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."
Cities 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. 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.
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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