The Oil Drum staff wishes a Happy New Year to all in our readership community. We are on a brief hiatus during this period, and will be back with our regular publications early in the new year. In the meantime, we present the top ten of best read Oil Drum posts in 2012. The ninth in this series is a post by Arthur Berman on the cost of shale gas production and its relation to the US natural gas price, originally published in February 2012.

U.S. Shale Plays

The advent of shale plays provided an important new source of gas. Yet this new supply is characterized by high decline rates which means that wells must be continuously drilled to maintain supply. In 2001, the U.S. natural gas decline rate was about 23% and the annual replacement requirement was 12 Bcf/d when total consumption was 54 Bcf/d. Today, the decline rate is estimated to be 32% and increased consumption of gas means that approximately 22 Bcf/d must be replaced each year (Exhibits 1 and 2).

The Oil Drum staff wishes a Merry Christmas to all in our readership community. We are on a brief hiatus in this period, and will be back with our regular publications early in the new year. In the meantime, we present the top ten of best read Oil Drum posts in 2012. The second in this series is a summary by Rembrandt on shale oil developments and production expectations.

The impact of unconventional fuels like shale oil on the global energy system is still an issue of great uncertainty. Not so much because of the size of the tank (the resource base), but due to the large physical effort necessary to obtain a sizeable supply of this type of fossil fuel. For instance, to exploit tight shale oil formations we need large capital expenditures to obtain relatively low flow rates from many horizontally drilled wells.

The developments of all things shale oil were discussed at a seminar organized by Allen & Overy and their Future Energy Strategies Group in London on 16 October, of which a summary and key take-away points can be found below the fold. With many thanks to both Allen & Overy and the speakers at this event for sharing their knowledge on these important developments in a public setting.

On occasion, the British Government goes through an internal shake-up that leads to various pundits trying to explain to us lesser mortals what it all means. Thus, with changes in the Ministers who work in the Department of Energy and Climate Change, there is a suggestion that the UK is pulling back from their commitment to wind energy, and instead beginning to look more seriously at shale gas supplies.

The UK is not unique. The success of the American development of long horizontal well drilling, with follow-on multiple fracture of the shale beds to release gas at economic volumes into the well, has caught the world’s attention, and with it a desire to emulate that success. Though it should be said that the American success comes in part with the volume of the release in supply and the consequent fall induced in the price of natural gas. That, in turn, is providing a less well-recognized boost to the US economy, through lower energy costs.

This has not been lost on the Chinese, who are fully aware of their own need to keep finding resources at as cheap a price as possible to keep their own economy growing. It is, in relative terms, however, still an industry in its infancy. Earlier this year China agreed to buy 65 billon cu m of more conventionally produced natural gas from Turkmenistan – about twice the initial buy - roughly the equivalent of 6.3 billion cu ft/day (bcf/d). In addition, from April 1, China has started to import natural gas from Uzbekistan. That sale has been projected to be at around 10 bcm/year (1 bcf/day) and there has been a move in Uzbekistan to increase coal-fired power generation in the country in order to free up more gas to meet export demands as the sales to China ramp up to perhaps double this level in the next few years.

Further China still has the option of buying more natural gas from Russia, which has the potential to supply an additional 65 bcm/year into China. (6.3 bcf/d)

The current boom in drilling for ‘unconventional’ gas has helped raise US production to levels not seen since the early 1970′s. This has been an incredible boon to consumers and has kept spot prices contained below $5 per million BTU for the past year, recently dropping below $3/mmbtu. Unfortunately, this price is below the cost of production for many of these new wells. When the flood of investment currently pouring into natural gas drilling operations dries up, the inevitable bust will be as scary as the boom was exciting.