Notes on US Shale Gas
March 29, 2017
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Rough idea.
After reading the RFF report on Mitchell Energy, I doubt whether deregulation had much to do with the technological advances
that led to the shale gas boom. Quite the opposite in fact. Mitchell had a long term contract with a buyer that guaranteed it
higher prices than on the spot market. It was also one of the largest players and could afford to make risky investments.
After the initial technological breakthrough, though, there followed a massive shale gas boom. Many independent gas producers started scouring for shale gas resources, prices plummeted and the US gave up on importing LNG. It is debatable how
profitable shale gas has been for gas producers, but for consumers and for the economy the benefits could be large. On the
other hand, the environmental consequences could be severe.
To what extent did deregulation contribute to this? Did deregulation make the market more competitive so that, once a
technological breakthrough did happen, the industry was much better equipped to take advantage of it?
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Some background on shale gas
http://www.rff.org/files/sharepoint/WorkImages/Download/RFF-IB-13-04.pdf
The RFF report has a very interesting discussion of Mitchell Energy’s experience in developing shale gas technology when
working on the Barnett shale play. They benefitted from tax breaks or "incentive pricing" (higher prices for developing
unconventional gas resources) in a very limited way. They benefitted from having a long-term contract that gave them higher
than market prices, and from being a large company that could make significantly more risky investments. Their eventual
benefit did not come from selling the gas, but from leasing the land where the shale gas was located, and selling the lease
at higher prices (apparently this is common in the U.S. gas industry! Has anyone examined the economics behind this?).
Eventually they made a tidy profit from selling to Devon Energy, in 2003; after the sale the development gained much more
pace.
The whole interplay between R&D, and leasing, and drilling, is quite fascinating. There is an article in the FT and it talks
about how some companies failed to take advantage by not leasing out enough land.
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Background on oil and gas markets
The EIA has an interesting report here on the difference between oil and gas majors and non-majors. A couple of facts. First,
the production share of nonmajors has been rising (up until the 1990s, when this report was written), and this is driven by
drilling rather than purchase (i.e. "new" production). Secondly, and very interestingly, the extraction rate of non-majors is
higher than the extraction rate of majors.
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• For oil: it seems that when prices were high in the early 80’s, nonmajors added costly reserves to their books. Then
when the price crashed, they stopped working the most costly fields but kept them in their books; by the time the price
started rising, they both dropped costly reserves from their books AND began intensifying production.
• EIA hypothesizes that for gas, this is a function of field size: smaller fields are more costly to drill, and so have to be
drilled more intensively for this exercise to be profitable. (Why though? Are these higher fixed costs?)
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Natural gas deregulation
From the Cliff Whinston report on deregulation
“Finally, in the natural gas industry, independent producers have increased their share of gas production since deregulation,
and independent shippers now have competitive access to pipelines.”
More history of nat gas deregulation here: http://naturalgas.org/regulation/history/
Other References: Costello and Duann (1996) and Crandall and Ellig (1997).
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