Over the last decade, the shale gas boom has emerged as the biggest story in US energy. Gas extracted from shale formations accounted for only 1.6 percent of total US natural gas production in 2000, a share that ballooned to more than 40 percent by 2013. Its transformative influence on the American energy industry has led many scholars and policymakers to explore what factors were at work in shale’s initial development and explosive growth. The market structure behind the shale expansion is commonly cited, and is of particular interest to countries currently attempting to develop their own shale gas resources.
An often-repeated but unsubstantiated market claim by industry and media observers is that the US shale industry was created by thousands of small- and medium-sized firms, with drilling dominated by mom-and-pop companies. This view has already influenced policymaking in countries such as China, where shale development has been opened to newly established small firms with little or no prior drilling experience. In a new RFF discussion paper, we conduct the first empirical study of the structure of the US shale gas drilling market and prove that these common views of the industry are both inaccurate and misleading.
Using data from DrillingInfo on the six major modern shale gas plays (which account for 92 percent of production) as well as the Devonian shales, we analyzed which companies drilled wells in each play and how many wells they chose to drill. A look at the number of wells drilled in the six largest plays between 1981 and 2000 reveals that only a small number of firms were responsible for the overwhelming majority of wells. Over the same time period, a long tail of infrequent drillers emerged that accounted for only 2 percent of wells in these plays; about 34 percent of all the firms operating in these areas only drilled a single well.
Mitchell Energy was virtually the only driller in the United States before the shale boom began. During this experimental stage, Mitchell Energy drilled the vast majority of the industry’s total shale wells—482 by 1999 compared to 102 by their 15 competitors. Unlike most small firms during this time, Mitchell was willing to invest large financial and technological resources in an industry with a highly uncertain payoff. During its later expansion stage, drilling has become less concentrated because profitability has lowered entry barriers for smaller companies; the barriers to entry for the Devonian shales are particularly low, resulting in a longer tail of infrequent drillers. Although these market changes have helped more small companies participate competitively in the industry, our data suggest that the drilling market has always been led by a limited number of large independent oil and gas producers in both its exploratory and expansion stages, with mom-and-pop companies making only negligible contributions.
