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Is there really so much shale gas in the ground?

Shale gas fever has overtaken America, but we have seen this sort of mania before.

In 2003 and 2004, a "hydrogen economy" was touted as the Next Big Thing. The United States was poised to run its 240 million cars and trucks on it some day, and wean itself off of oil. California would lead the way, putting half a million hydrogen vehicles on the road and building 200 fueling stations by 2010. Today, after the expenditure of around $2 billion of public funds, the U.S. has just two-dozen fueling stations and 500 hydrogen vehicles, plus only modest progress in fuels cells. There is no longer mainstream discussion of a hydrogen economy.

Then Americans became drunk on ethanol. More than $20 billion in subsidies was spent over a three-decade period ending Dec. 31 that ultimately turned nearly 40 percent of the U.S. corn crop into less than 10 percent of the country's fuel needs by volume, and less than 7 percent by energy content. In 2009, the U.S. taxpayer subsidized 75 percent of the price of each gallon of gasoline replaced with ethanol.

Now the U.S. has gone batty for natural gas. President Barack Obama and key members of Congress have cited a humongous estimate for the natural gas supply supposedly possessed by the United States -- nearly 2,200 trillion cubic feet of the fuel, the equivalent of 379 billion barrels of oil, which if accurate would exceed the crude oil reserves of Saudi Arabia, and satisfy U.S. gas demand at current levels for around a century. Only, that widely published figure represents what are called "possible" reserves, not the more certain categories known as "proved" and "probable" -- gas that is more likely to be producible under current technological and market conditions. When discussing proved reserves, the U.S. Energy Information Administration says the U.S. possesses just one-twelfth of that volume, or 273 trillion cubic feet of gas, the equivalent of 47 billion barrels of oil. That is still a lot but, at the country's 2010 rate of consumption of 24 trillion cubic feet a year, it's just an 11-year supply. Even if we assume a very optimistic 50 percent recovery factor for the estimated 550 trillion cubic feet of probable gas, we would still have just a 31-year supply.

A lack of good data, in addition to an apparent bias toward optimistic data, underlies this perception gap. Consider a new, well-by-well analysis by Houston-based petroleum geologist Arthur Berman. Berman, a long-time doubter of mainstream gas estimates, writes that, contrary to popular belief, gas production is not growing under current conditions; instead, 80 percent of the country's shale gas production (pictured above, shale gas operation in Springville, Pa.) has flattened out or declined over the past year. Total U.S. gas production has been on an "undulating plateau" since the beginning of 2009, Berman says, as new shale gas output struggles to compensate for a 32 percent-per-year decline in conventional gas production. This picture is missing from the EIA's data because the U.S. agency bases its reporting on shale gas data only for 2008 and 2009, and does not do well-by-well sampling.

The main factor behind the flattening-out of production is that, with gas selling for well under $3 per thousand cubic feet, nearly all shale gas production has become unprofitable. Analyses by Range Resources, Berman and others finds that nearly all operators need at least $4 per thousand cubic feet to break even while drilling new wells in existing plays, and at least $8 when one includes all costs, including leasing of gas fields, overhead and debt service. Berman finds that the fully burdened break-even point for the top-producing play, the Haynesville Shale in Louisiana, is around $9 per thousand cubic feet. Recent research from Louisiana State University, featured in the Oil and Gas Journal, reached a similar conclusion: "The probability of incurring a negative [net present value] for Haynesville wells is real and significant."

In short, there is much reason to disbelieve the sustainability of shale gas production at current prices. Perhaps this is why all the EIA's multiple forecast scenarios in its 2011 Annual Energy Outlook assume a gas price of at least $5 per thousand cubic feet. The agency wholly disregards the economics of producing sub-$3-per-cubic-foot gas.

Accordingly, a growing parade of drillers has been sharply curtailing work on the gas patch, and shifting to the production of natural gas liquids, which might permit them to eke out a bit of profit. The result will be further declines in gas production, despite forecasts suggesting the opposite.

The public discussion one hears contemplates as much as a 40 percent increase in domestic natural gas demand, including the retrofitting of transport trucks and power generation to gas, and the export of up to a fifth of U.S. supply as liquefied natural gas.

While such export enthusiasm has prevailed, the EIA has undermined the idea: Three weeks ago, the agency reduced its estimate of U.S. gas resources by 42 percent, to 482 trillion cubic feet, which equates with a 20-year supply of unproved reserves. To illustrate what that means, an earlier EIA analysis had concluded that, with a slightly lower resource base of 423 trillion cubic feet, the U.S. could turn into a net natural gas importer by 2035.

The shale gas phenomenon is so new, and the data so thin, that one wonders at the wisdom of making long-term export decisions with perhaps irreversible consequences. The last two energy manias lived and died without a wisp of a memory. This one, if it goes wrong, may not be so benign.

Chris Nelder, a San Francisco-based writer-investor on energy, is the author of Profit from the Peak and Investing in Renewable Energy. He blogs at getrealist.com.

Editorial Notes: Suggested by Steve LeVine who is the normal blogger at The Oil and The Glory. -BA

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