EXCLUSIVE: Oil industry, US govt, inflating shale gas reserve estimates fueling unsustainable economic bubble that could crash in five years

My latest Guardian report dissects the US Energy Information Administration's (EIA) latest estimates of global oil supplies, particularly shale gas, based on three little known reports published in the last few months and exclusive interviews with independent, former government, and current government experts. 

Shale gas won't stop peak oil, but could create an economic crisis

Overinflated industry claims could pull the rug out from optimistic growth forecasts within just five years

A new report out last week from the US Energy Information Administration (EIA) has doubled estimates of "technically recoverable" oil and gasresources available globally. The report says that shale-based resources potentially increase the world's total oil supplies by 11 per cent.

Acknowledging fault-lines in its new study, contracted to energy consulting firm Advanced Resources International Inc. (ARI), the EIA said:

"These shale oil and shale gas resource estimates are highly uncertain and will remain so until they are extensively tested with production wells."

The report estimates shale resources outside the US by extrapolation based on "the geology and resource recovery rates of similar shale formations in the United States." Hence, the EIA concedes that "the extent to which global technically recoverable shale resources will prove to be economically recoverable is not yet clear."

Two years ago, following the publication of the EIA April 2011 report aNew York Times investigation obtained internal EIA communications showing how senior officials, including industry consultants and federal energy experts privately voiced scepticism about shale gas prospects.

One internal EIA document said oil companies had exaggerated "the appearance of shale gas well profitability" by highlighting performance only from the best wells, and using overly optimistic models for productivity projections over decades. The NYT reported that the EIA often "relies on research from outside consultants with ties to the industry."

The latest EIA shale gas estimates, contracted to ARI, is no exception. ARI, according to the NYT's 2011 article, has "major clients in the oil and gas industry" and the company's president, Vello Kuuskraa, is "a stockholder and board member of Southwestern Energy, an energy company heavily involved in drilling for gas in the Fayetteville shale formation in Arkansas."

Independent studies published over the last few months cast even more serious doubt over the viability of the shale gas boom.

A report released in March by the Berlin-based Energy Watch Group (EWG), a group of European scientists, undertook a comprehensive assessment of the availability and production rates for global oil and gas production, concluding that:

"... world oil production has not increased anymore but has entered a plateau since about 2005."

Crude oil production was "already in slight decline since about 2008." This is consistent with the EWG's earlier finding that global conventional oil production had peaked in 2006 - as subsequently corroborated by theInternational Energy Agency (IEA) in 2010.

The new report predicts that far from growing inexorably, "light tight oil production in the USA will peak between 2015 and 2017, followed by a steep decline", while shale gas production will most likely peak in 2015. Shale gas prospects outside the US are incomparable to gains made so far there "since geological, geographical, and industrial conditions are much less favourable."

Consequently, global gas prices are likely to increase rather than follow the initial US trend. In the meantime, conventional oil production will continue declining, dropping as much as 40 per cent by 2030. The upshot is that the US "will not become a net oil exporter."

The EGW report follows two other reports published earlier this year also challenging the conventional wisdom.

A Post-Carbon Institute study authored by geologist David Hughes, who worked for 32 years as a research manager at the Geological Survey of Canada, analysed US production data for 65,000 wells from 31 shale plays using a database widely used in industry and government. While acknowledging that shale has dramatically reversed "the long-standing decline of US oil and gas production", this can only:

"... provide a temporary reprieve from having to deal with the real problems: fossil fuels are finite, and production of new fossil fuel resources tends to be increasingly expensive and environmentally damaging."

Despite accounting for nearly 40 per cent of US natural gas production, shale gas production has "been on a plateau since December 2011 - 80 per cent of shale gas production comes from five plays", some of which are already in decline.

"The very high decline rates of shale gas wells require continuous inputs of capital - estimated at $42 billion per year to drill more than 7,000 wells - in order to maintain production. In comparison, the value of shale gas produced in 2012 was just $32.5 billion."

The report thus concludes:

"Notwithstanding the fact that in theory some of these resources have very large in situ volumes, the likely rate at which they can be converted to supply and their cost of acquisition will not allow them to quell higher energy costs and potential supply shortfalls."

Report author Hughes said that the main problem was the exclusion of price and rate of supply: "Price is critically important but not considered in these estimates." He added: "Only a small portion [of total estimated resources], likely less than 5-10 per cent will be recoverable at a low price...

"Shale gas can continue to grow but only at higher prices and that growth will require an ever escalating drilling treadmill with associated collateral financial and environmental costs – and its long term sustainability is highly questionable."

Another report was put out by the Energy Policy Forum, and authored by former Wall Street analyst Deborah Rogers - now an adviser to the US Department of the Interior's Extractive Industries Transparency Initiative. Rogers warns that the interplay of geological constraints and financial exuberance are creating an unsustainable bubble. Her report shows that shale oil and gas reserves have been:

"... overestimated by a minimum of 100% and by as much as 400-500% by operators according to actual well production data filed in various states... Shale oil wells are following the same steep decline rates and poor recovery efficiency observed in shale gas wells."

Deliberate overproduction drove gas prices down so that Wall Street could maximise profits "from mergers & acquisitions and other transactional fees", as well as from share prices. Meanwhile, the industry must still service high levels of debt due to excessive borrowing justified by overinflated projections:

"... leases were bundled and flipped on unproved shale fields in much the same way as mortgage-backed securities had been bundled and sold on questionable underlying mortgage assets prior to the economic downturn of 2007."

Seeking to prevent outright collapse, the report argues, the US is ramping up gas exports so it can exploit the difference between low domestic and high international prices "to shore up ailing balance sheets invested in shale assets."

Rogers, who testified last month before the Senate Committee on Energy and Natural Resources, also expressed scepticism about the EIA's latest assessment:

"The EIA actually does retrospective assessments of their forecasting and their track record is dismal... They admit that they overestimated natural gas production 66 per cent of the time and crude 59.6 per cent of the time in their March 2013 assessment for 2012."

She added that "there is definitely a bubble." Though it would not have an impact as devastating as the banking crisis, she said:

"The oil majors do have losses, but the smaller independents are being shaken out. Chesapeake and others are struggling, like Devon, Continental, Kodiak and Range. Without exception, they all have had a significant deterioration in negative free cash since 2010. This is obviously not sustainable."

The impact of this would be greater centralisation, with smaller companies and their assets being absorbed by the oil majors through mergers and acquisitions. Rogers said:

"What is most troubling to me is that there appears to be a complacency setting in about transitioning to a more sustainable energy economy. Shales should be used as a bridge. But we are hearing far too much euphoric talk about 100-200 years of natural gas. Therefore no need to worry, it can be business as usual. This is highly problematic in my opinion. We must globally transition away from hydrocarbons."