Costs Chase Prices as North American Drilling Shifts to Unconventional
The shift to drilling unconventional natural gas resources -- coal bed methane, gas-bearing shale and tight sandstone – has buoyed gas production in North America, but has also raised unit costs since gas production per well has fallen. This trend is projected to continue, according to the study.
Phase II of the study, Diminishing Returns, a joint study by Cambridge Energy Research Associates (CERA) and IHS, finds the trends of declining well productivity and reserves per well observed over the past few years are expected to continue through 2015, with strong implications for gas production and resultant prices.
Even heightened levels of drilling are unlikely to completely offset declines from maturing conventional resources, meaning that North America gas production on lands currently accessible will soon move into gradual decline. Liquefied natural gas (LNG) will then be needed to supplement domestic production.
"The shift toward unconventional gas production was prompted by the clear inability of conventional gas resources to keep pace with gas consumption. With LNG imports growing, but not fast enough to serve the appetite of the market, unconventional gas, even resources that are relatively expensive, are good options for gas producers for several more years," said study co-author Robert Ineson, Director of North American gas research at CERA.
"With unconventional resources dominating production trends in the next decade, the performance of existing and emerging unconventional plays will define the long-run supply curve for indigenous North American natural gas supply."
"The challenge will be to develop these plays in a cost-effective manner to maximize economic production in the face of eventual competition from imported LNG," he added.
New Insight in Cost, Price and Resource Potential Revealed
The study projected how much gas production could be cost effective at successively higher market price levels. "Higher market prices, along with advances in technology, unlocked the resource potential of unconventional gas," added Ineson.
"The study, however, suggests that there is a limit to the unconventional resource potential at market prices within the $4 to $10 per thousand cubic feet price range analyzed. While successive layers of gas resource are unlocked at successively higher price levels, domestic natural gas then becomes uneconomic relative to imported LNG, coal in the power sector, and other technologies. This price/cost/geologic potential relationship defines the trajectory of gas production in the years ahead" Ineson noted.
The study examines the interplay among the future cost of gas production, the geological potential of gas in North America, and how supply would build at higher market prices.
The Diminishing Returns analysis identified plays in virtually every region of North America that are attracting exploration and development interest, with some of the best opportunities emerging in the rapidly growing East Texas and Rocky Mountain regions. Others, such as the emerging shale plays in the Appalachian and Black Warrior Basins, show growth potential, especially at sustained price levels in excess of $6.00/Mcf.
In contrast, the study highlights significant challenges to increasing production at almost any price level in some more mature regions, such as the Western Canada Sedimentary Basin conventional shallow plays and the shelf region of the Gulf of Mexico.
By analyzing historical production and calculating costs for 2005 for the more than 48,000 wells completed that year in over 273 natural gas plays, and projecting production performance across each play's remaining resources, the Diminishing Returns analysis generated overall productive capacity on a play-level for North America under price scenarios ranging from $4.00 per thousand cubic feet (Mcf) to $10.00/Mcf looking forward to 2015. This produced several key operational and strategic findings, including:
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