HOUSTON — A Houston energy economist predicts that shale fever is about to ebb, and the industry soon will be looking to offshore fields for reliable and lucrative investment payoffs.
Familiarity with the Gulf of Mexico will lure producers after years of fighting concerns of landowners and environmentalists over hydraulic fracturing in shale plays nationwide, said Michelle Michot Foss, chief energy economist for the Bureau of Economic Geology’s Center for Energy Economics at the University of Texas.
“There is a level of comfort in working in the Gulf of Mexico,” Foss said. “People understand the risk there. You can get a 5,000-barrel-per-day well, a 30 percent return, and you don’t have to deal with the voters of Fort Collins. After watching all the weight of attention on the onshore plays, offshore opportunities are going to get their time in the sun, as everyone migrates back to the Gulf of Mexico.”
Foss was one of several speakers addressing an international investment audience Tuesday morning at Norwegian Finance Day in Houston.
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The recent drop in U.S. natural gas prices has created a challenge in developing onshore shale plays profitably. The Henry Hub natural gas price hovers around $5.40 per million British thermal units now — a modest recovery from its $3 price just months ago, but well below the $13.58 peak it reached in 2008.
And, in terms of value, it’s far lower than the $100 per barrel that domestic crude currently commands. That’s creating a financing challenge in some shale plays, which now are largely financed by liquids production.
“The reason we can produce gas cheaply is because we are already producing the oil and liquids in the same play for good crude oil prices,” Foss said. “The reality is that liquids are financing natural gas in the U.S. Capital providers are seeing the weak returns and as a result you don’t get the production that you need.”
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Foss also emphasized that while there are abundant resources in new shale plays, the jury is still out on whether they can be extracted profitably, because of the pricey technology and intensive labor required to do so.
And in some plays, such as the Niobrara Shale in Colorado, infrastructure limitations have made potential production much more costly than competing offshore oil, Foss said.
“Plays like the Mississippi Lime are fraught with difficulties and have not yielded the opportunities that people once hoped for,” she said. “We don’t have pipelines, we don’t have storage, we don’t have capacity.”
Financing for new shale plays will also become more difficult, as operators move to areas where the oil and gas is more difficult to access.
“The best acreage is in play right now,” Foss said. “We are working through those locations very fast, and that is what has created the glut of oil. But people look at these businesses more closely – no one wants to lend money on dry holes.”
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