May 14, 2011

Doubling of Natural Gas Reserves Deemed Dubious

The argument over natural gas raises three key questions. One is whether new techniques of drilling for shale gas have dramatically expanded reserves, giving the United States enough resources for another 100 years and other states (like Poland and Ukraine, who sit on large shale deposits) the potential for a geopolitical revolution. A second question is whether natural gas is environmentally much better than other fossil fuels. Advocates say it burns cleaner and releases less carbon dioxide and other greenhouse gases; also, that it can be exploited without danger to water supplies. A third question is whether the low price environment for natural gas in the United States will persist. If shale gas is abundant and can be produced without serious environmental cost, that conclusion would seem to follow.

All three questions are closely examined in an extensive critical report just issued by Post Carbon Institute. The author, David Hughes, challenges the case of the optimists on all three points. He argues that that the negative environmental consequences are extensive and that the low price environment for gas that has prevailed in the United States since 2008 is very unlikely to persist. But it is his skeptical analysis of the reserves situation that I want to highlight here.

Richard Heinberg, who wrote the introduction, argues that a convergence of interests led to the new consensus behind the reserve increases:
First, the shale gas industry was motivated to hype production prospects in order to attract large amounts of needed investment capital; it did this by drilling the best sites first and extrapolating initial robust results to apply to more problematic prospective regions. The energy policy establishment, desperate to identify a new energy source to support future economic growth, accepted the industry’s hype uncritically. This in turn led Wall Street Journal, Time Magazine, 60 Minutes, and many other media outlets to proclaim that shale gas would transform the energy world. Finally, several prominent environmental organizations, looking for a way to lobby for lower carbon emissions without calling for energy cutbacks, embraced shale gas as a necessary “bridge fuel” toward a renewable energy future. Each group saw in shale gas what it wanted and needed. The stuff seemed too good to be true—and indeed it was. . . .

It is understandable that the shale gas industry would fudge supply and price forecasts in the interest of drumming up investment capital. However, the EIA is supposed to be an impartial purveyor of data and analysis. Yet that organization has historically been overly optimistic with regard to fossil fuel supplies and prices. During the past decade several non-profit energy groups, including Post Carbon Institute, warned that depletion of giant oilfields and declining oil discoveries would lead to a situation of higher petroleum prices and tight supplies beginning before 2010. Indeed, a leveling off of world crude oil production and a simultaneous steep rise in oil prices during the past few years have arguably marked the most significant shift in the history of the petroleum industry—a shift whose consequences continue to ripple throughout the entire global economy. Yet EIA oil forecasts in the early years of the decade contained no hint of this impending and wholly foreseeable supply-price shift. In our view, the EIA is making similar mistakes in its too-rosy projections with regard to shale gas supplies and natural gas prices. . .

The stark reality we face is that humanity has embarked on the era of extreme energy, where there are no simple solutions. The inexpensive, high-yield fossil fuels that powered the industrial revolution and that helped make the U.S. the world’s wealthiest and most powerful nation are dwindling, and all of them emit dangerous levels of greenhouse gases. While enormous amounts of natural gas, oil, and coal remain, the portions of those fuels that were cheapest and easiest to produce are now mostly gone, and producing remaining reserves will entail spiraling investment costs and environmental risks. Moreover, while alternative energy sources exist—including nuclear, wind, and solar—these come with their own problems and trade-offs, and none is capable of replicating the economic benefits that fossil fuels delivered in decades past. There is no likely scenario in which the decades ahead will see energy as abundant or as cheap as it was in decades past. 
Here are some extracts dealing with natural gas production from the report:
U.S. natural gas production hit its all-time high of 21.73 trillion cubic feet (tcf) per year in 1973. Up until the late 1990s, the majority of U.S. gas production came from conventional reservoirs, which are pressurized pools of free-flowing gas trapped beneath impervious seals. Unconventional gas from coalbed methane became important in the early 1990s and was once heralded as a panacea to offset declines in conventional production, although now coalbed methane production is forecast to decline in the future. Production from unconventional, very-low-permeability reservoirs in the form of tight gas sands and shale gas became significant in the late 1990s and especially over the past six years.  
Natural gas production is a story about a race against depletion. Typically, the production from a new conventional gas well will decline by 25% to 40% in its first year, before tapering off to lower yearly declines as time goes by. The overall yearly decline rate of all U.S. gas wells has been estimated at 32% by EOG Resources. This means that gas production would decline by a third each year, if no new wells were drilled. Sixty percent of U.S. gas production in 2006 came from wells drilled in the prior four years according to the EOG estimates. Chesapeake Energy has estimated that as of year-end 2007, nearly half of U.S. production came from wells drilled in the previous three years. So in order to keep overall gas supply from declining, drilling activity must be sustained.  
Natural gas production is also a story about a rapidly increasing number of producing gas wells and a declining amount of gas produced from each. There are now more than half a million producing gas wells in the United States, nearly double the number in 1990 (Figure 10). Yet the gas production per well has declined by nearly 50% over this period. This is a manifestation of the law of diminishing returns, as a complex infrastructure nearly 100% larger than that in 1990 must be maintained today to achieve a 21% increase in natural gas production.  

The law of diminishing returns is further illustrated in Figure 11, which plots the annual number of successful gas wells drilled versus gas production. When gas production peaked in 1973, about 7,000 gas wells were drilled annually. Throughout the 1990s gas drilling averaged about 10,000 wells yearly, which allowed some growth in production. Despite doubling this rate to more than 20,000 wells annually, gas production hit a post-peak summit in 2001 and began to decline. In the run-up to the Great Recession, gas drilling more than tripled from 1990s levels to 33,000 wells per year in the 2006–2008 time frame before falling back below the 20,000 level. This burst of drilling served to grow production modestly to near the 1973 peak, albeit at more than four times the 1973 drilling rate. This “exploration treadmill” indicates the United States will need on the order of 30,000 or more successful gas wells per year to increase production going forward, which is triple the 1990s levels.

The recent observed growth in U.S. gas production is a result of the unprecedented drilling boom of the 2006 to late-2008 period. Many of these wells are now being tied into production facilities. Of current drilling activity, some is motivated by requirements to retain leases and is likely otherwise uneconomic. It is unlikely that drilling will rebound to 2008 levels in a low-priced gas environment; hence production can be expected to start falling until prices and drilling activity recover. Thus the level of drilling activity that would be required to maintain and grow U.S. gas production in the future would be unprecedented in the history of U.S. gas production.  
Hughes also investigates at length the prospect for shale gas and reviews the financial and environmental costs of drilling.  He insists that shale gas wells have a much higher rate of depletion than conventional gas wells:
Conventional gas wells typically decline by 25% to 40% in their first year of production, whereas shale gas wells decline at much higher rates, typically between 63% and 85%. The initial productivity of shale gas wells can be very high. In plays like the Haynesville Shale in Louisiana, initial rates can be more than 10 million cubic feet per day (Barnett Shale wells are typically much lower at about 2 million cubic feet per day). However, their steep production decline rates suggest that relying on shale gas for a large proportion of U.S. gas production will only exacerbate the “exploration treadmill” problem of the number of wells that must be drilled to maintain production.

There is simply too little history of shale gas production to substantiate the 40-year well life purported by many shale gas producers. Analyst Arthur Berman, who has studied the Barnett Shale (the oldest and best-known shale gas play) in depth, suggests that the estimated ultimate recovery from shale gas wells and overall recoverable reserves have been overstated by operators, and that shale gas plays are marginally commercial at best in the current low gas price environment.

A further issue is the extrapolation made in assuming all parts of shale gas plays will be equally productive. Initially, it was assumed that shale gas plays would be "manufacturing” operations, where wells would be equally productive regardless of where they were drilled. This proved to be erroneous. As Berman pointed out, quoting Chesapeake Energy CEO Aubrey McClendon, in the Barnett Shale all 17 counties were thought to be equally prospective a few years ago, but today just two and a half counties have been proven to be highly productive core areas. In the Haynesville Shale play of Louisiana, which in 2008 was promoted as the fourth-largest gas field in the world, the focus of interest has retracted to a core area about 10% of the original area assumed in the optimistic projections. The many geological characteristics that combine to make shale plays commercially viable will certainly prove to be restricted to small “core areas” of the broad expanses of individual shale plays currently outlined, as more drilling defines the most productive areas.

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