Natural Gas Reserves May Rapidly Disappear (and Later Reappear)

Michael Giberson

At Toronto’s The Globe and Mail, Nathan Vanderklippe reported, “Low natural gas price casts doubt on ‘proven’ reserves.”

He explains how rapidly falling natural gas prices can cause reserves to disappear. And, by the way, with higher prices reserves can just as quickly reappear. It isn’t magic. But the nature of oil and gas reserves is not well understood, often not even within the energy policy community, so it is worth looking at this relationship between prices and reserves.

Frequently in public policy discussions of oil and gas, reserve amounts get talked about as if they are estimates of all of the remaining oil and gas that will be developed. Reserves are actually just estimates of the currently discovered petroleum resource that is technically recoverable using current technology and anticipated to be profitable to develop at expected prices.

It is the last part of the description – “anticipated to be profitable to develop at expected prices” – that may be responsible for the disappearance of natural gas reserves this Spring. As Vanderklippe discusses, prices expected for this year and the next few were somewhat higher last year while reserve reports were being prepared (in the $3.50 to $4 range). Looking at the same set of resources at today’s much lower price (current futures prices for May are just over $2 an mmBTU) and a perhaps sizable fraction of reserves reported last year may no longer be profitable to develop. And if some of today’s reserves are no longer profitable to develop, the natural gas is no longer countable as a reserve. Experts quoted in the article suggest drops of from 20 percent to 40 percent of proved reserves due to lower prices.

But of course the natural gas resource doesn’t disappear when the reserve numbers fall, the gas just gets reclassified into a sub-commercial category, “contingent resources.” When prices rise again (or the cost of developing resources falls), the natural gas resource can just as suddenly reappear as a reserve.

One other reserve definition note: the reserve numbers most frequently mentioned in policy reports and news articles are “proved reserves.” As described in the Petroleum Resources Management System, the industry standard reserves definitions, proved reserves are a  fairly conservative estimate of the discovered resource anticipated to be profitable to develop at expected prices. Nine times out of ten you actually expect to produce more than the proved reserve estimate.

(Note that Vanderklippe’s article refers to Canadian reserve reporting practices, in the United States the Securities and Exchange Commission determines reserve reporting requirements which may vary from Canadian practice.)