Chesapeake Energy Corporation (CHK), EXCO Resources Inc (XCO) and The Biggest Reason Natural Gas Prices Could Surge

Berman has conducted exhaustive analyses of thousands of individual shale oil and gas wells and arrived at a shocking conclusion — many shale plays have decline rates so staggeringly high that hundreds of new wells need to be brought online each year just to maintain a flat level of production.

In the Barnett shale, for instance, he calculates the yearly decline in total gas resources to be roughly 1.7 billion cubic feet per day. For net production in the play to increase, he estimates that Barnett producers would have to drill nearly 4,000 new wells each year.

High decline rates among shale gas wells may help explain why drilling is so abnormally sensitive to abrupt changes in gas prices. If wells continue to decline at the rates shale gas skeptics suggest they will, we could see a sharp increase in prices over coming years — a response needed to give gas drillers incentive to produce more.

Jeremy Grantham’s view and final thoughts
Others outside the oil and gas industry have also suggested that natural gas prices could rise sharply in coming years. Investor Jeremy Grantham, co-founder and chief investment strategist at Boston-based investment firm GMO, suggests prices could triple over the next five years, as the current surplus gradually turns into a shortage.

Speaking at the Richard Ivey School of Business value investing conference in Toronto earlier this month, Grantham argued that the current level of US natural gas prices — less than half what it is in Europe and about a quarter of the level in Japan — is unsustainable.

This massive gap in global prices has lured a number of companies — including petrochemical, steel, and fertilizer manufacturers — back to the U.S., in hopes of capitalizing on cheap domestic energy. As these and other sources of demand grow, they will soon outpace supply and lead to a surge in prices, according to Grantham.

The article The Biggest Reason Natural Gas Prices Could Surge originally appeared on Fool.com.

Fool contributor Arjun Sreekumar has no position in any stocks mentioned. The Motley Fool owns shares of Devon Energy and has options on Chesapeake Energy.

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