Shale gas recovery has been touted as the "Second Coming of the Oil and Gas Boom", "Freedom from Foreign Energy Imports", "A Bridge Fuel to Sustainable, Renewable Energy" and many other hyperbolic descriptions that are great marketing slogans, but really little more. As with any business, the shale gas industry must make a profit to sustain long term opeations. And, as with any industry, there are certain start up costs that initially offset revenues causing a period of financial losses while operations mature and profits begin to grow.
According to claims by industry giants like Chesapeake Energy, Devon Energy and others, the cost of drilling a gas well averages about $2.5 - 3 million, depending upon the area, depth of the formation, local taxes and restrictions and other factors that affect operating costs such as the availability and price of fresh water, frac sand, transportation expenses getting materials and equipment to and from a well site, etc. The US Energy Information Administration website, however, states that the typical cost to drill a natural gas well in 2008 (the last year for which information is available) was $5.2838 million per well, which is about double the estimate stated by industry giants.1
At a US EIA estimated average cost of $710.42 per foot drilling cost a company has to throw a lot of money into a hole in the ground hoping to hit a viable pocket of natural gas that will produce for long enough to recover drilling, frac'ing and production costs. Typical natural gas formations occur between 3,000 and 16,000 feet below the surface. Most Texas wells are drilled at least 7,000 feet below the surface.
Why is there such a discrepancy between industry-stated costs and those stated by the US EIA, which gets its numbers from reports submitted by industry? Has drilling cost really decreased by that much since 2008? Has the process been streamlined to reduce drilling costs? Are drilling companies publicly dowmplaying costs to attract more investment capital? Who knows? Even at the lower figures stated by industry it costs a lot of money to drill a well, and just as with oil well drilling sometimes you hit a dry hole that will not produce a viable flow, which results in cementing, capping and abandoning that well at a total loss.
But, the drilling cost is hardly the only factor in the equation of cost v. revenues facing the gas industry. There is also the tremendous cost of acquiring land and installing a pipeline distribution system, building gathering stations and compressor stations, and other infracstructure that is required to move the gas from well sites to processing sites, and then onto the commercial grid where that gas can be sold to and used by consumers in residential, commercial and industrial markets. Since numerous gathering and compressor stations are required in each geographical area that means the companies are going to incur hundreds of millions of dollars in expenses above the mere cost of drilling in order to get their product into marketable condition and to the customers who will buy and use it.
Drilling companies also have to pay signing bonuses and royalties to mineral rights owners such as individual property owners and city, state and federal government entities that sell leases for exploration and recovery. The amount of signing bonues fluctuates greatly from location to location, and individuals owning small parcels of land do not get more than a few hundred dollars up front. Cities, states and the federal goverment, all of which usually own large parcels of land, do much better initially. XTO Energy and Trinity East Energy together paid the City of Dallas about $33.8 million for leases of city-owned property with the expectation of drilling. As of now, no drilling has been done because leases require zoning changes to allow heavy industrial operations in areas not zoned for such uses, and those permits have not been granted. If the Special Use Permits (SUPs) are not granted, then those companies stand to lose that money with no offset.
Royalties are a different matter altogether. Royalties apply to produced gas. Generally, the industry offers a 25% royalty to the landowner(s). In the case of residents of a community under which a well is drilled royalties are divided among all neighbors who signed leases for their minerals. In what seems like a theft, those who do not sign get nothing even though minerals beneath their land are also taken. In Texas, that is the way it is because those who dominate the Legislature and Texas Railroad Commission have gotten laws and regulations enacted to allow legal theft of minerals from those who do not play their game. But, unless there is a viable flow that produces an adequate quantity of gas nobody gets any royalties, and there is no additional cost to the gas companies.
There are also unanticipated costs associated with shale gas drilling and production that affect the cost v. revenues ratio. Occasionally, a well blows out, a spill occurs, a pipe casing fails, a pipeline rupture creates airborne emissions of contaminants or explodes killing people and destroying homes - all of which negatively impact the bottom line.
Like just about everything else for sale, natural gas is subject to the law of supply and demand. The breakeven point for shale gas sales at the wellhead is about $8.00/mcf (thousand cubic feet). Over the last 10 years the wellhead price for natural gas in the United States has ranged from a low of $2.19/mcf in February, 2002 to a high of $10.79/mcf in July, 2008. The rate as of March, 2012, was $2.40-2.50/mcf. Except for September, 2005 through January, 2006 and February through August, 2008, the wellhead price has been below the breakeven point.2
At 6:11 pm PDT on September 9, 2010, in San Bruno, California, a suburb of San Francisco, a 30 inch diameter steel natural gas pipeline owned by Pacific Gas & Electric exploded in flames in the Crestmoor residential neighborhood 2 miles west of San Francisco International Airport sending flames an estimated 1,000 feet into the sky. By September 29, 2010, eight people were dead. The explosion and fire leveled 35 homes and 3 more had to be bulldozed because they were deemed uninhabitable. Many more homes were heavily damaged.
San Bruno, California pipeline explosion, September 9, 2010
Photographer and copyright unknown
On February 11, 2011, a Tennessee Gas Pipeline explosion happened at 10:29 p.m. in rural Columbiana County, Ohio. Fortunately, there were no injuried or deaths, and no structures were damaged by the explosion, but area residents were evacuated from their homes for a couple of hours while the fires were contained after the pipeline was shut down.
Incidents like these add to the costs of doing business for gas producers and lower profits. They increase public relations costs by forcng companies to spend more money touting the benefits of their product in the face of scrutiny and public conern. In fact, there have been many such accidents, and the cause is usually corroded pipeline structures that have not been inspected. Unfortunately, in several of these cases a loss of human life has occurred. Every accident reduces profitability for the companies involved.
These considerations are part of why Dr. Marc Durand, a professor of engineering in applied geology at the University of Quebec at Montreal refers to the industry as "Shale Gas - A Business Plan Very Much in the Red." . It is a risky business, and just as it is coming into its own people are learning about the enormous threat risks of water, air and soil contamination, human and animal health risks, permanent and semi-permanent environmental destruction and other negatives that are causing cities and states to ban or severely restrict the process known as slickwater horizontal hydraulic fracturing (frac'ing) while studies are conducted to learn the true science that underlies this whole process.
Time delays are one more cost factor for the industry that drives up the price they pay to produce and reduces the profits of production for an industry that is currently operating very much in the red.
1 1 - US Energy Information Administration
2 2 - US Energy Information Administration
Copyright © 2010-2013, Marc W. McCord. All rights reserved. CobraGraphics is the trademark of Marc W. McCord dba CobraGraphics. The textual, graphic, audio, and audio/visual material in this site is protected by United States copyright law and international treaties. You may not copy, distribute, or use these materials except for your personal, non-commercial use. Any trademarks are the property of their respective owners. All original photographic images are the exclusive property of Marc W. McCord or other designated photographers and may not be copied, duplicated, reproduced, distributed or used in any manner without prior written permission of the copyright owner under penalty of US and International laws and treaties.