#378. Shale Gas – A Game Changer? Part I

Posted on | The Agurban
Shale Gas-A Game Changer? Part I

One of the more incredible growth stories of the U. S. economy in the past two years has been the increase in shale gas production, a story of American innovation and ingenuity. And, just like most American success stories, this one is due to the persistence and determination of one man, George Mitchell.

His father was a goat herder in Greece but immigrated to Galveston where young George grew up dirt poor during the Great Depression. He worked to put himself through Texas A&M where he studied geology and then served in WWII. After the war he and his brother started their oil business in a one room office above a drugstore. While Johnny Mitchell met with potential investors in the drugstore, George worked over geology maps upstairs. Because they lacked capital to be able to buy the maps, the brothers would borrow them from a blueprint company overnight and return them by 8 am the next morning.

In 1982, Mitchell became convinced that he could unlock the gas that sat in the Barnett Formation in north Texas. For the next twenty years, Mitchell doggedly experimented with ways to unlock that gas from the concrete-like-formation. Finally, using sophisticated 3-D seismic mapping, horizontal drilling, and specialized fracking mixtures, the gas began to flow in the early 2000s. Devon Energy from Oklahoma, monitoring production from around the country, was astounded by the increase in gas production from a field that was thought to be dying, swooped in to purchase Mitchell Energy for $3.5 billion. Today, Devon has a market cap of $26 billion and is a leader in the shale gas play taking place in many states around the country. Mitchell, who is now 92, was recently quoted, “Some people have said I’m to blame for driving the price of gas down from $11 to $2.50. Well, I say too bad!”

And, how it has changed the landscape in a very short period of time! 

Today, the USA is the world’s largest producer of natural gas and could become the world’s leading oil producer (utilizing the same technology) as early as 2017. Today, our reserves of natural gas are in excess of a 100 year supply and growing.

In December 2011 PWC (Price Waterhouse Coopers) released the detailed study “Shale Gas: A renaissance in US manufacturing?” Some of their key findings were:
  • Lower feedstock and energy costs could help US manufacturers reduce energy costs by $11.6 billion annually through 2025. US manufacturers currently consume about 1/3 of all of the energy used in the USA.
  • US manufacturing firms could employ an additional 1 to 3 million workers by 2025 because of lower energy costs and the need for products to extract this gas.
  • In April 2011 the US Energy Information Administration (EIA) estimated that the USA had 862 trillion cubic feet (tcf) of technically recoverable shale gas, with 410 tcf from the Marcellus basin in OH & PA. In 2002 that same basin was estimated to contain 2 tcf!
  • The following firms have announced plans for new plants in the USA because of these costs savings: Dow Chemical; Formosa Plastics; Chevron Phillips Chemical Co; Bayer Corp; Westlake Chemical; Shell Oil; CF Industries; Santana Textiles; and Nucor.
The cost savings from this dramatic change are being felt in a number of industries, changes that could reshape the entire economic landscape of rural America. Stephen R. Wilson, CEO of CF Industries, a producer of anhydrous ammonia, stated in a WSJ interview, “The economics have changed radically. We’ve gone from a high-cost producer by world standards to a low-cost producer and plan to spend up to $1.5 billion to boost our North American capacity.”