A Primer on the Economics of Shale Gas Production: Just how Cheap is Shale Gas?
John D. Martin
Baylor University - Department of Finance, Insurance & Real Estate
J. Douglas Ramsey
EXCO Resources, Inc.
University of Texas at Austin - Department of Finance; National Bureau of Economic Research (NBER)
Larry W. Lake
University of Texas at Austin
April 3, 2012
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).
Number of Pages in PDF File: 30
Keywords: Shale gas economics, Capital budgeting
JEL Classification: G31, L71, Q40
Date posted: April 3, 2012 ; Last revised: July 18, 2012