New gas extraction methods increase price responsiveness
WASHINGTON–Over the past decade, the shale revolution, driven by unconventional methods such as hydraulic fracturing and horizontal drilling techniques, has fundamentally changed how natural gas is produced in the United States. One of the effects of this transformation is that producers are able to more quickly ramp up gas production in response to changing demand, suggesting we are now in an era of increased price stability for the natural gas sector, according to a new study posted by Resources for the Future (RFF). Stable natural gas prices can provide substantial benefits for governmental and private sector decision-making as well as the US economy.
The new paper specifically analyzes the differences in operators’ price-responsive behavior between conventional and unconventional gas. “Trophy Hunting vs. Manufacturing Energy: The Price-Responsiveness of Shale Gas” is authored by Richard G. Newell and Brian C. Prest of Duke University and Ashley Vissing of the University of Chicago. (Dr. Newell officially begins as RFF’s next president on September 1.)
In their study, the authors use detailed data from approximately 62,000 gas wells drilled in Texas during 2000-2015 to examine whether unconventional gas supply is in fact more responsive to price changes than conventional sources, as has been widely conjectured. They separately analyze three key stages of gas production: drilling wells, completing wells, and producing natural gas from the completed wells. The study finds that unconventional gas supply is almost three times as responsive to price changes compared to conventional gas extraction methods, due entirely to greater well productivity.
Although unconventional wells tend to take longer to reach production, they produce much more gas per well than conventional wells and have much lower percent variation in production, consistent with the notion of a manufacturing process.
The faster flow rate per well turns out to be the primary margin by which aggregate supply from unconventional gas production is more price-responsive than conventional reservoirs.
In particular, the responsiveness of unconventional gas supply to price changes is approximately 2.7 times greater compared to conventional gas, due entirely to greater well productivity. (This distinction is critical in an industry where drilling rigs are a major cost factor, as rising well productivity allows for more production per rig.)
Neither production from existing wells nor completion times respond strongly to price changes. The important margin for supply response is drilling investment.
There was no evidence that the elasticity of drilling response to prices (estimated at 0.7) is different for unconventional versus conventional gas wells.
Simply counting wells drilled or rigs operating is no longer sufficient to gauge changes in gas supply without also measuring heterogeneity in well productivity.
Read the entire study: Trophy Hunting vs. Manufacturing Energy: The Price Responsiveness of Shale Gas.
Full research paper: http://www.rff.org/research/publications/trophy-hunting-vs-manufacturing-energy-price-responsiveness-shale-gas