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Natural Gas Boom Gets Put On Hold

In a recent post I pointed out that the United States is betting the house on shale gas to cover declines in conventional gas production over the next decade. I followed up that post with Shale Gas Shenanigans, in which I argued that smaller operators may be understating their production costs in the big shale plays, thus inflating their own value to attract takeovers by or mergers with major oil & gas producers like Exxon Mobil or Total. I originally wrote about shale gas last summer in A Shale Gas Boom? This latter article is must-reading to understand the basic issues in the debate about the role of shale gas in America's future energy mix.

Today and tomorrow I will review the natural gas issues again. Monday's post, which will be a bit technical, will discuss estimated ultimately recoverable (EUR) gas reserves in the Marcellus Shale (see the map below).

I'm sure many of you are aware that there's been an enormous amount of hype accompanying the coming Shale Gas Revolution. The Wall Street Journal's US Gas Fields Go From Bust To Boom is typical—

Shale_gas_playsApril 30, 2009

CADDO PARISH, La. — A massive natural-gas discovery here in northern Louisiana heralds a big shift in the nation's energylandscape. After an era of declining production, the U.S. is now swimming in natural gas.

Even conservative estimates suggest the Louisiana discovery — known as the Haynesville Shale, for the dense rock formation that contains the gas — could hold some 200 trillion cubic feet of natural gas. That's the equivalent of 33 billion barrels of oil, or 18 years' worth of current U.S. oil production. Some industry executives think the field could be several times that size.

"There's no dry hole here," says Joan Dunlap, vice president of Petrohawk Energy Corp...

Huge new fields also have been found in Texas, Arkansas and Pennsylvania [Marcellus]. One industry-backed study estimates the U.S. has more than 2,200 trillion cubic feet of gas waiting to be pumped, enough to satisfy nearly 100 years of current U.S. natural-gas demand...

Just three years ago, the conventional wisdom was that U.S. natural-gas production was facing permanent decline. U.S. policy makers were resigned to the idea that the country would have to rely more on foreign imports to supply the fuel that heats half of American homes, generates one-fifth of the nation's electricity, and is a key component in plastics, chemicals and fertilizer.

But new technologies and a drilling boom have helped production rise 11% in the past two years. Now there's a glut, which has driven prices down to a six-year low and prompted producers to temporarily cut back drilling and search for new demand.

Aside from the huge recoverable reserves numbers being tossed around, let's examine the claim that production rose 11% in the past two years. For example, we get graphs like this one from economist Mark Perry.

Eia_natural_gas_production
Taken from Perry's US Natural Gas Hockey Stick: The Technology Driven Energy Boom That's Changing U.S. Energy.

There's a small problem with the boom in U.S. natural gas production—it hasn't happened as advertised. From the Wall Street Journal's U.S. Natural Gas Data Overstated

Overstated_natural_gas_production The Energy Department is preparing to make sweeping revisions to its U.S. natural-gas production data after finding it has been overstating output, raising new questions about the government's collection of energy information...

The EIA plans to change its methodology this month, resulting in "significant" downward revisions in some areas, according to Gary Long, the acting director of the 914 report, who led the review...

The EIA data showed that gas supply rose 4% in 2009, despite a 60% decline in onshore gas rigs. The conflicting numbers have perplexed analysts.

Analysts also point to the discrepancy between supply (how much gas is produced or imported) and demand (the amount that is stored or used). Those two figures should cancel each other. While there always is a margin of error, that margin has widened sharply in recent months.

In December, the agency reported total new gas supply at 87.8 billion cubic feet a day and total demand of 80 billion, leaving 7.8 billion cubic feet unaccounted for—a margin of error of 10%.

"It's getting ridiculously large," said Ben Dell, an analyst with Sanford C. Bernstein. "When you have a 10% gap, that's somewhat making a mockery of the data."

Mr. Dell in January wrote a report raising questions about the mismatch. In that report, he focused on October numbers that showed a 12% margin of error.

"We think that most would agree that a 12% margin of error makes a data set tough to rely on, to say the least," Mr. Dell wrote in that report. Rather than gas supply being flat or slightly down as the data suggests, Mr. Dell wrote, he believes production is actually falling.

Eyeballing those 2008-2009 unaccounted-for supply numbers in the graph above, we can see that there's more than a few trillion cubic feet (tcf) of gas which has gone missing—nobody consumed it, and it wasn't injected into storage. The rumor is that production numbers are going to be revised downward in some states. For example, "the EIA predicts the switch could result in some "significant" revisions, including lower production volume in Louisiana, the fifth-largest-producing region in 2007." It just so happens that Louisiana is home to the Haynesville Shale play, which the Wall Street Journal was hyping in the April, 2009 story I quoted above.

Some analysts think the revisions, which are due to start April 30, will result in higher natural gas prices. Others think that we would have to work off the large glut of stored gas before prices will go up. I don't know what will happen. But it seems clear that the current oversupply is related to lack of demand at least as much as it's due to a shale gas production boom.

It's also not clear to me how the shale gas plays figure into the coming downward revisions in produced gas. What is clear is that the EIA's methodology for determining supply numbers has fallen woefully behind what is actually happening in the field. Unless you're using and tallying operator numbers—there are many hundreds of them—there is no way to know how much shale gas the U.S. has been producing since 2005 and is producing at present. Of course, if you're in the Hyperbole Business, actual data doesn't matter one way or another.

I do not know if the EIA is going to backdate its revisions to make the historical production series more congruent with reality. But for the time being, the natural gas boom has been put on hold until we find out what's really going on.

What do you think? Leave a comment below.

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