by Geoffrey Styles, Managing Director of GSW Strategy Group
Two independent organizations, Standard and Poor’s and ITG Investment Research, recently issued reports suggesting that current government estimates of the natural gas resources in the Marcellus shale are significantly understated. The differences among estimates are startling, with ITG assigning resources of 330 trillion cubic feet (TCF) of natural gas equivalent to the Marcellus, in contrast to the latest estimate of just 141 TCF from the Energy Information Agency (EIA) of the US Department of Energy. Standard & Poor’s reportedly concluded that the Marcellus could provide “almost half of the current proved natural gas reserves in the U.S.”–which I take to imply up to 300 TCF of dry gas. It’s important to understand why these figures could vary so much, and it’s equally important to consider what they might mean for other shale basins and for the future development of the US natural gas market.
Two factors stand out when comparing the Marcellus to other gas fields: its relative youth and its enormous extent. The first Marcellus well was only drilled in 2003, into a formation underlying roughly 95,000 square miles of the Appalachian Basin of the eastern US. That is more than 10 times larger than the Hugoton gas area of Kansas, Oklahoma and Texas. Discovered in 1922, the Hugoton fields were long considered the largest gas accumulation in the country, with an estimated ultimate recovery of 75 TCF. They are still producing, though at declining rates. Hugoton, which is also the source of most of the world’s supply of helium gas, has 12,000 wells, versus around half that figure for the Pennsylvania portion of the Marcellus, as of May 2012. Because so much of the Marcellus remains essentially untouched, with most of its producing wells still early in their lives, anyone estimating its recoverable resources must make numerous assumptions about well productivity, productive life, and how the resources will be developed over time. Changes in the actual results from a relatively small number of wells can have a big impact on such estimates at this stage of development.
This can be seen in the progression of Marcellus estimates. In 2002 the US Geological Survey projected mean resources of just 2 TCF, which they revised in 2011 to 84 TCF and 3.4 billion barrels of gas liquids, yielding an effective total of just over 100 TCF of gas equivalent. Meanwhile, EIA included an estimate of 410 TCF in its 2011 Annual Energy Outlook, but then revised that to 141 TCF in its 2012 Energy Outlook. That decline of 66% made headlines and was viewed by many critics of shale gas development as signaling that shale resources were not as significant as previously thought, and perhaps indicative of a “bubble.”
Following the bouncing ball of Marcellus resource estimates no doubt creates uncertainty about the scale of this and other shale deposits. However, no matter which Marcellus number one chooses among the recent estimates, the resource looks enormous. Even the USGS figure of 84 TCF is equivalent to over 14 billion barrels of oil, or half-again the original estimate for Alaska’s Prudhoe Bay field, which was a game-changer in global oil markets in the 1980s. That means there’s enough gas to sustain higher production volumes than today’s for decades–up to 5 billion cubic feet per day (22% of US dry gas production in 2011) for perhaps 40 years or more. And those resources are likely to grow over time, as more of the Marcellus is accessed and evaluated. That’s been typical of large oil and gas fields such as the Hugoton, and I would expect to see a similar trend with the big gas and liquids shale plays, including the Eagle Ford and Niobrara, after the initial volatility of estimates settles down.
If the production from the Marcellus and other shale gas deposits were just a case of a big straw draining a small glass, the US would soon be back in the same situation as it was in the first half of the last decade, relying on imported liquefied natural gas (LNG) for a growing share of its gas supply. Under such a scenario, it would make little sense to build new infrastructure to transport this gas to distant markets. It also wouldn’t make sense to invest in new, gas-intensive manufacturing in petrochemicals and other industries. And it certainly wouldn’t be prudent to undertake the even more complex transformation of part of our transportation system to use natural gas instead of petroleum products. Yet we’re starting to see all of these things, including a new ethylene complex in the former rust belt of Pennsylvania, the conversion of a Gulf Coast LNG import terminal to a liquefaction and export plant, and the beginnings of a compressed natural gas (CNG) refueling network for heavy trucks. Together with estimates of the low cost of Marcellus production from the Standard & Poor’s and ITG reports, these developments validate the potential of a resource that energy economist Philip Verleger suggests could make the US “the low-cost industrialized country for energy.”