New York Times
August 24, 2011
A previous post in Energy Forward noted that the U.S. Geological Survey (USGS) had increased its estimate of “technically recoverable” natural gas from the Marcellus Shale from two trillion cubic feet in 2002 to 84 trillion cubic feet. We also noted that the reference to “technically recoverable” reserves refers to those quantities of oil and gas producible using currently available technology and industry practices, regardless of economic or accessibility considerations. This new estimate from the USGS, while 42 times higher than its 2002 estimate, is still substantially lower than the 410 trillion cubic feet that the Energy Information Administration estimated would be recoverable from the Marcellus Shale in its report earlier this year. In its Annual Energy Outlook 2011 April 2011, the EIA also predicted that shale gas production would grow to 12.2 trillion cubic feet in 2035, when it would comprise 47 percent of total U.S. production—up considerably from the 16 percent share in 2009. As a result of the anticipated expansion of shale gas production over the next 25 years, the EIA Annual Energy Outlook also predicted reduced volatility and relatively modest increases in natural gas prices through 2035; average wellhead price for natural gas was forecasted to increase by an average of 2.1 percent per year, to $6.26 per million Btu in 2035 (2009 dollars).
According to the New York Times article, the Energy Information Administration has said it will slash its official estimate for the Marcellus Shale by nearly 80 percent, in response to the new estimates announced by USGS. In doing so, the EIA apparently acknowledged that the USGS is the “expert” in the matter. The Times article notes that resource estimates often include gas in pockets that are so small or so deep that it may never be drilled or produced at any price, and that the gas may also be in areas that are off limits or impractical to drill. Part of the problem in the imprecision of both the USGS and EIA estimates is the reference to “technically recoverable” resources which, by definition, does not take into account economic or accessibility considerations. “Reserve” estimates, on the other hand, take into account how much of this gas can be profitably extracted from the ground. In any event, it will be interesting to see the rippling effect through the EIA Energy Outlook if in fact the agency reduces its estimates for the Marcellus Shale by nearly 80 percent. That level of reduction is likely to affect forecasts of natural gas prices through 2035, and the extent to which natural gas can be expected to displace coal as a source of baseload electric generation over that same period. The EIA Energy Outlook, for example, predicted that about 80 percent of the capacity added between 2025 and 2035 would be natural-gas-fired. Will this hold true if the Marcellus Shale estimates upon which the natural gas price forecasts were based are reduced by 80 percent?