I’m a skeptic, and for good reason.
After years of reporting and writing about the oil, gas and power generation markets, I’ve learned that long-term forecasts on pricing and supply almost never come to pass. Predicting the price of oil or gas is like playing golf on a putting green covered in ice. Your line could be perfectly straight, but you’ll miss the target most of the time.
To get a better gauge on pricing and supply, you must read between the lines and consider the real-world forces so often ignored by forecasts from the Energy Information Administration and the prejudicial energy companies bent on bolstering their own stock prices.
When the EIA tells us we have a 100-year supply of cheap natural gas and the mainstream press and politicians start treating it like gospel, it should be a sign to jump off the bandwagon and start digging deeper. It reminds me of the company that booked billions in false profits based on long-term contracts. The company’s stock price soared, but investors ultimately lost billions. What was the name of that company? Oh, Enron.
Most have blindly embraced the EIA’s lavish estimates on the recoverable supply of shale gas in the U.S.
The mainstream media, environmental groups, self-promoting energy companies and enterprising consultants have wittingly or unwittingly promoted the EIA’s conclusion that natural gas will be cheap and abundant for decades to come.
A few people immediately questioned the EIA’s generous projections and have unearthed what I think is the truth about this nation’s supply of shale gas.
Bill Powers’ new book, “Cold, Hungry and in the Dark: Exploding the Natural Gas Supply Myth,” claims the estimates from the EIA are overstated and over-hyped. He uses hard evidence to show that the production life of shale gas wells will fall well short of the EIA’s expectations. They already have. Shale gas production in the Barnett, Fayetteville, Haynesville and Woodford shale plays is well below EIA’s estimates, Powers said in an interview with The Energy Report.
“As these shale plays reverse direction and the Marcellus Shale slows down its production growth, overall U.S. production will fall,” Powers said.
Politicians, analysts and policymakers often point to the nation’s 100-year supply of natural gas to advance their own interests. Geological consultant Arthur Berman, who writes the foreword in Powers’ book, says the U.S. has enough gas for 22 years, less than a quarter of the 100-year supply projected by the EIA .
Canadian researcher David Hughes is another skeptic who believes the oil and gas industry has grossly overstated the potential of shale gas reserves. Speaking to attendees at COAL-GEN 2012, Hughes said meeting the EIA’s projections for gas production will be very difficult, if not impossible, to achieve.
“Almost all of the eggs are in the shale gas basket as a hope of meeting supply growth projections for gas,” Hughes said. “There are very significant geological, environmental and economic challenges in continuing to grow shale gas supplies. I expect significantly higher gas prices going forward over the short to medium term.”
Hughes, president of Global Sustainability Research and former research manager for the Geological Survey of Canada, said the EIA underestimated the number of new wells required to meet its production estimates.
“I think they’re going to have to do a lot more drilling to keep production rising,” Hughes said. “Shale gas wells are more productive than the average gas well, but they decline more quickly.”
Powers, Hughes and others, including myself, believe the stage is set for much higher gas prices.
The natural gas market remains volatile because of the way the commodity is traded. The growth of speculative hedge funds, energy traders and automatic trades can cause a lot of volatility. More traders, with no official connection to the producer or consumer, are buying gas and immediately selling it at a profit. A large number of gas transactions are made by outfits that have no interest in taking possession of natural gas.
The power sector is becoming increasingly reliant on natural gas to generate electricity. There’s nothing wrong with that. The use of this nation’s large supply of shale gas will lead to fewer emissions, better efficiency and more diversity.
The problem is, we have a policy that prevents the industry from preparing for the day when gas prices spike and supplies shrink. Building a low-cost, low emission and highly efficient coal-fired plant is no longer an option in the U.S. under new federal rules proposed by the Environmental Protection Agency.
Removing that option will one day endanger the affordability and reliability of electricity in the U.S.