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Always read the "fine print"; the shale-gas bonanza (AEO 2011)

John Steelman

Posted December 21, 2010

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Last week the U.S. Energy Information Agency (EIA) released its annual forecast for all things related to domestic energy markets.  It was really an “early release” that should be followed in a few months by the full report, Annual Energy Outlook 2011.  The smashing headline for this year’s report, as reported by Bloomberg, is that “Shale-Gas Output May Double by 2035”.  Wow, that is big news!  Isn’t it?

It might be if all you read is EIA projections—not that they don’t make for fine reading, of course.  You would have to be living under a rock in a remote location not to know that there has been optimism in the air regarding U.S. natural gas supplies, largely due to the growth of gas produced from shale formations.  This optimism is reflected in energy markets where the price of natural gas has droped to under $5 per thousand cubic feet (MCF)—half of where it was earlier this decade—and it is expected to remain in that range for the next few years, even as the economy expands coming out of the recession.  EIA now projects natural gas to stay under $6/MCF for the next 10-15 years. 

So how did the projected supplies of shale gas double in only one year?  This is geology after all, not computer science.  And by that I mean no slight to geologists.  It’s just that geology is a very mature science and big surprises are very rare.  Geologists have known about shale formations for decades and oil companies have been developing innovative ways to tap these shale reserves for both gas and oil for more than a decade now.  What changed from last year to this year was the addition of the theoretical potential of the largest of these formations, the Marcellus Shale, to the EIA’s resource base.  The Marcellus Shale is enormous and underlies five states in the Midwest and Northeast. 

As a result, the EIA increased its estimate for “technically recoverable unproved shale gas resources” from 347 trillion cubic feet to 827 trillion cubic feet.  This is indeed a big number, but again, that’s geology for you.  The world of “technically recoverable unproved resources” is usually huge, at least when you are referring to fossil fuels.  What is actually producible—a.k.a. “proven reserves”—is always a lot less that what is “technically recoverable”.  Proven natural gas reserves—what is “reasonably recoverable under existing economic and operating conditions”—are typically about 10% of the technical potential, and it may be even less for shale gas reserves.

The fine print

The National Mining Association, which represents the coal industry and is notorious for spinning up the potential of coal reserves, ironically was quick to point out the “fine print” in the report.  Fine print that reads like a warning in a medicine ad, “side effects may include shortness of breath, headaches and blurry vision...”:

“There is considerable uncertainty about the amounts of recoverable shale gas in both developed and undeveloped areas. Well characteristics and productivity vary widely not only across different plays but within individual plays. Initial production rates can vary by as much as a factor of 10 across a formation, and the productivity of adjacent gas wells can vary by as much as a factor of 2 or 3. Many shale formations, such as the Marcellus Shale, are so large that only a small portion of the entire formation has been intensively production-tested. Environmental considerations, particularly in the area of water usage, lend additional uncertainty. Although significant updates have been made to the estimates of undiscovered shale gas resources in newer areas, most of the resulting additions are not economically recoverable at AEO2011 prices and have little, if any, impact on the projection.”

That’s quite a caveat.  Some experts, such as Arthur Berman, a petroleum geologist and former contributing editor for World Oil magazine, argue (here) that experience to date with shale-gas development already shows that the potential will be more limited than projected. 

The EIA report furthermore barely touches on the “environmental considerations,” which include potentially serious impacts from poorly regulated “frac’ing” of these shale formations with a high pressure mixture of water and chemicals—a practice that has been implicated in contamination of drinking water supplies and can otherwise impact local communities, as my colleague Amy Mall has discussed (here).  And efforts to develop the Marcellus Shale raise additional concerns in communities where gas development is a new, landscape-altering intrusion.

I’m not saying that greater supplies of natural gas are a bad thing, necessarily.  Natural gas is a much cleaner burning fuel than coal and oil, which emit a host of toxic chemicals, dangerous soot particles, and as much as double the carbon pollution when burned.   Lower natural gas prices are leading many electric utilities to turn away from building new coal plants and even rebuild old ones to run on natural gas, which should be good for local and regional air quality.  But, as with any natural resource, we need to take every precaution to make sure that we develop these gas supplies in a way that protects our communities rather than putting them at risk.  Those safeguards are certainly not in place now.  All fossil fuel extraction, refining and combustion have impacts that can pose serious risks, which is why we need to develop energy efficiency and renewable energy sources first and foremost.  Energy efficiency and renewables are also the best way to reduce carbon pollution and keep natural gas prices low by keeping demand low, which will also help limit how much and fast we develop new reserves.

So make sure you read the fine print along with the hype, because you are going to hear a lot of it in the months ahead, especially hype from the oil and gas industry complaining that the U.S. can’t afford to regulate practices like hydraulic frac’ing.  Don’t buy it.  We’re always better off with effective regulations for inherently risky endeavors, like oil and gas drilling.  Not to mention, lower gas prices mean we can afford to do things right, not the other way around.

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