U.S. Crude Oil, Natural Gas, and Natural Gas Liquids Proved Reserves, 2008

The Energy Information Administration's (EIA) estimates of proved reserves of natural gas and crude oil as of the end of 2008 tell very different stories about apparent changes in the availability of these two energy resources in the United States. Proved reserves are those volumes of oil and natural gas that geological and engineering data demonstrate with reasonable certainty to be recoverable in future years from known reservoirs under existing economic and operating conditions. Proved reserves of natural gas rose enough not only to replace production, but also to grow by almost 3 percent over 2007, largely due to continued development of unconventional gas from shales (see Table 1). In contrast, even though discoveries of crude oil rose for the third year in a row, proved reserves of crude oil fell by more than 10 percent. Under Securities and Exchange Commission (SEC) rules for determining reserves that have been in effect since 1982, operators assessed their 2008 reserves based on what they could produce with reasonable certainty at the market price on the last day of the year. Under updated SEC rules issued in 2008 that take effect in 2010, operators will instead use an average of first-day-of-the-month prices throughout the year, which is less sensitive to volatility in prices, in developing their reserves estimates. The SEC's new rules would have shown an increase in oil prices in 2008 compared to 2007, rather than the significant decline in the year-end 2008 price relative to the year-end 2007 price. Under the new rules, there would likely have been a smaller drop (or possibly even an increase) in crude oil proved reserves.¹

Table 1: Changes to Proved Reserves, 2008
	Dry Natural Gas (trillion cubic feet)	Crude Oil (billion barrels)	Natural Gas Liquids (billion barrels)
Reserves at December 31, 2007	237.7	21.3	9.1
Total Discoveries	29.5	1.1	1.1
Net Revisions and Other	-2.0	-1.6	-0.1
Production	-20.5	-1.7	-0.8
Reserves at December 31, 2008	244.7	19.1	9.3
Net Change	2.9%	-10.3%	1.4%
Note: Percent change calculated from unrounded numbers.

Natural Gas

Total U.S. proved reserves of dry natural gas² rose by 6.9 trillion cubic feet (Tcf) from 2007 to 2008. That increase was on top of production of 20.5 Tcf (see Figure 1) and reflects another strong year of net proved reserve additions of natural gas in the United States. Figure 2 shows that natural gas proved reserves are now at their highest level since EIA began reporting them in 1977.

Discoveries. Total natural gas discoveries of 29.5 Tcf represented the sixth consecutive yearly increase and were the highest level of discoveries in the 32 years EIA has published proved reserves estimates. Discoveries include discoveries of new fields, identification of new reservoirs in fields discovered in prior years, and extensions (reserve additions that result from the extension of previously discovered reservoirs).

Extensions typically represent most of what operators report as total discoveries. In 2008, 90 percent of total discoveries came from extensions of existing fields. Discoveries of new fields and reservoirs are important signals of new resources, but are usually small because companies usually can prove up (learn enough about the resource to consider reserves as proved) only a small part of potential new reserves during the initial year of discovery. In 2008, new field discoveries totaled 1.2 Tcf and new reservoir discoveries in previously discovered fields totaled 1.6 Tcf, showing fairly large percentage increases over 2007, but accounted for less than 10 percent of total discoveries.



Net Revisions and Other Changes. Proved reserves revisions occur primarily when operators change their estimates of what they will be able to produce from the proved reserves they have already identified. These revisions reflect changing prices, changing cost structures (for example, because of innovation), and other factors. Other small changes occur when operators buy and sell properties (revaluing the proved reserves in the process), and as various adjustments are made to reconcile estimated volumes.

Net revisions of natural gas proved reserves for 2008 were a negative 3.1 Tcf, reflecting a significant drop in the price used to estimate the economic viability of reserves from 2007 to 2008. Under existing SEC rules, the price at Henry Hub, Louisiana used to estimate reserves dropped 21 percent from $7.11 to $5.63 per million British thermal units (MMBtu)³ from year-end 2007 to year-end 2008. Under the rules that will be in effect for the 2009 reporting year, the Henry Hub price would have increased 32% from $6.76 to $8.93 per MMBtu.⁴ The net revisons estimate consists of a balance between two much larger numbers: negative revisions of 33.8 Tcf largely due to low end-of-year natural gas prices and positive revisions of 30.7 Tcf, largely the result of improving ability to produce unconventional gas economically.

Other changes to proved reserves estimates from buying and selling properties and adjustments were small.

Production. Natural gas produced during a year is subtracted from proved reserves. EIA's Annual Survey of Domestic Oil and Gas Reserves includes an estimate of production, based on interim estimates from operators. As reported on the survey, production of dry natural gas in 2008 totaled 20.5 Tcf in 2008, up 5.4 percent from 2007, marking the third consecutive annual increase in U.S. natural gas production. This is similar to EIA's official reported estimate of natural gas production derived from final producer reports.

The Importance of Unconventional Sources. Application of new technologies can convert categories of previously uneconomic natural gas resources into proved reserves. In the 1990s, coalbed methane led this reserves growth. Today, increases in shale gas proved reserves reflect the industry's rapidly maturing ability to apply two technologies to shale formations: horizontal drilling and hydraulic fracturing. EIA began reporting reserves data separately for coalbed methane in 1990 and for shale gas in 2008. EIA does not currently report reserves estimates for tight gas, the third category of gas generally described as unconventional.

In 2008, dry natural gas proved reserves attributable to shale reservoirs grew dramatically, up 51 percent to a total of 32.8 Tcf, or 13 percent of total proved reserves of dry natural gas (Table 2). Of this, 8.9 Tcf was from discoveries and 4.2 Tcf was from upward revisions and other adjustments. Production from shale formations reported on the reserves survey climbed sharply as well, surpassing 2 Tcf in 2008; a 65 percent increase from 2007. ⁵

Table 2: Changes to Proved Reserves of Dry Natural Gas by Source (Trillion Cubic Feet at 14.73 psia and 60 degrees Fahrenheit)
Source of Gas	Proved Reserves Year-End 2007	Discoveries 2008	Revisions & Other Changes 2008	Production 2008	Proved Reserves Year-End 2008
Coalbed Methane	21.9	1.4	-0.5	-2.0	20.8
Shale	21.7	8.9	4.2	-2.0	32.8
Other (Conventional & Tight)
Lower 48 Onshore	167.8	17.4	-1.4	-13.9	169.9
Federal Offshore	14.4	1.8	-0.4	-2.3	13.5
Alaska	11.9	0.02	-3.9	-0.3	7.7
TOTAL	237.7	29.5	-2.0	-20.5	244.7

Through the end of 2008, Texas accounted for about two-thirds of the Nation's proved shale gas reserves, primarily due to early and sustained development in the Barnett Shale play⁶ in and around Fort Worth. Increasingly, other shale plays have emerged. In 2008, proved reserves of shale gas rose by 5.3 Tcf in Texas (primarily the Barnett in Railroad Commission Districts 5, 7B, and 9), 2.4 Tcf in Arkansas (primarily the Fayetteville), 2.6 Tcf in Oklahoma (primarily the Woodford), and 0.8 Tcf in Louisiana (primarily the Haynesville). Development of the Marcellus shale (Northeast) has only recently begun and did not lead to major proved reserve increases in 2008.

Proved reserves of coalbed methane declined by about 5 percent after growing rapidly through the 1990s and earlier this decade. It now accounts for about 8.5 percent of the country's total dry natural gas proved reserves. Coalbed gas production continues to grow, however, and totaled nearly 2.0 Tcf in 2008 (as estimated from the reserves survey) 12 percent more than in 2007.⁷ Colorado, New Mexico, and Wyoming combined accounted for about three-quarters of both proved reserves and production in 2008.

Natural Gas Liquids. EIA also collects reserves estimates of natural gas liquids (NGL) which are hydrocarbons in natural gas that are extracted (as liquids) at the surface in gas processing or cycling plants. Generally, such liquids consist of propane and heavier hydrocarbons and are commonly referred to as lease condensate, natural gasoline, and liquefied petroleum gases. Natural gas liquids include natural gas plant liquids (primarily ethane, propane, butane, and isobutane) and lease condensate (primarily pentanes produced from natural gas at lease separators and field facilities). Year-end 2008 proved reserves of NGL were 9.3 billion barrels, an increase of 1.4 percent over 2007 (Table 1). Total discoveries were 1.1 billion barrels in 2008, 2.6 percent less than in 2007. Net NGL revisions were a negative 0.2 billion barrels, also reflecting lower end-of-year prices. Sales, acquisitions, and adjustments in 2008 resulted in a net addition of 0.1 billion barrels. NGL production rose in 2008 by 1.1 percent to 0.8 billion barrels.

Crude Oil

In contrast to natural gas, reported crude oil proved reserves declined by more than 10 percent to 19.1 billion barrels, despite a third year of increased discoveries (Figure 3). Net negative revisions were about the same as the volume produced during the year, and nearly 1.5 times as much as was discovered. The overall decline in reported proved reserves of crude oil was the largest in the 32 years that EIA has published estimates (Figure 4).



Net Revisions and Other. From a long-term perspective, the steep decline in crude oil proved reserves is probably misleading. It arises almost entirely from negative net revisions, which in turn are largely a result of the fall in the price that operators used to estimate how much oil they could economically produce. Generally, higher prices mean that operators can economically produce more from the same portfolio of resources, thus raising proved reserves estimates. Lower prices have the opposite effect.

SEC regulations in effect through 2008 required operators to use the commodity price on the last trading day of the year to estimate proved reserves. Depending on year-end prices, a comparatively volatile year like 2008 can have major implications for revisions to proved reserves.⁸ At the beginning of 2008, the spot price for West Texas Intermediate (WTI) crude oil stood at $99.64 per barrel. In early July, it rose as high as $145.31 per barrel, but fell to $44.60 per barrel by year's end. This amounts to a 55 percent price decline from the beginning to the end of the year, a fall that is reflected in the large negative revisions to crude oil proved reserves. As it turned out, the end-of-year price was close to the bottom of the market - the lowest WTI price for 2008 and 2009 to date was $30.28 per barrel on December 23, 2008.

The changes to SEC rules for the 2009 reporting year are designed to make proved reserves estimates less sensitive to short-term price fluctuations that sometimes occur at the end of the year. Using the new approach, the WTI price would have been $71.79 per barrel for 2007 and $101.63 for 2008, an increase of 42 percent. While the effect of the new methodology cannot be precisely estimated for past years, it seems certain that net revisions for 2008 would have been substantially less negative, or perhaps even positive, under the new reporting method. (Proved reserve estimates increased in 2007 when net revisions were positive due to higher end-of-year prices.) In any case, EIA's 2009 proved reserves estimates will reflect operators' reports based on the new regulations.⁹

Discoveries. Even while record negative revisions reduced overall crude oil proved reserves, 2008 saw a drilling boom in the first half of the year and an increase in new discoveries of crude oil for the year. The largest share of total discoveries in U.S. oil reserves in 2008 came from extensions of existing fields. (With oil, this observation does not always hold; in 2001 and 2003, very large discoveries of new fields in the Gulf of Mexico Outer Continental Shelf (OCS) accounted for the majority of overall discoveries.) Geographically, the largest volume of total discoveries in 2008 came from producing areas that were already large - the Gulf of Mexico OCS, with discoveries of 375 million barrels and Texas, with 250 million barrels of total discoveries. In the Gulf of Mexico OCS, this led to an overall increase in proved reserves, although overall offshore reserves fell because of larger decreases in the Pacific Federal Offshore. For Texas, large negative net revisions led to an overall decline in proved reserves of 11.1 percent.

The other notable source of total discoveries was North Dakota, which added 167 million barrels. These discoveries represent rapid growth in reserves in the Bakken shale and the underlying Three Forks formation. Operators can produce oil from the Bakken using the same horizontal drilling and hydraulic fracturing techniques used so widely for natural gas shale production. However, it is important to recognize the distinction between the production of oil from the layers of shale within the Bakken Formation and the extraction of oil from oil shale plays. See This Week In Petroleum, March 4, 2009.

Production. In 2008, operators responding to EIA's Annual Survey of Domestic Oil and Gas Reserves reported producing about 1.7 billion barrels, a decrease of 1.1 percent from 2007. The decline was primarily the result of reduced Gulf of Mexico OCS volumes due largely to shut-in of producing facilities during and after Hurricanes Gustav and Ike and a 5 percent production decline in Alaska.

¹ Securities and Exchange Commission, Modernization of Oil and Gas Reporting (SEC Release No. 33-8995, pp. 11-12)

² Dry natural gas is the volume deliverable to consumers after liquefiable hydrocarbons and excess nonhydrocarbon gases have been removed.

³ Natural Gas Intelligence, Daily Gas Price Index

⁴ Natural Gas Intelligence, Daily Gas Price Index

⁵ Energy Information Administration, Office of Oil and Gas

⁶ The U.S. Geological Survey (USGS) defines a play as a set of discovered or undiscovered oil and gas accumulations or prospects that exhibit nearly identical geological characteristics. (USGS, Energy Resource Program)

⁷ Energy Information Administration, Office of Oil and Gas

⁸ Energy Information Administration, reports of daily spot prices from Reuters, Ltd.

⁹ A similar logic applies to natural gas. The end-of-year 2008 price at Henry Hub fell by 21 percent from the same period in 2007, from $7.11 per MMBtu to $5.63 per MMBtu, but the yearly average under the new SEC regulations would have increased 32 percent from $6.76 per MMBtu to $8.93 per MMBtu. Presumably, under the 2009 accounting rules, dry natural gas net revisions would have been more positive than they were in 2008.