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The rise of U.S. shale gas production has been tremendous but might not reach the pinnacle forecast by some in the industry, an energy consultant told an Anchorage audience Jan. 6.

Art Berman, director at Texas-based Labyrinth Consulting Services Inc. and a 20-year veteran at Amoco, said forecasts of a 100-year supply, decades of low natural gas prices and a gusher of profits are not supported by the production history of wells in U.S. shale-gas plays.

The data available so far show the productivity of shale wells declines twice as fast as wells in conventional gas plays and that most of the production occurs within a year, Berman said in a presentation at Meet Alaska, an annual conference of the Alaska Support Industry Alliance, a 460-member trade association for oil and gas service companies. The group invited Berman to present his views on shale gas production.

Berman's views are controversial within the industry and dismissed by some as overly pessimistic. The official U.S. Energy Information Agency forecast is that the United States has 2,543 trillion cubic feet of potential natural gas resources - more than a 100-year supply at current consumption rates – with technically recoverable shale gas projected at 827 tcf. The EIA greatly boosted its forecast of shale-gas resources between 2010 and 2011 based on new shale developments and said its estimates "are likely to increase further in the future."  

Berman contends that the typical shale well produces only half as much methane over its life that many well operators estimate.

In addition, many forecasts of gas resources in shale plays ignore that gas will be produced profitably from just the sweet spots, which encompass only a small fraction of the entire play, Berman said.

"The message in my talk is not that these plays are bad. The message is that when things look too good to be true, they usually are," Berman said.

"We have a business model that says there are no barriers to entry except capital, we have an infinite supply of something that's cheap, and yet everybody's going to make a lot of money from it. Now if someone can show me a business model that includes those components, I've got a little bit of money I'd like to invest, because I've never seen it," he said.

Still, the industry is attracting billions of dollars in investments. Shale-gas production showed an average growth rate of 48 percent a year from 2006 through 2010, says the EIA. The agency's data and forecasts are widely used, and last year it predicted a four-fold increase in shale production through 2035, with shale's market share of overall U.S. gas production growing from 16 percent in 2009 to 47 percent in 2035.

But Berman says, "It's unclear that shale gas production will support even the short-term expectations of abundance. What I see right now is that gas supply is flat," with rising shale production offsetting plunging output from conventional gas reservoirs.

"Capital expenditures exceed cash flow for most companies. That's documented. That's not a question," he said.

Looking at proven and probable shale gas reserves, Berman estimates the United States has about a 20-year supply of shale gas at current consumption rates. The 100-year estimates come by adding possible and speculative gas resources.

Berman is a geologist by training. He is part of a group of researchers and analysts who study data from shale wells and company filings with the U.S. Securities and Exchange Commission and conclude that hype pervades the shale-gas industry. He also is a director of the Association for the Study of Peak Oil & Gas USA.

"If people in Washington and people in Alaska in policy positions believe we have an infinite supply of natural gas that is cheap, they're going to make decisions based on that which, if it costs more and there's less of it, are going to hurt us in the long run," Berman said.

He noted the shale industry is relatively new. He's studied data from three of the older shale plays – Barnett (in Texas), Haynesville (mostly in Louisiana) and Fayetteville (in Arkansas) – in drawing his conclusions. Newer plays such as Marcellus and Utica in the eastern United States might perform differently, he acknowledged.

"There's very little shale gas production history, so we really don't know the outcome," Berman said. "You can take my view and be somewhat pessimistic about it. You can take the view of the companies that are optimistic. But the truth no one knows."

He said corporate financial reports filed with the SEC show the break-even price for shale production when all costs are considered is $6 to $8 per thousand cubic feet, at least double the current U.S. price of about $3.

"For the last 12 to 18 months, gas prices are too low for profits," Berman said, adding that companies that say they're making money are excluding land, seismic, debt service, overhead and other costs. Some who disagree with Berman's assessment say he underplays how improvement in horizontal drilling and hydraulic fracturing are enhancing the economics of shale plays.

If Berman is correct, critics say, why are so many shale wells getting drilled and why are so many oil company majors investing billions of dollars to get stakes in shale plays?

A lot of the shale development occurred a few years ago when natural gas prices were increasing, he said. When prices collapsed in 2008 many producers already had hedged their future production to sell the gas at high prices. Prices – including prices available for hedging – aren't high any more, Berman said.

Major oil companies are investing in shale mostly to replace reserves from their other fields around the globe, he said.

"If I were a major, I'd have a third of my assets in shale just because there's nothing else left that the national oil companies (around the world) don't have locked up."

"For a BHP Billiton or a Statoil, a billion or two billion dollars is nothing. It's not exactly chump change but it's not a lot of money. This is a small part of their portfolio. So let's not get carried away. For companies and countries that don't have any (energy) assets, countries like (South) Korea or countries like China that have already found most of their oil and gas ... they've got to have energy no matter what the cost. And so they're willing to pay a premium for it."

The smaller companies that are selling interests in their shale leases to the majors and others are doing so because they're desperate for cash, Berman said. "If the plays are so profitable, then why can't these companies pay for drilling out of cash flow? Why do they have to keep going into these joint ventures?"

Existence of shale oil and gas resources has been known for decades but not pursued until recent years because the companies had better prospects in conventional plays.

"We exhausted all better opportunities and now we're stuck with shale. We went through tight sandstones, we went through coal-bed methane first in the last 20 or 30 years and now we're at the bottom of the barrel. We've got shale left. That's not a bad thing. But ... the economics are marginal," Berman said. It doesn't make sense that methane production from shale will be as profitable as conventional gas production, he said.

"Is there an optimistic outcome for the future? Yes, it's called a higher price. And that's going to be good for a lot of people and it's going to be good for all the stranded gas that exists in Alaska," Berman said.

Natural gas prices likely will stay very low for the next 12 to 18 months before starting to rebound to levels that reflect the cost of shale wells. Drillers already have cut the number of rigs working in shale plays that lack natural gas liquids and oil, which bring much higher prices than methane – the gas used in furnaces and power plants, he said.

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