A Primer on the Economics of Shale Gas Production: Just how Cheap is Shale Gas?

30 Pages Posted: 3 Apr 2012 Last revised: 18 Jul 2012

John D. Martin

Baylor University - Department of Finance, Insurance & Real Estate; Baylor University - Department of Finance, Insurance & Real Estate

J. Douglas Ramsey

EXCO Resources, Inc.

Sheridan Titman

University of Texas at Austin - Department of Finance; National Bureau of Economic Research (NBER)

Larry W. Lake

University of Texas at Austin

Date Written: April 3, 2012

Abstract

Dramatic claims have been made about the effect of shale gas discoveries in the continental U.S. on the country’s energy needs. However, several industry experts question the estimated volume of recoverable reserves as well as the economic viability of producing them at current market prices for natural gas. In this paper we develop a model to explore the economics of shale gas production and calibrate it to a gas well located in the Haynesville shale. We generalize the model using sensitivity and simulation analysis to identify the bounds of economic feasibility for producing shale gas. Our results suggest that shale gas production at current price levels is marginal and the prospect for an energy game changer resulting from the development and production of the US shale gas reserves may be in jeopardy if the value drivers do not improve (i.e., gas prices increase or production costs decline).

Keywords: Shale gas economics, Capital budgeting

JEL Classification: G31, L71, Q40

Suggested Citation

Martin, John D. and Ramsey, J. Douglas and Titman, Sheridan and Lake, Larry W., A Primer on the Economics of Shale Gas Production: Just how Cheap is Shale Gas? (April 3, 2012). Available at SSRN: https://ssrn.com/abstract=2033238 or http://dx.doi.org/10.2139/ssrn.2033238

John D. Martin (Contact Author)

Baylor University - Department of Finance, Insurance & Real Estate ( email )

P.O. Box 98004
Waco, TX 76798-8004
United States
254-710-4473 (Phone)
254-710-1092 (Fax)

HOME PAGE: http://hsb.baylor.edu/html/martinj

Baylor University - Department of Finance, Insurance & Real Estate ( email )

P.O. Box 98004
Waco, TX 76798-8004
United States
254-710-4473 (Phone)
254-710-1092 (Fax)

HOME PAGE: http://hsb.baylor.edu/html/martinj

J. Douglas Ramsey

EXCO Resources, Inc. ( email )

12377 Merit Dr.
Suite 1700
Dallas, TX 75251
United States

Sheridan Titman

University of Texas at Austin - Department of Finance ( email )

Red McCombs School of Business
Austin, TX 78712
United States
512-232-2787 (Phone)
512-471-5073 (Fax)

National Bureau of Economic Research (NBER)

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

Larry W. Lake

University of Texas at Austin ( email )

1 University Station
Austin, TX 78712-1179
United States

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