Did Barnett shale production peak in 2011?

That intriguing question is a side issue to a recently completed, comprehensive University of Texas Bureau of Economic Geology study assessing the full-cycle production capabilities of the Barnett shale, the granddaddy of the modern shale boom.

The good news, beside the fact that annual Barnett shale production is just shy of 5.4 billion cubic feet per day, is that the resource play still has plenty of resource left. The UT study reviewed production for more than 16,000 individual wells and forecast recoverable reserves in the Barnett at 44 trillion cubic feet (Tcf) through 2030, or approximately three times cumulative production to date. The study forecast 13,000 additional wells for the Barnett, or a little more than 10,000 locations left to drill over the 2010 base-case forecast.

The UT study is a bottoms-up, well-by-well analysis that divides Barnett shale acreage into 10 quality tiers, then makes assumptions based on the likely productive capability of neighboring undrilled acreage. Significantly, the study eliminates the issue in the great shale debate as to whether sizeable reserves exist. They do.

The bad news is that the resource will be competing in an oversupplied North American gas market with several shale plays exhibiting potential production that is a multiple of the venerable Barnett, implying an extended period of low commodity prices.

And it is the latter issue—commodity prices—that injects uncertainty into forecasts. Because long-term commodity prices are unpredictable, variable, and ultimately impactful, the great shale debate continues. In other words, a company investing annually in the Barnett shale can overcome geologic and engineering challenges—the resource is there. But risk associated with future commodity prices can threaten shale investment at any point in the future.

The study uses an average natural gas price of $4 per thousand cubic feet (Mcf) through 2030, which seems optimistic in light of the enormous remaining untapped productive capability of existing North American shale discoveries. The latter argues for an extended low price environment until natural gas demand grows significantly.

Another interesting implication from the study, which was disseminated as a press release, implies an average Barnett well will generate 1.5 billion cubic feet of gas, or approximately $6 million in revenue, assuming the $4-per-Mcf price deck. Also of note, seven years passed before Barnett production reached 1.4 billion cubic feet per day. Two additional years passed before production doubled to 2.7 billion cubic feet per day, and it took just four more years to double once again, to reach 5.48 billion cubic feet per day at peak in 2011.

On the backside, the study indicates that 20 years will separate the Barnett passing the marker of 1 trillion cubic feet in annual production on the way up and passing back through the same marker on the way down. This play has legs.

There are other implications as well, particularly for items like rig count. Most agree resource plays follow a specific model that rotates through discovery, delineation, optimization and harvest. In real life it is possible to model this. Indexing shale rig counts to a common starting point shows it takes two years before a resource play enters a hockey-stick profile in rising rig count, and another two years before rig count peaks. Here, the model gets murky, because so few shale plays have a long history. While we can demonstrate what rig counts do early in the shale cycle, the great unknown is what happens to rig counts after the peak.

The UT Barnett forecast may shed light on this. First, the rapid switch to horizontal drilling in 2005 (coupled with high natural gas prices) sent the Barnett rig count soaring from 60 to 180 rigs at the 2008 peak. Since then rig count has dropped faster than natural gas prices.

So how many rigs are necessary to sustain Barnett drilling? If we follow the assumption in the UT study that 10,000 locations still remain in 2012, it is possible to project 550 wells per year through 2030 on an evenly paced development program. At two wells per month, the Barnett can support a rig count of about 22 to 24 units, which is just a couple units shy of where the Barnett rig count is currently.

In other words, the Barnett rig count should be bottoming—even as production peaks—at a level that can support development on a sustained basis to 2030 and beyond—if commodity prices cooperate.