“I’m sorry for you—coming to Texas [in 1915] to look for oil. Don’t you know there is no oil in Texas?!”
- Wallace Pratt (oil and gas geologist), quoted in “Oil Finding—the Way it Was,” Petroleum 2000 Issue, Oil & Gas Journal, August 1977, p. 144.
The New York Times has published two amazing front-page articles on shale gas (here and here), which raise a number of issues about the prospects for the resource, suggesting that the reserves and profitability are vastly overstated. A careful reading of the articles, however, suggests that it is more smoke than fire.
Two specific issues raised in the article are important: the profitability of shale gas wells and their long-term production profiles. Many ancillary issues are also raised but can be dispensed with.
First, the reports that many landowners were not paid the promised bonuses or made much less than expected: this is hardly unusual when a resource boom occurs. Some companies are overly optimistic, rush in with offers that are intended to line up prospects as quickly as possible, then find that they can’t satisfy them.
The method’s use of water and potential contamination are certainly concerns, and is being addressed by the government. While the industry downplays concerns, and much of the coverage is the usual NIMBY hype, it is quite possible that this will add to long-term costs.
The entire articles are very poorly done, making references and implications that are completely unsupported by any real facts. A Fed official is skeptical? Some wells are described as underperforming?
Skepticism, True and False
That there are skeptics is hardly surprising: there are always skeptics, those who grumble about new technologies, who think that claims are overblown, and downplay the long-term success or applicability of techniques that appear promising.
In the 1980s, I heard some claim horizontal drilling was going to prove viable only in the Austin Chalk. More recently, when gas in the Barnett Shale began to be exploited, there were those who thought that no other shale would have the appropriate geology to allow commercial exploitation. One geologist made himself famous by, in 1901, listing various reasons why the Spindletop discovery would not pan out.
An examination of other industries would surely find similar results: biotech companies that just burn up capital, software firms that never deliver, automobile companies that produce rosy sales forecasts. And in every case, there would be those who would see the problems. But it is all too easy to be carried away by a good theory and cherry-pick the data: look only at under-producing wells, ignore optimistic emails, and so forth. This is especially likely to occur if the skeptics are doing the reporting.
And no doubt, there are problem wells and companies that over-invested during the peak of the boom, but there is no evidence of widespread financial troubles. Unfortunately, the Times article provides little information about how widespread the concerns are within the industry.
What about the claimed lack of profitability for most wells? First and foremost, many of these wells were actually drilled when the price of natural gas was $8/Mcf, and revenue expectations much higher accordingly. For wells drilled then to be marginally profitable at half the price expected is actually a bit remarkable, not suggestive of
The other factor is that this is an evolving ‘technology’. The industry is still experimenting with the right mix of fracturing, chemicals used, and so forth, especially in the newer plays as they come to understand the geology and the best ways to produce from it. There has been enormous improvement in well productivity as the industry in the Marcellus over time. Similar examples abound, although no one has yet put together a complete quantitative analysis.
Invoking the Shell Scandal (2004) and Enron Collapse (2001)
In today’s follow-up, the Times mentions the Shell reserve scandal of 2004, quoting (with a picture) a Shell executive saying he “was tired of the lying” and implying that this is occurring again with the shale gas industry.
The point being raised—the possible overstatement of reserves—is an important one. But the connection with the Shell case is non-existent. And recall that during the Shell case, it was claimed by numerous analysts (mostly in the peak-oil community), that similar scandals would sweep the industry. That simply did not happen.
There are three possibilities to justify the journalism in question:
1) The industry has not sufficiently acknowledged uncertainty about production trends and recoverable
reserves, and relied on forecasting methods that are not adequately tested and may prove optimistic;
2) The industry is being assailed yet again by gadflies, and the occasional pessimist within the industry are being used in support of them; or
3) The industry is knowingly engaged in fraud.
The fact that Enron engaged in fraud and was in Houston, or that Shell had a scandal involving over-stated reserves tells us nothing. If the reporter had decided to do an optimistic story, he could have discussed great breakthroughs or fantastic discoveries instead, and quoted effusive emails about the prospects of shale gas.
What we do not see are any numbers that show what percentage of wells is experiencing continuously declining production, how many leases did not pay off, or companies where the capital outflow is exceeding the revenue.
That natural gas production has been soaring despite the strong cutback in drilling is suggestive that this is another gas of neo-Malthusian bias–or just wishful thinking by those looking for a rationale to dumb down our energy mix.
Still, the concerns cannot be dismissed without better analysis of data. If the models being used to estimate recoverable reserves are flawed, and the entire industry is making the same mistakes, then there could be a big problem down the road with reserve restatements, lower than expected production, and higher prices.
But there seems a lot more evidence that this was just a poorly done piece of work.