Increased Shale Demand is a Good Thing!

A new report from Barclays Capital predicts a “Tectonic Shift” in demand for natural gas in the United States by 2020. While this report will no doubt be used by the prophets of “peak gas” theory as ammunition for the construction of new strawman fright scenarios, the reality is this is nothing but good news for the American public.

The new reality of extremely abundant and reasonably priced natural gas has already led to significant national benefits in the following areas:

  • lower carbon emissions in the power generation sector;
  • lower utility bills for consumers;
  • the creation of hundreds of thousands of new, high-paying jobs;
  • tens of billions of additional tax collections at the state, local and federal levels;
  • billions of dollars in royalty payments to hundreds of thousands of mineral owners;
  • massive new investments and new job creation by industries that use natural gas as a feedstock, such as plastics, fertilzer and chemicals;
  • hundreds of billions in economic impact across the breadth and depth of the nation;

That’s all happened in just the last five years, and during a time in which the price for natural gas became quite depressed, and the number of rigs actively drilling for natural gas wells fell from about 1600 in 2008 to around 400 today. The reality is that many of these deep, high pressure wells that typify many of the prolific shale plays in the U.S. simply are not economic to drill at the $2 to $3 prices we’ve seen from 2010 through 2012. As a result, the great majority of natural gas wells that were drilled during that time frame were wells operators were obligated to drill in order to hold their leases by production.

As we’ve pointed out before, this means that there is an enormous amount of excess drilling capacity in the system all over the country, given that lease obligation wells represent a small fraction of the potential wells that are ultimately available to be drilled.

As the price has risen in recent months back to the $4 to $4.30 range, we’ve already begun to see leasing activity in dry gas areas like the Haynesville Shale and the Eastern third of the Eagle Ford Shale begin to pick up, and will no doubt begin to see increased natural gas rig counts if the price holds in that range, where so many more projects are in fact economic to drill.