The Natural Gas Resource Base
The flow-chart (below) gives an overview of how the estimates of natural gas resources are broken down, and provides a description of each category. It is important to remember that the broadest categories are also the least precise. As one moves towards the categories at the bottom of the chart, the associated estimates of the amount of natural gas in those categories becomes more and more precise.
Below is a description of the various categories outlined in the chart above. It is important to remember, however, that there are a number of different ways of classifying reserves. This information is based on the Energy Information Administration’s classification system.
Conventional and Unconventional Natural Gas
So far, we have been discussing natural gas that may exist in the earth, trapped in a reservoir. ‘Unconventional’ natural gas does not exist in these conventional reservoirs – rather, this natural gas takes another form, or is present in a peculiar formation that makes its extraction quite different from conventional resources. Unconventional natural gas, despite existing in non-traditional forms, is usually included in estimations of the amount of natural gas available for use. For more information on the differences between conventional and unconventional resources, click here.
The Natural Gas Resource Base
The broadest classification of natural gas estimates is generally termed the natural gas resource base. According to the EIA, the total natural gas resource base includes the entire volume of natural gas contained and trapped in the earth, before any is extracted and produced. Essentially, the total resource base includes estimations of ALL of the natural gas that is, or was (before production), trapped in the earth. Most of this natural gas is in forms that are technically non-recoverable. For instance, there is a great deal of natural gas located in very low concentrations throughout the earth’s crust. The technology does not exist, nor is it expected to come about in the near future, to effectively extract this gas. The remainder of the total resource base is natural gas that is obtainable using current or foreseeable technology. It is this portion of the resource base that is of most interest, and is included in estimates of the amount of natural gas.
Discovered and Undiscovered Technically Recoverable Resources
Recoverable resources are the subset of the total resource base that is thought to be technically recoverable; the technology exists to make its extraction possible. This subset is further divided into discovered and undiscovered resources. Discovered recoverable resources are those in a known location. That is, those reservoirs that geologists have actually located through exploration. Discovered recoverable resources include current production, all past production, as well as the gas that is remaining to be produced (known as ‘reserves’). For more information on how geologists locate natural gas, click here.
Undiscovered resources are those deposits that have not been pinpointed, but are generally expected to exist based on geologic conditions. Geologists know, or at least have a good idea, that these natural gas reservoirs exist, although they are not able to pinpoint a specific location for a reservoir. In the U.S., the Department of the Interior (DOI) and the U.S. Geological Survey (USGS) are responsible for estimating how much undiscovered recoverable natural gas there is in onshore areas and State governed offshore areas of the United States. Conversely, the Minerals Management Service (MMS), an agency with the Department of Interior, is responsible for estimating the undiscovered natural gas in Federal offshore areas. Each of these departments uses slightly different definitions, and terminology, when measuring and referring to undiscovered resources. However, as a general estimate, most agree that there is at least as much technically recoverable natural gas remaining to be found in the earth than has already been located to date.
Economically Recoverable Resources
Economically recoverable resources are those natural gas resources for which there are economic incentives for production; that is, the cost of extracting those resources is low enough to allow natural gas companies to generate an adequate financial return given current market conditions. However, it is important to note that economically unrecoverable resources may, at some time in the future, become recoverable, as soon as the technology to produce them becomes less expensive, or the characteristics of the natural gas market are such that companies can ensure a fair return on their investment by extracting this gas.
Those resources that have been discovered, and for which a specific reservoir location is known, can further be broken down into those resources that are economically recoverable, and those that are economically unrecoverable. This differs from technically unrecoverable resources, in that the technology exists (or is foreseeable in the near future) to get economically unrecoverable resources from the ground, but the economics do not exist to make the production of this natural gas profitable. For more information on the economics of exploration and production, click here.
Those discovered, technically and economically recoverable resources are further broken down into different types of ‘reserves’. Organizations measure reserves for their own use and for outside publication, often using different measuring and estimation techniques for the different types of reserves. However, in general, reserves can be broken down into two main categories – proved reserves, and other reserves.
Proved reserves are those reserves that geological and engineering data indicate with reasonable certainty to be recoverable today, or in the near future, with current technology and under current economic conditions. According to the Energy Information Administration (EIA), the statistics arm of the Department of Energy, ‘reasonable certainty’ implies that there is a 90 percent probability that the natural gas actually recovered from those reserves will exceed the amount that is estimated beforehand to be recoverable.
The EIA further divides proved reserves into non-producing and producing reserves. Producing proved reserves are those reservoirs that are currently being produced, that is, natural gas is currently being extracted. These are probably the most certain of the estimates, as characteristics of the reserves become more apparent once a well is actually drilled, and natural gas is extracted. Proved non-producing reserves are further broken down into proved undeveloped reserves, and proved developed non-producing reserves. Of these two categories, proved developed non-producing reserves are more accurate. This means that pre-production work has been done on the reservoir and a well may have been drilled to prepare for natural gas extraction, but as of yet no natural gas has been produced. Proved undeveloped reserves are those where no well has been drilled, but for which there is still relative certainty surrounding the amount of natural gas they contain.
Other reserves are those that are less well known than proved reserves. This classification goes by many names, depending on who is asked. They may be called probable reserves, possible reserves, indicated reserves, or inferred reserves, to name just a few. Because the quantity and characteristics of these reserves are less well known, the extraction of this natural gas is not completely assured, although there is a relatively high probability that they will be recoverable.
Proved reserves can be found as the ‘on the books’ reserves in operational and financial data of natural gas exploration and production companies, carrying with them economic implications for the company. These companies have economic incentives to not overstate these ‘on the books’ estimations of their reserves as this classification carries with it a high degree of certainty. In order to not overstate the actual amount of natural gas (and suffer the potential financial side effects of such an overstatement or miscalculation), many companies list a high percentage of their reserves as unproven. It follows then that most of the natural gas that exists in the United States does not fall under the proven reserves classification. It may be misleading, then, to look only at levels of proved reserves as an indication of how much natural gas there really is. Instead, the entire supply picture should be examined, including conventional and unconventional natural gas, discovered and undiscovered, and economically recoverable or unrecoverable.
For more information regarding the classification and measurement of the natural gas resource base, please visit the EIA’ site here.