The EIA monthly tight oil drilling productivity report forecasts a very large jump in Marcellus shale gas legacy production decline month-on-month of 49 MMcf/d for February. It is a huge increase in the trend, which in the previous three monthly EIA reports only came out to a 10MMcf/d increase in decline rates on average.
This is a very important development given that currently, if we are to take shale gas production from all other fields combined, production is in slight decline mode. It is hard to tell exactly by what magnitude the decline is occurring, because aside from the six fields covered by the EIA in its newest monthly report series on tight oil and gas, we do not have up to date data. We know that other major fields such as the Barnett in Texas and Fayetteville in Arkansas are in decline while the Utica field is just starting to come online.
The thing that seems to get lost in all the noise regarding the shale gas revolution is that we are now down to a one field revolution, with the rest of the industry already in stagnation mode just half a decade into it. A few bright spots aside from the Marcellus field, such as Eagle Ford, which is mainly talked about as a liquid fuel play, are still in production increase mode and will be for a few more years most likely, but it is not enough to make up for the decline in four other major shale gas fields.
What this jump means for Marcellus and shale gas in the future.
The most common counter-argument used by shale gas enthusiasts to deflect arguments that the boom will be short-lived has been to point to the falling natural gas spot price as the main reason for declining shale gas fields. If we look at the EIA data however, there is now reason to believe that natural gas price bottoming and moving up again will not have as great an impact on production as hoped. Natural gas prices bottomed at just under $2 per million BTU's in the spring of 2012 and has since increased to over $4 and we are now possibly looking at $5 per million BTUs, given that as of today the spot price is at $4.80. Yet, if we look at the production profile of fields such as Haynesville where production has been in decline for a few years now, we see no reverse of the declining trend as a response to the price increase.
Note: Pink line represents price, blue line is for monthly increase/decline in production. Data I used in graph for April, 2012 - October 2013 period is from EIA on gas production by state. Data reflects Haynseville's overall production trend, given that it is the only on-shore significant gas field and most of it is in Lousiana. For November 2013 to February 2014 I used the EIA monthly tight oil and gas productivity report, which I mentioned at the beginning of the article, which covers Haynesville as one of the six major shale oil and gas fields.
The Haynesville field peaked a few months before the price of gas bottomed at just under $2 in April 2012 at a record production rate of about 10.5 billion cubic feet per day. Field production is now down to 6.3 billion cubic feet per day and as the chart shows no evidence of a decline rate slowing significantly, never mind reversing the decline in response to growing natural gas prices.
While a one month increase in legacy production decline rate does not tell us a lot about specific future monthly increase trends for the Marcellus field, it does tell us the obvious, which is that the net increase in production from month to month will be affected going forward. For instance, if from now on we were to assume that the rate of legacy production decline rate and the total gross monthly increase due to new production were to be the same (10 MMcf/d for instance), the monthly net increase in production will stay the same as in February. In other words we can assume the net increase each month to be 388 MMcf/d, which is about 10% less than the average increase we had in the Nov-January period. I believe Marcellus shale still has some way to go before it reaches a peak, but if we will have more such jumps in legacy decline rates, or this large decline from existing fields becomes a new monthly trend, the end of the shale gas revolution will come much faster than most expect. I don't think there will be much of a gas revolution left once the Marcellus reaches a peak.
It remains to be seen whether a further increase in natural gas prices will have the expected desired effect of unleashing a second round of shale gas recovery from these fields. I have no doubt that price will have an effect on production and it will be a positive one. Given the lack of response so far on the production side in fields that are already in decline, despite steady upward price momentum for almost two years now, I believe the size of the price effect on production will be very disappointing. Combining the two conclusions, it seems clear that we might be just a few short years away from the shale gas revolution stalling out.
Possible side effects:
There are currently many companies investing in the United States with the expectation of relatively cheap and abundant natural gas supplies available for perhaps decades to come. As I pointed out in a previous article (link), there is currently 18 Bcf/d worth of NGL export capacity being planned. A company like Cheniere (NYSEMKT:LNG), which is heavily invested in building such capacity, could get hurt if supply of natural gas will turn out to be either too expensive or simply unavailable.
Sasol (NYSE:SSL) is planning to build a $14 billion gas to liquids (GTL) plant in Louisiana, which will not be profitable if natural gas price rises over $6 according to various estimates. In order to retrieve the capital investment involved in building the plant, Sasol will need low natural gas prices for a few decades to come. Shell canceled a similar plan for a GTL project in Louisiana in 2013.
Much was made last year of Dow Chemical (DOW) investing in the United States once again in order to take advantage of the low price of natural gas, which is the main feedstock in its plastics production operations (link). If this is the main reason Dow Chemical is investing, it might end up being a poor decision.
There is no doubting the fact that much economic activity depends on the expected shale gas boom, which is still forecast by many prestigious organizations such as the EIA to continue for decades to come, despite early evidence of potential for us to be left disappointed. It is not only about some companies which decided to take this projected increase in natural gas supplies for granted, which can easily end up suffering great loss as a result of making very large investments based on these projections that can get hurt. The US economy is in desperate need of some engines of growth given that the consumer is squeezed by high debt and declining median household income for a decade and a half already. Shale oil and gas was a just in time arrival on the economic scene and based on increasing indicators could also be a faster than expected departure, leaving everybody very disappointed.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.