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The Energy Report: Your last interview in May stimulated more discussion on how much natural gas supply we actually have in North America. Have there been any significant developments since then to support your views on the long-term supply picture?

Bill Powers: More data points have come in supporting my views and making it very clear that the Fayetteville and Haynesville shales are now in decline and the Barnett had a very steep, 17% decline in H1/13 on a year-over-year (YOY) basis. It is now producing about 4.6 billion cubic feet a day (Bcf/day), which is substantially down from its peak of near 6 Bcf/day. The facts are starting to show that declines for the older shale plays such as the Barnett, Haynesville, Fayetteville and Woodford are very serious. More important, once production growth from the Marcellus slows down, it will no longer be able to offset declining production from shale plays as well as conventional, offshore, CBM and tight sands production, which are all in terminal decline.

TER: Have companies been overproducing?

BP: There are still about 40 rigs running in the Haynesville. That’s dry gas with no associated liquids. Virtually every one of those wells will be uneconomic at under $6 per thousand cubic feet ($6/Mcf) and probably closer to $7/Mcf. About 80% of production will come within the first two years for most Haynesville wells, so current gas prices have an outsized influence on an individual well’s economics. There are still a number of companies out there willfully drilling uneconomic wells, which boggles my mind. These companies are continuing to drill to keep their production from collapsing entirely.

Last year, Chesapeake Corp. (CHK:NYSE) wrote down 4.6 trillion cubic feet (4.6 Tcf) of proven reserves from its Barnett and Haynesville shale wells. At the end of 2012, Southwestern Energy Co. (SWN:NYSE) wrote down the proven reserves of its Fayetteville Shale assets from 5 Tcf to 3 Tcf. Other companies, such as BHP Billiton Ltd. (BHP:NYSE; BHPLF:OTCPK) and BP Plc (BP:NYSE; BP:LSE), took huge write-downs. BG Group Plc (BRGYY:OTCQX; BG:LSE) also took a big write-down due to poor performance of its Haynesville wells. The list goes on and on. These reserves were supposed to have a 90% confidence level of being producible and generating a 10% rate of return using existing technology.

The low price of gas alone isn’t causing these write-downs. A lot of it has to do with the poor performance of these wells. There’s been a lot of evidence put forward by myself, Art Berman, who wrote the forward to my book, and David Hughes, that the shale industry has overbooked its reserves by approximately 100%. The write-downs of the last few years have largely proven this out. More importantly, if shale operators are writing down reserves at the rate we’ve seen, this also speaks volumes about the total recoverability of all shale gas in the United States.

The two really bright spots right now are the Marcellus and the Eagle Ford. There have been thousands of wells drilled through the Marcellus over the years for both the Oriskany, directly underneath the Marcellus, and the Trenton Black River Trend, also below the Marcellus. Operators have had the advantage of using a very good cheat sheet to know where to drill first for the best wells. Additionally, all the knowledge operators gained in developing other shale plays has greatly accelerated the ramp-up in Marcellus production. For example, operators began drilling horizontal wells early in the lifecycle of the Marcellus due to experience gained in the Barnett, Fayetteville and Haynesville. The strong growth in the play has really been the only thing that has kept gas production even close to flat this year in the U.S. As I discussed earlier, it will not be long before future shale wells will not be able to replace production from older wells.

The decline will become more evident once the aerial extent of the Marcellus fields becomes more clear. This is starting to happen in southwestern Pennsylvania, where Range Resources Corp. (RRC:NYSE), one of the most aggressive producers in the region, is now saying in its investor presentation that it and other operators have defined the outer limits of some fields. Once you run out of the high-quality, liquids-rich drilling locations in Washington County (southwestern PA), you will get a very large fall-off in productivity.

TER: Why all the production overestimates regarding U.S. shale reserves?

BP: Many of the people promoting the 100-year myth were doing it for either financial or political reasons. Let’s look at why the U.S. government promoted the myth. The government has the idea that if the U.S. were to become an LNG exporter through the rapid development of shale, we would lessen the importance of Russia on the world’s stage. Ernest Moniz, who’s the head of the Department of Energy, is a big advocate of exporting LNG. He recently granted the fourth LNG export license to Dominion Cove Point LNG (D:NYSE) to open an export facility in Cove Point, Maryland.

Industry mainly wanted the ability to sell acreage to latecomers. Chesapeake Energy championed this model by generating a lot of excitement after making a discovery and then selling out a significant chunk of that acreage to a latecomer, who would almost always overpay. This strategy was actually discussed by the former CEO, Aubrey McClendon, in an October 2008 conference call. Industry needed money to develop its own acreage and also to generate higher stock prices so they could acquire other assets or companies more cheaply. David Hughes has talked about how it would require $42 billion ($42B) to keep gas production flat in the U.S., while shale operators only generate around $32–33B dollars a year in revenue, and probably closer to only $8–9B in cash flow. They are far outspending their cash flow to drill additional wells.

Looking at academia’s role, there was a case where Penn State put forward a very optimistic report that was paid for by the industry and that payment was not disclosed. After a community group discovered this, the dean of the Earth Sciences Department redacted the report and reissued it with numerous changes and proper disclosure as to the source of the funding. The report discussed the economic impact on Pennsylvania from the Marcellus and made some very optimistic projections.

Unlike a lot of people who make statements about the amount of gas that’s out there and provide little or no empirical evidence to support their claims, I have almost 600 footnotes in my book that explain exactly where my estimates of future shale gas recoveries come from.

Other promoters of the 100-year supply myth include people such as T. Boone Pickens, who has a very self-interested agenda to get natural gas vehicles onto the road. Pickens, who said on CNBC in 2011 that the U.S. will recover 4,000 Tcf and has never provided any support for this statement, promoted this patriotic idea that we should convert our vehicle fleet to natural gas rather than buying oil from the “enemy.” Pickens has been known to refer to certain oil-exporting nations as the “enemy.”

However, Pickens almost never discusses the fact that he is one of the largest owners of Clean Energy Fuels Corp. (CLNE:NASDAQ), a company that is one of the biggest providers of natural gas refueling stations and that stands to benefit significantly from the growth of natural gas vehicle adoption. The legislation that T. Boone Pickens is advocating for in the Pickens Plan, which includes large tax credits and grants to the natural gas vehicle (NGV) and NGV refueling industry, would benefit him uniquely because he owns approximately 18.1 million (18.1M) shares of Clean Energy Fuels stock. Pickens’ shares are currently valued at around $230M. There are very few people, and you can count them on one hand, who want to discuss the reality of shale gas, which my book does.

In addition, the Securities and Exchange Commission (SEC), after heavy lobbying, changed its rules in 2010 to allow for a significant increase in proven undeveloped reserves to be booked, so the SEC was also complicit in the perpetuation of the shale gas myth. Without this change in how shale gas reserves were booked in 2010, most shale operators would have been forced to take large write-downs rather than booking increases in reserves. I believe this rule change by the SEC grossly distorts the value of a company’s reserves since it allowed for a large increase in the booking of proven undeveloped reserves.