My intent with this post is to provoke thought and discussion on when the best time is, “the sweet spot” to enter a lease, produce, bring to market, export and so on, activities related to shale gas production.  First of all, I’m not an expert, only providing my opinion as a smaller tract landowner.

There is virtual certainty that demand for energy will rise about 50 percent over the next 15-20 years in large part due rapid economic growth in the developing world and demographics. The US Energy Information Agency anticipates steadily rising global production through 2035, driven by OPEC production increases and unconventional oil and gas in North America.  US production of shale gas has exploded; a nearly 50 percent annual increase between 2007 and 2011, resulting in a collapse in the price of natural gas in the US.  The 3 year futures prices uptick only slightly. 

As a landowner, my interest is minimal impact to surface area and no adverse long-term impact to water or long-term property usability and value, all while maximizing profit and keeping taxes in check.  Producers are motivated by maximizing profit as well as minimizing liabilities and managing risk.  I suspect large and multi-national energy players want large pooled packages to posture themselves on the national and international market.  Government (pick your political position) is a no brainer.

Shale oil production in the US is still in its early stage but preliminary estimates for 2020 range from 5-15 million barrels per day with a production breakeven price as low as $44-68 per barrel depending upon the fields.  By the 2020, the US could emerge as a major energy exporter.  I’m not well informed but have hear discussion of a major pipe in Maryland which could carry product to the coast having some political tension and also needing fitted for outbound vs. inbound product.  For the US, lower energy prices will have a positive effect on the US economy and may encourage those taking advantage of lower energy prices to locate or relocate back to the US.  If this became reality, these developments could impact the US economy, perhaps delivering a 1.7-2.2 percent increase in GDP and 2.4-3.0 million additional jobs by 2030.  For the US government, this would contribute (hopefully) to reducing the ever growing national debt, annual deficit spending and hopefully bring us part way out of the hole.

On the global scene the International Energy Agency also posits growing global production of key fossil fuels through 2030 (about 1 percent annually for oil).  Increased production could offset or erase the US net trade balance or even push global spare capacity to exceed 8 million barrels per day, at which point OPEC could lose price control and crude oil prices would drop, possibly sharply.  Such a drop would take a heavy toll on these energy producers, increasingly dependent on relatively high energy prices to balance their budgets.  Other regions and countries also have shale reserves.  China has the world’s largest reserves of nonconventional gas, double estimated US reserves but their lack of equipment, experience and extraction resources (mainly water) may inhibit development there.  Europe has generally stricter regulation than the US, (exception Poland) while the French banned hydraulic fracking.

Alternative fuels such as hydropower, wind, and solar energy continue to provide a relatively small increase in energy requirements as the IEA baseline scenario shows renewables rising just 4 percent during the 2007-2050 period. Hydropower accounts for the overwhelming majority of renewables in this scenario, with wind and solar energy providing 5 and 2 percent contributions in 2050 respectively and contributions in 2030 even less and an effort to raise that bar would require substantial investment in alternatives.  The same reason steam took 40 years to replace the sail fleet as ships were built and operational and to replace them with substantially more expensive steam ships just didn’t make sense, the same as for electric cars now.

For the landowner, it seems to me if you have not signed a lease and do not have the offer you want, depending on your age and needs, you have time.  Current prices are down, 3 year futures are relatively flat, infrastructure for export is incomplete and then there is the current “administration.”  This being said and barring another war, I see the sweet spot 2018-2024.

For the producer, you want all the leases you can get or can afford before prices move up and they will move up.  For the large and cash heavy multi-nationals, leases are an effective means to move cash off the balance sheet while prices are a bargain and before regulation moves south.  For the government, pick your flavor.