A very important point about shale gas

It\’s lovely to see someone actually getting this distinction correct:

However, as Ed Davey, the Energy Minister, flagged, this will not reflect the reserve – the amount of gas which can in practice be produced economically from that resource. “Until more exploration work has been done, a significant number of wells fracked and production patterns established over time, it will not be possible to make any meaningful estimate of likely economically recoverable resources of shale gas in the United Kingdom,” he said.

\”Reserve\” does not mean how much there is. It\’s how much we can extract and make a profit doing so.

But, here\’s the corollary. DECC and all that are forecasting that gas prices are going to rise over the coming decades. And given that reserves are an economic concept, bounded by that profitability, this means that reserves of shale are going to rise even as we use it. For as the price rises more of it will become profitable to extract.

This is entirely separate from technological development (extraction from shale is less than two decades old: we\’d not expect everyone to have explored all of the details of its efficiency as yet).

If DECC is right and gas prices are going to increase then reserves are too.

9 thoughts on “A very important point about shale gas”

  1. If you want to make a political point rather than an economic one, its always helpful to ignore the effect of prices on both supply and demand.

    Venezuela has enough heavy oil to keep the world going for decades. It is so heavy that it sinks in water. It needs billions of dollars upgrading investment for a moderate sized production project, albeit utilising tried and tested technology.

    Leave aside the fact that the country is run by a maniac, whether this is a reserve or not depends entirely on the price of oil

  2. Most oil states are run by maniacs.

    But I think that’s more to do with the fact that most states are run by maniacs than with oil.

  3. So Much For Subtlety

    Serf – “Venezuela has enough heavy oil to keep the world going for decades. It is so heavy that it sinks in water. It needs billions of dollars upgrading investment for a moderate sized production project, albeit utilising tried and tested technology.”

    Instead people turn to shale – which is much harder to extract. Politics has triumphed here. If America had Venezuela’s oil and Venezuela had America’s shale (which it does if I remember right), the Greenies would be complaining about the use of heavy oil and no one would have heard about fracking.

    It remains to be seen if our politicians want to be as stupid as Venezuela’s. I hope not.

  4. Tim – I think you were wrong about the CCC/DECC not assuming gas price falls cos of shale the other day.

    Two grounds:

    – how can they, when not a teaspoon has been produced yet, and won’t be for what, 5 years, who knows?

    – why should UK shale have an earth-shattering effect on the European gas price, what % of supply might it be, or what impact on the uncompetitive market place might it have?

    I don’t think we know any of this.

    If I was DECC I’d do what I always do – use the current price, or a moving average, unless someone has a watertight better idea.

    If I knew what the price would be I wouldn’t be doing this etc etc

  5. Has anyone ever got energy price forecasting right? When oil hit 147$ per barrel, Goldman Sachs was cheerfully predicting a rise to 200$. What happened? The price dropped to 30$.

    That’s in a mature global industry. Forecasting shale gas prices must be even more uncertain. You might as well get Mystic Meg to do the forecasting.

  6. …..Forecasting shale gas prices must be even more uncertain……

    Actually it should be easier in the medium term. Shale wells decline extremely quickly, meaning that new wells need to be drilled constantly. As the number of wells drilled varies with price, the gas price should be self correcting in a way that is not true of conventional oil and gas.

    The reason that this has not happened in the USA so far is:
    1) Leases will be lost if not used
    2) Large amounts of gas were forward sold at profitable prices.

    In the absence of such distortions, gas prices in a market with plentiful shale will stay close to the marginal cost.

  7. Serf, I take your point about the marginal cost, and I agree that shale being the most expensive drilling will set the marginal cost, so price.

    But I’ll raise you one bet that there is no significant oil well producing at current cost, about 110$ per barrel. If I’m wrong I’ll send you a unicorn for Christmas.

    People think shale plays are good. Good. Let them risk their money. Let’s hope they get rich. Then we get cheaper fuel.

Leave a Reply

Your email address will not be published. Required fields are marked *