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No, not a 100 years' supply of gas [ClearOnMoney]
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No, not a 100 years' supply of gas

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Commentary

No, not a 100 years' supply of gas

9 Mar 2010 by Jim Fickett

Journalists have latched onto the idea that the US has a “100 years' supply of natural gas”. You never know. But that is not what the current evidence indicates. First, the supposed supply includes gas whose existence has not been verified, as well as deposits that may be uneconomical to develop. Second, the 100 years figure assumes that usage does not increase – a most unlikely scenario.

Yesterday even the Financial Times fell into an oft-repeated error:

Recent advances have led analysts to triple estimates of US reserves of shale gas to 100 years' supply

The 100 years figure comes, of course, from the estimate published last summer by the Natural Gas Committee (US natural gas reserves). Their estimate of 1836 trillion cubic feet of “technically recoverable resources” covers all types of gas, all deposits including those not yet discovered, and may well include deposits that are not economically feasible to develop (definitions of “technically recoverable” differ from one analysis to another, but do not, by definition, include economic considerations). So, first big error, it is quite possible that this number is significantly higher than what can actually be developed, or even what exists.

The second big error is in a hidden assumption about level of production. The “100 years' supply” comes about by adding proved reserves from the US Geological Survey to the technically recoverable resources from the Natural Gas Committee, and dividing by the current level of production. But of course if gas is plentiful production will increase, and the time will shorten.

Just to illustrate, let's suppose that

  • T Boone Pickens has his way and, say, on average half of road transport in the US runs on natural gas over the next few decades
  • the amount of natural gas used for electricity generation is, on average, double the current amount, over the next few decades

According to the DOE Transportation Energy Databook, total US highway transportation use 13.7m barrels of oil per day, or 5.0 billion barrels/year. This is 679 million tons of oil per year, thermally equivalent to 26.6 trillion cubic feet (Tcf) of gas per year. Even assuming total transport fails to grow, this adds 13.3 Tcf/year to current usage of 20.5 Tcf/year, for a running total of 33.8 Tcf/year.

Electrical generation in the US uses about 5 Tcf/year. Doubling that adds 5 Tcf/year to total demand, bringing it to 38.8 Tcf/year.

At this rate of usage, 1836 Tcf of technically recoverable resources (should they all turn out to exist and be economically recoverable), plus 240 Tcf of proved reserves, would last 54 years.

I am not trying to make a prediction about how long the natural gas will last. The point is just that (1) we really do not know whether the “technically recoverable resources” of the Natural Gas Committee even exist, much less whether they are all economically recoverable, and (2) under perfectly possible scenarios, even if all the gas exists and is recovered, it could last more like 50 than 100 years.

Don't be surprised if the “100 years' supply of natural gas” fiction leads to senseless policies from Washington (think corn ethanol). But keep in mind that gas may not be as plentiful as some think.

Price volatility is the friend of the long-term investor.

(See also An earlier post on the unconventional gas revolution.)