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Math Problems: Production In Natural Gas
By: Hard Assets Investor   Monday, April 5, 2010 5:10 PM
As E&P technology improved, it has unlocked previously inaccessible natural gas deposits in shale fields, such as those in Louisiana, Pennsylvania and New York. According to Reuters, the development of "fracking" technology, or hydraulic fracturing, has helped boost U.S. reserves of natural gas by a whopping 33 percent just since 2006.

Of course, this output explosion means it's much harder for the EIA to get a sense of the total U.S. market by just looking at the largest companies. It's even harder when you consider that the agency relies on data anywhere from two to seven years old to help estimate volume from smaller producers.

That has led to some "significant" overestimates for domestic natural gas production, says the EIA. For example, although the number of on-shore natural gas rigs dropped 60 percent overall in 2009, the EIA data state that natural gas supply actually rose by 4 percent.

This has meant the margin of error between supply and demand has widened starkly in the past few months, rendering the natural gas data almost useless to industry participants.

The Wall Street Journal reported that December's total gas supply stood at 87.8 billion cubic feet/day, while demand only reached 80 billion—leaving an unexplained deficit of 7.8 billion cubic feet. That's a margin of error near 10 percent, high enough to give even nonstatisticians the willies.

"When you have a 10% gap, that's somewhat making a mockery of the data," said Ben Dell, an analyst with Sanford C. Bernstein, to the WSJ.

Will The New Numbers Affect Prices?

In the next EIA-914 report, due out on April 30, the agency will use a new methodology to both revise January's numbers and analyze data for February. Exactly how the statistics will change is yet to be confirmed, but at the very least, the EIA says it will use more recent data in its production estimates for smaller companies (switching to data only 6-18 months old, rather than several years), and it will recalibrate data monthly, rather than annually.

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