[Noozhawk note: Click here for Part I of this series, which focuses on global forecasts for oil production.]
Natural gas is the Ron Burgundy of energy — kind of a big deal. According to the Energy Information Administration, it now accounts for about 31 percent of U.S. primary energy production, our largest single source of energy. Natural gas has now surpassed coal production (about 26 percent), is more than double the energy from oil production (about 17 percent) and is almost triple the energy we obtain from renewables (11 percent).
Natural gas from fracking (hydraulic fracturing) — shale gas and “tight gas” (see Figure 3) — now constitutes about 40 percent of all natural gas produced in the United States, up from almost nothing a decade ago. This is a remarkable increase, taking place mostly in the last four to five years, made more remarkable when we consider that natural gas has now displaced King Coal as the largest source of fossil fuel energy in the United States.
The shale revolution has yet to reach countries other than the United States and Canada, with no other country producing more than 1 percent of its total gas from shale.
However, even though this new unconventional gas production has expanded rapidly, we’ve seen a concurrent and rapid decline in conventional natural gas production. As with conventional oil production, it seems that conventional natural gas production has peaked in the United States — way back in the mid-1990s (see Figure 3). Why does this matter if the total amount of gas production is still increasing? It matters because of the higher costs and because it indicates that the easily available fuels have been exhausted.
There’s a reason companies are increasingly drilling for oil in deep waters or other far-flung locations, and using more expensive and environmentally-damaging techniques to extract natural gas. The easily available oil and gas is disappearing.
The reality behind the “shale gale” — the revolution in shale oil and gas production — is complex. It’s undeniable that shale gas has ramped up very quickly in the United States, but it’s far less clear how much more shale gas will ramp up in the future here in the United States or around the world.
One thing is clear, however: There has been a lot of hype around shale gas, and it’s important to distinguish between this hype — from gas companies and their boosters — and reliable forecasts from less partial sources. This article will go through the numbers in some detail, in an attempt to get a better feel for the future of energy as it pertains to natural gas production, particularly here in the United States, which is by far the biggest producer of natural gas from fracking.
Natural Gas By the Numbers
Natural gas has increased from its recent lows in 2006 by about 33 percent (Figure 1). This is an important figure: the revolution in shale gas and other extraction techniques has resulted in an increase in total natural gas production of only about 33 percent.
The U.S. Energy Information Administration projects no increase in U.S. natural gas production through 2014, due to current low prices for natural gas, but in the longer term production will rise — a lot — as prices rise.
The EIA projects that gas production will rise from about 24 quads to 33 quads by 2040, a 38 percent increase.
Shale gas and tight gas production has more than doubled in the last four years, due in large part to the fracking revolution and horizontal drilling (Figure 3).
Fracking (“hydraulic fracturing”) is a technique that uses a mix of pressurized water and various chemicals to free gas from shale and other porous rock formations.
It’s a controversial technique, for various reasons, and it is coming increasingly under scrutiny by state and federal regulators.
Where does our shale gas come from? Two key formations produce most of the shale gas: the Marcellus shale in Pennsylvania and West Virginia, and the Haynesville shale in Texas and Louisiana.
The Haynesville formation has reached a clear peak, in 2011, and is declining sharply, about 40 percent from its peak by the end of 2013. The Marcellus shale continues to see increased production and constitutes the large majority of increased gas production in the last couple of years.
The Barnett formation in Texas is third and this field has also seems to have peaked, probably in 2012. The Barnett is where fracking was first developed by local extraction firms and was the biggest field for some time.
The fact that a number of major shale gas fields have already peaked is itself pretty telling.
EIA’s Natural Gas Forecasts
Forecasting natural gas production, because it is such a large source of our energy now, is an ongoing controversy at the EIA. A New York Times investigation in 2011 obtained internal communications expressing doubt about the EIA’s projections for natural gas production. Numerous internal emails and other documents decried undue influence by the natural gas industry in the EIA’s forecasts.
A sample quote from the article is revealing: “In the emails, energy executives, industry lawyers, state geologists and market analysts voice skepticism about lofty forecasts and question whether companies are intentionally, and even illegally, overstating the productivity of their wells and the size of their reserves. Many of these emails also suggest a view that is in stark contrast to more bullish public comments made by the industry, in much the same way that insiders have raised doubts about previous financial bubbles.”
A similar conclusion was reached by Deborah Rogers, former advisory council member of the Dallas Federal Reserve, who has published a report online warning that the shale gas revolution is just another investor-driven bubble.
The EIA is ostensibly independent since no other agency reviews its reports prior to publication. But as with many government agencies, it seems that the industries that are analyzed or overseen can end up exerting undue influence over the agency through concerted lobbying efforts. Time will tell if this is the case with the EIA, though the existing documents revealed by the New York Times suggest strongly that this has been the case.
There is also some debate about how to calculate current production. One critic has raised the point that the EIA’s method is actually a sample of total production, not a comprehensive accounting, and that this sampling method, at least in the case of Texas, has resulted in significant overestimates of actual production.
The controversy around natural gas production forecasting seems to revolve primarily around the projected price of natural gas, due to the fact that the economic viability of shale gas production is thin to non-existent at current prices, and the degree to which existing wells in producing fields are indicative of the ability of new wells in those fields to produce new gas. The next section delves into these issues.
Doubts About the Staying Power of Shale Gas
Art Berman is perhaps the most outspoken critic of the shale gas revolution. Berman concludes that based on the EIA’s own data on natural gas resources in the United States that there is only about an eight-year supply of shale gas left in the ground — far less than forecast by the EIA, which projects dramatic increases in production at least through 2040, the farthest that the EIA’s forecasts extend at this point.
According to an article on Berman’s contrarian claims: “Berman recently studied one area that has been actively drilled for several years and found that 25 to 30 percent of the wells drilled that are five to seven years old are already sub-commercial.” Industry typically claims up to a 40-year lifespan for new wells, highlighting a very large potential discrepancy. Many of today’s wells don’t, according to Berman, even cover lease and operating expenses because their production has already fallen too low.
And this is the rub: Production in shale gas wells declines extremely rapidly. The average annual decline in the first five years for shale gas is 30 percent to 40 percent — compared with about 20 percent per year for conventional wells. This means that every three years the entire shale gas production resource needs to be replaced. This should give a hint of the work and resources required to maintain production at today’s levels, let alone to reach the EIA’s projected production in coming decades.
Berman also concludes that the commercially viable area of most natural gas fields is 10 percent to 20 percent of the geographic area. If Berman is even close to being right, the very crude model that the EIA uses to project natural gas production will be well wide of the mark. This is the case because the EIA projects future production based on geographic area and well density in that area. But if historical production data comes from the 10 percent to 20 percent of the area that is the best producing area, the “sweet spots,” it will not lead to accurate extrapolations for the entire area. The EIA attempts to adjust for this effect (as discussed in the 2012 Annual Energy Outlook Issue in Focus No. 11).
Berman adds that shale gas plays are often unprofitable even when they’re producing at high levels because it costs a lot more to produce shale gas than it does to do so in conventional plays. He has good company in this assessment. Exxon CEO Rex Tillerson has said that “we are all losing our shirts” on shale gas, though he made this statement when natural gas prices were far lower than today.
Berman sums up his view: “We are spending more and more to get less and less.” Berman is certainly the loudest critic, and also the source of many other critics’ information about the EIA forecasts. As such, it’s important to recognize that his is a minority view and may not be right. The continued increases in production from Marcellus and Eagle Ford formations suggests he may be a bit pessimistic when it comes to the profitability of today’s shale plays.
Time will tell whether the EIA’s current forecasts are far too rosy or not. My feeling, on balance, is that the EIA’s projections are likely to be on the very rosy side, particularly in years beyond 2020.
The EIA’s own track record supports the conclusion that its current forecasts are too rosy. The EIA publishes a retrospective study of its own forecasts each year. It found that it had, in its “reference case” scenarios, overestimated crude oil production 60 percent of the time. The EIA also overestimated natural gas production 66 percent of the time. So the EIA’s bias, for whatever reason(s), seems to be in favor of higher production than has been the case historically.
I’ve not focused in this piece on the environmental issues associated with natural gas production. They are considerable, however, and it may be the case that states becoming increasingly aggressive in regulating natural gas production. If this does happen, this will impose further downward pressure on future production.
In sum, it looks like we’re likely to see far less natural gas production in the United States than the EIA and many others are currently forecasting, particularly for years beyond 2020. The good news is that a sustained and sustainable technological revolution is in fact underway in a similar industry: the solar industry. Solar energy can substitute in many ways for natural gas-fired electricity, particularly when combined with vigorous efficiency and demand response programs and with the advent of cost-effective energy storage technologies like molten salt thermal storage and batteries.
Two recent reports found that various storage technologies in many different configurations will likely be cost-effective by 2015, particularly when the full array of grid services that storage can provide is considered.
Solar combined with storage is a game-changer, and we are on track to reach a substantial portion of our electricity from these technologies by the middle of the next decade if we continue anywhere near the growth rates we’ve seen over the last five years. As with natural gas, there are good reasons that solar growth will slow. But the limits on solar growth are far more surmountable than the limits on natural gas production because costs are continuing to decline for solar, a good thing, whereas costs for natural gas are still too low for much new production to occur. Also, solar installations are only now reaching scale, whereas natural gas production has been at scale for decades, suggesting also that the solar phenomenon has a long way to go before it reaches any natural limits.
But I could be wrong because no one’s crystal ball works that well when we look many years into the future.
Some Thoughts on Forecasting
I try to be objective in these articles. I’m obviously biased in that I work in the renewable energy industry, and I believe strongly that we need to transition quickly away from fossil fuels. At the same time, I believe one can be objective by recognizing one’s innate biases and being fair with the data.
Philip Tetlock, a psychologist at the University of Pennsylvania, has studied expert forecasts and political judgments in detail. He’s found in over two decades of study that most experts aren’t much better than chance in their forecasts. He has found, however, that the experts who are open-minded and draw from a wide variety of sources — a “fox” rather than a hedgehog in his parlance — generally do better than “hedgehogs,” those who are driven by ideology and one or a few “big ideas.”
I’m taking part in Tetlock’s Good Judgment Project, an exercise in crowdsourcing world affairs political forecasting (my team is currently No. 1 of 25 teams). As part of this process, participants like me undergo numerous tests. Tetlock’s tests found me to be more fox-like than hedgehog-like, with a score of 2 on a scale of 1 to 7. They also measured “actively open-minded thinking,” and I was a 6.44 on a scale of 1 to 7, with 7 being the most open-minded. Anyway, this is far from definitive proof of my lack of bias, but it should help convince readers that I’m capable of being objective.
Tetlock has looked in detail at expert judgment in my primary field, energy, in his book Expert Political Judgment. An excellent article by Andrew Nikiforuk, a columnist in British Columbia, summarized well Tetlock’s findings regarding energy forecasting:
» First and foremost, regard all energy forecasts, whether boom or gloom, with radical skepticism. Recognize that many are paid for by dominant energy players in a world where fewer and fewer corporations now control energy flows.
» Search out humble foxes. They draw their information from a diversity of sources and are accountable for their actions. They tend to be geologists and physicists and not economists.
» Accept that our energy future will not only be uncertain but largely unpredictable. Unanticipated surprises will shock a highly complex system into unforeseen directions.
— Tam Hunt is owner of Community Renewable Solutions, a consultancy and law firm specializing in community-scale renewables. Community Renewable Solutions can help developers navigate this complicated field and provide other development advice relating to interconnection, net metering, procurement and land use. Click here to read previous columns. The opinions expressed are his own.