Fossil Fuels

Published on April 25th, 2014 | by DeSmog Blog


Natural Gas In New York Marcellus Shale Costs More To Get It Out Than The Gas Is Worth

April 25th, 2014 by  

Originally published on DeSmogBlog.
By Sharon Kelly

shutterstock_162413993For years, the shale industry has touted the economic benefits it can provide. An overflowing supply of domestic natural gas will help keep heating and electric bills low for American consumers, they argue, while drilling jobs and astounding royalty windfalls for landowners will reinvigorate local economies. These tantalizing promises have caught the attention of politicians in Washington, D.C. who argue that the rewards of relying on shale gas outweigh the risks, especially because harm can be minimized by the industry or by regulators.

But across the U.S., communities where drilling has taken place have found that the process brings along higher costs than advertised. Even when properly done, drilling carries with it major impacts — including air pollutiontruck traffic, and plunging property values — and when drillers make mistakes, water contamination has left residents without drinking water or cleaning up from disastrous well blow-outs.

And as the shale drilling boom moves into its 12th year, the most crucial benefit claimed by drillers — cheap and abundant domestic fuel supplies — has come increasingly into question. The gas is there, no doubt, but most of it costs more to get it out than the gas is worth.

new report from New York state, where a de facto shale drilling moratorium has persisted since 2008, concludes that unless natural gas prices double, much of the shale gas in the state cannot be profitably accessed by oil and gas companies.

Using public data from Pennsylvania, the researchers predict that shale gas will be far more expensive to extract than current natural gas prices would suggest. And even if gas prices double, their analysis of production history suggests only small regions of the Marcellus in New York can be profitably tapped.

“At current gas prices near $4.00-4.50/MMBtu (Million British Thermal Units), the results of this study indicate that no area in New York is likely to be commercially viable,” petroleum geologist Arthur Berman and petroleum engineer Lyndon Pittinger wrote in their report, which was commissioned by the League of Women Voters of New York State, adding that at $8/MMBtu, at most 9.1 trillion cubic feet of gas can be profitably drained from the Marcellus.

Their conclusions were based on a review of production data from over 4,000 active Marcellus wells in Pennsylvania and West Virginia.

These projections stand in sharp contrast to the projections described in New York state’s draft 2014 energy plan, now open for public comment. In that report, state regulators cite up to 516 trillion cubic feet of gas held in the formation, while adding in a footnote that only 10 percent of that gas is likely to be economically recoverable. The new report finds only a fraction of that can be produced even at $8/MMBtu, double what gas costs today.

“If New York is building an energy plan based upon access to a resource, such as natural gas, it is critically important to know whether and to what extent that resource exists,” said attorney Elisabeth Radow, Chairwoman of the New York State League of Women Voters’ Committee on Energy, Agriculture and the Environment.

A sprint to lock down oil and gas leases in shale fields nationwide released a huge glut of natural gas onto the market over the past few years. But as the hard slow work of drilling hundreds of thousands of shale wells across huge swaths of the U.S. truly begins – in industry parlance, the shift from “land rush” to “build out” – major oil and gas companies like Exxon and Shell have admitted that shale projects are too expensive to be profitable while gas prices remain low.

“Financial performance there is frankly not acceptable,” Shell CEO Ben van Beurden said last month, referring to shale projects in North America. “Some of our exploration bets have simply not worked out.”

Some industry analysts say that his comments simply show that Shell is worse at shale development than its competitors. “Whether this is a signal, as some argue, that the US oil boom is overhyped, it is too soon to tell,” said a column in November’s Economist, after Shell announced it was slashing onshore operations in North America. “What is clearer is that Shell paid dearly for unexplored land at the peak of shale mania.”

But other companies have also struggled in the shale and at times have had to admit that investors lost money over their attempts, like Exxon CEO Rex Tillerson did in July 2012. “We are all losing our shirts today,” Mr. Tillerson said. “It’s all in the red.”

Another major oil and gas company, BP, recently spun off its shale division, arguing that a smaller company would be more nimble and “compete more effectively with independents.”

But industry analysts saw a bigger trend. “Shell has failed miserably in generating any returns from US shale, and BP does not want to make the same mistake,” Fadel Gheit, an oil analyst at Oppenheimer & Co, told the Financial Times on March 4.

If the Marcellus shale boom’s economic potential has been over-hyped, as the new report suggests, that does not mean that drilling and fracking will simply peter out. In the face of challenging economic conditions, companies find ways to adjust.

They may try to drill multiple formations at once, for example, targeting both the Utica and the Marcellus shale formations simultaneously, although the potential returns from the Utica are even less well understood than in the Marcellus and targeting the two formations would add costs for drillers.

“The Utica is older and deeper than the Marcellus and while the two have areas of potential overlap, the Utica in Pennsylvania and New York becomes very deep and very hot and over-mature in a hurry,” explained Mr. Berman. “If the Utica were a viable target, people would be drilling for it right now.”

There are signs that even for smaller shale gas companies, these costs have eroded profits. To adjust, some drillers have adopted cost-cutting measures that left their business partners — investors and the people living in the gas fields who leased their land — feeling burnt.

In Pennsylvania, landowners who leased their land for drilling to Chesapeake Energy complain that the company has begun making massive and potentially illegal deductions from their royalty checks. Landowners report that their monthly royalty checks have plunged as much as 94 percent, an investigation by ProPublica found. Using these techniques, Chesapeake raised $5 billion dollars. “They were trying to figure out any way to raise money and keep their company alive,’’ one industry source told ProPublica.

For years, the company was also accused of using deals called Volumetric Production Payments to keep debt off its books. In its most recent report to investors, ProPublica found, Chesapeake for the first time revealed just how extensive those deals were: the company had $36 billion in “off balance sheet arrangements” — vastly higher than the $1.4 billion in such deals that the Wall Street Journal estimated in 2012.

Without strong regulation, drillers under financial pressure may also cut corners by failing to follow industry “best practices” — and that can lead to serious environmental harms and mistakes that cause accidents.

The simplest way for shale gas to become profitable, however, is for prices to rise. Although the EIA currently projects shale gas prices will stay at roughly $4/MMBtu for decades, their prediction would change dramatically if more natural gas export terminals are opened up across the U.S.

And if gas prices rise sharply after natural gas power plants and pipelines are built, American consumers are the ones who could wind up feeling burnt by the shale gas boom.

Photo Credit: Oil value Bubble about to explode by a needle, Via Shutterstock.

Check out our new 93-page EV report, based on over 2,000 surveys collected from EV drivers in 49 of 50 US states, 26 European countries, and 9 Canadian provinces.

Tags: , , , , , , , , , , , , , , , , , , , , , , , , , ,

About the Author

The DeSmogBlog Project began in January 2006 and quickly became the world’s number one source for accurate, fact based information regarding global warming misinformation campaigns. TIME Magazine named DeSmogBlog in its "25 Best Blogs of 2011" list. Our articles and stories are routinely highlighted in the world’s most popular news outlets and blogs: New York Times DotEarth, Huffington Post, Daily Kos, ThinkProgress, and Treehugger, to name a few. DeSmogBlog has won the Canadian Public Relation Society’s Leadership in Communication award, and was voted Canada’s “Best Group Blog” by their peers.

  • Guy

    it is tough to take seriously when you are so bias that you torture facts. Things like Wind Turbines kill many more birds and bats for equal power than natural gas. That wind and solar require vast amounts of land to make notable contributions of power…where as natural gas requires very little. Without the vast fracking finds….Obama presidency would be an even worst disaster. Wind and Solar operate about 30% of the time…What are we suppose to do the remainder of the time. I am all for conservation and smart use of money to reduce our impact. Wind and Solar have high impact and low usability….and reidiculous pieces like this article show desperate the industry is.

    • Bob_Wallace

      There are so many incorrect statements in that post that all one do is point an laugh….

  • R B

    regarding this article. I have a question for the author. WHAT? were does his economics figures come from? A quick google search discredits volume figures hes touting. I don’t think its going anywhere. The reason it doesn’t work in NY is because the formation outcrops in NY. you can see it in road cuts. It’s not the same environmental conditions (save for the boarder to pa) Here’s a company which borders NY STATE literally has wells that can see NY from their back yard

    • Bill

      All gas and oil in the earth is exploitable at a certain cost and a certain energy input to get it out.
      However at every price point, only gas and oil that can be extracted below that cost (actually less than that due to rate of return needs) will be exploited.
      The costs include the cost of the energy input.
      Any changes that lower cost; cheaper cost of energy input, lower labor and materials costs, etc. will increase the gas and oil exploitable.
      Why are the majors keeping out of these plays today? Answer: They keep careful track of the total costs and know the price point is above current prices.

  • Rick Kargaard

    I am a little late to this conversation, but I think it should be pretty obvious that natural gas cannot be economically produced (at current prices) from shale without significant NG liquids being present.
    Northern BC has liquid rich tight gas but is looking for markets for the NG which is almost a by-product.
    The drilling boom in the U.S. virtually shut down drilling for gas in central Alberta because the price became lower than the cost of production. It still has not recovered significantly.
    The shale gas drilling boom in the U.S. was a political phenomenom rather than an economical one. Energy independence at any cost

    • Bob_Wallace

      I’d say that the shale gas drilling boom in the US was more an investment bubble. Capital flooding into the new gold rush.

      Too much capital led to too much drilling which produced too much gas for demand and prices collapsed.

  • marinemec

    This arcticle is all about the self proclaimed experts taking a new angle. Look up Utica shale near Albany and see why Cuomo is delaying all of it. Since when, and why do the American people believe all these white elephant stories from blogs and self proclaimed experts with no scientific credentials? NY is loaded with both OIL and GAS!

    • Bob_Wallace

      You mean self proclaimed experts with no scientific credentials such as petroleum geologist Arthur Berman and petroleum engineer Lyndon Pittinger who wrote the report?

      Arthur E. Berman is a geological consultant with thirty-three years of experience in petroleum exploration and production. He currently is consulting for several E&P companies and capital groups in the energy sector. He frequently gives keynote addresses for investment conferences and is interviewed about energy topics on television, radio, and national print and web publications including CNBC, CNN, Platt’s Energy Week, BNN, Bloomberg, Platt’s, Financial Times, Rolling Stone and New York Times.

      He has published more than 90 articles on geology, technology, and the petroleum industry during the past 5 years. During the past year, he has made 28 presentations to energy sector boards of directors and executive committees, financial analyst conferences, oil & gas association meetings, and engineering and geological society meetings.

      He worked 20 years from Amoco Corporation (now BP plc.) and has been an independent consulting geologist for 12 years.

      He has an M.S. (Geology) from the Colorado School of Mines and a B.A. (History) from Amherst College.

      Lyndon Pittinger is a consulting engineer with over 28 years experience in global reservoir engineering, economic evaluation, and decision analysis for the oil and gas industry.Prior to becoming a consultant in 2008, Lynn worked from 2001-2007 for Occidental Oil and Gas in Houston, Texas, where he was Chief of Exploration Economics, and then Sr. Economics and Planning Consultant. As Chief, he was responsible for reviewing all exploration projects and focused on improving play and prospect resource assessment. Hebegan his career with Unocal in 1981. His 20 years experience at Unocal included 10 years overseas in Indonesia, Philippines, Scotland and Thailand. His last two positions at Unocal were Director of Petroleum Engineering (Thailand business unit), and Manager of International Evaluations, with concurrent responsibility as Technology Integration Team Leader for Deepwater, companywide in reservoir engineering and economics.

      Pittinger received his B.Sc. in Mechanical Engineering and a Degree of Engineer (Management Option) in Petroleum Engineering, from Stanford University. Following his graduate work in decision analysis, his main career interest has been incorporating risk and uncertainty into exploration, development and acquisition evaluations. He adopts a pragmatic approach to capture the range of potential outcomes with a limited number of scenarios, yet keeps the evaluation simple. This allows the discussion to focus on the most important input assumptions, their impact on financial results, and how various alternatives compare, enabling the decision maker to manage risk and uncertainty more effectively.

      Now, what’s your background that should impress us and let us know that you know what you’re talking about?

      • marinemec

        While putting words in peoples mouths, you answered your own question, until 2007. Technology since, has changed extensively and locally we have a retired CEO of Exxon that was using his credentials to stop HF in NY and slipped in a conversation that he didn’t want his asthetics disturbed around his property. ALL of his rhetoric was exposed to be false. Anyone can write a good line without stating a single fact of the subject at hand. READ what I wrote and look up the map I described without sidesteppng any further.

        • Bob_Wallace

          Your fingers put your words in your mouth when you wrote:

          “self proclaimed experts with no scientific credentials”

          I posted the credentials of the people who wrote the report.

          Did you not read what was written? There is no dispute that there are fossil fuels in NY.

          The report states that it is not economically feasible to extract them at today’s market prices.

          • marinemec

            Typical anti, your rhetoric is dully noted and I don’t have the need to convince you, so, you and your buddy keep spreading the doom and gloom to all the low information people but in the end, NY will be drilling even with all the blogs and todays self proclaimed enviromentalists who rely on people like yourself, to sell them a bill of goods. As I said, you and your buddy are using a new tactic to stop drilling in NY by saying there is not enough gas to drill for profit here in NY.
            Again, people, look at the Utica shale maps and then re read this bogus article.

          • A Real Libertarian

            As I said, you and your buddy are using a new tactic to stop drilling in NY by saying there is not enough gas to drill for profit here in NY.

            There isn’t.

            It’s all too expensive to drill for at current prices.

          • Bob_Wallace

            Perhaps you don’t realize that it costs money to drill a hole in the ground, frack the shale, and pump out the gas. No one will do that for free.

            If you can’t sell the gas for more than the cost of extracting then you lose money.

            That make sense to you?

  • exdent11

    Sharon Kelly,
    You had better explain how most of New York City ,using natural gas or oil to heat it’s buildings, is better off importing gas and oil than developing gas supplies in central New York State. Please explain how millions of homes in N.Y.S. can heat their homes if they don’t have access to natural gas, propane, or heating oil.Who is going to pay for conversion to heat pumps for the average home. . I just had it done and it cost $20,000 .Natural gas can be harvested safely with strict regulation and oversight. It is the bridge we need until renewable heating technologies are affordable for most people.

    • JamesWimberley

      Ah yes, the bridge. Like this one:

      • exdent11

        Great visual; very poor answer to questions posed.

  • robert

    So why isn’t Cuomo letting the fools waste their money?

    • Why would a politician allow what’s not in the public interest and is against their wishes?

      • robert

        Why can’t pigs whistle?

      • Otis11

        Because it got them elected… (If you have access to Netflix, House of Cards is in interesting watch. WAY overblown, but it sheds some light on American’s messed up politics.)

    • Guy

      you mean we have a dictator?

  • Will E

    here is another mania.
    the Solar and Wind mania.
    Still too soon to tell but the Solar Power and Wind Power Mania is doomed to fail,
    Argument for Solar and Wind Power is
    The Sun shine every day, and the Wind blow every day,

    BUT; ——within 5 years;——-as I am told from convincing data,
    The SUN will stop shining, and end power production of SOLAR, and
    The WIND will stop blowing, and end power production of WIND.

    • sault

      Are you getting your apocalypse information from the EIA?

  • R B

    just a quick statistics of benefit vrs risk. There were more plane crashes ytd then oil and gas spills. No one is talking about shutting down aviation industry. Marcellus is bigger than NY and due to moratorium was never started in NY. PA and OH are big enough to supply the entire nation that’s why their production numbers have gone up every year. There’s so much gas pipelines are being reversed to ship south and there are plans of export overseas. Finally as far as blowouts from lack of safety. Look at auto recalls from 2011 to today. In just 3 years we’ve had so many deaths due to faulty equipment. No one is talking about shutting down Auto industry. Also Hydro power has environmental issues to the environment Why not shut down Niagra? So because of a few incidents (not even a visible anomaly on a scatter plot vrs over 40 years of production coming directly to your home via a pipe) we’re going to shut off the heat to millions and go back to burning coal and heating oil in the NY?

    • sault

      “There were more plane crashes ytd then oil and gas spills.”

      “In just 3 years we’ve had so many deaths due to faulty equipment. No one is talking about shutting down Auto industry.”
      Two wrongs don’t make a right. And you are making a strawman argument in trying to insinuate that environmentalists will shut down the drilling industry. It’s plain and simple: companies cut corners sometimes, especially when they’re desperate for cash. If we don’t have adequate regulation and enforcement, these companies will end up harming millions of people. For example, contaminating an aquifer with fracking fluid / waste endangers water quality for everyone that uses the aquifer basically forever since there’s no way to clean up groundwater contamination. Adequate regulation is all that is being asked for here.

  • JamesWimberley

    What’s convincing about this story is not Berman – a bête noir of the industry, who will be written off even if he’s right – but the concurring statements and actions of Exxon-Mobil, Shell, and BP. Can they all be wrong?

Back to Top ↑