Monday, June 27, 2011

Shale Gas Reserve Projections and Price Forecasts

The New York Times has published several important articles questioning industry estimates of the amount of natural gas reserves in shale deposits. The first article, accompanied by extensive documentation, offers evidence that the industry has overestimated the size and productivity of shale gas reserves. Another article describes how a change in a rule promulgated by the Securities and Exchange Commission allows natural gas companies to use modeling techniques to claim larger reserves without disclosing their methods.

Today the Times reports that optimistic estimates of natural gas reserves could be affecting government energy projections:
In its annual forecasting reports, the United States Energy Information Administration, a division of the Energy Department, has steadily increased its estimates of domestic supplies of natural gas, and investors and the oil and gas industry have repeated them widely to make their case about a prosperous future.
But not everyone in the Energy Information Administration agrees. In scores of internal e-mails and documents, officials within the Energy Information Administration, or E.I.A., voice skepticism about the shale gas industry.
EIA projections are used to guide policy and planning in government and industry. If shale gas projections are too optimistic, then natural gas price projections will turn out to be too rosy as well. The EIA, in its Annual Energy Outlook 2011, estimates shale gas extraction to grow fourfold over the next 25 years, based on an estimate of 827 trillion cubic feet of technically recoverable reserves.

Natural gas price projections, which have dropped sharply specifically due to higher estimates of the supply, are used to calculate the estimated cost premiums of renewable energy. If the long term projection of natural gas prices goes down, then wind and solar power look more expensive by comparison. The EIA's projects that its most conservative shale gas recovery estimate would result in prices 30 percent higher than its reference case.

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