Shale Gas—It Ain't Everything They Said It Would Be

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A new assessment by the United States Geological Survey (USGS) has slashed the estimated volumes of recoverable natural gas resources in the now-famous Marcellus Shale Basin, putting yet another damper on the concept that America can fuel its future with domestic gas.

Geologists have long been aware that the shale rocks of the Marcellus Basin hold lots of gas, but it was only with the development of horizontal fracturing well technology that the gas became accessible. Once it became a potential resource, geologists started trying to figure out just how much gas was really in Marcellus. The first government estimate came from a research group within the US Department of Energy, which in 2009 pegged the resource at 262 trillion cubic feet (tcf) of technically recoverable gas. Another commonly quoted estimate for the Marcellus Basin came from Professor Terry Engelder of Pennsylvania State University, who in 2009 claimed the basin held 489 tcf of technically recoverable gas. And earlier this year the federal Energy Information Administration (EIA) estimated Marcellus gas resources at 410 tcf.

These huge estimates sparked not just a wave, but a tsunami of interest in America's natural gas supplies. Natural gas suddenly became the clean-burning "bridge" fuel that would carry the United States through its transition from dirty coal to renewable alternative energies. With domestic supplies sufficient to power America for dozens of years, natural gas was also touted as a home-grown solution to America's reliance on foreign oil. By late 2009, people from Capitol Hill to California were jumping aboard the natural gas train.

If it all seems a bit too good to be true, there's a good reason. Several reasons, in fact.

The concept of natural gas as a clean bridge fuel sparked a loud debate in itself, and we will get to those arguments in a moment. First, let's consider this new USGS estimate, as it has essentially eliminated a huge portion of the fuel that was behind the fire. The USGS now thinks the Marcellus shale holds just 84 tcf of technically recoverable natural gas, and that's at a P50 level of certainty (P50 resources have a 50% certainty of being produced). Increasing certainty to the 90% level - the P90 resources - reduces volume of usable Marcellus gas to just 43 tcf.

From 262 tcf to 43 tcf - that alone is a serious downgrade, leaving aside the fact that many people had touted the basin as holding almost 500 tcf of gas. Instead of dozens of years' worth of gas, the shale formation stretching from New York to Virginia now contains only enough to sate America's gas need for two years.

And even the 84 tcf of P50 resources are just that - resources. They are not reserves, which are resources that can be extracted economically.

Why the huge downgrade? It is not clear, but one likely cause is that a better understanding of the geology of the basin (drawn from two years of exploration drilling by a raft of companies) has shown the gas reservoir to be less continuous and tighter - and therefore more difficult to fracture - than previously thought. There are also areas where it is now off limits or simply impractical to drill, such as close to or underneath cities or anywhere in the state of New York, which has imposed a moratorium on shale drilling.

Based on the USGS report, the EIA - which is responsible for quantifying oil and gas supplies - says it will slash its official resource estimate for the Marcellus shale by almost 80%. Accurate estimates are essential for lawmakers considering long-term decisions about subsidies and energy policies, for landowners considering leasing their land to drillers, and for investors contemplating an investment in a gas company. As such the demotion is akin to pouring water on the American shale gas fire.

Then again, even before this major resource downgrade, interest in exploring for natural gas in these unconventional shale basins in the United States was already on the wane, following a few years of manic activity. That manic phase put so many cubic feet of natural gas into America's books that the market became flooded with gas reserves, and the glut of supply cut the North American price of natural gas in half. The Henry Hub price of natural gas now averages US$4 per mmBTU, down from the $8 average prior to 2009.

Companies don't like to explore for a resource that is not very valuable, especially since the United States charges similar royalties and taxes on oil and natural gas. The result? It is now significantly more advantageous to explore for oil than gas. The latest rig-count report shows that the number of oil rigs is going up, while the number of rigs exploring for gas is going down. So not only is there less gas in the Marcellus Basin than we thought, there are fewer and fewer rigs actually tapping into those shale rocks.

As for the general concept of natural gas being the perfect bridge fuel to transition America from high-carbon sources of energy (like coal and oil) to a renewable energy future, there are several major issues. The most apparent is the loud controversy that fracking has stirred up across America and Europe. Shale gas is characterized by high-cost, rapidly depleting wells that require high energy and water inputs. All of those characteristics lead to problems.

Water: Fracking uses a lot of water, which is a concern in a world increasingly concerned about supplies of fresh water. The bigger debate, however, is over whether drilling and fracturing one of these wells contaminates ground or surface water, with gas or with the various petrochemicals used in the fracking process. Stories abound of people who live near frack wells turning their kitchen taps on and being able to light the water on fire. The legitimacy and seriousness of these concerns is very much still open for debate, but regardless they have already catalyzed major opposition to fracking.

Waste: Those mixtures of petrochemicals mentioned above, known as frack fluids, pose another problem: how to dispose of them. The fluids are what fracture the ground - injected under high pressures, the fluids crack the ground open and lubricate the openings to help the newly-released gas flow. They are proprietary mixtures of petrochemicals; and there currently is no easy way to dispose of these toxic brines.

Well costs: With the supply glut having depressed natural gas prices to just US$4 per mmBTU, it has become uneconomical to drill new gas fracks. Really, shale gas became a victim of its own success - by finding so much gas explorers flooded the market, pushing prices down and making shale gas too expensive.

"Clean" energy: One of the major arguments behind using natural gas as a bridge fuel is that it is a "clean-burning" fuel. While it is true that the emissions generated from burning natural gas are less than those produced from burning coal, burning is not the only stage at which a fuel creates greenhouse gases. To properly compare fuels, one has to look at full-cycle emissions, which means adding up emissions generated in: drilling the well; fracturing the ground; collecting, processing, and transporting the gas; and then finally burning the gas. It turns out that several recent studies found natural gas to have worse full-cycle emissions than coal.

So, surprise, surprise - shale gas cannot alone solve the problem of America's insatiable need for energy. That is not to say the shale gas is out of the picture. In time gas prices will rise and it will again become economical to drill new fracks. Those frack wells will provide natural gas to heat homes, run air conditioners, power factories, and run buses. However, the vocal opposition to fracking will impede field development, especially if other states follow New York's lead and ban the practice. And with the idea of shale gas as a low-emission energy source being debunked, the arguments supporting it as a bridge fuel will lose steam.

Natural gas will remain part of America's and the world's energy mixture for a long time. North America and Europe are well endowed with shale gas resources, and in time those resources will become very valuable. However, the Mania Phase is over for shale gas exploration - instead, it is time to face reality, and that reality says that natural gas drawn from shale formations may not enter the scene in a major way for some time, given that the resources now appear to be a small fraction of the size everyone thought they were and given that the process is so highly controversial.

[More than energy prices are volatile - regulations, science, and technology can all cause swings in the numerous players in this sector. Let Casey Energy Opportunities help you invest wisely for maximal profits. A three-month trial subscription is risk-free.]

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