January 2012, Week 2


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Sun, 8 Jan 2012 21:58:07 -0500
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What the Frack?
Is there really 100 years' worth of natural gas 
beneath the United States?
By Chris Nelder
December 29, 2011

[moderator: please use the link above to view the
accompanying graphs]

The recent press about the potential of shale gas would
have you believe that America is now sitting on a 100-
year supply of natural gas. It's a "game-changer." A
"golden age of gas" awaits, one in which the United
States will be energy independent, even exporting gas to
the rest of the world, upending our current energy-
importing situation.

The data, however, tell a very different story. Between
the demonstrable gas reserves, and the potential
resources blared in the headlines, lies an enormous gulf
of uncertainty.

The claim of a 100-year supply originated with a report
released in April 2011 by the Potential Gas Committee,
an organization of petroleum engineers and
geoscientists. President and Chairman Larry Gring works
with Third Day Energy LLC, a company based in Austin,
Texas, that is engaged in acquiring and exploiting oil
and gas properties along the Texas Gulf Coast.* Chairman
of the Board Darrell Pierce is a vice president of DCP
Midstream LLC, a natural-gas production, processing, and
marketing company based in Denver. The report's
contributors are from the industry-supported Colorado
School of Mines. In short, the Potential Gas Committee
report is not an impartial assessment of resources.

Its website consists of a single press release
announcing the April report, with a link to a brief
summary slide deck. A more detailed slide deck issued by
the committee presents some optimistic estimates of
potential resources, including a "future gas supply"
estimate of 2,170 trillion cubic feet (tcf). At the 2010
rate of American consumption-about 24 tcf per year-that
would be a 95-year supply of gas, which apparently has
been rounded up to 100 years.

But what is that estimate based upon? Those details
haven't been made freely available to the public, but
their summary breaks it down as follows here and in the
graph below: 273 tcf are "proved reserves," meaning that
it is believed to exist, and to be commercially
producible at a 10 percent discount rate. That conforms
with the data of the U.S. Energy Information
Administration. An additional 536.6 tcf are classified
as "probable" from existing fields, meaning that they
have some expectation that the gas exists in known
formations, but it has not been proven to exist and is
not certain to be technically recoverable. An additional
687.7 tcf is "possible" from new fields, meaning that
the gas might exist in new fields that have not yet been
discovered. A further 518.3 tcf are "speculative," which
means exactly that. A final 176 tcf are claimed for
coalbed gas, which is gas trapped in coal formations.
(Note: The PGC reports the total for probable, possible,
and speculative coalbed gas as 158.6 tcf, but adding up
their numbers for each category, we find the correct
total is 157.7 tcf. We haven't been able to reach the
PGC to discuss the discrepancy. Adding the 18.6 tcf of
proved coalbed gas reserves reported by the EIA in 2009-
the most recent data it offers-to the 157.7 gives a
total of 176.3 tcf for all categories of coalbed gas.

By the same logic, you can claim to be a
multibillionaire, including all your "probable,
possible, and speculative resources."

Assuming that the United States continues to use about
24 tcf per annum, then, only an 11-year supply of
natural gas is certain. The other 89 years' worth has
not yet been shown to exist or to be recoverable.

Even that comparably modest estimate of 11 years' supply
may be optimistic. Those 273 tcf are located in reserves
that are undrilled, but are adjacent to drilled tracts
where gas has been produced. Due to large lateral
differences in the geology of shale plays, production
can vary considerably from adjacent wells.

The EIA uses a different methodology to arrive at its
resource calculations, offering a range of estimates. In
the most optimistic, "high shale resource case," it
estimates there are 1,230 tcf in the "estimated unproved
technically recoverable resource base." It also offers
several production forecasts through 2035, ranging from
827 tcf in their Reference case, to 423 tcf in their Low
case-one-fourth the headline number. In the Low case,
which certainly could be correct, the EIA says the
United States could once again become a net natural-gas
importer by 2035. 

One complicating factor here is recoverability, because
we are never able to extract all of an oil or gas
resource. For oil, a 35 percent recovery factor is
considered excellent. But recovery factors for shale gas
are highly variable, due to the varied geology of the
source rocks. Even if we assume a very optimistic 50
percent recovery factor for the 550 tcf of probable gas
(536.6 tcf from shale gas plus 13.4 tcf from coalbed
gas), that would still only amount to 225 tcf, or a 10-
year supply. That plus the 11-year supply of proved
reserves would last the United States just 21 years, at
current rates of consumption.

Natural-gas proponents aren't advocating current rates
of consumption, however. They would like to see more
than 2 million 18-wheelers converted to natural gas, in
order to reduce our dependence on oil imports from
unfriendly countries. They also advocate switching a
substantial part of our power generation from coal to
gas, in order to reduce carbon emissions. Were we to do
those things, that 21-year supply could quickly shrink
to a 10-year supply, yet those same advocates never
adjust their years of supply estimates accordingly.

The truly devilish details of supply forecasts, however,
rest in the production models of shale-gas operators.

Arthur Berman, a Houston-based petroleum geologist and
energy sector consultant, along with petroleum engineer
Lynn Pittinger, has long been skeptical of the claims
about shale gas. Their detailed, independent work on the
economics of shale-gas production suggests that not only
are the reserves claims overstated, but that the
productivity of the wells is, too.

The problems begin with the historical production data,
which is limited. The Barnett Shale in Texas is the only
shale formation, or "play," with a significant history.
The first vertical well was drilled in 1982, but it
wasn't until the advent of horizontal drilling in 2003
that production really took off. By horizontally
drilling and then "fracking" the rock with a pressurized
slurry of water, chemicals, and "proppants"
(particulates that hold open the fractures), operators
kicked off the shale-gas revolution. Drilling exploded
in the Barnett from about 3,000 wells in 2003 to more
than 9,000 today. Thus we have a reasonably good data
set for the Barnett. Data from the Fayetteville Shale in
Arkansas are also reasonably substantial, dating back to
2004 and including roughly 4,000 wells. The data on the
Haynesville Shale in Louisiana are minimal, dating to
late 2007 and including fewer than 2,000 wells. The
historical data for the rest of the major shale-gas
plays-the Marcellus, Eagle Ford, Bakken, and Woodford-
along with a handful of other smaller plays, are too
recent and sparse to permit accurate modeling of their
production profiles.

After mathematically modeling the actual production of
thousands of wells in the Barnett, Fayetteville, and
Haynesville Shales, Berman found that operators had
significantly exaggerated their claims. Reserves appear
to be overstated by more than 100 percent

Typically, the core 10 to 15 percent of a shale
formation's gas is commercially viable. The rest may or
may not be-we don't know at this point. Yet the industry
has calculated the potentially recoverable gas as if 100
percent of the plays were equally productive.

The claimed lifetime productivity, or estimated ultimate
recovery, of individual wells was also overstated,
Berman found. The production decline curves modeled by
well operators predict that production will fall steeply
at first, followed by a long, flattened tail of
production. Berman's analysis found a better fit with a
model in which production falls steeply for the first 10
to 15 months, followed by an more weakly hyperbolic
decline. Shale-gas wells typically pay out over one-half
their total lifetime production in the first year. So
operators must keep drilling continuously to maintain a
flat rate of overall production.

Berman concludes that the average lifetime of a Barnett
well might be as little as 12 years, instead of the 50
years claimed by operators, and the estimated ultimate
recovery from individual wells might be one-half what is
claimed. We will only know which models are correct
after another five to 10 years for the Barnett, and more
than a decade for the newer plays.

Other issues Berman identified include artificially
inflating the average well productivity numbers by
dropping played-out wells from their calculations;
improperly including production data from restimulated
wells as if it owed to the initial well completions; and
intermixing data from older and newer wells without
aligning the data by vintage, giving the impression of
significantly higher-than-actual production overall.

Multiplying the error, operators seem to have applied
their overly optimistic models of these older shale
plays to newer plays, which may have radically different
geological characteristics and might not be nearly as
productive. For example, the lifetime output of Barnett
wells may never be matched by wells in the Marcellus.

The EIA makes reference to all of these issues in its
assessment of the prospects for shale gas, noting that
"there is a high degree of uncertainty around the
projection, starting with the estimated size of the
technically recoverable shale gas resource," and that
"the estimates embody many assumptions that might prove
to be untrue in the long term." Yet none of these issues
are properly accounted for in the official financial
statements of the operators. 

An example of how inflated initial resource claims can
be, and how they can be sharply cut, presented itself in
August with a new assessment of the Marcellus shale by
the U.S. Geological Survey. It offered a range of
estimates, from 43 tcf at 95 percent probability, to 84
tcf at 50 percent probability, to 114 tcf at 5 percent
probability. (Not surprisingly, the 95 percent probable
estimates have proven historically to be closest to the
mark.) Only five months earlier, the EIA speculated in
its Annual Energy Outlook 2011 that the Marcellus might
have an "estimated technically recoverable resource base
of about 400 trillion cubic feet." The USGS reassessment
had slashed the estimate for the Marcellus by 80
percent. Similar adjustments may be ahead for other
shale plays.

In addition to the uncertainty about shale gas resources
and productivity, there are other lingering questions.
For one thing, on an averaged annual basis, shale gas
has been unprofitable since 2008. Wildcatters-those who
explore and sink the first wells in a new location-have
been taking on a great deal of debt and risk to discover
the plays and produce them at a loss, in hopes that
larger, well-funded players will buy them out later.
It's not clear that this gamble will ever pay off.

The other major concern, of course, is about
environmental contamination from fracking operations. It
seems to me that the vast majority of shale-gas
operations are as environmentally benign as the rest of
the oil and gas industry's operations, although some bad
actors have, through negligence or outright
irresponsibility, caused actual contamination. For now,
though, the jury is out on the overall safety of shale
gas production.

I am not anti-gas; neither is Berman. What concerns him,
and me, are the overblown claims about the potential for
shale gas and the poor quality of both technical and
financial information about its production. We don't yet
know how much of the estimated gas resources will be
economically recoverable or whether the projected
production rates for some wells might be off by a factor
of 10. We might have a 100-year supply of gas, or we
might have an 11-year supply. We might realize economic
and environmental benefits by transitioning trucking and
coal-fired power generation to natural gas, or we might
do so only to find ourselves out on a limb far more
economically dangerous than the current peak and
impending decline of world oil supply. We simply don't
know, and we may not know for years to come.

This article arises from Future Tense, a collaboration
among Arizona State University, the New America
Foundation, and Slate. Future Tense explores the ways
emerging technologies affect society, policy, and
culture. To read more, visit the Future Tense blog and
the Future Tense home page. You can also follow us on

Correction, Jan. 3, 2012: This article originally
misstated the name of Larry Gring's energy company. It
is Third Day Energy LLC, not Third Way Energy LLC.


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