A Contrarian on Shale Gas
Originally published November-December 2012
The Marcellus Shale gas play in Pennsylvania does not yet show evidence of peaking, said Berman.
If you’re looking for someone to spout the party line on the availability and cost of shale gas, you need to ask someone other than Art Berman. Berman is a petroleum geologist and consultant to the energy sector and president and CEO of Labyrinth Consulting Services, in Sugar Land, Texas.
Art Berman is a
to the energy sector.
He is also a member of the editorial board of The Oil Drum, associate editor of the AAPG Bulletin (American Association of Petroleum Geologists), and director of the Association for the Study of Peak Oil & Gas USA. He has appeared on CNBC and CNN, and in Platt’s Energy Week, Financial Times, and The New York Times.
Prior to starting his own business 13 years ago, Berman worked for 20 years for Amoco Corp. (now BP p.l.c.). Last June, he spoke on a panel about the future of natural gas supplies and prices at the 2012 American Public Power Association National Conference in Seattle. The session was titled “Will Natural Gas Be There When We Need It (and at What Price)?”
Berman’s main message: Shale gas is an economic loser. He makes it clear that he does not wish “shale plays” to go away, he is not against them, and he does not dispute their importance. What he does suggest, though, is that they have yet to demonstrate any sustainable value.
Shale Gas Supply—Shale gas is a relatively new and important contribution to the North American supply. However, its availability does not represent anywhere near the magnitude that is commonly discussed and cited in the press, Berman said. He is familiar with the estimates that the United States has 100 years’ worth of secure gas production. But people misunderstand the difference between a “resource” and “reserve,” he said. Resource is what actually exists. Reserve is what can actually be commercially extracted. “A resource is everything that is in the ground without consideration of economic value,” he said. “People look at shale gas resources and say they are immense. However, the next question is, of that total volume of resource, how much can you make money on? And the answer is a much smaller percentage.”
In other words, by focusing on shale gas resources, people assume that reserves are much higher than they actually are. Reserves have been substantially overstated, he said.
Berman’s math: If you divide the “technically recoverable resource” of about 1,900 Tcf (trillion cubic feet) of gas, as identified by the Potential Gas Committee’s (PGC’s) report by annual U.S. consumption, you come up with 90 years. However, the PGC’s report also says the “probable recoverable resource” is only about 550 Tcf—approximately one fourth of the “technically recoverable resource.”
Furthermore, if you divide the 550 Tcf “probable recoverable resource” by three, which represents the component of the resource that is actually provided by shale gas, you get about 180 Tcf. (The remaining 370 Tcf includes conventional reservoirs plus non-shale/non-coalbed-methane unconventional reservoirs.)
The result: There is about eight years’ worth of shale gas supply available in the United States, he said.
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. This conflicts with the popular comment that most wells can last 40 years or longer. Other wells are producing less than one million cubic feet per month. At today’s gas prices, this does not even cover lease and operating expenses, he said.
Core Areas—With tight economics, shale gas plays need to focus on desirable core areas—the “sweet spots” for production and economics. But the natural gas industry has been inefficient in identifying these lucrative areas, Berman said. Drilling 12,000 wells in search of the core area is inefficient, he said. The industry would be more successful if it relied on “old school geology work.” The first step is to create a really good structure map. Other tools are well logs and seismic geophysics.
Even the most well-known shale gas plays (such as the Haynesville, the Barnett, and the Fayetteville) all end up contracting to core areas that have the potential to be commercial of about 10 to 20 percent of the total geographic area of the play. So, if you take a resource size that is advertised as 250 Tcf and then focus on the core area, it is likely to be between 25 and 50 Tcf.
Some large producers are getting more involved in shale oil plays and are using good science, but many smaller players continue to “drill and hope for the best,” he said.
Foggy economics—When someone claims to be making a good profit when gas is $3.50/mcf, Berman wants to know what costs the prospector is excluding. A lot of shale gas producers publicize “foggy economics,” he said. For example, some producers publicly claim they can make a profit when gas is $4/mcf. However, information in their required financial filings may reveal that their costs are closer to $7/mcf. The difference between the two numbers is the failure to include the cost of leasing and other expenditures directly related to their shale gas operations, he said. According to Berman’s estimates, when gas falls below $5/mcf, production tends to flatten out, because companies cannot make a profit.
Supply and cost interactions—Berman has found that a lot of companies are booking reserves that may never be developed unless gas moves to a much higher price level. They are doing so because they believe the price will increase. For the sake of the producers, Berman hopes they are right. “However, so much of the reserve levels are based on assumptions about price,” he said. “As far as I am concerned, though, about 50 percent of undeveloped reserves are fictional. So, if producers believe the price is going to increase, then that’s a good thing for them.”
About 80 percent of existing U.S. shale gas plays are already approaching peak production, Berman said. The two major plays that do not yet show evidence of peaking are the two newer ones—the Marcellus Shale in Pennsylvania and the Haynesville Shale in Louisiana. However, Haynesville may be reaching a production plateau. In addition, Haynesville is among the least economic of the shale plays, requiring gas prices about $7/mcf to sustain new drilling and nearly $9/mcf after accounting for leasing and other costs.
In sum, Berman believes that shale gas is a growing “bubble.” The bubble can continue for years, he points out, but it is still a bubble that will eventually burst. Exacerbating the problem is the shift in activity away from conventional gas, which accounts for 70% of our total supply. Drilling for shale gas needs to continue at a significant pace just to make up for the decline in production from conventional gas wells, because unconventional wells have much steeper production decline rates and are, therefore, shorter-lived than conventional gas wells.
Another challenge in the United States relates to environmental regulations. There is a lot of backlash over hydraulic fracturing, water use, and water disposal. “I don’t think environmental regulations will get any easier,” he said. “This is especially true as the issue of fracking continues to grow.”
Berman believes virtually no one in the current administration in Washington understands much, if anything, about the oil and gas business. He sees the situation as “a bunch of amateurs dealing with something that needs a bunch of professionals.” He does not expect this to change. “I don’t think that the administration or the Congress have a good understanding of energy in general,” he said. “They have an understandable need to get re-elected, and that is their primary concern. Frankly, I would like to hear from a lot more government representatives, because they need the information.”
However, he does not expect that to happen.
Certainly, it seems that Berman is a voice in the wilderness when it comes to shale gas. However, in a two-part interview in “Energy Bulletin” (July 2010), he noted that, “I have a large community of supporters with impeccable credentials.”
In addition, he reports that he has had an open challenge to the industry for five years to challenge his analysis. “So far, I have had no takers,” he said.
“In the future, I think utilities will end up having to pay more for natural gas,” he said. “The marginal cost of production of natural gas is higher than most companies want to admit. This is a cost that the consumer is going to have to pay in the long run.”
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