What is the real cost of shale gas?

  • US shale gas production has grown from around 4 billion cubic feet (bcf) per day in 2007 to around 26 bcf/day in 2012
  • US gross natural gas production  has grown from a plateau of 2 trillion cubic feet (tcf) per month in the period 1995 to 2002 to 2.5 tcf per month in 2012
  • Some believe this is marching the USA towards energy independence while others believe, owing to costs and decline rates, that this may be an energy bubble
  • At the end of 2011, shale gas accounted for 32% of total US natural gas production (EIA data) 
  • Pre 2008 financial crash, there were roughly 400 rigs drilling oil in the USA and 1600 drilling gas. Today it is roughly 1400 drilling oil and 400 drilling gas
  • The fall in US prices to <$2 in 2012 has created the illusion that shale gas is cheap while in fact over-production caused a crash in the price in US natural gas to below the level where it was possible for companies to make a profit
  • What is the real cost of shale gas? “Some wells are profitable at $2.65 per thousand cubic feet, others need $8.10…the median is $4.85,” attributed to Ken Medlock, Senior Director of Rice University’s Baker Institute Center for Energy Studies

Figure 1 The astonishing evolution of global annual average natural gas prices according to BP. Shale gas development in N America, The Fukushima nuclear disaster and a shortage of LNG explains much of what is going on. The grey bar to the right shows minimum, maximum and median break even prices required for US shale gas according to Ken Medlock of The Baker Institute. These shale gas prices would be really cheap in Japan but are expensive for the USA and still mainly above US spot prices today ($3.85 / mmbtu). Click on all exhibits to get a larger version that will open in a new browser window.

In this second part of  three in this mini series on “Shale gas myths and realities” I want to address one of the central questions surrounding this new bounty: is shale gas cheap or expensive? Last week in a bruising exchange on Andrew Montford’s Bishop Hill Blog I made the assertion that shale gas was expensive and not cheap. This produced a tirade of incredulous opposition.

Euan, shale gas is cheap. Really, really cheap. It isn’t just the gas. It is all the steel pipe needed for drilling and distribution. And all the jobs making the steel pipe.

At that point I had already made some enquiries into the cost of shale gas and made the assertion that break even price was likely between $4 and $8 ($ per thousand cubic feet are roughly equal to $ per million btu and are used throughout). It is extremely important to observe that $4 to $8 is currently cheap if you are in Europe, really cheap if you are in Japan but actually quite expensive if you are in North America (Figure 1) and making relative assertions about life cycle production costs is not a sensible way to proceed.

Before taking a more detailed look at published estimates of the life cycle break even costs of shale gas I first provide an overview of the very brief history and stunning growth rate of shale gas in the USA, since it is only through understanding the past that we may begin to understand the present and perhaps get a glimpse of the future.

US shale gas production to date

Figure 2 shows the history of US shale gas production produced by David Hughes [1]. It shows that production is dominated by 4 plays, The Haynesville, Barnett, Marcellus and Fayetteville (Figures 2 & 3). Production has grown from around 4 billion cubic feet (bcf) per day in 2007 to around 26 bcf/day in 2012! The expansion of shale gas production has had material impact upon US gross production that has grown from a plateau of 2 trillion cubic feet (tcf) per month in the period 1995 to 2002 to 2.5 tcf per month in 2012 (Figure 4). Some believe this is marching the USA towards energy independence while others believe, owing to costs and decline rates, that this may be an energy bubble. Where does the truth lie?

Figure 2 Stack of US shale gas production from a presentation by David Hughes [1]. From a standing start in 2000, production has grown to an astonishing 25 bcf per day.

Figure 3  Map showing the main shale gas and oil plays of the USA and Canada from the EIA.

Figure 4 The evolution of US gas production by type since 1993 based on data from the US Energy Information Agency (EIA). The dislocation in the data series in 2006 comes with the introduction of shale gas reporting. Prior to that shale gas was reported together with conventional dry gas production. At the end of 2011, shale gas accounted for 32% of total US natural gas production. According to David Hughes, by the end of 2012 that figure had risen to 40% (Figure 2).

The phenomenal growth in US shale gas production did not just happen. The US drilling industry went into overdrive beginning around 2003 that saw the total number of rigs more than double to 2000 units by the summer of 2008 (Figure 5). The majority of rigs were drilling for gas and, putting Figure 5 together with Figures 2 and 4, it is apparent they were increasingly targeting shale gas at the expense of conventional gas production that began to decline after many years on plateau (Figure 4). Then, in August 2008 came the financial crash followed by a sharp decline in drilling activity as everyone pondered the future of the global financial system. US drilling activity picked up quickly in 2009 and 2010. But then began a great migration from drilling shale gas to shale oil plays (Figure 4). Pre crash, there were roughly 400 rigs drilling oil and 1600 drilling gas. Today it is roughly 1400 drilling oil and 400 drilling gas.

Figure 5 US drilling rig count from Baker Hughes compared with natural gas production (gross withdrawals) from the EIA. Since 1995, the size of the US drilling fleet has grown from about 700 rigs to 2000 rigs. For a long while, the increased drilling effort was only sufficient to combat declines until the attention turned to shale. New shale plays clearly provided better production returns than pursuing the very mature conventional gas targets. It remains to be seen if shale provides similar economic returns. There is evidence that gross gas production has plateaued during the past 24 months.

The migration from gas to oil is quite simple to explain. Overproduction of shale gas dumped the price from over $13 in June 2008 to below $2 in April 2012 (Figure 6). In the same time frame the oil price has been much more robust prompting the great migration from shale gas to shale oil drilling. Natural gas below $2 was fantastic for US consumers and economic growth but led ExxonMobil chief executive Rex Tillerson to famously proclaim:

“We are all losing our shirts today.” Mr. Tillerson said in a talk before the Council on Foreign Relations in New York. “We’re making no money. It’s all in the red.”

Figure 6 Henry Hub natural gas spot prices from the EIA.

European and Asian governments have looked on with envy as a shortage of natural gas on international markets, caused by the combined impact of the Fukushima reactor tragedy and a fall in LNG supply during 2012, sent prices soaring ever higher, creating enormous disparity in price (Figure 1). The fall in US prices to <$2 has created the illusion that shale gas is cheap while in fact over-production caused a crash in the price in US natural gas to below the level where it was possible for companies to make a profit. This is not good for society who without realising it, is dependent upon profitable energy industries for its survival.

What is the real cost of shale gas?

So what is the actual life cycle production cost of shale gas in North America? There is no single and simple answer. There are a large number of variables that need to be taken into account:

  1. The ultimate gas recovery from a well (EUR)
  2. The sunk costs drilling a well
  3. The land costs
  4. The cost of pipelines, process facilities and transport to market
  5. Tax and royalties
  6. Interest paid and interest rates
  7. Corporate overhead

There can be enormous variations in some of these variables from State to State, e.g. tax regime, and even bigger variance between N America and Europe. In the various estimates given below it is not clear in some cases if full life cycle or point-forwad economics are used (see caption to Figure 8). The estimate below is attributed to Ken Medlock, Senior Director of Rice University’s Baker Institute Center for Energy Studies:

“Some wells are profitable at $2.65 per thousand cubic feet, others need $8.10…the median is $4.85,”

These are the prices I have indicated on Figure 1. Figure 7 is lifted from an academic study [2] which seems to indicate minimum costs in the range $4 to $6 / mcf.

Figure 7 Ruud Weijermars [2] in an academic article estimates minimum prices of between $4 and $6 / mcf for various US shale plays.

In a 2012 presentation, shale gas analyst and critic Arthur Berman [3] pointed towards full cycle costs for shale gas in the Barnett, Fayetteville and Haynesville in excess of $8 applying an 8% discount rate (Figure 8). Berman argues that companies consistently over estimate well ultimate recovery and hence relative costs are actually higher than declared.

Figure 8 From a 2012 presentation by Arthur Berman [3]. In an email from Arthur today: “Point-forward economics do not include entry/land costs, overhead/G&A or debt service.  The table is two years out-of-date so I wouldn’t use the break-even gas prices as other than a guide.  The decline-curve analysis remains sound.”

I have this from the former CEO of a major oil company:

It is all a function of gas price. At $4-5/m, there is a ton.

In summary, it seems clear that below $2 the shale gas industry as a whole is unprofitable. The published evidence points to the estimates of Ken Medlock at the Baker Institute as providing a balanced picture. The profitability of individual companies will depend upon the quality of their overall portfolio. Only time will tell if the high end estimates of Weijermars and Berman come to pass as a result of wells producing less than currently assumed. But this is an extremely volatile and active industry with efficiency gains being made all the time, and making forecasts is incredibly difficult, especially about its future.

The future of shale gas in the USA

There are signs that the sharp slow down in shale gas drilling  is beginning to feed through to a slowing of gas production rate (Figure 5) where a 24 month production plateau may be evident. One of the surprising things is that gas production continued to rise while the rate of drilling fell. This in part is due to a time lag between drilling wells and hook up to the distribution system. Wells need to wait for the pipelines to arrive and at any point in time there is a backlog inventory of new wells that are sitting idle waiting to be hooked up. But drilling efficiency has also improved, fracking and completions are improving and in some areas like the Marcellus of PA, production hot spots are being found and drilled. This excerpt from The Motley Fool:

With so many companies using pad drilling, it shouldn’t come as a surprise that the average North American active rig drilled 15% more wells during the third quarter of this year than in the first quarter of 2012, according to Baker Hughes data.

In North Dakota’s Bakken shale, each rig’s daily oil production from new wells is expected to nearly double this year, from slightly more than 250 barrels of oil per day last year to an estimated 496 barrels per day in December, according to the U.S. Energy Information Administration. Similarly, in Texas’ Eagle Ford shale, each rig’s production from new wells is projected to increase to 413 barrels per day, up from about 200 barrels per day last year.

It seems possible that an equilibrium point has been reached where 400 rigs are managing to provide sufficient volumes to offset gas declines. Demand for cheap gas has risen in the USA which still imports small volumes from Canada. It is difficult to envisage in current market conditions a fresh migration of drilling activity away from oil into gas. It seems reasonable to expect, therefore, that the rise in production may come to a halt or may even reverse in the medium term, a situation that will persist until natural gas prices have risen back to a level that attracts rigs away from The Bakken and Eagle Ford.

The spectacular efficiency gains made in drilling times and well productivity must inevitably slow down at some point. The longer term future will be determined by the number of production sweet spots and hot spots that are found. For so long as new wells continue to be better than the old, it will seem like the shale miracle will go on forever.

On the basis of the foregoing it seems likely that US natural gas prices may continue to rise to beyond $5 in the near term. Citizens may grumble but should also appreciate that at this level, the prosperity of the shale gas industry may be assured for a while at least, and that will be of major benefit to the US economy. At $5, companies with a good quality portfolio of cheap, productive wells may make a lot of money whilst those with low productivity, expensive wells may not.

Relevant posts on Energy Matters

1. Shale gas myths and reality – part 1
2. Marcellus shale gas Bradford Co Pennsylvania: production history and declines
3. LNG Heading East


The information presented here is done in good faith in an effort to provide an objective summary of the current state and near-term prospects of the US shale gas and shale oil industry. The author invests in oil and gas companies but does not hold any stock in US or Canadian listed energy producers.


  1. The “Shale Revolution” Myths and Realities” Energy Growth Conference First Energy Capital Toronto, Ontario November 19, 2013; J. David Hughes, Global Sustainability Research Inc., Post Carbon Institute
  2. Ruud Weijermars, Economic appraisal of shale gas plays in Continental Europe, Applied Energy 106 (2013) 100–115
  3. After The Gold Rush: A Perspective on Future U.S. Natural Gas Supply and Price, Arthur E. Berman Labyrinth Consulting Services, Inc. ASPO Conference 2012 Vienna, Austria May 30, 2012
This entry was posted in Energy and tagged , , , , . Bookmark the permalink.

15 Responses to What is the real cost of shale gas?

  1. Roger Andrews says:

    What’s going to control future natural gas production in the US is a) the price at which it becomes cheaper than alternative sources of energy, particularly coal, and b) the impact of the EPA CO2 regulations.

    Taking these issues in sequence, according to the link below natural gas has a cost advantage over coal at prices below $7/million btu, and at this price I would guess that potentially-extractable natural gas resources would be large enough to supply US demand well into the future and that O&G companies could extract them at a profit:


    As to what sources will be used to fill future US demand, no one expects much in the way of coal or nuclear, which leaves natural gas and renewables to take up the slack. And according to EIA 63% of US electric capacity additions between 2012 and 2040 will be natural gas and 31% renewables:


    On the issue of CO2 emissions the EPA regulations allow new natural gas-fired plants to be built without CCS but require CCS for new coal-fired plants, which is tantamount to banning new coal-fired plants. A new administration could overturn these regulations, whereupon coal and natural gas would once again compete on a level playing field, or it could tighten them to the point where CCS is required for natural gas too. What’s going to happen? My guess is that the EPA regulations will get watered down or maybe even go away altogether shortly after the end of President Obama’s term, but I could be wrong.

    • Euan Mearns says:

      Roger, thanks for this US perspective. It’s going to be interesting to see how US consumers react. The coal industry must be in a world of hurt as must coal based utilities. If electricity prices begin to soar, it will be a free ticket for the next Republican presidential candidate. I’m guessing coal miners simply go off and get a job drilling shale.

      There is a world of difference between shale gas – CCGT – consumer. And shale gas – CCGT balancing wind – CCS – consumer (which I think is the UK plan).

  2. Roger Andrews says:

    I forgot to mention that the EIA projections show US shale gas production expanding by 20% between 2013 and 2108 even though spot prices remain below $4. Is this a realistic expectation?

    • Euan Mearns says:

      Roger, many years ago I learned to always take government and corporate projections with a big pinch of salt. Both tend to suffer from optimistic bias. Do you really mean 2108? I’m guessing 2018;-) Will be able to answer that question better with another 6 to 12 months production data. Is a 20% expansion of shale gas production enough to cancel the declines in dry and oil associated gas?

      $4 seems unrealistic to me based on information presented here. But the US shouldn’t have too much to fear from $6. But maybe Obama does!

      The US is high grading its shale deposits – i.e. developing sweet spots and hot spots, on a wave of unmitigated optimism. At some point, new wells will begin to deliver poorer performance than those that went before and at that point drilling intensity (and price) will have to rise. I don’t know when that happens. US can always add another 1000 drilling rigs – before you know it half the population will be working in the shale drilling industry.

      • Roger Andrews says:


        Yes, I meant 2018. Thick fingers. Sorry

        To enlarge on my earlier comments about the impact of the proposed EPA CO2 standards, according to the EPA there won’t be any:

        “ …. even in the absence of this rule, existing and anticipated economic conditions will lead electricity generators to choose new generation technologies that meet the proposed (CO2) standard ….”

        “Therefore …. the EPA anticipates that the proposed …. standards will result in negligible emission changes, energy impacts, quantified benefits, costs, and economic impacts by 2022. Accordingly, the EPA also does not anticipate this rule will have any impacts on the price of electricity, employment or labor markets, or the US economy.”



  3. David Shipley says:

    Great analysis here dealing very effectively with the challenges I and others made on Bishop Hill. Genuinely educational for me – thank you. Does make wind look even more pointless and demands aggressive exploration in the UK and elsewhere in Europe to see if the RGS is right.

  4. Hugh Sharman says:


    The “really cheap” gas is the stuff that comes from “conventional” reserves (figure 4). This is the geologically trapped gas and the oil associated gas that (for Heaven’s sake) they are flaring in the Bakken for lack of pipelines from North Dakota and (I suppose) gas treatment plants.

    It is alarming to see how rapidly conventional gas extraction is depleting in the USA, after decades of bumping along that plateau.

    Shades of the North Sea and the ever increasing balance of payments deficit that our children and grand children face if we do not invent our way out of energy deficits!

  5. Leo Smith says:

    Really good stuff Euan..

    The $4.85 average price per million BTU comes out (after some recalculations having dropped a decimal point) at about £15.7 /MWh for the fuel contribution to gas generated electricity. (assuming sane exchange rates and power station efficiencies)

    As against a similar calculation in current European gas prices of about 29 €/MWh which comes out at about £33/MWh

    So even the most expensive fracking in the US is still competitive in the European market. And if the average prices were maintained here would halve the cost of gas and knock 1.5p off the unit cost price of gas generated electricity.

    I have been looking for this sort of data because the balance between ‘fracking will make gas so cheap it will save the nation’ and ‘fracking will be so expensive gas prices will go up’ has been unreachable due to simple lack of data.

    • Euan Mearns says:

      Thanks for the sums Leo. But there are two ways forward:

      Option 1. Shale gas – CCGT – consumer
      Option 2. Shale gas – CCGT balancing wind – CCS – consumer

      Just had an email from Ken Medlock who has explained that the prices from his study were based on 12,000 wells from the Barnett Shale.

  6. masoninman says:

    The graph from the paper by Ruud Weijermars says this on the figure caption for prices: “Breakeven marginal prices for major US shale gas play, duly accounted for or limited to ‘best’ well performance.” If I’m understanding right, these aren’t average breakeven prices, but the prices required for top performing wells to break even. So these prices listed would underestimate the average breakeven cost, right?

    The reference for this is listed as: “Bloomberg & Credit Suisse. Breakeven prices reported by Deutsche Bank in proprietary investor report; 2011.” So apparently the data is a bit old. And, as you noted, ditto for Berman’s numbers shown here.

    I’d be really interested in seeing some recent breakeven price data, if any are available.

    • Euan Mearns says:

      Hi Mason, getting the recent past data is hard enough. But drilling efficiency has gone up, and quality of resource has gone up, so you can rest assured that break even price has gone down short term. A crunch comes at some point in the future when drilling gains flatten and quality of resource starts going down. I wouldn’t like to make the call. The hunger for C-H bonds and inventiveness of US drilling industry is a potent driver of capitalism. But at the same time, all the rigs have gone off to drill liquids….

  7. Simon Tytherleigh says:

    Very good analysis.
    One interesting question is the effect all this will have on the US consumer. I have read about companies ‘repatriating’ energy-intensive industries on the back of the promise of ‘enough cheap gas for 100 years’. Obama repeated the wild claims, and the US public seems to have believed them.
    But it looks like the price needs to more than double to assure even a modest future, and even this seems to presume that there are still plenty of sweet spots to be found in the various plays. A doubling of gas prices would cause significant pain, and plenty of accusations of broken promises.
    The low-hanging fruit rule would suggest that the best spots will have been found pretty quickly. Very high decline rates for fracked wells mean that they will struggle to maintain steady production, despite innovations such as re-fracking wells. The only option to maintain the illusion would be to drill lots more wells. But, as you show, this is not happening – and why should it when most are unprofitable anyway?
    So the prediction that the US will experience a shock as gas prices quickly rise again, and that shale gas is not the road to energy independence, looks likely to be true.

  8. Euan Mearns says:

    The only option to maintain the illusion would be to drill lots more wells. But, as you show, this is not happening – and why should it when most are unprofitable anyway?

    Yes, I think the road to energy independence may have some bumps on it. But the US seems to be pressing ahead with building LNG trains. It will be interesting to see how the story unfolds.

  9. Dennis Coyne says:

    Hi Euan,

    You need to be careful with your interpretation of the EIA’s drilling productivity report. I will comment on the two plays I am most familiar with, the Bakken and the Eagle Ford. In the case of the Bakken the productivity per rig may have increased because leases were secured by getting at least one well producing on each lease over the period from 2007 to 2011 and this required a lot of moving of drilling rigs from lease to lease to accomplish this. Then oil companies were free to focus on their best leases and pad drilling was employed to reduce costs. This is part of the explanation for the increased new well output per rig (fewer rigs can drill more wells.) The second effect is that the fracking crews have not been able to keep pace with the drilling crews so there is a backlog of 500 wells waiting on fracking services which has built up over the last few years. This is the reason why the number of drilling rigs has decreased in the Bakken from 218 in May 2012 to about 174 in Nov 2013 because the wells drilled can’t be fracked quickly enough. This ends up look like the rigs are more productive when in fact the new wells coming online may have been drilled 6 months earlier, but only got fracked last month. The EIA’s report assumes the rig count from 2 months earlier is the relevant parameter to determine new well production, but it is not under these circumstances.
    The bottom line is that for the Bakken the productivity per rig given by the EIA is inaccurate.

    The Eagle Ford is a different story. The EIA uses all rigs operating for its DPR and does not distinguish between oil and gas directed rigs. This makes sense for gas possibly because there is often associated gas produced by an oil well. For oil production this makes less sense. The Eagle Ford started mostly as a natural gas play, but the crash in gas prices led to most rigs being directed to liquids production. The apparent increase in productivity of rigs in the Eagle Ford simply reflects this move from oil to gas:


    The left vertical axis is # of rigs or barrels per total rigs (green dots) and the right vertical axis is barrels per oil rig.

    Note that when we consider the oil rigs (data from baker hughes) we see the oil rig productivity has been pretty steady at about 450 to 550 barrels of new well output per rig.

    Dennis Coyne

    • Euan Mearns says:

      Hi Dennis, thanks for your chart. You can post charts here using same html as was used on The Oil Drum. The more the merrier I say. I can’t confess to understand the detail of what you are saying. But I do understand that time lags between drilling wells, fracking wells, hooking wells to pipelines combined with huge migrations of drilling crews from gas to liquids may create huge distortions in statistics. Companies and political parties (governments) may seek advantage in exploiting such distortions in the short term. Understanding exactly what is going on in shale world is of vital importance and I doubt that companies and government are going to provide that truth.

      I’m posting links to Linked In, about 8 groups, with over 100,000 members (rough guess) where companies are posting their spin that is somewhat counter to my view of reality. Key question right now. Will USA ever export liquefied natural shale gas?

      best euan

Comments are closed.