The real game changer in shale gas production is economics. While environmental damage, water usage and contamination, air pollution, soil contamination, human and animal health and safety, property values and myriad other concerns are driving the debate it all boils down to cost versus revenues - profits for the gas producing companies and their partners.
In March, 2012, U.S. wellhead prices for natural gas were about $2.50 per thousand cubic feet (mcf). Industry needs a wellhead price of at least $8.00 per mcf to breakeven, and more than that to be profitable. In 2008, wellhead prices hovered around $11.00 per mcf and briefly peaked around $13.00 per mcf, and that was when the uptick in drilling, frac'ing and production really began. With the eventual settling of prices back to current rates due to supply far outstripping demand the growth of the shale gas industry has been slightly tempered as financial backers get jittery about putting too much money into speculative investments that do not show near-future signs of turning around to become profitable.
Low wellhead gas prices have caused many production companies to shut in their wells and withhold production until the market returns to a favorable position, which includes greater demand and higher prices. As a result gas companies are paying much lower rates for lease bonuses, and royalty payments have been sharply curtailed or suspended since royalties depend upon production volume. Mineral owners on exiting wells are seeing their royalty income dwindle or evaporate while those looking to lease their minerals are being offered less upfront money and the prospect of little or no royalties in the near future.
Promises of vast amounts of recoverable gas have been questioned by several prominent industry experts. Promises of high signing bonuses have given way to much smaller initial payments in most areas of the country. Promises of high royalty payments to mineral owners and municipalities have proven to be false and misleading. Promises of "energy independence" from the Middle East have been proven to be false considering that the two biggest import sources of energy to the US are Canada and Mexico, and that the entire Middle East accounts for a small percentage of total US imports.
Promises of a 60-200 year supply of natural gas that will power our nation have fallen to the truth that actual recoverable reserves are probably no more than 20% of the total quantity of gas known to exist and that we are building terminals to export much of our production to China and India, where prices are much higher, rather than keeping it here to provide "energy independence" while China and India take American jobs that are outsourced for lower labor costs to American businesses. A glut of natural gas in the US has depressed market value leading to a slowdown in drilling and production. In 2011, the US Energy Information Administration sharply lowered its estimate of recoverable natural gas by about 50%. In 2012, the US EIA again lowered the estimate by an additional 70%. These lowered estimates are bad news for investors who bought into a speculative market based upon severely inflated claims of recoverable reserves in the U.S.
On December 7, 2010, Chesapeake Energy staged a public meeting in Grand Prairie, Texas to convince local residents to pressure their city council to rescind a drilling moratorium. On its website and in handouts at the event Chesapeake claimed that the moratorium meant that Grand Prairie mineral owners risked losing $240 Million in royalty income, the city and school district risked losing $105 Million in tax revenues and the city risked losing a total $3 Billion economic impact. These numbers are pure fiction. With 96 operating wells in 2010, Grand Prairie received a total of about $132,000 in royalty income. At that rate it would take 1,717+ years to equal the promised $240 Million in royalties that Grand Prairie mineral owners "risked losing if the city did not rescind the moratorium."
Recently, Arlington, Texas resident Kim Feil saw her property taxes reduced by 31% after she protested her latest property valuation on the basis that natural gas wells and compressor stations nearby had devalued her property substantially because of air pollution, noise, truck traffic and threats to health and safety. Ironically, gas production facilities nearby also received tax appraisals that were lower than in previous years because their own activities reduced the market value of their properties. This is a new front in the war against urban drilling that every property owner should pursue. Read the full story HERE. For another perspective on this issue please visit the DARRD website.
Cities and counties that rely on royalty revenues to fill budget gaps will be in serious trouble when those royalties fail to materialize, whether from wells being shut in due to no pipeline connections being available, reduced or curtailed production due to low market rates, or due to well depletion resulting in a greatly reduced output. The added loss of revenues from lower property tax assessments will further exacerbate loss of available revenues to meet budgetary requirements putting those entities into further decline. Yet, many municipal governments make decisions on allowing gas well drilling based upon false and inflated promises of revenues to be received for many years.
Economist and former financial anaylyst Deborah Rogers has discussed the economics of shale gas and oil for several years putting hard numbers to the claims of the oil and gas industry to demonstrate the fiction being sold to investors and investment banks, often by investment bankers themselves who make money on the deal regardless of whether others are making or losing money because they are the middlemen handling the transactions for a fee. Ms. Rogers points out that in 2008, Fort Worth, Texas earned about $50 Million from just 44 producing gas wells, and that in 2012, Fort Worth earned only $23 Million from 397 producing gas wells - less than half the money from roughly ten times as many wells because of two critical factors - gas well output was severely below what it had been just four years earlier and lower prices for natural gas caused by a glut in supply reduced the market value of the product. She also points out that the loss of production flow from field depletion means that the industry has to drill about 7,000 new wells per year at a cost of about $42 Billion just to maintain present levels of production output. These conditions are not sustainable.
Economics also can be viewed from the taxpayer perspective, which is what means the most to the vast majority of citizens. When an industry causes externalized costs to be paid by taxpayers, and that cost exceeds the benefits received by those taxpayers, citizens end up taking huge losses in the form of tax increases to subsidize corporate welfare and risky business ventures that were doomed to fail from the start. Such costs can be exemplified by looking at what states receive from oil and gas taxes, royalty payments and signing bonuses versus what they have to pay to remediate the damage to roads caused by the volume of heavily loaded trucks that decimate roads, streets and bridges. Below is a chart showing the costs versus expenses four states recently incurred as a result of heavy drilling activities. Bear in mind there are many additional costs to taxpayers that are passed on to them from oil and gas drilling activities that are not reflected in the numbers below.
Citizens should demand accountability of state officials who allow an industry to operate with impunity, and then pass along its externalized costs to taxpayers while in the pursuit of corporate profits and shareholder equity. If citizens fail to hold their elected, appointed and hired officials accountable, then they have nobody but themselves to blame for the higher taxes they pay while simultaneously paying higher prices in fuel costs for products that they subsidize with tax breaks and tax reductions for drillers and higher taxes on citizens.
These issues will be discussed and debated in the pages linked in this section. Of all the issues that drive the debate over natural gas production economics is the engine that will make or break the industry. Regardless of other issues and the merits of claims from either side, if shale gas production is not profitable, then it will not prevail. It is really that simple.
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