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ANALYSIS: Reserves – or the total amount of crude oil and/or natural gas that an energy producer can extract from its assets – is the primary measure of not only how much a given energy company is worth, but also how much supply exists in any given region of the world.
The calculation comes from Jan Arps, a British petroleum engineer who passed away in 1976, more than three decades after devising what eventually became
known as the Arps Method. Trouble is that method was designed specifically to apply to conventional oil wells, where a drill is sent straight down through
several layers of rock to a reservoir below.
Shale-based resources are extracted using a dramatically different process whereby drilling is only partially straight down, then goes horizontal and continues to cut through hundreds of metres of the same rock drillers once passed right through. That rock is then fractured (or “fracked” as the process has become known) to allow oil and gas particles to escape.
The first shale well to be commercially viable was drilled in 2004, 28 years after Arps passed, yet it was his method that was used to calculate how much oil that well would produce and when it would run dry. Now, a full decade later as lawmakers across North America praise shale gale as the harbinger of continental energy independence, some scientists are starting to cry foul.
“We have deceived ourselves into thinking that since we have an infinite resource, we don’t need to worry,” Tad Patzek, chair of the Petroleum and Geosystems Engineering Department at the University of Texas at Austin, told Bloomberg recently. “We are stumbling like blind people into a future which is not as pretty as we think.”
Alarm bells have in fact been ringing for some time now and in all the places you might expect to hear them.
“Instead of having a 100-year supply of natural gas, a large portion of this coming from shale, the U.S. is likely going to be faced with a deliverability crisis over the next few years,” warned Bill Powers, independent analyst and author of Cold Hungry and In the Dark, in comments made to BNN commodities guru Andrew Bell nearly three months ago. “Demand is continuing to rise and supplies are flattening and may start to decline in 2014.”
“Many of [the U.S. government] projections [for growing shale gas production] are not based on any empirical fact whatsoever,” said Powers.
There is no shortage of new models out there intended to more accurately measure shale-based reserves but they are about as real-world tested as their names: Stretched Exponential and Simple Scaling Theory being among the more popular titles (which might be more at home on the sign-up board of a local Battle of the Bands).
THE RISK TO CANADA
That spells trouble not only for policymakers banking on a rapidly approaching end to a decades-long reliance on foreign energy imports, but for Canada’s hopes of building a multibillion-dollar liquefied natural gas (LNG) export industry. Hopes for a vibrant LNG export industry are based largely in the Montney, an area roughly the size of New Brunswick that spans northern British Columbia and Alberta.
The Montney has been explored since the 1950s but because virtually all its resources are shale based, the necessary technology to drill there did not exist until half a century later. According to data from Canada’s National Energy Board, production began in 2005 and soared to over 2.5 billion cubic feet per day by the end of 2013.
regulatory bodies estimate
the Montney contains 12.7 trillion cubic metres of marketable natural gas resources, enough to sustain production at current levels for close to 500 years. Of
course, that assumes Montney reserves were accurately calculated.
Plenty of reputable engineers, scientists and analysts will say they are actually far lower. And in the meantime, the NEB has already issued seven licenses to export up to 16.77 billion cubic feet of natural gas daily from Canada’s west coast, regardless of whether the gas will still be there by the time those costly LNG plants are built.
Jameson Berkow is BNN's western bureau chief based out of Calgary. Every weekday morning he researches the top stories affecting commodities and the oil patch, and sends his analysis to the BNN newsroom in Toronto. You can follow him on twitter @crudereporter