Shale Gas: Policy Context

R e s o u r c e s f o r t h e F u t u r e ’ s

C e n t e r f o r E n e r g y E c o n o m i c s a n d P o l i c y ( C E E P )

D r. A l a n K r u p n i c k , C E E P D i r e c t o r 1 1 / 1 4 / 1 1

4 4

Gas price for given rate of return

Production rate

Conventional gas

plays

Shale gas

plays

Costs versus production

Bulls vs. Bears

• Resource Base: “Enough gas for 100 years” vs. “USGS: 80% lower than EIA estimate of resources”

• Price: Stable and low vs. BAU

• Global warming: “Foundational” vs. “Flimsy bridge to a low carbon future”

• Energy Security: “an answer” vs. BAU

• Environmental risk: “Tempest in a teapot” vs. fracking bans

Discovered?

Economic?

3 Ps +

cumulative

production?

USGS 2011 Estimate

84 tcf

AEO 2011 410 tcf

Marcellus Natural Gas Resource Base (Old Diagram)

Marcellus Shale Gas Resource Base (New Diagram)

Unproved and Undiscovered Technically Recoverable

Resources and Inferred Reserves are essentially measuring

the same thing when considering continuous resources.

But using different methods and data

Whatever the true resource base,

• Companies are learning fast

– Longer “laterals” (from 2000’ to 8000’)

– Faster drilling (from 80 to 20 days)

• And being surprised

– Shallower decline curves (“decades”)

• Two years ago: 4.1 Bcf per well

• Today, some wells up to 7.1 Bcf

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9

10

2011

2012

2013

2014

2015

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2020

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2026

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2028

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2030

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2009 D

ollars

per

millio

n B

tu

Natural Gas Henry Hub Spot Price Forecasts

AEO 2011 AEO 2009

Low and stable for long-run (based on AEO2011).

Short-run?

Natural gas and global warming

• Is natural gas (from shale) a lower carbon

substitute for coal? – Fugitive methane*GWP + other fuel cycle elements < >

Coal emissions (CO2e)

• Will natural gas substitute for coal in the

power sector?

13

516566

1,096

0

200

400

600

800

1,000

1,200

Gas 2010 Gas 2011 Coal

Life

cycl

e G

HG

Em

issi

on

s (k

g C

O2

e/M

Wh

)

EIA-ICF (2011) Lifecycle CO2e Analysis Shows Gas (with

fracking): 50% Cleaner than Coal

Note: 100 year global warming potential

Source: EIA, ICF International, DBCCA analysis 2011

+10% Revision

Gas still 48%

cleaner than

coal

14

CMU study: shale gas ~40% cleaner than coal

Cornell Study and Critique

• GWP => 20 vs. 100 years

should stimulate further study

• Fugitive methane data are thin (handful of wells in 5

plays). For key play (Haynesville):

15

0

1,000

2,000

3,000

4,000

5,000

6,000

7,000

8,000

Haynesville Barnett Piceance Uinta Den-Jules

tho

usan

ds o

f cu

bic

mete

rs

Methane “emitted” during flow-back

Cornell Study and Critique

• GWP => 20 vs. 100 years; IPCC or revised estimates

should stimulate further study

• Fugitive methane data are thin (handful of wells in 5

plays). For key play (Haynesville):

• Documentation misread (IHS Global, 2011)

• Methane is mostly flared, rather than vented. Some

methane too expensive to capture;

• Metering errors can lead to misclassification as fugitive

• Research on-going

17

Natural Gas, Power Sector and CO2 emissions

• Increased gas resources:

– NEMS: AEO2009 269 vs. PGC 616 tcf:

increased natural gas use and share, more

carbon

– HAIKU: AEO2010 347 vs. AEO11 827 tcf:

increased gas use and share, slightly less

carbon

• With CO2 policy: cheap gas lowers costs

A “narrow” bridge to a low carbon future, but pressure on old coal plants to retire will likely

create a bigger role for natural gas

Energy security and global warming: Heavy-duty LNG-Fueled Trucks

instead of Diesel Trucks

If:

– LNG truck is $70K more expensive than diesel

– LNG is $1.50/ge cheaper

– Observed impatience (31% interest rate)

– 125,000 miles/yr.

– 5.1 mpge

3 year payback

But chicken and egg problem with investment

New Investment in LNG Infrastructure

• Chesapeake Energy: investing $150 million in Clean Energy Fuels Corp. to develop up to 150 LNG truck fueling stations along major truck corridors (interstates) in the U.S.

• 79 stations over the next 2 years; 250 miles apart

• Clean Energy partnering with Pilot Flying J

• Capacity of system: 3-4 million gallons of LNG/station a year 11K trucks (@125K miles/yr)

December 2012 Projected (Chesapeake Energy website)

- Niche market for LNG-fueled heavy-duty trucks - Tougher case for CNG-fueled light-duty vehicles; Weak energy security benefits for now

Environmental Risk?

Aubrey McClendon

interview with Forbes:

F: It’s clear that as long as

wells are cased and

cemented properly,

fracking is safe, right?

M: 100%!

Environmental Risk?

• No comprehensive analysis of impact pathways

• No comprehensive examination of expert opinion

• No examination of public opinion where trade-offs are

forced

– “An industry response that hydraulic fracturing has been

performed safely for decades rather than engaging the range

of issues concerning the public will not succeed.” (SEAB,

2011)