A drilling foreman once told me, "Don't believe ANY reserve number unless it's linked to a price." And, that is just what petroleum geologist and consultant Arthur Berman and his colleague Lyndon Pittinger have done in a new report on the viability of shale gas in New York state.
Not surprisingly, when Berman and Pittinger considered what it would cost to extract the shale gas beneath New York state at a profit, the mammoth claims about recoverable reserves made by the oil and gas industry appeared heavily inflated.
The stunning conclusion of the report is that at current prices--in the mid-$4 range per thousand cubic feet (mcf)--NONE of the natural gas trapped in the New York portion of the Marcellus can be profitably extracted. It's possible, of course, that someone would try. But, the economics look very shaky at current prices given what we know about the nature of the underground deposits.
Shale gas, you'll recall, is found in deep shale layers, in this case more than 4,000 feet below New York state. The shale formation the two authors studied is called the Marcellus which stretches from Tennessee to New York.
The natural gas in the Marcellus is deep, and it does not flow in commercial quantities on its own after a well is drilled. A new variant of an old technique called hydraulic fracturing--namely, high-volume slickwater hydraulic fracturing--combined with horizontal drilling has made this resource available for the first time. The fractures that result allow the gas to flow out of the formation, and the horizontal wells provide a relatively economical way to do a lot of fracturing or fracking from just one drilling pad.
Industry spokespersons, analysts and reporters often quote the total technically recoverable natural gas resource when discussing the Marcellus. Berman and Pittinger note a 2009 estimate of 489 trillion cubic feet (tcf) of which about 71 tcf were thought to be under New York state.
There are two problems with this estimate. First, just because something is technically recoverable doesn't mean that it will be profitable to bring out of the ground. Second, these estimates (and they are only estimates) keep going lower as actual drilling reveals just how little of the Marcellus is turning out to be amenable to extraction.
The U.S. Energy Information Administration (EIA) now believes that the entire formation across all states contains only about 141 tcf of technically recoverable gas.
But, just how much of this gas could actually come out of the ground at a profit at a given price? Berman and Pittinger first had to consider New York's rules about setbacks from public and private buildings and protected natural areas such as parks, streams and rivers. They then extrapolated actual drilling experience from Pennsylvania along the border with New York because the prospective drilling areas in New York have many similarities but no track record. New York currently has a moratorium on natural gas development using fracking.
We already discussed the authors' conclusion about the viability of shale gas in New York at current prices in the mid-$4 range. There is none. But at $6 per mcf the report details three scenarios based on what land turns out actually to be available under New York's rules. The range of recoverable reserves is from 0.8 tcf to 2.4 tcf. At $8 the range is 2 tcf to 9.1 tcf.
Compare these to the original estimate of technically recoverable resources of 71 tcf for the New York state portion of the Marcellus, and you'll understand why the industry doesn't like to talk about just how little shale gas might turn out to be profitable to extract.
Berman and Pittinger's work calls into question the industry promise of cheap, abundant domestic natural gas for decades to come. The $8 price tag for the highest estimated recovery from New York state is 300 percent higher than the average price that Americans paid for natural gas in the 1990s ($1.92 per mcf) and almost 80 percent higher than what they are paying today.
But at these higher prices, won't natural gas be abundant? Abundance is in the eye of the beholder. Certainly, there will be more natural gas available for extraction at higher prices. But, there are two issues. First, claims that the United States has 100 years of natural gas at current rates of consumption are completely overblown. The actual statistics on which the claim is based give a number of 92 years.
And, as the report points out, only the so-called "probable" portion of the American natural gas resource has even been drilled to show that it actually is recoverable, and that area represents about 25 percent of the total estimated resource. Of that it is unlikely that more than half will actually ever become reserves--that is, accessible and profitable to extract. That would bring us down to just 12.5 percent of the technically recoverable resources ultimately turning into reserves. And, that would imply a figure of just 17.6 tcf of recoverable natural gas reserves for the entire Marcellus based on the EIA estimate of 141 tcf in resources. The report, however, does not make any such estimate. For comparison, the United States consumed 26 tcf of natural gas in 2013.
So what is Berman and Pittinger's estimate of years of total U.S. natural gas reserves at current rates of consumption? Just 26 years.
Anticipation can be very, very exciting all by itself. And, the oil and gas industry has filled the nation with excitement over an anticipated bounty of domestic natural gas. But with reality setting in, it turns out that natural gas isn't going to be as cheap or as abundant as the industry promised.
Will this disappointment register when New York state considers whether to lift its moratorium on fracking? This is what the League of Women Voters of New York, sponsor of the report, is going to find out. Is this much smaller than anticipated resource with its many admitted drawbacks and risks worth extracting? Should New York and other states consider a different path to a viable energy future?
Perhaps the most important questions to ask are these: What will New York and other states do when the gas runs out? What will they do when all that's left is the mess that shale gas development will inevitably leave behind in the form of disturbed landscapes, disrupted neighborhoods and farms, polluted surface water, abandoned gas wells, long-term dangers to aquifers from injection wells used to dispose of fracking wastewater, and the failure to build a renewable energy infrastructure in advance of this inevitable day?
I wonder if these last two questions will even come up.