Economist Foresees Move Away From Shale Investment

February 2014, Vol. 241 No. 2

A leading energy economist expects the shale boom to retreat somewhat amid weak returns on capital investments that are already causing investors to turn their attention offshore where “risks are more understood.”

Michelle Michot Foss, chief energy economist at the University of Texas, said foremost among the shale investment risks are uncertainty about adequate shipping infrastructure, ongoing battles over fracking restrictions and the volatility of pricing.

“This is much more volatile than some expected, and you can’t deny volatility,” she told international investors Tuesday at the Norwegian Finance Day program in Houston.

Foss said a pullback from more “adventuristic projects” has already begun with producers showing increased interest in offshore opportunities in the Gulf of Mexico.

“It doesn’t mean we are giving up on shale plays, but a wakeup call is underway,” she said.

Low natural gas prices in the United States have further complicated the profitability of onshore shale plays, despite a modest recovery in recent months.

Foss said the reason inexpensive gas can be produced is that oil and liquids are also produced from the same plays for crude oil prices.

“Liquids are financing natural gas in the U.S.,” she said. “Capital providers are seeing the weak returns, and as a result you don’t get the production you need.”

Foss, who heads the Center for Energy Economics (CEE) at UT, said the center projects demand for natural gas by residential and commericial users will stand at 10.5 Tcf in 2030, which is 0.3 Tcf less than EIA forecasts.

However, the center expects combined demand for power generation and industrial use in 2030 to reach 24.7 Tcf vs. EIA projections of 18.6 Tcf.

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