Is Natural Gas Just a Bubble?

Halstead Harrison

“Shale Gas: A View from the Bottom of the Resource Pyramid”
A lecture at UW, by Arthur E. Berman, Director of Labyrinth
Consulting Services, Inc. and the Association for the Study of
Peak Oil & Gas USA.
May 16th, 2011   Reviewed by Halstead Harrison.

Arthur Berman works in an interesting crevice between the Oil
and Gas industries, and academics.  He earns his keep by studies
paid by the former, bringing to them intelligent critiques from
the latter.  Briefly, he asserts recent euphoria about large
reserves of natural gas .. “enough for a hundred years” .. to be
greatly exaggerated [Would you believe 22 years?] and that the
industry is experiencing a classic economic bubble, very like
the recent disaster in our housing market.

I append his abstract below.

The timing and context of Berman’s talk is especially
interesting owing to recent and very similar essays on Peak Oil,
Peak Coal: now we have Peak Gas as well.  All combine to
envision a present .. or very soon .. shift in carbon-based
energy pricing from demand- to supply-limited.  In the former
mode real prices vacillate with varying demand, but trend toward
cheaper: if demand increases it’s cheap to pump more oil or
strip more coal to supply that demand profitably at current
prices.  In the latter mode increased demand is not met by
increased supply, and prices rise as costs rise also to extract
harder-to-access reserves.

Berman convincingly argues that natural gas supplies and pricing
will very soon enter ‘mode two’.

One aspect of his talk especially intrigues: Berman asserts that
only a small fraction [~5%] of recent, presently producing,
high-technology gas wells in Texas and Louisiana operate
profitably at present prices [~4 $/thousand cubic ft], with
break-even market prices for the remaining 95% near 7 $/tcf [!].
This is made possible by something close to housing-bubble
economics: high and unrealistic estimates of extractable
production ‘justify’ loans to drill marginal wells, which
reflect into currently rising stock-market prices, while
declining production is strongly diagnostic of Peak Gas.

Berman confirms this dystrophy by comparing the industry hype
with 10-K Sarbanes-Oxely tax filings [which Chief Executive
Officers must sign with potential penalties for fraud], and with
a recently accelerating trend for the lesser players to sell out
to the larger, especially to Exxon Mobil and Chevron, who are
betting on dramatic price increases and who have the capital to
wait for them.

Meanwhile, the lending banks securitize their junk-loan
portfolios and market derivatives to greater fools.
Sound familiar?


Here is Berman’s Abstract:

The widespread belief that shale gas will provide a cheap and
abundant supply of natural gas, while operators make a sizeable
profit, must be questioned based on results to date.

Shale gas, like tight-sandstone gas, coal-bed methane and oil
sands, is at the bottom of the resource pyramid and, therefore,
while resource volumes are large, costs are high and recovery
efficiency is low.  Based on several decades of experience with
other low-permeability reservoirs, the expectation that shale
gas plays will realize significantly higher profit margins seems
unlikely, and empirical results to date from longer-lived shale
plays supports this observation.  Evaluation of the Barnett,
Fayetteville and Haynesville shale plays suggests that company
claims of reserves are over-stated by as much as 100 percent.
This is largely because low decline-rate hyperbolic models are
not supported by empirical production history data.

Relatively long-lived production histories in the Barnett and
Fayetteville shales suggest weakly hyperbolic declines matched
with b-exponents that generally average less than 0.5 and rarely
exceed 0.75.  Operator claims of profitability at less than
$5.00 per thousand cubic feet of gas, therefore, must be

These industry forecasts are based largely on point-forward
economics and are at odds with costs reported to the Securities
and Exchange Commission in 10-K filings. In fact, less than 10
percent of Barnett Shale wells have recovered break-even costs
after eight years of horizontal drilling and modern fracture

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