SHALE GALE - Houston Energy Experts take on the New York Times

July 1, 2011
Deon Daugherty

Houston industry experts react to N.Y. Times’ article questioning natural gas economics

Contrary to cryptic warnings that shale gas plays are “Ponzi schemes” built on shaky economics, according to a recent New York Times article that anonymously quoted analysts and industry executives, Houston oil and gas experts say shale isn’t some pipedream.

Rather, shale production has proven to be a bona-fide success, said Michael Economides, professor at the Cullen College of Engineering at the University of Houston and author of the national bestseller “The Color of Oil.” Five years ago, shale accounted for less than 1 percent of natural gas production. Today, it provides between 20 and 25 percent of the country’s natural gas output.

“There is no story like this in the history of the oil and gas world,” he said.

The emails quoted in the June 25 Times article — which set off a gusher of industry reaction this week — suggested skepticism of shale as a long-term resource for natural gas production. That was certainly the case in 2008 and 2009, when the notes were drafted and there were still many questions lingering.

Just five years ago, shale was still a relatively new word in the energy industry’s vocabulary.

“I had some of the same questions about the viability of shale production” during its early days, said Daniel Layton, president of Layton Corp., a Houston-based private-equity firm and the parent company of Republic Gathering and Marketing.

In the current market, though, successful exploration of the Bakken and Marcellus shales and now the new rush to tap the burgeoning Eagle Ford Shale in South Texas makes him optimistic. Infrastructure to develop and transport shale products is key, he said, and a comprehensive federal energy plan would help the industry move the economy forward.

Capital expenditures of the 50 largest U.S. oil companies rose to $180 billion in 2010 from $80 billion the year prior, with the majority of that capital funneled into acquisitions of onshore shale plays, according to a recent report from Ernst & Young LLP.

Oil majors, such as Exxon Mobil Corp., are having trouble accessing foreign reserves for future development, so many are moving investment into domestic shale plays that focus on oil, said Charles Swanson, managing partner of E&Y’s Houston office (read more at

Natural gas prices have been depressed for the past two years and are now at just under $4 per thousand cubic foot (mcf) because there is an abundance in the market and it’s difficult to transport, Economides said.

Oil, which is selling for $90 to $100 a barrel, can be loaded onto a tanker and moved much more easily.

Economides said that given the low price of natural gas, the performance of shale plays as a new source of oil is phenomenal. Worldwide energy leaders are taking notice. His clients in China and throughout Europe want to know “the secret” the U.S. market has discovered.

Once more connectivity is established for the use of natural gas, though, Economides said the price will increase and make shale drilling an even more compelling business model.

When it can be moved around the world in the form of liquefied natural gas to places like China, where the demand for natural gas is expected to quadruple within a decade, prices will go through the roof, he suggested.

“In the end, the reality is that the economics are going to prevail,” Layton agreed. “Very few corporations are going to build a $300 million pipeline to nowhere.”

Risk is inherent to the oil and gas industry, Layton said, and success depends partially on both science and art.

“Mother Nature calls the shots in these plays,” he said.

Dan Pickering, chief energy strategist and head of asset management at TPH Management LLC, wrote in a June 28 commentary (see page 36) that the Times article is correct in noting that company predictions rely on limited data and guesswork.

“Indeed, natural gas comes from reservoirs one to four miles deep in the earth. It seeps out through pore spaces so tiny they can’t be viewed with the naked eye. As such, almost everything about shale is an estimate,” he wrote.Still, each of the industry leaders agreed the debate is a healthy one.

“Early estimates about various plays were too conservative in some instances and two aggressive in others. The Western Barnett turned out disappointing. The Marcellus is better than people initially thought,” Pickering wrote.

“That isn’t fraud or deception, it’s the oil patch.”  •  713-395-9627