Looked at in isolation, “steep decline” always sounds bad. How can US NG production be meaningfully boosted by new shale gas resources, if those individual wells shoot off like bottle rockets only to decline very steeply? In a back and forth conversation over this issue with Paul Kedrosky, he offered up the following remark:
As a wise math prof once said to me: if you combine enough asymptotically declining curves you get an advancing curve.
Indeed. Or, as an informed analyst from Calgary explained to me two years ago at an oil and gas conference: “The companies and the banks don’t mind the production curve, at all. It’s blast-off from the get-go where these wells produce an enormous amount of natural gas. This is an NG gusher that pays back financing quickly. Steep decline? Yes. The declines can be massive, but from a very high point. So the well carries on afterward, producing at much lower levels. So what?”
Let’s acknowledge however that it’s taking more wells across North America to produce this natural gas from shale. And, let’s also be aware that any attempt to scale up this production is going to run into water, and contamination issues, as recently portrayed in Josh Fox’s film, Gasland. These will present formidable hurdles to any large, future call on US natural gas resources, say, of the kind as suggested by the Pickens Plan. That said, natural gas from shale is simply not analogous to Alberta Tar Sands production whose capital and energy costs remain sky high. Or, to ultra-deep offshore oil that needs oil above 100 dollars a barrel to extract, in volumes. Frankly, North America–not just the US but Canada as well–looks to have massive natural gas resources. Those who are still stuck in the analysis of last decade, therefore, need to stand down a little here and confront the fact that US natural gas production is heading towards all time highs.
As an investor, or a policy maker, your better path forward now is to greet with skepticism those who continue to talk about an impending steep decline of North American NG production. A technique has been perfected to extract this NG, and the results are inarguable. Equally, it would not be advisable to start counting on the resource as a miracle, that can be easily scaled up quickly, safely, and cheaply. That’s naive. I do think the US can continue to migrate energy demand towards natural gas. But, only at moderate growth rates. Given my negative outlook for the US economy over the coming decade, this limit to shale natural gas is unlikely to present a problem.