January 24, 2012

Gas drilling may not make economic sense right now

Not that it makes the local battle any less important, but I've had a hard time for a while believing that the rush to drill here made much economic sense. It's not that I question there being gas here, but the prospects seemed badly oversold.

Today the estimates for the recoverable gas in the Marcellus fell in another estimate, from last year's 410 trillion cubic feet to the EIA's current 141 trillion cubic feet. Chesapeake, one of the most visible of the gas companies, is cutting back its production in the face of ever-lower gas prices. (Futures are down to $2.32 per 1000 cubic feet.)

It's hard for me to make sense of the enthusiasm of the "let's drill now" crowd, when gas seems to be so abundant that you can't make the money back drilling new wells. I think, though, that I finally found an explanation that works. Oil prices, unlike natural gas prices, are still historically high, and this has a side effect for natural gas:

Large amounts of natural gas are produced in conjunction with the production of hydraulically fractured shale oil and in association with conventional oil drilling. Given the price differential between oil and gas at present many companies have changed their focus to shale oil or liquids rich shale gas to enhance economic returns. Although much associated gas in the production of shale oil is simply flared, as in the Bakken play in North Dakota, much is also produced into the market even at current low prices.

As that article makes very clear, the decline rates on shale gas and shale oil wells are very fast, so this situation won't last forever. I'm guessing, though, that even if New York State gave drillers everything they claim they want in the dSGEIS, we wouldn't see an army of drilling rigs crossing the border the first day it was legal. I suspect we'd see some test wells to see how things look, and then a wait for gas prices to climb to a level where drilling these intensive and expensive wells is profitable.

Given that, I suspect the gas companies are quite pleased with the delays in New York. It lets them argue that the leases they bought cheaply should be extended while they wait for prices to go up, and gives them a story to tell impatient investors who thought they'd have the money by now. Their lawsuits and lobbying are still important - after all, they want to be able to get to New York's gas in the long run, and they have a core group of dedicated supporters pushing hard now. It's much harder to put that kind of enthusiasm on hold and bring it back later than to sustain resistance.

Overall, though, I can't help thinking that the gas companies' outrage at New York State's delays is theater meant for Wall Street and a few politicians. Some days I wonder if Dryden is stuck as a bit player in a pump-and-dump stock swindle, forced to defend itself against projects whose value is far less certain than the costs.

Posted by simon at January 24, 2012 7:22 PM in
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