Though gas production has stabled in recent years, during the boom period from 2007 to 2012 shale gas production in the US expanded at an astounding average growth rate of over 50% per year, and thereby increased nearly tenfold over this short time period alone. Hydraulic fracturing technology, or “fracking”, as well as new directional drilling techniques, played key roles in this shale gas revolution, by allowing for extraction of natural gas from previously unviable shale resources. Although hydraulic fracturing technology had been around for decades, it only recently became commercially attractive for large-scale implementation. As the production of shale gas rapidly increased in the US over the past decade, the wellhead price of natural gas dropped substantially.
Looking at the relationship between wellhead price and cumulative natural gas output in terms of an experience curve, a learning rate of 13% is achieved for the industry using hydraulic fracturing technology. This learning rate represents a measure for the know-how and skills accumulated thus far by the US shale gas industry.
The use of experience curves for renewable energy options such as solar and wind power has allowed analysts, practitioners, and policy makers to assess potential price reductions, and underlying cost decreases, for these technologies in the future. The reasons for price reductions of hydraulic fracturing are fundamentally different from those behind renewable energy technologies – hence they cannot be directly compared – and hydraulic fracturing may soon reach, or may have already attained, a lower bound for further price reductions, for instance as a result of its water requirements or environmental footprint. Yet, understanding learning-by-doing phenomena as expressed by an industry-wide experience curve for shale gas production can be useful for strategic planning in the gas sector, as well as assist environmental policy design, and serve more broadly as input for projections of energy system developments.
Experience curve analysis expresses the relationship between price reductions and cumulative production of a good or technology. Based on the correlation between price and production observed for the past, experience curves yield information for potential price reductions in the future. The steepness and value of the learning rate identifies the rapidity of the structural market, manufacturing, or industry change for the technology. The methodology stipulates that every doubling of cumulative production of a certain commodity or technology generates a constant relative reduction (in %) of its price.
The learning rate of this curve is 13%, that is, a doubling of shale gas output results on average in a 13% fall in the constant US (2009)$ terms of the price of natural gas. The R square of this regression is 0.66, hence the fit is reasonable but implies by no means a conclusive statistical reliability. The 13% steepness of the learning curve is an indicator of the speed of experience gained by the industry from new hydraulic fracturing technologies and drilling techniques.
Since 2005 shale gas production in the US through hydraulic fracturing has grown exponentially and forced wellhead prices down. Indeed, the shale gas revolution in the US has shown the impact hydraulic fracturing technology has had on increasing natural gas production and associated price reductions. This experience curve presented may be helpful for industry planners and policymakers in efforts to estimate the trajectory of future shale gas prices, both within and outside the US, and to assess opportunities for applying hydraulic fracturing technologies in other countries around the world. The price reduction trend illustrated by our hydraulic fracturing experience curve provides insight into future shale gas price levels at given levels of output.
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Image courtesy of John Hopkins School of Advanced International Studies.
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