RAND: Rockies oil, gas assessments fall short of real-world 'viability' test—a Mar. 19 update

March 19, 2002
Current oil and gas supply scenarios for the US Rocky Mountain region are "too narrow," because they focus mainly on availability of resources on federal lands. That's one of the conclusions of a recent report by Santa Monica, Calif.-based think tank RAND Corp. The report is likely to further fuel a rancorous debate over federal lands access in the region. One industry official slammed the study as another effort to block oil and gas development on public land.

By Steven Poruban
Senior Staff Writer
HOUSTON, Mar. 18 -- Updated Mar. 19; all updated text appears in boldface.
Current oil and gas supply scenarios for the US Rocky Mountain region are "too narrow," because they focus mainly on availability of resources on federal lands. That's one of the conclusions of a recent study by Santa Monica, Calif.-based think tank RAND Corp. The report is likely to further fuel a rancorous debate over federal lands access in the region. It has already drawn sharp criticism from Independent Petroleum Association of Mountain States as a bid to further hobble oil and gas development efforts on public lands.

The study, which was funded under an energy initiative by the Hewlett Foundation, also highlighted the deficiencies found today in oil and gas supply assessments and offered a new approach for measuring "viable" energy resources in certain areas of the Rocky Mountain region. "Our research has shown that current oil and gas resource assessments are deficient for policy purposes," said Mark Bernstein, who directed the study. "There has been too little attention paid to 'real world' scenarios that drive energy development," he added.

Traditional assessments
Traditionally, the goal of a resource assessment has been to "estimate the potential supply of natural gas and oil resources, which. . .makes it possible to appraise the nation's long-range gas and oil supply," the RAND report stated. After examining a total of four resource assessments of the western area of the Rocky Mountain region, the study concluded that—although each assessment varied slightly from one to the other—they all deemed the western Rocky Mountain region's oil and gas reserve base as "substantial."

"However," the report noted, "traditional resource assessments estimate the 'technically recoverable' resource, which does not reflect the amount of resource that can viably be produced."

The report continued, "The distinction between the technically recoverable resource and that which is likely to actually be produced is important when confronting questions about the potential benefits and impacts of increased natural gas and oil exploration and production."

In addition to a resource being technically recoverable, RAND stated that there are other determining factors that affect a resource's recoverability, including exploration and production costs, infrastructure and transportation costs, and impacts on the environment. "The resource that satisfies this more complete set of criteria has a reasonable likelihood of actually being developed and produced," the report said.

Separately, existing studies on access restriction possess their own set of limitations, RAND said. "Rather than attempting to estimate the viable resource, existing approaches to understanding resource availability have focused on legal access restrictions on federal lands." These efforts have been fueled greatly by the Energy Protection and Conservation Act of 2000, RAND said. "As a result, considerable effort has been and continues to be expended on quantifying the amount of gas and oil resources underlying federal lands that is subject to various forms of access restrictions."

Comprehensive assessments
Assessments will need to be more comprehensive if policy-makers are expected to make informed decisions about any given resource, RAND suggested. This assessment should focus on "determining the viable resource: that which is available when considering wellhead costs, infrastructure costs, and acceptable environmental impact," the report said.

Also, when creating standard economic models of a particular area—in this case, the western Rocky Mountains—several improvements should be made to account for the unique costs of gas and oil exploration and production, RAND stated. These include: using data that accurately depict the region, accounting for the large volume of nonconventional gas, using local drilling success ratios, and addressing other costs specific to the Rockies.

All told, ". . .the viable resource is the fraction of the technically recoverable resource that is also economically feasible for production, sufficiently supported by infrastructure, and environmentally acceptable," RAND stated.

The report stated that at the present time, it is only possible to make "a first-order estimate of the effect of some of these viability criteria on the amount of gas that could be viable in the Rocky Mountain region."

Based on data from the US Geological Survey economic analysis, ". . .the economic viability criterion alone can dramatically reduce the amount of gas that is viable for extraction," RAND said. "At a wellhead price of $3.34/Mcf. . .less than 20% of the technically recoverable gas in the total Rocky Mountain region is economically viable, and only 5% of the technically recoverable gas in the Greater Green River basin is economically viable."

Industry reaction
"What the RAND report is trying to do is redefine how we assess potential oil and gas resources," Marc Smith, IPAMS executive director, told OGJ. "And rather than start from a base line of what is technically recoverable, their aim is to look at a much narrower subset of resources that they believe are recoverable using their own economic analysis and their own understanding of the restrictions and prohibitions currently in place."

Is RAND's economic analysis accurate? "Absolutely not," Smith contends. "Their economic analysis is flawed in that the oil and gas industry is constantly finding new ways to lower finding and development costs in the Rocky Mountains.

"The price access in their exhibit doesn't refer to any real market price. And market price is critical," he continued. As an example, Smith noted that years ago, a small independent in Wyoming's Green River basin somehow managed to bring into production only two small wells in Jonah field, which is more than 30 miles from the nearest gathering line. Now, the field produces in excess of 700 MMcfd, which would be enough gas to heat most of southern California on a cold winter day, Smith said.

"During the first year of [Jonah field's] production in 1992, there was one summer month when the mainline price for gas was $1.14/MMbtu, meaning a well had netback price of less than 75¢/MMbtu," Smith explained. "And yet the area was somehow still economic. The average price for gas in the Green River Basin in 2001 was $3.95/MMbtu."

On the policy side, Smith noted that the study makes no mention of several other issues, namely, national security, economic security, and the importance of this type of activity on rural communities, such as job creation, taxes, and the royalties paid to state and federal governments.

"The report seems to be an effort to block development of oil and gas on public land, plain and simple." Using their own economics and their own understanding of how infrastructure costs and build out occurs, Smith said, the report seems to be stating that of the 300 tcf considered "technically recoverable" in the Rockies, less than 50 tcf is "actually economically recoverable." And once infrastructure and environmental acceptability are considered, he added, according to RAND's graph, none of it is an acceptable resource to develop.

RAND responds
In response to Smith's comments about access to land, Tom LaTourrette, RAND associate physical scientist and one of the authors of the study, said, "In many cases, access is not the major consideration limiting production. The 'viable' resource begins to address this question."

He added, "The requirement that a resource be technically recoverable is obviously an important criterion in assessing resource potential. However, it is only one of several that are relevant to understanding what resources can actually be recovered. Few in industry would argue that the entire technically recoverable resource can or will be produced."

Regarding Smith's comments about the accuracy of RAND's economic analysis, LaTourrette said, "RAND has not yet conducted an economic analysis. As the report clearly states, the economic results cited in the report are from the 1995 US Geological Survey analysis. Although we would have liked to present an economic analysis prepared by the gas and oil industry, none is available.

"This is one of the frustrating aspects of the debate: industry does this kind of economic analysis routinely, yet none of this information is available to policy-makers," he added.

LaTourrette noted that RAND is currently conducting such an analysis.

LaTourrette called Smith's statement about the RAND report being an 'effort to block development of oil and gas on public land' an "unfortunate misunderstanding."

LaTourrette stated, "Many federal lands may be completely appropriate for gas and oil exploration and production. But decisions to open lands need to be based on an understanding of the potential benefits and impacts of those decisions.

"Our point is that without assessing the viable resource, policy-makers and industry are operating with insufficient information to balance the expected economic benefits of allowing access to federal properties with other national, regional, and local objectives including impact on the environment," LaTourrette said.

Contact Steven Poruban at [email protected].