The Risks and Rewards of Natural Gas Production from Shale

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Standard & Poor’s examines the prospects for natural gas production from shale in two new reports.

Highlights from What Does A Boom In Shale-Gas Production Mean For U.S. Midstream Energy Sector? (Premium)

The discovery of abundant, low-cost natural gas formations in shale rock is having profound implications throughout the oil and gas industry. In the U.S., shale gas production has expanded from virtually nothing in 2005 to about 10 billion cubic feet per day (bcf/d) in 2009, constituting nearly one-fifth of total natural gas production in the lower 48 states. At the current rate of growth, shale gas production could easily double within the next five years, particularly as the industry continues to find new shale gas areas, otherwise known as shale plays.

Exploration and production (E&P) companies are actively drilling the shale plays, and moving gas rigs out of the more conventional areas in the Midcontinent, the Permian basin, southern Texas, and the Rockies.

The shale plays tend to be less costly than conventional plays, with many producers claiming that $4 per million British thermal units (mmBTU), or even $3/mmBTU, wellhead prices allow for reasonable rates of return on new drilling prospects. In contrast, many conventional plays require $7-8/mmBTU prices to justify new drilling economics.

Standard & Poor’s Ratings Services views these cost assessments somewhat more cautiously, however. We believe the geological trends throughout these plays are not homogenous, meaning some acreage positions will be far less productive than the “sweet spots”. We also believe that much of the current drilling activity is being driven by a desire to maintain acreage. E&P companies generally need to establish production in a given acreage position within a certain timeframe or will otherwise forego the opportunity. As such, companies may be incentivized to drill wells that would otherwise not be economic in today’s price environment.


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