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In mid-July 2008, the US somewhat unexpectedly discovered that it had an oversupply of natural gas, and prices fell sharply. Jen Snyder, head of Wood Mackenzie Ltd.’s North American Gas Research Group, recently said that the development of shale gas plays has caused “a significant potential oversupply” (Oil & Gas Journal, Dec. 1, 2008). I am disturbed by an irrational tendency in the E&P industry to pursue shale plays despite oversupply of natural gas and lower prices, since most of these plays were marginally commercial at higher gas prices.
I have struggled to understand the economic appeal of shale plays. I thought that lower gas prices would greatly reduce shale activity, but this has not occurred. In the first half of July, spot gas prices were more than $13/MMBtu. Six weeks later, the price had fallen below $8, and further dropped below $6 in early December. Some analysts predict $5−6/MMBtu range at least through the end of 2010.
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