Shale Gas Evolution

Abstract

The emergence of natural gas production from shale formations was due to the convergence of three technologies, horizontal drilling, hydraulic fracturing and 3-D seismology, which had been developed over decades through incremental innovations. Shale gas seemed revolutionary only because this convergence coincided with a short-term spike in natural gas prices, which stimulated a burst of development that allowed producers to quickly climb the learning curve and reduce costs. Shale gas has turned out to be similar to other extractive resources in that the short term cost curve rises sharply due to input constraints, while the long term cost curve will gradually shift up as low cost resources are exploited over time. Shale gas will not be an unlimited source of low cost natural gas. Shale gas does stabilize gas markets because unlike conventional gas reservoirs with high initial capital costs but low marginal costs of production, shale requires continuous drilling to maintain supplies, resulting in a smoother industry supply curve. The key economic unit for investment decisions is the drilling pad, not the gas reservoir.

Keywords: Shale gas, energy, natural gas, frac, fracking

JEL Classification: Q40, Q41, Q48