Last week I discussed the changing fortunes of shale oil production in the US in the light of the precipitous decline in oil prices by nearly 60 per cent since June 2014.

The International Energy Agency (IEA) in its September “Oil Market Report” said “US light tight oil, the driver of US growth, is forecast to shrink by 0.4 mbd next year” and “oil’s rout extends a slump in drilling and completion rates”.

While the decline in tight oil production is now setting in, attention is also turning to the impact of all this on shale gas production in the US. The rise in US tight oil production was preceded by what was called the “shale gas revolution”.

The 2008 production was 2,116 billion cubic feet (bcf) and rising to 11,415 bcf in 2013 and touching 16,425 bcf on an annualised basis in July 2015.

The availability of so much gas — an environmentally desirable fuel — caused a crash in prices in spite of equally rising demand, which was fuelled by a switch away from coal for power generation and a significant expansion in the petrochemical industry.

Prices were about $15.50 (Dh55.05) per million British Thermal Unit (mbtu) at the end of 2005. It is now about $2.50 per mbtu.

Innovation

Yet, production kept rising because drillers were after the more lucrative oil and condensate production when their prices were higher, between 2010 and 2014, and sufficient enough to support the shale gas production. Innovation and improved efficiency in drilling also played a role.

There are however signs that the fall in oil prices is finally catching up with shale gas which may also decline. Charles Kennedy of oilprice.com says: “Only after oil prices busted did natural gas production start to slow down”. He cites the US Energy Information Administration (EIA) reports, by saying, “With a loss of around 208 million cubic feet per day expected in October, the four-month drop off will be the longest streak of losses in about eight years.”

Bloomberg reported that “If the oil market remains oversupplied and oil-rig counts fall, the decline in associated gas production would leave the market short of gas”. It added that “Supplies may fall by about 1 billion cubic feet a day next year as drillers’ idle rigs in response to the collapse in oil prices”. The number of drilling rigs for gas has fallen by 45 per cent since November 2014 according to Baker Hughes data.

Bloomberg also quoted Bank of America analysts as saying, “Supply will finally fall short of demand next year”. “The bank is forecasting that total output in the lower 48 states will shrink by 0.3 billion cubic feet a day next year” as producers delay well completions. Uncompleted wells rose by more than 50 per cent in the first half of 2015 as compared to the same period in 2014.

Pipeline exports

Yet there are different views. CoBank issued a report entitled “US Natural Gas Outlook through 2020” in which it says demand will grow by 25 per cent over the next five years and that gas exports will account for half of the growth through pipeline exports to Mexico and LNG exports to overseas buyers.

The US will become a net exporter by 2017. EIA is forecasting an increase in US marketed natural gas production by 4.2- and 1.5-bcf a day in 2015 and 2016 respectively without attributing the increase to shale gas or to conventional gas.

Perhaps we need to wait before the picture becomes clear.

Worldwide, China is going ahead, albeit slowly, with shale gas development. It has gained experience by investing in US shale gas industry with 20 per cent of all foreign investment in the sector. Drilling cost per well is reduced from about $15 million in 2013 to $11.5 million in 2015.

Government subsidy for shale gas production of $1.8 a mbtu was instituted in 2012 and extended this year at a lower rate and played its role in encouraging companies to develop.

With 700 wells drilled in the last four years, shale gas production has reached 0.38 bcf a day and is expected to reach 0.6 bcf a day by the end of this year, a fraction of China’s total gas production of 13 bcf a day.

Therefore, we cannot say that the “shale gas revolution” is over as some analysts are predicting because there could be some surprises. Interested gas producers should then carefully monitor these developments.