The shale-bust recovery may be coming this time — slowly

By Mike Lee, Nathanial Gronewold, Edward Klump | 04/23/2015 09:09 AM EDT

HOUSTON — Ever since the shale industry killed the price of gas in 2008, producers have been saying recovery is just around the corner — once the United States starts liquefying the fuel for export, once pipelines are built to get the gas from Pennsylvania to the Southeast and Gulf Coast, once power demand or trade with Mexico ramps up.

All of that may actually happen before long. Not only are liquefied natural gas exports poised to start by 2016, but gas exports to Mexico are picking up and the Obama administration’s climate plan could force more electric generators to switch from coal to gas.

All the gas industry needs now is the hardest part — pipelines.


"The infrastructure almost always moves behind the discoveries," said Richard Kinder, CEO of Kinder Morgan Inc., the biggest U.S. pipeline company, during the annual IHS CERAWeek conference here.

Gas production began to climb in the mid-2000s as hydraulic fracturing and other technologies made it possible to drill in shale and other deep hardrock formations. The drilling companies found so much gas, though, that the price plummeted by two-thirds in nine months, from a high of nearly $13 per thousand cubic feet (mcf) in June 2008.

Paradoxically, production kept climbing. Companies started drilling for oil because it was more profitable, and wound up producing billions of cubic feet of "associated gas" along with crude. That pushed the price down even further — to less than $2 per mcf in the spring of 2012.

Meanwhile, gas producers kept finding ways to wring more gas from each well. Energy Corporation of America, which produces gas on 1 million acres in the Appalachian region, is getting 10 million cubic feet (mmcf) a day of initial production from wells that extend 10,000 feet laterally, up from 3 mmcf a day on 2,500-foot lateral wells in 2009.

All that output pushed U.S. gas production to a record in 2014, an average 87.4 billion cubic feet (bcf), despite the depressed price.

"We are the problem," ECA President Kyle Mork said in a presentation.

The relief that Mork and other producers have been counting on for years could start arriving this year.

Cheniere Energy Inc., which won the first federal permit to export LNG to countries that don’t have free-trade agreements with the United States, plans to ship its first cargo of liquefied natural gas from a terminal on the Louisiana border by the end of this year, CEO Charif Souki said during the conference. Within five years, the company could be purchasing 6 bcf of gas a day — about 7 percent of average U.S. production in 2014 — he said.

Meanwhile, Kinder said, petrochemical companies and other industrial gas users are investing $100 billion in new plants along the Gulf of Mexico. And exports to Mexico could double in the next 10 years to 4 bcf a day.

Regulations are forcing power generators to switch to gas from coal, since natural gas produces about half the carbon dioxide emissions of coal when burned. The trend could pick up if the Obama administration’s Clean Power Plan for regulating power plant emissions is finalized, said Mary Lashley Barcella, who tracks North American natural gas at IHS.

"Between now and 2020, just in the next five years, we expect to see growth of 25 bcf a day in North American gas demand," she said. "About half of that, we think, is going to come from the power sector."

The infrastructure problem

The problem for Mork and other producers is that the gas is in the wrong place. The Marcellus and Utica shales are producing so much gas — an estimated 16 bcf a day by the end of 2015, according to IHS estimates — that producers are having to sell it for $1 less than producers get in Texas and Louisiana.

Pipeline companies are "still in the process of re-plumbing the infrastructure," said Michael Casey, managing director for energy at Citigroup Inc.

Some of the problem is public resistance. Protests have broken out against pipelines around the country from residents concerned about safety and the fairness of losing their land to pipelines (EnergyWire, April 21).

People have learned to live with drilling in Ohio and Pennsylvania, but "midstream is different," said Jeff Daniels, director of the Subsurface Energy Resource Center at Ohio State University.

"It is … more on a local basis — this pipeline going through this farmer’s field and setting up a compressor station five, six hundred feet away from his house," he said.

Kinder, whose company has encountered protesters around North America, has said he underestimated the resistance that pipelines would provoke in places like New England. At the same time, he said, some of the resistance comes from people who oppose oil and gas development on ideological grounds.

"There’s a group of people, and they’re pretty smart people, who decided they can use pipeline permitting as a choke point," he said.

There’s also a normal lag between oil and gas development and pipeline construction. Most pipeline companies won’t build a new route unless they have long-term shipping contracts to cover the costs. In remote places like North Dakota, the pipelines are so long and expensive, it’s hard to get the commitments, Kinder said.

Colette Honorable, who sits on the Federal Energy Regulatory Commission, said pipelines are one of several issues regulators are trying to balance as the U.S. energy landscape changes.

"As the generation is changing, so must the ways in which we deliver it, so that means not only will we need more pipes, but we will need more transmission, as well," she said.

The slow pace likely means that prices will rise slowly, and investors will only spend money on new production in the best acreage, said David Foley, CEO at Blackstone Energy Partners.

"You need to be patient," he said.