In preparation for whatever the 108th Congress holds in store for US energy policy, oil and gas producers should dispense with fallacies that arose last year about natural gas resources on federal land inaccessible to producers. The corrections should be easy to make. Drawing attention to the refutation, however, requires preemptive persuasion.
During 2002, RAND Corp. and the Wilderness Society disputed optimistic estimates of the potential for gas production from federal land in the US West. Their reports anchor political opposition to assessment and development of that potential. The new Congress will have to address the issue somehow. If it doesn't debate federal-land access as part of repackaged energy legislation, it will have to consider it separately in response to the price increases of an undersupplied market.
Similar conclusions
RAND, in a study for the William and Flora Hewlett Foundation, and the Wilderness Society critiqued several assessments of the federally owned gas resource in the West. Their studies differed somewhat in scope and focus. But they extruded similar conclusions from identical logic.
The studies argued that traditional resource assessments overstate production potential by concentrating on technically—rather than economically—recoverable gas volumes. Discounting resources on the basis of costs of exploration and production, transportation, and environmental effects, they postulated values for what the Wilderness Society labels "economically recoverable resources" and RAND, "the viable resource." These portions of the resource, they asserted, should guide policy decisions about oil and gas activity on federal land. The values fall so far below normal resource estimates as to make leasing and drilling seem not worth the trouble.
Both studies are detailed enough to appear serious and therefore to wield influence in policy debates. But they're flawed beyond use. The Wilderness Society, for example, resorts to dividing its deeply discounted resource estimates for specific areas by consumption rates for all of the US. This is supposed to demonstrate insignificance of the potential. If the resulting numbers had any meaning for policymaking, which they don't, the US could justify never allowing any resource development anywhere. Responses to key points of the RAND study appear on the Domestic Petroleum Council's web site at www.dpcusa.com.
When and in whatever context Congress takes up land access in the US West, producers will need to respond in detail to the misconceptions teeming in the RAND and Wilderness Society reports. But the studies suffer from an overarching weakness that deserves attention now.
The weakness is the assumption that resource numbers represent values precise enough to produce definitive results in cost calculations. They don't. Except for their reserves components, resource estimates don't even represent volumes of hydrocarbons. They represent the potential for occurrence of some volume of hydrocarbons at some point along a spectrum of probability. They're scientific, not economic numbers. In decisions about where to consider exploration for oil and gas, they're essential. In estimates of operating costs before exploration ever occurs, they mean very little. To use them in that way in policymaking usurps the debate.
Facing choices as controversial as oil and gas leasing, lawmakers naturally recoil from ambiguity, which is inherent in estimates of hydrocarbon resource. Some of them will find the simplicity implied by the RAND and Wilderness Society studies appealing. Producers will have to show that the studies' cost-based discounting of reserves estimates—because of the nature of those estimates—is illusory.
The challenge is great. Quantification of oil and gas resources and—something very different—reserves is conceptually difficult. A grasp of the process requires comfort with uncertainty, which doesn't come easily to anyone. Intellectual management of the concepts requires outright submission to uncertainty, which doesn't come easily to self-assured politicians.
What's at stake
Yet if lawmakers are to make proper decisions about access to federal land, they must know what's at stake. And knowing what's at stake means deliberating resource assessments with more sophistication than comes through in the RAND and Wilderness Society studies.
Producers have rich opportunity to provide education useful to a nationally important political debate that's almost certain to arise in the next 2 years. The lesson, however, should start now. The inevitable debate will be about environmental values and risks. Once that fight starts, interest in the nuances of resource estimation will be scarce.