By Richard Martin

In what producers and marketers of natural gas will consider a piece of notably bad timing, last week the Golden, Colo.-based Potential Gas Committee released its biennial estimate of  U.S. natural gas reserves.

Concluding that accessible reserves have risen by 39 percent since the 2007 report, the estimate promptly sent gas prices tumbling by nearly 4 percent – a decline accelerated by the Energy Information Administration’s weekly stockpile report that said gas on hand had increased more than predicted.

Driven by innovations in exploration and drilling technology, estimates of gas reserves have been spiking sharply upwards for the last couple of years. In 2008 the American Clean Skies Foundation said that the U.S. has up to 2247 trillion cubic feet of natural gas in reserve, which would be more than a century’s supply at current usage levels. And in April of last year,  the U.S. Geological Survey stated that the Bakken Field, which stretches from the Canadian border down into North Dakota and Montana, contains “an estimated 3.0 to 4.3 billion barrels of undiscovered, technically recoverable oil.” That’s a whopping 25-fold increase in the amount of recoverable oil compared to the agency’s previous, 1995 estimate of Bakken reserves.

As I noted in an earlier post, some of these estimates are likely exaggerated. The USGS Bakken survey, which was commissioned by Democratic Sen. Byron Dorgan, of North Dakota, includes oil that is “technically recoverable” but still likely too expensive and too laborious to produce. This analysis on the Oil Drum blog, written by a petroleum engineer under the name Piccolo, examines skeptically the study’s claims.

The Clear Skies and Potential Gas estimates both come from industry-funded bodies that are in the business of lobbying for more use of (and more federal subsidies for) natural gas. In this situation gas producers are in a dilemma: estimates of vast reserves of natural gas are a double-edged sword. On the one hand they are designed to convince the public, and lawmakers, that the country can shift to natural gas as a replacement for expensive imported oil.

“I launched the Pickens Plan a year ago to help reduce our dangerous dependence on foreign oil, and using our abundant supply of natural gas as a transition fuel for fleet vehicles and heavy-duty trucks is a key element of that plan,” oil tycoon T. Boone Pickens told the Associated Press last week.

On the other hand, the more the putative supply of gas in the ground rises, the more the price gets depressed. Prices have plummeted nearly 70 percent from their peak a year ago, and they continue to drop – to around $4 per 1000 cubic feet this week. In case you think that drop is a temporary anomaly, have a look at this chart of gas futures, stretching out three months. It’s hard to drill for more gas when it’s unprofitable to produce.

Nevertheless some investors believe that now is a good time to buy shares in natural gas companies. Writing on Seeking Alpha, Vitaliy Katsenelson offers “Six Reasons Why Gas is a Better Investment Than Oil.” They include the fact that the price ratio of oil to gas, at around 17 to 1, is at a historic high. “Natural gas prices will go up, oil will decline, or both,” Katsenelson asserts. Big Oil, apparently, concurs. While production on the Western Slope has declined drastically, investment in capacity there has not ceased.

ExxonMobil said last week it has installed new field processing facilities in the Piceance Basin, adding the capacity to process up to 200 million cubic feet per day.

Eventually, gas prices will recover to a point where it’s once again economical to produce. At that point those inflated estimates of available reserves will start to be useful again. Until then only those with deep pockets will be able to withstand the current depression.