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Page added on December 29, 2014

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David Hughes Weighs In on The Fracking Fallacy Debate

David Hughes Weighs In on The Fracking Fallacy Debate thumbnail

In the current debate about the Nature article “The Fracking Fallacy,” the discussion has focused on estimates of cumulative production of shale gas plays by the Energy Information Administration (EIA) and The Bureau of Economic Geology at the University of Texas (UT/BEG).

David Hughes provides another estimate in his recent post “Fracking Fracas: The Trouble with Optimistic Shale Gas Projections by the U.S. Department of Energy,” a summary of his comprehensive study of all U.S. shale plays Drilling Down published by The Post Carbon Institute.

The Fracking Fallacy debate is important because it casts doubt on the reliability of government estimates of our natural gas supply.  If U.S. gas production is in decline by the early 2020s as described in the Nature article, or sooner as I suspect, then important policy decisions about the export of natural gas and the retirement of coal-fired electric power plants have been based on questionable information.

Cumulative production estimates are interesting but do not address the economics of shale plays.  Proven reserves provide a more meaningful estimate because they supposedly represent volumes of oil and gas that can be produced commercially at a particular price.

There are two categories of proven reserves:  proven developed producing (PDP) and proven undeveloped (PUD) reserves.  PDP reserves refer to volumes of oil and gas that have been proven by drilling a well, testing its production and projecting its estimated ultimate production (EUR). PUD reserves are those volumes of oil and gas that can beinferred to be commercial but have not yet been drilled and tested.  PUD reserves are booked based on proximity to PDP reserves.

Considerable uncertainty exists about the commerciality of shale production because of the lack of long-term production history to validate the EUR.  I doubt that much of PDP shale gas reserves are, in fact, commercial based on our economic analysis of the Marcellus, Haynesville, Barnett and Fayetteville shale plays.  PUD reserves are even more questionable since they have not been tested by a well. These observations are confirmed by public filings of financial data to the Securities and Exhange Commission by companies involved in these plays.  This data shows that most companies have negative free cash flow and have extremely high debt loads.  In other words, they are losing money.

Proven reserves are, nevertheless, the best publicly-available measure of production potential from shale gas plays.  The nearby chart and table compare the ultimate production estimates by the EIA, UT/BEG and Drilling Down (DD) with 2013 proven and proven undeveloped reserves published recently by the EIA.

(Click The Figure To Enlarge)

This data shows that both Drilling Down and UT/BEG cumulative production estimates are reasonably close to 2013 PDP reserves + PTD (Production To Date) + PUD reserves.  The UT/BEG estimate is nearly identical with the PDP-PTD-PUD estimate except that Haynesville Shale production appears to be over-estimated.  Drilling Down estimates appear to slightly under-estimate Barnett production and over-estimate Marcellus production compared to proven reserves.

The important take-away, of course, is that EIA appears to have over-estimated production for all of the plays by more than one-third (123 Tcf more) compared with total proven reserves.  Its estimate for the Haynesville Shale play is more than three times as high (70 Tcf more) as proven reserves.  EIA estimates for Barnett and Fayetteville are reasonably close to the PDP-PTD-PUD estimate. One has to wonder whether the people who do these production estimates for the EIA talk to the people in their own organization who do the reserve accounting.

The implication is that government estimates of shale gas supply appear to be highly optimistic compared with two studies by credible sources who I believe have done a much more thorough job than EIA of analyzing the production data by evaluating every individual well in the plays.  All three estimates are probably optimistic because they use EIA price forecasts that I believe are too low.

How the SEC justifies approving reserves that financial data from the companies involved shows is non-commercial is a fascinating subject for another inquiry.

The shale gas success story of multi-decade abundance is at odds with the findings of the Bureau of Economic Geology and David Hughes’ work with The Post-Carbon Institute. The story stresses success based on resource estimates but not reserves, production volumes but not the cost of that production, the benefits of technology but not its price, and claims of profit that exclude important expenses.

The government and press accept this story because it paints a picture that fulfills so many aspirations of energy independence, U.S. re-emerging political strength, dominance in energy affairs and economic growth that warning signs of potential risk have so far been ignored.

Shale gas has provided the United States with a decade of supply that was not recognized as recently as 2005.  That is a good thing.  However, it probably represents a hiatus in the decline of U.S. gas reserves rather than a fundamental change in energy supply.

Petroleum Truth Report



12 Comments on "David Hughes Weighs In on The Fracking Fallacy Debate"

  1. Northwest Resident on Mon, 29th Dec 2014 9:41 am 

    “government estimates of shale gas supply appear to be highly optimistic…”

    Do you mean to tell me that the U.S. Government is fudging numbers to make things look better than they really are?

    For any and all, both on this forum and elsewhere, who would argue that the FED and the U.S. Government (and its agencies) are NOT active, willing, scheming and key players in the creation of propaganda specifically designed to manipulate mass public opinion and perception, please, recognize the error of your way.

    It is important to recognize that the U.S. Government IS an active participant and even perhaps a directing author in creating the volumes of propaganda that we are daily blitzed with.

    Why? Because of the implications that fundamental realization of fact leads to.

    Major corporations and the U.S. Government (and its agencies) are in league with one another. They are actively coordinating propaganda themes and messaging to manipulate mass public opinion and perception.

    The goal is to keep “the herd” calm and unaware of the circling wolves that creep closer day by day.

    The goal is to “keep it together” for a little while longer.

    The goal is to fortify and maintain public confidence in “the system” for a little while longer, or for as long as possible.

    When we contemplate the goals of the mass propaganda campaign being waged upon us, and we stop to think about it and ask “why are they doing it”, that question leads to a very disturbing answer.

    I happen to believe that it is an answer that is critically important for as many of us to contemplate and understand as can be drawn into the “circle of knowing”. So, I’ll keep hammering on the point from time to time, until it’s too late.

  2. Plantagenet on Mon, 29th Dec 2014 10:23 am 

    Obama campaigned in 2012 on the promise that the U.S. had a “100 year supply” of NG thanks to fracking. It’s very naive to expect US Government agencies headed by Obama appointees like the EIA and DOE to issue numbers that undercut the political positions of president Obama.

  3. JuanP on Mon, 29th Dec 2014 11:13 am 

    Damn, Plant! You beat me to it, but I will say it anyway. Obama promised me 100 years of cheap gas! That guy is a verified, certified LIAR. Obama, the Putting Puppet in Chief of the USA is a disgrace of a human being. He lied to me! 🙁

    And I thought he was better than Borderline W.

  4. Northwest Resident on Mon, 29th Dec 2014 11:43 am 

    JuanP — I believe it is safe to assume that nearly all elected officials and major federal government officials are involved in an ongoing policy designed to keep the masses calm and unaware of the mounting dangers — certainly including Obama. They need to keep the stock market pumped up. They need to keep confidence in the system from disintegrating. They need to work together to maintain the illusion of “all is well”. That is their JOB. Are they lying and spinning fact to get their job done? Well, duh! Of course they are. What?! You think they are going to tell us the truth? (the crowd rolls on the floor laughing) Obama is just one of many involved in projecting the illusion of “all is well” to the masses, and most definitely not the main one, though perhaps the most visible — the “fall guy”.

  5. Nony on Mon, 29th Dec 2014 12:52 pm 

    1. We’ve already had this posted and discussed it. Not the same exact piece, but still Hughes’s content itself (what this article regurgitates).

    2. Despite all the sturm and drang from Berman, Rogers, and Hughes, the market is producing more nat gas and is doing it at a price WELL below $5. And with the futures market at below 5 until the cows come home (decades). Berman and Rogers started their spiel in 2009. There has been plenty of time for a bubble to explode, but it hasn’t. Sure some companies have exited because they could not compete…but so what. That’s capitalism. And the consumer benefits.

    P.s. Marcellus dry gas in northern PA tipped into $1/MCF. That’s the exact opposite of “running out of sweet spot”. That’s stranded gas. That’s infrastructure bottleneck. Not geology, not cost of production.

  6. shortonoil on Mon, 29th Dec 2014 1:46 pm 

    The term “proved reserve” is a slippery creature at best. To be determined it requires making two assumptions: present, and future production costs, and present, and future prices. The present part can usually be reasonably estimated; the future part is a lot more challenging.

    We have very recently seen world petroleum proved (actually P1 & P2) reserves fall from 2500 Gb to 1350 Gb when the price dropped 45%. Those that claim that the reserves will be restored when the price recovers are just as likely to be correct about that price on the way up as they were on the way down. Most future price estimates are a wish list of desires, and amount to no more than a coin flip. They are a statement that says that what has happened in the past must be infinitely repeated.

    We use a different approach to determine prices from this point forward. We calculate it by determining what the consumer can afford to pay for it. We could use the old Econ 101 approach of supply curves, and demand curves, but that model has been broken for a very long time. Either the demand curve slopes in the wrong direction, or there is 10000 Gb barrels of oil that the oil producers have been hiding for the last 50 years. Chances are the model is broken. Anyway our model:

    http://www.thehillsgroup.org/depletion2_022.htm

    So what does this have to do with NG? Quit a lot actually. Like oil we have seen ever increasing statements about NG reserves. US reserves have supposedly trebled in the last six years. These estimates are also based on present, and future production costs, and present, and future prices. Outside of the fact that these reserves will have to be produced at a price below their cost of production does not seem to be a problem. Of course these estimates are coming from people whose demand curve is sloping in the wrong direction.

    We are likely to side with Mr. Hughes. His curves aren’t backwards!

    http://www.thehillsgroup.org/

  7. Nony on Mon, 29th Dec 2014 1:57 pm 

    Short’s post gives the mistaken impression that future price assumptions can be manipulated. Actually what happens is that they use current prices (average over last 12 months) as the basis for future price assumptions. This is generally conservative (rarely is the futures market heavily backwarded). In any case, it’s not subject to finagling.

    The same applies to costs.

    It’s actually a fundamental principle of the reserves accounting “current economic conditions”. Short shows his amateurness by blathering out with stuff that is wrong that he could have found from just a little research. You should watch out for people like that. Lot’s of fancy blather…and wrong on basic concepts. There is a lot of that in peaker land…

    I am not a reserves estimator. But I can Google. And read stuff on the Internets.

  8. Northwest Resident on Mon, 29th Dec 2014 2:38 pm 

    Nony — I didn’t find in shortonoil’s post where he gave the “mistaken impression that future price assumptions can be manipulated”. Can you point out the exact sentence, paragraph or phrase where he supposedly gave that mistaken impression?

    Despite what shortonoil may or may not have implied, there are many who believe that any and every aspect of the stock market not only can but IS being actively manipulated. Would you make the case that the stock market including futures are all representative of fundamentals and logical projections?

    What stuff did short “blather out” that demonstrates his amateurishness (amateurness not being a word, btw)?

    The reason I’m asking these questions of you Nony is because you vacillate from playing the complete clownish moronic fool, to being an unrepentant shale cheerleader, to being a very papa-smurfish like obnoxious troll. Your main contribution on this forum is to play the fool and to take the idiot’s stance so as to generate rebuttals. And, at times, as demonstrated during your “Christmas Season Borish Beyond Belief” period, to simply make rude and obnoxious accusations and to constantly repeat trite and idiotic platitudes.

    So, redeem yourself, Nony. Answer the questions. Prove you’re not just a fool and an attention-seeker looking to stir up trouble.

  9. oilystuff on Mon, 29th Dec 2014 3:10 pm 

    Regardless of price manipulation, proven reserves have nothing to do with predicting future prices, or future costs; proven reserves are those estimated reserves recoverable from known reservoirs and current prices and current costs. By standard accounting principles anyway. Nony is correct on this, actually. Proven reserves have become “slippery” because of the shale oil industry, which likes to more or less drill one well on an acreage block and declare that the entire block is therefore proven developed reserves and bankable. Proven and proven developed are two different things. Estimated ultimate recoveries of wells also are made at current prices and current costs. A well, and a field, can of course become uneconomical to produce earlier in the decline curve when one and/or of price, or costs, change. Nobody can predict oil prices, NOBODY. Declaring any reserve estimate at any given time simply makes oil folks feel good, and banks feel better.

  10. Nony on Mon, 29th Dec 2014 5:55 pm 

    NWR:

    First two sentences of short’s remark. He says future prices are assumed in the reserves accounting. But they’re not. You use the average of last 12 months. It’s fixed, man. There is no predicting or assuming allowed or involved.

    Thanks, man. I’m sober Nony now. Less playful.

  11. GregT on Mon, 29th Dec 2014 10:00 pm 

    “The term “proved reserve” is a slippery creature at best. To be determined it requires making two assumptions: present, and future production costs, and present, and future prices. The present part can usually be reasonably estimated; the future part is a lot more challenging.”

    Thanks Short for stating the obvious. Amazing how some people don’t have the capacity to understand a concept that is so simple.

  12. Northwest Resident on Wed, 31st Dec 2014 12:33 am 

    It begins…

    Oil-Bust Contagion Hits Hedge Funds, Supplier Layoffs Begin

    “Civeo is a thermometer into jobs in the oil and gas industry whose erstwhile boundless boom was funded to a large part by debt. It pushed the economy forward through big capital expenditures and massive job creation. Now capital expenditures are being cut with mindboggling speeds, and the job-creation machine has shifted into reverse. The effects will ripple through other industries.”

    “What Civeo is doing, other companies in the oil patch have already started to do, or will do soon: cutting capital expenditures not with a scalpel but with an axe while slashing headcount and other operating expenses. These companies gorged on debt during the greatest credit bubble in US history. The Fed encouraged them to. Investors closed their eyes and held their noses and handed them the money. Wall Street made sure they did. And now that debt sits on their shoulders and will have to be dealt with, even as the price of oil has plunged by half. It’s going to be very, very tough.”

    http://wolfstreet.com/2014/12/30/oil-bust-contagion-hits-hedge-funds-supplier-layoffs-begin/

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