Recent news stories and press releases about U.S. natural gas supply, and the role of shale gas in improving U.S. energy supply security, have presented many conflicting estimates of America’s natural gas reserves. The accuracy of these estimates matter, because business investment and public policy decisions rely on such estimates of future energy availability and cost.

Financial markets also pay close attention to these figures for guidance on whether natural gas will be in undersupply or oversupply relative to market demand in coming years, a question that matters a great deal if you are betting on the future value of this energy commodity. Homeowners also care, because most of the cost of heating a home in northern climates is related to the cost of natural gas supply.

Mineral reserve and resource estimates are notoriously tricky, involving major assumptions about geology, technology, operating costs and future pricing of the mineral in question. For natural gas, the question of “How much is left?” has been of concern to industry and government officials for over 40 years. As shown in Exhibit 1, U.S. natural gas reserves and production rose roughly in tandem from 1950 until about 1970, when first reserves, and then production, began to fall.

The physical shortages of the 1970s, caused by federal interference in the energy sector in the form of price controls that dissuaded exploration and development. Also during this period, the U.S. Congress banned natural gas usage in new power plants in the late 1970s and four liquefied natural gas (LNG) import terminals were built to allow us to import gas in the form of LNG to compensate for our lost domestic production.

All of this gave way almost immediately after President Reagan abolished energy price regulations. Subsequent to lifting of price controls, a long period of domestic supply began to come on line and the four LNG terminals, once built for importing gas and exporting dollars to foreign shores sat idly and largely mothballed for the next 20 years.

Exhibit 1: U.S. Natural Gas Proved Reserves (left axis) vs. Production (right axis)

Source: U.S. Department of Energy, Energy Information Administration

During this subsequent period, the U.S. and the world witnessed a huge build-out in natural gas-fired power generation owing to its low initial cost, high efficiency and very low carbon emissions. The second LNG boom, beginning in the mid-1990s and continuing to this day, was prompted by the common belief that both Europe and North America had finally largely exhausted their natural gas resources.

This led to a steady increase of U.S. natural gas prices through most of the first decade of this century, peaking in mid-2008 and then declined steadily when the combined impact of the economic recession (which reduced energy demand) and development by U.S. engineers of a new drilling technology was deployed that enabled us to recover a vast new natural gas resource in North America – shale gas which previously could not be recovered economically.

If you had followed the annually updated U.S. proved natural gas reserve estimates of our Department of Energy’s Energy Information Administration over this entire period, however, you would be hard pressed to identify much cause for all the alternating optimism and despair. As shown in Exhibit 2, from 1970 on, the ratio of proved reserves-to-production (R/P), which provides a measure of the remaining years of gas supply, stood at roughly 10 years. In other words, U.S. producers were finding enough new gas reserves each year to replace the previous year’s production.

Exhibit 2: U.S. Gas Production vs. Years of Remaining Proved Reserves

Source: U.S. Department of Energy, Energy Information Administration

So what’s all this we’ve been hearing over the past few years about the “100 years of gas supply” that shale gas development is supposed to provide?

These pronouncements are centered around the term “potential” or “recoverable”, not “proven” as used in the statistics above. This is not a slight of hand but rather reflects a long standing standard of care used by the industry that is based on the prudent use of capital deployment.

Over time, most companies in the business of accessing, recovering and selling natural gas have recognized that a 10-year relatively certain supply on hand for sale is about as much insurance as they need for business continuity. Why tie up money “in the ground” when it’s not really necessary? So the best way of thinking about proved reserves is as “in-stock inventory,” ready to sell, whereas “recoverable” reserves are inventory parts that have been identified but where capital has not been deployed to assemble them because they are not yet needed. This is why proved gas reserves so consistently hover around an R/P ratio of ten years, as noted above.

Is all this natural gas really there? The truth is that we really don’t know: there may be more or less, but history tells us that there is probably even more. The bottom line is that estimates of potentially recoverable resources are estimates, made by the people best qualified to know, who have performed exceedingly well in the past by relying on increasingly better technology and proven methodologies.

These growing estimates of potential gas resources is good news indeed, as they constitute very big numbers, indicating decades of adequate reserves with additional development and open the United States up for policy options that were not available to it in the past.

It is my hope that these policy options will: (a) turn into prudent programs that allow the United States to reduce its outflow of capital for imported energy, (b) allow firms to compete more effectively because of competitive energy costs, and (c) enable firms to regain confidence in domestic regulatory energy policy and supply so they can repatriate the many manufacturing jobs that have fled our shores since the early 1970’s.