Curious, isn’t it, how some of the largest shale gas producers seem to be drilling more for oil these days? According to Baker Hughes Inc., a major oil services company, last week the number of natural gas rigs operating in the US fell for a fifth consecutive week to a ten-month low.

Just as the rest of the world seems set to emulate the American engineering breakthrough for harvesting shale gas, it looks like North American producers are scaling back. Do they know something that others don’t about this supposed game-changer for world gas supply?

What investors in these companies have already found is the unprofitable wellhead economics of shale gas at today’s natural gas prices. Weak cash flows have spurred investor concerns that companies may no longer even be able to meet wellhead break-even costs at those prices. While debt rollovers, new equity offering, and asset lease sales have financed the shale gas boom, disappointing cash flows, meanwhile, are leading some investors to jump off the bandwagon. And some industry commentators are suggesting that more than a few operators will face Chapter 11 bankruptcy protection over the next year, barring a huge rise in natural gas prices.

In response to deteriorating—if not negative—profit margins, many of the biggest shale gas producers are suddenly redeploying their rigs to drill for something much more lucrative: oil. That includes the likes of industry leader Chesapeake Energy Corporation, whose CEO, Aubrey McClendon, recently noted that “the economics just compel you to go for oil rather than natural gas right now.” Other major gas producers, like Petrohawk Energy Corporation, EOG Resources, Forest Oil Corporation, and Quicksilver Resources, are following suit.

The switch in exploration activity from shale gas to oil won’t be without consequences for future gas supply. What effect more rigs drilling for oil will have on North American oil production may be debatable. Other than mucking around in the Alberta tar sands or risking another Macondo-style disaster in deep water, there probably isn’t a whole lot of oil left to be found.

But there can be no debate about what plunging rig counts mean for future US natural gas production, particularly when you consider the abnormally steep depletion rates that come with shale gas reserves. Lower rig counts mean less production tomorrow and, all things being equal, rising prices for natural gas.

So before the rest of the world jumps on the shale gas bandwagon, it had better take a good long look at what’s happening in the North American gas industry right now. Far from being the game-changer it’s supposed to be, North American shale gas production isn’t even sustainable at today’s natural gas prices.

  • Adrian Overdulve

    Totally agree with this assessment.
    I saw your interview on BNN and I have to disagree re the use of Nat Gas as transportation fuel.
    LNG has been used in Europe for quite some time as a transportation fuel. Here in NA the infrastructure needs to be put in place but using Nat Gas as a replacement for is possible.

    Other then that I do agree that current gas prices are not sustainable as is outlined in your article.

  • Abitibidoug

    In summary that means gas prices are low in the short term but will increase in the long term due to inadequate supply in the longer term. That could be good news for two reasons. There is talk of extracting gas in the lower St. Lawrence Valley in Quebec. The concern is that the process, namely fracking, could have undesirable consequences like contaminating ground water. If the project is put on hold due to low gas prices, there will be more time to figure out hot to develop this resource with minimal risk of such consequences. As for the longer term, higher gas prices could put an end to the insanity of using a relatively clean fuel (gas) to extract a more dirty fuel (heavy oil) in the Alberta Oil Sands.

  • Rojelio

    Does anyone have a good knowledge of how sustainable the natural gas price below $5 is? It is so cheap now compared to 2006 – 2008 and natural gas price doesn't seem to be rising alongside oil prices like it did in 2008.

  • Walter Derzko

    The real game changer is the fact that shale gas fracking ,which uses over 250 chemicals that contaminate the water table and has lead to shale gas drilling moretoriums in several US states in now obsolate. Ukrainian scientists have developed a novel vibration technology for drilling and fracturing shale rock to get at the gas. It's far cheaper to drill then conventional fracking and greener, It only uses nitrogen gas.

  • Walter Derzko

    We are in a recession (actually its a depression) but the US doesn't like that word. You'd expect natural gas a oil usage to drop

  • Rojelio

    do you have any links to that?

  • Rojelio

    There are many who tout natural gas as the future of energy…

  • zeke

    In my nickel/dime analysis, we're in the “magical solution” stage of change. For a period of time, we'll have lots of these solutions into which we'll plunge untold sums of money in our efforts to avoid facing reality. Of course, every scam artist, public and private, on the planet will reap the benefits. For us in the industrialized world, drowning time is a ways away. For those in the third wold, including the US “third world” population (the poor), the drowning has already started.
    Been following this issue for couple of decades. I read very, very few blog comments indicating any level of the reality we face. Endless discussions about this or that “magical solution”. As we move from “magical solutions” to reality, it will be a very dangerous time.

  • Rojelio

    I'm a bit confused. One can read article after article explaining how we're setting record levels of natural gas production in WV, Texas, and the Marcellas oil shale and “gas production is rising faster than pipelines can be built” etc..”Exxon developing advanced technologies for retrieving shale gas” etc….

    Why the apparent contradictions in the current literature?