Industry Monitor: Fossil Fuel Reserves
Patrick Armstrong
There has been a great deal of
discussion in recent years regarding the
future of America’s energy supply. Many
proponents of renewable energy have
based their arguments on the downward
trend of U.S. crude oil reserves over
the past 30 years. Although this is a
legitimate point, it does not take into
account domestic reserves of other fossil
fuels, particularly natural gas. Over the
past decade, U.S.-proven reserves of
natural gas have increased dramatically as
higher prices and advances in technology
have turned previously unrecoverable
resources into major sources of
domestic production. Moreover, the
decline in crude oil reserves has slowed
significantly over the past decade, and
with the opening of portions of the Outer
Continental Shelf that were previously
off-limits to drilling activities, crude oil
reserves look set to at least maintain their
current levels in the medium term.
The Energy Information
Administration recently released its annual
estimates for crude oil and natural gas
reserves in the U.S. for 2007. Crude oil
reserves were estimated to have risen by
1.6%, while dry natural gas reserves were
estimated to have risen by 12.6% (see
Chart 1). This was the ninth straight year
that dry natural gas reserves increased.
However, the increase in crude oil reserves
was less than half of the previous year’s
decline. Additionally, reserves of natural
gas liquids, which are byproducts of
natural gas processing and include fuels
such as propane and butane, rose by 7.9%
from the previous year. Natural gas-proven
reserves for 2007 were the highest in the
31 years the EIA has published reserve
estimates. Moreover, natural gas reserves
have now increased by approximately 46%
since 1993 (see Chart 2).
Natural gas
The most important aspect of the
EIA’s report was the unprecedented
increase in natural gas reserves. This
reflects the rapidly growing importance
of unconventional gas resources such
as coal bed methane and gas trapped in
Chart 1: Crude Oil Reserves Have Stabilized
U.S. crude oil reserves, billion barrels
shale formations in domestic production.
Reserves in coal and shale reservoirs now
accounted for approximately 18% of total
proven gas reserves, and given the fact
that they have been increasing at a much
more rapid pace than traditional reserves,
it is likely that this number will continue
to rise. Shale formations in particular offer
enormous potential for future production.
With the exception of the Barnett Shale
in Texas, most shale formations remain
in the embryonic stages of development.
Estimates of the total recoverable reserves
in the Barnett, Fayetteville, Haynesville,
and Marcellus shale formations have
reached into the hundreds of trillions of
cubic feet. To put this into context, the
country’s proven gas reserves in 2007
totaled approximately 238 trillion cubic
feet. The Marcellus shale formation,
which stretches from New York to
West Virginia, could have an especially
profound impact on the nation’s energy
supply due to its proximity to major
consumption areas in Pennsylvania, New
Jersey, New York and New England.
Chart 2: Unconventional Reserves Main Source of Growth
U.S. dry natural gas reserves, trillion cubic feet
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200
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190
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Chart 3: NGL Reserves Continue to Increase
U.S. natural gas liquids reserves, billion barrels
Chart 4: Decline in Oil Production Will Moderate
U.S. oil and natural gas production, 1973=100
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100
Natural gas
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7.0
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The importance of the steady increase
in natural gas reserves over the past
decade cannot be overstated. Due in
large part to uncertainty over potential
regulations of greenhouse gas emissions,
electric utilities have been investing
heavily in new gas-fired power plants
instead of coal-fired plants. Natural gas
emits about 40% less carbon dioxide than
coal, and since it does not pose any of
the technological hurdles that renewable
sources of energy such as biofuels pose, it
has become increasingly popular among
electric utilities looking to hedge against
the risk of a carbon tax or a cap-and-trade
system. Natural gas reserves will remain
on an upward trend over the medium
term as technological advances allow
producers to extract a larger percentage of
the gas trapped in shale formations.
Proven reserves of natural gas liquids
increased for the fourth consecutive year,
reaching an all-time high of more than 9
billion barrels (see Chart 3). Due to their
relatively low emissions of carbon dioxide,
the possibility of switching to these fuels
as a medium-term substitute for gasoline
and diesel fuel until electric vehicles
can be mass produced has gained some
traction. With dry gas reserves likely to
continue rising over the next few years,
reserves of natural gas liquids will steadily
increase as well.
Crude oil
Domestic crude oil reserves rose for
the second time in three years, as growth
in reserves outpaced production in Alaska,
Texas and North Dakota. After declining
rapidly during the 1980s and the first
half of the 1990s, crude oil reserves have
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Crude oil
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stabilized over the past decade. This is a
trend that is likely to continue, at least over
the next decade, as more unconventional
resources such as the Bakken formation
in North Dakota are developed.
Consequently, the steady decline in
domestic crude oil production over the last
25 years will moderate (Chart 4). Although
the moratorium on oil and gas drilling in
certain portions of the Outer Continental
Shelf was not renewed last year, it will
likely be more than a decade before
large-scale drilling activities commence.
According to estimates by the U.S.
Geological Survey, the OCS areas that were
previously off-limits are believed to contain
reserves of approximately 18 billion
barrels, or around 85% of existing proven
reserves. However, the true wild card in
the long-term outlook for domestic crude
oil reserves is the development of oil shale
resources in the Midwest. These resources,
which are primarily located in Colorado,
Wyoming, and Utah, are believed to
contain more than 800 billion barrels of
oil; to put this into perspective, Saudi
Arabia’s proven reserves, currently more
than double that of any other country,
total approximately 267 billion barrels.
However, the technology to fully develop
oil shale resources is still in its infancy,
and current oil prices do not provide a
strong incentive for firms to invest in more
advanced production technologies.
Coal
Although U.S. reserves of natural
gas have increased rapidly over the past
decade, coal remains the most plentiful
fossil fuel in the country. The U.S. has by
far the world’s largest coal reserves, with
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nearly 30% of the world’s total. Moreover,
at the current rate of production, the
country has enough supplies for at least
the next 150 years. Despite its abundance
and affordability relative to crude oil and
natural gas, coal faces an uncertain future
as a part of the nation’s energy supply. Of
the three types of fossil fuels, coal emits
the most carbon dioxide when it is burned.
With the new administration advocating
a cap-and-trade system to reduce carbon
emissions, there is a possibility that it
could be phased out as a major source
of energy in the U.S. over the next few
decades. Coal’s largest use is in electric
power generation and accounts for nearly
half of the electricity that is generated
each year. However, wind and natural
gas-generating capacity has increased
significantly more than coal-generating
capacity over the last few years, and this
looks set to continue as utilities brace for
harsher regulations on CO2 emissions.
The rapid increase in natural gas
reserves in recent years has come as a
blessing for domestic oil and natural gas
exploration firms. Although domestic
crude oil reserves have stabilized, it is
unlikely that any major new oil fields
will be discovered onshore in the lower
48 states, excluding oil shale deposits.
Moreover, with many governments around
the world nationalizing their countries’
energy resources, especially countries
such as Venezuela that have large crude
oil reserves, finding major new sources
of production internationally has become
a less promising option in recent years.
According to the EIA, investor-owned oil
companies such as Exxon Mobil are in
possession of only 12% of the world’s
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proven reserves, and this number has
been falling for decades. Therefore, the
enormous increase in natural gas reserves
is such an important development for the
industry; it has given firms the potential
to offset declines in oil production
with increased natural gas production.
Moreover, the transition to a cleaner fuel
like natural gas will allow them to more
easily absorb the effect of restrictive
greenhouse gas regulations.
A major challenge facing the
industry is its ability to attract enough
skilled labor, particularly engineers,
to develop unconventional natural
gas fields and, longer term, to find an
economical way to develop the oil locked
away in shale formations. In order for
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the Barnett Shale formation to become
one of the largest sources of natural
gas production in the country, new
techniques such as horizontal drilling
had to be developed. If domestic oil and
gas exploration companies are to take
advantage of the production potential of
shale formations, they will need to invest
heavily in human capital.
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