Views about US natural gas as a major fuel in the domestic energy mix oscillate between pessimism and optimism with fair regularity.
The 1970s were a decade of rising, indeed, deep, pessimism about US natural gas. It tracked the steady decline in reported, proved, dry natural gas reserves. In the 1970s, this category of reserve fell by 45% over the decade (the author has relied on various US government agencies for the reserves and resources information in this article).
In the 1980s, reserves continued to decline but so did consumption and again natural gas was seen as an underused domestic energy resource. The gas industry mounted a concerted and successful lobbying, marketing and technology development program to increase the visibility and favored treatment of natural gas amongst public policy makers, consumers and especially power generators.
The advent of the high efficiency, low capital cost and readily financeable gas turbine made natural gas a favorite of independent power producers and the emerging gas/electric merchant energy industry which saw tremendous embedded optionality in these turbines and correctly viewed them as future trading platforms.
In the 1990s, reserves were stagnant (the decade started with 169 Tcf and ended with 167 Tcf). However consumption rose briskly, thanks largely to the gas turbine based merchant energy industry and good economic growth. Reserve pessimism returned as forecasters saw rising use and stagnant reserves. Imported LNG became the perceived savior.
By 2004, natural gas pessimism was rampant and natural gas prices were elevated well beyond historical experience. LNG terminals became the topic of daily discussion in the industry. There was both euphoria about the prospects for the LNG terminal business and almost desperation in the quest for natural gas imports.
This pessimism has now, again, been replaced by growing optimism about US natural gas reserves and the domestic natural gas industry. It is not unfounded despite the current low real natural gas prices and languishing consumption. This decade has seen an uninterrupted and steady rise in reported, dry, proven, natural gas reserves from 177 Tcf at the end of 2000 to 237 Tcf at the end of 2007, about a one-third increase. (Industry publications, however, report a figure of about 215Tcf based on sampling company data).
The real basis for optimism, however, is the growth in non-producing reserves and in estimates about the US natural gas resource base. In 1996, this category of reserve (proved, non producing) was 33 Tcf . By the end of 2000, it was almost 43Tcf and at the end of 2007 it had grown to 78Tcf.
At this stage some definitions may be helpful to the non-industry reader. Proved producing reserves are natural gas quantities that are deemed recoverable with a very high probability and are currently in production. Proved non-producing reserves are reserves not in production. Probable reserves are estimated quantities in extensions of known fields. The certainty level is considerably lower than proved reserves. Possible reserves are reserves in addition to probable but with an even lower level of assurance that they exist and can be recovered commercially.
US natural gas resources are the physical endowment of gas in field, basin, region, nation. The quantity of resources is inherently unknown and unknowable. The more people look and study the more they find. US natural gas resources are virtually limitless within anyone’s strategic planning horizon and specific figures are meant to illustrate trends or enormous size relative to reserves.
Resources are an academic notion. Reserves are a business asset. Resources are transformed into reserves based on access, technology, regulatory regime, prices and costs, and takeaway infrastructure. Reserves, obviously, are a dependent variable and have meaning only in a specific context. Frequent revisions are the norm.
Just as reserve estimates have grown this decade, so have resource estimates. Shale illustrates this well. Enthusiasm for and the ability to produce gas from shale has increased dramatically this decade. As a result there is much more effort being expended in defining the resource base of certain basins and on transforming resources into reserves. In 2006, the technically recoverable shale resource in the US was estimated at 215 Tcf.
By the end of 2008, this estimate had jumped to 742Tcf. (The US government estimates that the total extent of the US shale resource base is 1,744 Tcf). The Haynesville shale estimate increased 8 fold from 34 Tcf to 251Tcf (the size of the total US shale recoverable resource estimate in 2006) and the Marcellus shale estimate also soared by a factor of 8 from 34 Tcf to 262 Tcf. This is not surprising since it is only in the past four years that independent E&P companies have started to focus on the Haynesville and Marcellus shales. In contrast, total US shale proven reserves were reported to be a mere 21 Tcf, about the same size as coal bed methane reserves.
The trajectory of reserve growth in coal bed methane (CBM) is inspirational for producers, investors and field service companies pursuing opportunities in shale. At the end of the 1980s, when coal bed methane was just beginning to make a contribution to the US natural gas industry, proven reserves were an insignificant 4 Tcf. The industry grew rapidly in the 1990s as technology advanced and independents risked capital to enter or expand the business. At the end of the1990s, reserves were 13Tcf and at the end of 2007, reserves were almost 22 Tcf or 9 % of US proven reserves.
Technology and Risk Capital
The driving force behind technological innovation and the growth in US natural gas reserves and production has been the independent E&P company. It is the independents who pursued the coal bed methane idea in the 1980s turning it into an industry and it is the independents who have turned shale from an intriguing idea in the 1990s to a rapidly expanding (and potentially very large) US natural gas industry this decade.
CBM technologies that have been key include understanding the mechanisms of producing gas from coal seams, measuring reservoir properties, advances in reservoir stimulation, horizontal drilling and dewatering. There are now dozens of independent producers involved in CBM production.
Another example of technological innovation in general is the suite of technologies developed over many years by many companies and research organizations in the US to improve the success rate of exploration for oil and gas. In 1973, over 7,600 exploratory wells were drilled in the US, of which a daunting 77% were dry (truly a treasure hunt, then). In 1981 the number had risen to an astounding 17,573 wells (the record still stands) of which 70% were dry. By 1989 exploratory wells drilled had plunged to 5,247 but the dry hole rate had declined to 64%. Drilling fell even further to 2,278 wells in 2000 but the dry hole rate was down to 58%.
A comparable number of exploratory wells were drilled in 2007 (5,509) but the dry hole rate had plunged to 26% (a transformation from treasure hunting to quasi-manufacturing: one of the great successes of the US energy industry).
It is shale, however, that is generating the greatest excitement in the US. The Barnett shale (Texas), still in the early stages of development, already accounts for almost 6% of lower 48 gas production. There are, at present, 26 named shale basins in the US. The Barnett dominates commercial production. There is also growing activity in the Haynesville/ Bossier (Louisiana), Antrim (Michigan), Fayetteville (Arkansas), Marcellus (mostly Pennsylvania), and New Albany (Indiana) shale basins.
Advances in horizontal drilling (which creates multiple productivity and cost benefits and has a much smaller footprint than vertical drilling) and high volume hydraulic fracturing, backed by the determination and risk capital of independent E&P companies are driving this cycle of reserve optimism. If this rising arc of optimism can be translated into actual production, then the economic and national security payoffs for the US will be considerable.
Disclosure: The author owns stocks in the natural gas industry.