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The Math Behind the 100-Year, Natural-Gas Supply Debate

Rob Reuteman, |Special to CNBC.com
Wednesday, 20 Jun 2012 | 10:17 AM ET

When President Barack Obama said in his State of the Union speech this year that the United States has a supply of natural gas that can last nearly 100 years, he was using a quick-and-dirty, back-of-the-envelope computation that is nonetheless rooted in recent geological research.

President Barack Obama speaks at the southern site of the Keystone XL pipeline on March 22, 2012 in Cushing, Oklahoma.
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President Barack Obama speaks at the southern site of the Keystone XL pipeline on March 22, 2012 in Cushing, Oklahoma.

Even the nation’s top petroleum geologists, who typically measure natural gas reserves in trillions of cubic feet (tcf) grudgingly admit the need to simplify — even oversimplify — their research for public consumption.

“The 100-year supply is strictly a talking point, and scientists don’t use it, but it gives you a comfort factor that lets you know you’re on the right path,” says John Curtis, a geology professor at the Colorado School of Mines and director of the Potential Gas Committee. The nonprofit group of industry experts and academics regularly assesses the nation’s untapped resources.

“We’re geologists, not economists,” Curtis says.

Obama was using what is called an “R/P ratio” — the nation's gas “reserves” divided by the amount of gas “produced” in the last year. The result is a number that represents the length of time those remaining reserves would last if production continues at the same rate.

Curtis’ group has estimated there are about 1,898 tcf of recoverable gas resources in the U.S. The nation’s gas producers pumped out 23 tcf last year, he said. Divide 1,898 by 23 and you get 82.5 years of supply.

“We scientists understand how imperfect the variables are in predicting how much gas is there,” says Terry Engelder, a geosciences professor at Penn State University. “However imperfect the known numbers are, an estimate can be made with a certain confidence, and that is important for making energy policy.”

Technology Advances Supplies

Estimates of recoverable natural gas have exploded in recent years because technology has made it possible to extract huge amounts from areas previously judged infeasible, mostly gas embedded in tight formations of shale rock. The new drilling process known as hydraulic fracturing, or fracking, has become widespread, raising supplies and driving down prices so it’s no longer profitable for many companies to drill for the commodity.

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A 2009 study by the IHS Global Insight energy research firm concluded, “Shale gas production has more than doubled the size of the discovered natural gas resource in North America —enough to satisfy more than 100 years of consumption at current rates.”

On top of that, a just-released IHS study estimates the industry boom will wind up creating 2.4 million jobs by 2035.

Pete Stark, IHS vice president of industry relations, says: “Getting all uptight about the 100-year number is ludicrous. There’s all sorts of gas being identified everywhere as potentially recoverable. Since 2009 we’ve known the ‘shale gale’ breakthrough was real. Now it looks as if there will be more than a 100-year supply. It was huge then, it’s huge now.”

A 2011 report by the National Petroleum Council for the U.S. Department of Energy concluded in part, “North America has a large, economically accessible natural gas resource base that includes significant sources of unconventional gas, such as shale gas. This resource base could supply over 100 years of demand at today’s consumption rates.”

Marcellus Shale

The importance of shale gas to the nation’s supply can be seen in the growing estimates of the Marcellus shale, a massive sedimentary rock formation, the bulk of which is in Ohio, New York, Pennsylvania and West Virginia.

In August 2011, the U.S. Geological Survey released its 10-year report on the amount of technically recoverable gas in the Marcellus, raising its estimate from 2 tcf in 2002 to 84 tcf now.

“The increase in undiscovered, technically recoverable resource is due to new geologic information and engineering data, as technological developments in producing unconventional (shale) resources have been significant in the last decade,” the USGS report says.

The assessment caused the government’s Energy Information Administration, the DOE’s data-gathering arm, to drastically reduce its previous Marcellus estimate of 410 tcf, triggering a small controversy in energy circles.

Energy researchers upset about the differing federal numbers aired their grievances at a conference at Penn State in March organized by Engelder. His estimates of gas in the Marcellus formation and those of IHS more closely match the EIA’s earlier, more optimistic, predictions.

“When you see conflicting or at least apparently conflicting information out there, it has implications,” Patrick Henderson, Pennsylvania Gov. Tom Corbett’s top energy adviser told the "Pittsburgh Tribune-Review." “It can send a signal for people who want to do business in Pennsylvania that maybe it’s not as promising as what was thought.”

The amount of gas in the Marcellus has been disputed for years, and accurate data are crucial for long-term policy decisions, experts say.

“Resource investment is a dynamic thing that changes over time, says Sara Banaszak, chief economist for America’s Natural Gas Alliance, an industry group. “The historical pattern has shown that estimates change in an upward direction, especially with new technology and geology. That trend has upheld well in the USGS estimates, suggesting we do a good job of staying conservative.”

Drilling Down on Reserves

'Gas Shale Bonanza'

Whichever estimates play out, Engelder says his research convinces him the Marcellus “will become a super-giant gas field.”

Source: EagleFordShale.com

“Coupled with other gas shale plays in North America, the prospects for a reliable supply of natural gas for the next several decades are so substantial thatnationalenergypolicywill eventually adapt to this gas shale bonanza,” he says.

One reason for differing estimates of natural gas reserves is that they can be measured in different ways.

The Potential Gas Committee, the USGS and the EIA estimate "technically recoverable resources," which can be produced using current technology, regardless of the current price of gas. Those estimates change as technology changes, as has been the case in the past four years with fracking.

A more conservative estimate is demanded by the Securities and Exchange Commission,which requires public companies to provide reserves data in their annual reports. So-called “proven reserves” are only those that can be produced profitably at current prices. Those estimates change as prices fluctuate.

Another term, gas “in place,” includes amounts that are not currently recoverable, as was shale gas several years ago. Shale gas that was deemed unrecoverable five years ago, now accounts for over 30 percent of overall U.S. gas production.

A 2011 report by British Petroleum estimated that, by the end of 2010, the United States had “proven” reserves of 272.5 tcf. That represents a 12-year supply, with most energy experts agreeing that “proven reserves” have a 90 percent probability of going to market.

Are Exports the Answer?

“Going to market” with today’s natural gas prices, however, is problematic for many energy companies. The current price of about $2.50 per British Thermal Unit is more than 50 percent off the 2011 peak and just a fraction of the record highs of 2008. Price is important because as the price rises, more reserves can move from the “technically recoverable resource” category into the “proven resource” category.

The number of operating U.S. gas rigs dropped 30 percent last year, from 900 to 600, says IHS' Stark. “For a period of time, this will help bring supplies back in line with demand,” he says.

Consultants like John Harpole, president of Denver-based Mercurator Energy, think the answer to current price woes lies in exports.

While prices here are below $3, prices in Asia are $14-$16 mmBTU, and $12-$14 mmBTU in Europe, says Harpole, formerly vice chairman of the Natural Gas Committee for the Independent Petroleum Association of America. “If we start selling more in worldwide markets, we might see a stronger price at home.”

Stark sees a huge U.S. competitive advantage“with such large volumes of natural gas delivered at a very low price.“

“The price in the rest of the world is more than $10 a unit,” says Stark. “We have a lot of options to make some really prudent decisions to support the U.S. economy. The amount of natural gas in North America is huge gift for us.”

Editor's note: This story has been updated since it was first published on June 15, 2012.

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