The Shale Boom and Its Impact on Domestic Energy Supply

A quick update on a post from a year and a half ago entitled ‘We have more oil and natural gas than anyone thought possible even 5 years ago.’

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These numbers are compiled by the Energy Information Administration, the data-aggregation arm of the Department of Energy. The graphs represent the remaining proved reserves* for crude oil and for natural gas for the United States. (Note that the numbers are the most current available, Year End 2012 [YE2012].) As such, we have nearly 18 months of continued robust drilling activity since that time, in a stable-to-higher price setting, around $100 per barrel.


In summary, YE2012 crude oil reserves, at 30.5 billon barrels, were at a higher level than any time in my working career, the highest since Prudhoe Bay’s Alaskan reserves hit the books. (This number excludes natural gas condensate, gas liquids, biofuels and other liquid hydrocarbons that have reduced the country’s reliance on foreign sources.)

During the shale boom, year-over-year reserve increases have run from 2 to 4 billion barrels per year for the four previous years. I see little sign of this trend abating. If it does continue, our reserves could top all-time, pre-Arab Oil Embargo highs.

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Gas is a color of another horse. Remaining Proved Reserves* of natural gas reached an all-time high of 350 trillion cubic feet (TCF) at the end of 2011. Gas reserves declined between YE2011 and YE2012 for a number of reasons. During 2012, production of 25+ TCF depleted the beginning reserve base. Gas prices remain at historic lows compared to oil, so most of the domestic drilling fleet is drilling for oil, not gas, so new discoveries are not outpacing production as is the case with oil. The low price of gas also impacts the calculation of future recovery: in a fixed cost environment, it takes higher levels of production to turn a profit. Part of the definition of “proved reserves” is that the forecasted future production must cover costs; therefore, low prices translate directly to lower reserves.


At the risk of sounding like a broken record, this massive turnaround is due in very large part to small- and medium-size domestic companies operating mostly on private lands, regulated by state governments, Texas, North Dakota and Pennsylvania in particular.

* The term “Proved Reserves” is bandied about by journalists, pundits and politicians who think they know what they’re talking about, but in actuality it is an engineering term of art with a specific, narrow meaning. Proved Reserves are those quantities that are reasonably certain to be produced from existing wells, or locations adjacent to existing wells and reasonably certain based on the best understanding of geology, and that are economic to produce with existing technology at current prices. Proved Reserves are a tiny subset of “resources”, a more theoretical total of discovered and undiscovered future supply.

In short, Proved Reserves are quantities that some resource company somewhere has “on its books”, sort of analogous to inventory on hand. At a national level, reserves are historically about 10-20 years of current production, which invariably leads those who don’t understand the number to conclude that “we’re running out of oil in 10-20 years.” No. Continued drilling always converts “resources” into “reserves”.





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