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Betting on Shale

Will unconventional gas assure plentiful supplies?

Fortnightly Magazine - September 2009

production that they saw coming. Oil man T. Boone Pickens started a well-funded campaign aimed at promoting expanded use of wind energy and natural gas. At one point a large shale producer went so far as to suggest that the United States would need to build LNG liquefaction terminals along the Gulf Coast to export the shale gas to needy markets in Europe.

Beyond the hyperbole, the U.S. government and industry were taking notice of unconventional gas production. The EIA’s 2009 energy outlook projected that the United States would be nearly self-sufficient in natural gas with very low levels of imported LNG compared to prior year forecasts (see Figure 2).

New Thinking

Last year a report from Navigant Consulting, sponsored by shale gas producer Chesapeake Energy, was released on July 4, which announced that shale gas was a game changer.

Navigant’s base-case estimate of total U.S. natural gas resources was 1,680 TCF, which included 274 TCF of undiscovered, technically recoverable shale gas resources. Navigant’s estimate of the U.S. shale gas resource was more than double that of the Potential Gas Committee (PGC) report for year-end 2006. Most striking were the high-end estimates of potentially recoverable shale gas that Navigant obtained directly from producers. Producers estimated that 842 TCF of technically recoverable shale gas remained undiscovered. The huge discrepancy was due almost entirely to the exclusion from official estimates of the two shale plays that were getting the most attention from producers in 2008—Marcellus shale (228 TCF of resources according to producers) and Haynesville shale (217 TCF according to producers).

A few months ago, at least one of the official sources—the PGC—appears to have caught up with the producers. PGC’s latest estimate of the U.S. resource base as of year-end 2008 included 616 TCF of technically recoverable shale gas resources and a total resource base of 1,836 TCF. This estimate was the highest of the U.S. natural gas resource base in the 44-year history of the PGC. If EIA’s estimate of proved natural gas reserves are included, the total amount of natural gas resource becomes 2,074 TCF. At current rates of consumption, this is more than 100 years of supply.

Of course, even PGC’s prior study provided more than 75 years of supply at current rates of consumption, so this isn’t meant to imply that there was a puny natural gas resource before. But, the revision in the expected contribution from shale gas was dramatic. Shale gas went from less than 10 percent of the total resource base in the 2006 PGC study to 30 percent in the 2008 study (see Figure 3).

A key, but often overlooked, issue with these resource estimates is that they ignore economics ( i.e., whether these natural gas resources aren’t just technically recoverable but also profitably recoverable). And on that issue a great deal of debate is taking place.

There is a wide range of opinion about the price level for natural gas that is required to make economic many of the shale plays. On the optimistic side, there are those that believe most of the