Is the shale gas “miracle” over-hyped?

In his upcoming book ““Cold, Hungry and in the Dark: Exploding the Natural Gas Supply Myth.”, Bill Powers argues that the shale gas miracle is over-hyped and will disappoint. Mr. Powers believes that shale gas will only last 10 years, and not the 100 years that many predict.

Certainly, in the recent presidential campaign both President Barack Obama, and Governor Mitt Romney both pointed to shale gas as a major contributor to America’s energy independence. But if there are only 10 years of shale gas in the ground the contribution of shale gas to this objective would be short-lived. Who’s right?

Everyone has their own “best estimates” all from expert opinions based on years of research and study. And Mr. Powers is one of many professional opinions. Certainly the shale gas boom in the USA, and Canada has brought on a massive new energy supply source that has fundamentally changed the North American and global energy markets. And the shale gas story will not end with the U.S. as new shale gas basins are discovered, developed and put into production around the world with major geopolitical impact.

But this is not about this story, the focus is the USA (North American) energy market, and whether the shale gas reserves will provide 10 or 100 years of energy.

The US Energy Information Administration (“EIA”) estimates that there are 2,203 trillion cubic feet (Tcf) of natural gas that is “technically recoverable” in the United States. At the rate of US natural gas consumption in 2011 of about 24 Tcf per year, 2,203 Tcf of natural gas is enough to last about 92 years.

However, given human nature and fundamentals to migrate to the lowest cost, as long as natural gas remains at current low levels, consumption is likely to increase as more power plants, trucks, cars, etc convert to natural gas. And during this same time of increasing demand we would likely see increases in natural gas prices which over time would temper demand. It is challenging to see how Mr. Powers gets from the EIA’s 92 year estimate to less then 10 years.  His theory is primarily based on stating that the data used by EIA and others is fundamentally flawed by over estimating the production life of shale gas wells. In other words, production drops off sooner and faster then most predict.

(The EIA states: “Technically recoverable reserves consist of “proved reserves” and “unproved resources.” Proved reserves of crude oil and natural gas are the estimated volumes expected to be produced, with reasonable certainty, under existing economic and operating conditions. Unproved resources are additional volumes estimated to be technically recoverable without consideration of economics or operating conditions, based on the application of current technology.”)

The key question here is what is the production life cycle of a shale gas well? It has always been know that this cycle is relatively short and dramatic compared to the longer production life of a traditional gas well. These life cycles differ between basins, whereby one basin may average longer production then another. It is not uncommon to see a production drop-off of 50% in the first 12 months of production in many wells. Numbers vary between basins and between wells.

Perhaps the EIA is wrong in their 92 year estimate, though their access to data seems to be quite extensive. There certainly are some variables including their usage of 2011 natural gas consumption rates their calculation and not predicting any increasing consumption rate over time. Either from economic growth, or increaseed usage of natural gas as part of the overall energy mix. Based on this alone one could resonable estimate that 92 years is not one hundred percent accurate. But with that said, predictions are never one hundred percent accurate and for this reason alone we know Mr. Powers calculations are likely off.

So if we took all the scientific calculations, and included Mr. Powers predictions we would like find a life span for shale gas between sixty and seventy years – about one generations worth of energy. Only time will tell who is right.

You can read a complete interview with Mr. Powers on the Energy Report: US Shale Gas Won’t Last 10 years

Forbes: In Obama’s Second Term, Shale Gas Production Not Likely to Slow Down

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