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After USGS Analysis, EIA Cuts Estimates of Marcellus Shale Gas Reserves by 80%

The U.S. Geological Survey released its estimates for natural gas reserves in the Marcellus Shale formation this week, concluding that earlier estimates were significantly inflated.

According to the USGS, there are about 84 trillion cubic feet of technically-recoverable natural gas under the Marcellus Shale, a massive sedimentary rock formation below eight East Coast states. Previous estimates from the Energy Information Administration put the figures at 410 trillion cubic feet.

In calling the USGS “the experts,” the EIA says the new figures are the most accurate. The agency has now cut its earlier estimates by 80%.

You might think the industry would be lamenting these downgraded figures. Actually, they’re celebrating them. In 2002, before new drilling methods were in place to more cost-effectively access shale gas, USGS estimates of recoverable gas were far lower than the current figures:

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These gas estimates are significantly more than the last USGS assessment of the Marcellus Shale in the Appalachian Basin in 2002, which estimated a mean of about 2 trillion cubic feet of gas (TCF) and 0.01 billion barrels of natural gas liquids.

These new estimates are for technically recoverable oil and gas resources, which are those quantities of oil and gas producible using currently available technology and industry practices, regardless of economic or accessibility considerations. As such, these estimates include resources beneath both onshore and offshore areas (such as Lake Erie) and beneath areas where accessibility may be limited by policy and regulations imposed by land managers and regulatory agencies. Federal geologists published new estimates this week for the amount of natural gas that exists in a giant rock formation known as the Marcellus Shale, which stretches from New York to Virginia.

But while we appear to be narrowing in more realistic figures, the inconsistencies in shale gas reserve estimates among industry, federal agencies and state agencies is of concern. The New York Times had a piece Wednesday on the differences in analysis:

In April 2010, the Energy Information Administration revised its methodology for estimating natural gas production. Despite the change, some energy analysts say that in Texas significant discrepancies remain between the federal numbers and estimates produced by state regulators. Some energy analysts have also faulted regulators in Pennsylvania, which is the only gas-producing state to publish oil and gas production data every six months rather than providing it monthly. This practice, according to the energy analysts, limits the ability to accurately assess well performance and provide more exact long-term estimates for how much gas that part of the shale formation can actually produce over time.

Some analysts have been very critical of industry estimates and projected decline rates, saying the amount of economically recoverable gas is far lower than what companies are claiming. In June, the Times released a large number of emails between industry analysts that suggest the industry is vastly overstating reserves:

“The word in the world of independents is that the shale plays are just giant Ponzi schemes and the economics just do not work,” an analyst from IHS Drilling Data, an energy research company, wrote in an e-mail on Aug. 28, 2009.

Deborah Rogers, a member of the advisory committee of the Federal Reserve Bank of Dallas, recalled saying that in a May 2010 telephone call to a senior economist at the Reserve, Mine K. Yucel. “We need to take a close look at this right away,” she added.

A former stockbroker with Merrill Lynch, Ms. Rogers said she started studying well data from shale companies in October 2009 after attending a speech by the chief executive of Chesapeake, Aubrey K. McClendon. The math was not adding up, Ms. Rogers said. Her research showed that wells were petering out faster than expected.

“These wells are depleting so quickly that the operators are in an expensive game of ‘catch-up,’ ” Ms. Rogers wrote in an e-mail on Nov. 17, 2009, to a petroleum geologist in Houston, who wrote back that he agreed.

With numerous state and federal agencies looking at this issue, the estimates are likely to get more accurate. But there’s one big caveat to the USGS figures: they are for technically-recoverable resources, not economically-recoverable resources. The amount of gas that can be competitively recovered will depend largely on gas prices and decline rates at existing fields — two very big unknowns.