Drilling Deeper: A Reality Check on U.S. Government Forecasts for a Lasting Tight Oil & Shale Gas Boom

FOR RELEASE OCTOBER 27, 2014

Flawed Energy Department forecast misleads country, Congress on U.S. oil and natural gas

Report from independent analyst who predicted vast Monterey Shale downgrade questions optimistic outlook

A worrisome reliance on the industry’s point of view

A new report from the analyst who predicted the vast downgrade of available oil resources in California’s Monterey Shale* calls into question optimistic government forecasts and industry claims about U.S. energy independence and the viability of oil and natural gas exports. Using an exhaustive well-by-well survey of major tight oil and shale gas fields, the report shows that the U.S. Department of Energy (DOE) has produced exaggerated forecasts that are misleading policymakers and the public about America’s long-term energy future.

“The Department of Energy’s forecasts—the ones everyone is relying on to guide our energy policy and planning—are overly optimistic based on what the actual well data are telling us,” the report’s author said in a written statement. David Hughes, a geoscientist who assessed energy resources for 32 years at the Geological Survey of Canada and is now an independent researcher and consultant, produced the report entitled “Drilling Deeper: A Reality Check on U.S. Government Forecasts for a Lasting Tight Oil & Shale Gas Boom.” The 302-page report was prepared for the California-based Post Carbon Institute (PCI).

“By asking the right questions,” Hughes said, “you soon realize that if the future of U.S. oil and natural gas production depends on resources in the country’s deep shale deposits, as the Energy Department contends, we are in for a big disappointment in the longer term.”

Based on well data from one of the oil and gas industry’s most widely used data providers, Hughes concluded, “Oil production from the Bakken and Eagle Ford plays, which constitute nearly two-thirds of U.S. tight oil production, will likely peak sometime this decade—a little earlier than the DOE projects—and then drop to a fraction of today’s totals by 2040, far below the projections of the U.S. Energy Information Administration, the statistical arm of the DOE. Meeting DOE’s reference case forecast for tight oil production by 2040 is highly unlikely, barring the discovery and exploitation of as yet unknown additional plays on the scale of the Bakken or Eagle Ford over this period.”

Regarding shale gas, Hughes said in his statement: “Although shale gas production will rise in the short term, until the 2020 timeframe, the DOE’s assumption that growth will continue to levels more than 100 percent higher than today by 2040 is not supported by the data. An analysis of seven major shale gas plays comprising 88 percent of DOE’s forecast production through 2040 suggests production rates will be about one-third of the DOE’s forecast in 2040 for these plays, and that production from these plays will peak as early as 2016.”

He added, “Several of the major shale gas fields have already peaked and will require significantly higher prices to slow or temporarily reverse declines. Production from the Marcellus Shale, along with associated gas production from the Eagle Ford and Bakken tight oil plays, appears to be supporting overall U.S. natural gas production with strong growth. But, four of the top seven shale gas plays are in decline, with the Haynesville, once the largest shale gas play in the United States, now down 46 percent from its peak rate of production.”

Creating additional uncertainty regarding future production is the precarious financial state of drillers engaged in tight oil and shale gas production. In a written statement Deborah Rogers, founder of the Energy Policy Forum and author of a 2013 report entitled “Shale And Wall Street,”** said:

“Although capital expenditures have been growing, free cash flow has been deteriorating since 2009, demonstrating a long-term pattern. I evaluated a universe of 22 shale operators and found that without exception, none had positive free cash flow cumulatively from 2010 through 2013. While free cash flow is a bit better this year thus far, it is due primarily to draconian cuts in capital expenditures which will in turn impact production volumes. This game cannot be played without continuous and prolific drilling programs. This inevitable drop in production could have implications for share prices in the next year due to production targets not being met.”

In a separate written statement Asher Miller, executive director of PCI, said, “Last summer Adam Sieminski, administrator of the U.S. Energy Information Administration, the Energy Department’s statistical arm, said in a briefing, ‘We want to be able to tell, in a sense, the industry story. This is a huge success story in many ways for the companies and the nation, and having that kind of lag in such a rapidly moving area just simply isn’t allowing that full story to be told.’ The quote was included in a recent Hearst News Service story† about the lag time for the reporting of domestic oil and natural gas production data to the EIA.”

Miller added, “As a citizen I’m not sure I want the government to be telling the oil industry’s story. The industry seems to be doing a great job of that all by itself. Instead, I would expect the EIA to act as an independent source of unbiased information upon which we as a nation can depend in formulating our energy policy.”

He continued, “That’s what makes our new report, ‘Drilling Deeper,’ so important. It offers an independent analysis of the future of America’s tight oil and shale gas, one not influenced by the oil and gas industry. Based on our analysis, the reality is far different from what the industry is telling the Energy Department, and the Energy Department is, in turn, telling the public and the Congress.”

Miller explained, “It is important to understand that the industry is constantly trying to raise money to drill new wells; and, it is constantly trying to boost stock prices in order to reward shareholders who, of course, include management. Recently, Bloomberg reported†† that industry chief executive officers are publicly announcing reserve numbers that are 5 to 27 times larger than what they report to the U.S. Securities and Exchange Commission. For all these reasons, both the public and policymakers should view the industry’s promotion-oriented oil and natural gas forecasts with skepticism. These forecasts should never form the basis for official government forecasts which are intended for a different purpose.”

* Drilling California: A Reality Check on the Monterey Shale by J. David Hughes.

** Shale and Wall Street: Was the Decline in Natural Gas Prices Orchestrated? by Deborah Rogers.

^†“Government lags in measuring gush of U.S. crude” by Jennifer A. Dlouhy.

^†† “We’re Sitting on 10 Billion Barrels of Oil! OK, Two” by Asjylyn Loder and Isaac Arnsdor of Bloomberg.

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