In an exclusive interview, OGIB asks noted author Bill Powers: have investors and the general public been grossly misled about America's energy future?
Something about America's shale gas renaissance -- and its gilded promise of previously-unthinkable U.S. energy independence -- never made sense to Bill Powers.
As the author of the shale-challenging new book "Cold, Hungry and In the Dark" explains, "I never understood how shale plays could be considered a game changer. These are fields where they have low-quality, low-permeability rock. How do you come up with such big numbers on reserves and production potential?"
It would easy to write off Powers' sentiment as blind naysaying. Except that he has the numbers to back up his skepticism -- numbers that cast doubt on current estimates about shale's bright future as America's go-to energy source.
Through over 600 carefully-researched footnotes, Powers' book documents numerous cases of data just not living up to the promises for shale gas.
One of the most glaring cases came in 2011, when the U.S. Energy Information Administration (EIA) -- the government data-gathering arm that serves as one of the go-to sources in the energy business-published a study on "technically recoverable resources" from shale gas plays across the country. A study that would within months become a poster case for just how uncertain estimates around shale gas deliverability can be.
"EIA published an estimate of 410 trillion cubic feet [Tcf] of technically recoverable resource for the Marcellus shale play in Pennsylvania in July 2011," recalls Powers. "To put that into perspective, EIA had estimated a total onshore resource for the entire lower 48 states of 750 Tcf. More than half of that was in the Marcellus."
The large estimate of gas for the Marcellus created a lot of excitement, but soon attracted dissent, from some high-profile sources.
Most notably EIA's fellow government agency, the U.S. Geological Survey (USGS). Just a month after the EIA's Marcellus estimate was released, in August 2011, USGS put out its own projection of gas that might be won from this shale. The number was much different: just 84 trillion cubic feet of technically recoverable gas, nearly 80% less than EIA's estimate.
"This seemed to be in direct contradiction to what the EIA said," notes Powers. Raising suspicions that perhaps the shale "boom" may not be the American energy panacea it had been hyped up to be.
Eventually the EIA reduced its Marcellus estimates in line with the lower USGS numbers. But for Powers, the fact that such glaring errors could happen at all points to systemic problems in the way America's most trusted source for energy data runs its calculations.
"These types of estimates are rampant because of EIA's estimating methodology," he says. "There are other, similar estimates out there that make no sense."
For Powers, this all points to a simple, but game-changing conclusion: despite the shale hype, America might actually be running out of gas.
"The realization," he says, "is that even with reduced demand this summer as compared to last year, we've seen more normalized storage levels. We're seeing production flat-line on a national basis. Texas, New Mexico, Wyoming and the offshore are really starting to come down. Louisiana especially. Dropping production rates in these states will eventually overwhelm what is likely to be the production growth from newer plays like the Marcellus."
But a chat with other industry insiders -- including officials from the EIA -- reveals that the agency's estimating errors may not be as insidious as they appear. In fact, they might be unavoidable.
"We won't really know how much gas is going to come out of a play until the last well is plugged and abandoned," says Philip Budzik from the EIA's Office of Petroleum, Natural Gas, & Biofuels Analysis. "There are a lot of things we simply don't know about the true productive lifetimes of these wells."
Budzik points out that drilling and well technology is changing so quickly that it's very difficult to make actual forecasts about production performance. The wells of tomorrow could be very different from the wells of today in terms of costs, spacing, depth, length, production and recoverable reserves.
Faced with this difficulty, Budzik notes that the EIA (and all groups making forecasts) are very dependent on obtaining actual production data-to give them a gauge of what is happening in the field.
But getting such data can be easier said than done. "States like Pennsylvania only release cumulative production data every six months," he says. It makes estimation here more problematic than for other states that publish monthly data, perhaps why Pennsylvania's Marcellus play could become the subject of such divergent forecasts from the EIA and the USGS.
Experts at respected energy analysis shop Bentek Energy agree that state production data is critical to forecasting. "In general, estimating current and historical production is a dash of art sprinkled primarily on science," says Jack Weixel, director of energy analysis at Bentek. "Bentek, IHS, Wood Mac, PIRA all have their own secret sauce, but the main ingredient is that well data."
Powers also agrees that a lack of good data is a big obstacle to understanding exactly what's happening in some of America's biggest shale plays. "Pennsylvania falls into that category," he says. "Other states such as Colorado, Utah and Arkansas fall into that category, so there can be very big disconnects."
He proposes a simple solution -- collect better data. Everywhere, every day.
"We should be using wireless metering in pipelines at the point of transfer from the producer to the interstate pipeline company," he suggests. "This is off-the-shelf technology that gives an accurate reading of production data without being overly costly."
Energy investors appear to favor Powers' approach -- with sophisticated market players today using data from private analysts like Bentek to make their decision about markets. "Bentek sees more than 90% of production on a daily basis," says Tony Scott, the group's Manager of Oil & Consulting Services. "So the market sees this before the EIA report and prices in any changes in the production numbers."
But lessons from Powers and others like him are critical for those numerous investors who still key their decisions off weekly supply and storage reports from groups like EIA. Even the people who produce these numbers acknowledge that such forecasts have big limitations. Especially during times of rapid change like we're seeing today in America's oil patch.
Spotting investable energy trends these days means doing a lot of digging. Not just taking one or two data points as gospel on where oil and gas are headed.
As the old adage goes, "If it seems too easy, it just might be."
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.
Business relationship disclosure: The Oil and Gas Investments Bulletin is a team of writers. This article was written by Dave Forest, one of our contributing authors. We did not receive compensation for this article, and we have no business relationship with any company whose stock is mentioned in this article. The author of this article has no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.