drive producer costs and/or gas prices higher, according to Black & Veatch, include:

"...[S]ignificant uncertainties remain as to the extent of future production of natural gas from shale plays," the study said.

The incremental cost of water for downhole and uphole activities for a well with an estimated ultimate recovery of 3.5 Bcf could range from 25 cents/Mcf  to as high as $1.38/Mcf, the study said.

"Industry-reported F&D costs for shale resources showed substantial variation and, in general, lacked transparency," the study said. "When normalized, the range of average F&D costs across the different shale plays and producers has ranged in recent years from $2.12/Mcf to $3.11/Mcf."

Policy trends in various regions with regard to land use could cause 10% or more of shale gas resources to be taken off the table, the report said. Further, the analysts said states like Pennsylvania will likely evolve toward imposing severance taxes on gas production comparable to those in states that have traditionally been oil and gas producers.

"This study estimates that the total natural gas production from shale plays may range from 15.5 Bcf/d to 17.0 Bcf/d in 2015 and from 15.4 Bcf/d to 28.3 Bcf/d in 2020, depending on the realized outcomes of the listed uncertainties such as resource availability, F&D costs, natural gas demand and [liquefied natural gas] imports," the analysts said.

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