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Right now the fossil fuel industry, utility execs, pundits, and politicians from both parties would like us to believe that natural gas will solve our chronic energy woes. But they all suffer from short memories. For years, natural gas has been known in the field as the “crack cocaine of the power industry.” As one energy company official famously put it: “They get you hooked and then they raise the price.”

Natural gas earned this reputation because its prices have fluctuated dramatically over the years. When prices are low (like now), lawmakers, power utilities, and consumers eagerly embrace natural gas. Then the price rockets up and they all suffer the consequences.

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All this matters because Washington may be making long-term policy decisions for us based on false, or at least shaky, assumptions. When federal regulators take an overly optimistic natural gas industry at their word, they risk upping this country’s fossil fuel addiction and ensure that in due time we’re left stranded again in only a few short years without a realistic solution to our energy and climate change woes.

Energy markets as a whole swing like a pendulum, but we can still attempt to untangle the mechanisms that have anointed natural gas as energy-savior-du-jour once again — mechanisms that can be as tough to pin down as the odorless, colorless gas itself.

How much gas is there, really?

There is deep uncertainty about the amount of natural gas in the ground and what it will ultimately cost to extract it. Despite this, drillers typically operate on unwavering optimism that borders on hubris: The common refrain about oil and gas men (they are indeed almost always men) is that they are “often wrong but never doubting.”

After attacking anyone who questioned the irrational exuberance surrounding shale gas, these oil and gas men have had to reckon with several new batches of data — first from the U.S. Geological Survey and then from the Energy Information Administration (EIA) — that offer a more sober picture of this resource. Countless market analysts and news venues (like here, here, here, and here) have also started corroborating doubts about the industry’s prospects and its early optimism.

The source of the industry’s tank-half-full optimism isn’t baseless: No one can deny that there is a helluva lot of gas in this country. But there isn’t nearly as much as the industry and federal regulators initially predicted — despite the fact that President Obama and others continue to cite overly optimistic figures. It’s also patently obvious that drillers have miscalculated how much of this gas can be extracted without going bankrupt. Even longtime champions like Chesapeake have started scrambling to cut their drilling way back.

These so-called shale plays may dry up a lot faster than planned or companies (and investors and consumers) may get taken to the cleaners trying to tap these resources. While companies have predicted that the wells will produce gas for as long as 50 years, independent analysts say that, for many wells, the real number may be closer to seven.

How hard is it to get out of the ground, anyway?

Hint: It’s not easy. The oil and gas industry doesn’t like to discuss is how hard it is to find the best places to drill for shale gas. Starting about a decade ago, drillers began offering investors some lofty rhetoric about the productivity of shale wells. They argued that they could pump this stuff in a “manufacturing model” whereby they could drop a well anywhere in a drilling zone (called a “shale play”) and it would be equally productive (see also here [PDF, slide 3] or here).

It is now clear that not all areas of shale play perform the same. Investors, small companies, and some landowners who expected sky-high royalties have been disappointed — even in the heart of drilling country. A close look at a recent study from Louisiana State University [sub. req.] shows that the oil and gas industry woefully overinflated its predictions for how much gas the nearby Haynesville shale will produce. (Check out other smart analysis on this by energy analysts Art Berman, Bill Powers, and Chris Nedler.)

Many drillers wind up in a tough spot because the contracts they signed with landowners require them to drill wells quickly — if they don’t, they lose their leasing rights. Many of these companies are deeply in debt; in fact, some of them are so leveraged that they’re raising eyebrows among federal and state regulators, who question whether companies broke the law by possibly providing inflated estimates to investors for the amount of gas that they could profitably bring to market.

Can anybody make any money off of it?

That all depends on the jumpy price of natural gas: If it’s too low, like it is now, companies cannot make money drilling for it. They start taking drastic steps, like burning it on site rather than delivering it to market.

Even the auditing companies that work for the oil and gas industry cite problems. In September, Ryder Scott, one of the biggest firms that checks energy company books, reported [PDF] that only 16 percent of the 53 oil and gas companies it reviewed were following new federal rules that dictate how companies are supposed to calculate their estimates for investors and the public. The SEC needs only “simplistic math” to challenge the estimates being put forward by some of these companies, Ryder Scott concluded.

Eternally optimistic, oil and gas companies say that they will figure out new technologies that can help make gas wells more productive and profitable. They point to the enormous volumes of gas that they’ve already produced as evidence of their success.

But the question for consumers is whether low natural gas prices are sustainable — or even beneficial. In the short term, cheap gas prices are good for the consumer but Wall Street investors and companies may go belly up. But if gas prices start rebounding and drilling companies begin making money, it means gas prices for buyers will start rise. That’s bad news for consumers or utilities — especially those tied to power plants that spent billions to build natural gas electricity plants rather than, say, investing in sustainable and stable solar or wind. This sort of natural gas pricing whiplash has happened plenty of times before.

So why did the government buy into industry’s inflated analysis?

New evidence shows that regulators have gotten a bit too cozy with the industry, and that relationship may have been part of the reason that natural gas estimates were so overstated. Emails released by the EIA through the Freedom of Information Act in January feature exchanges between industry backers and energy officials discussing how the agency calculates its numbers.

“Resource estimates, such as they are, are always wrong,” wrote Bob Ineson, in an email to an EIA staffer last April. Resource estimates refer to approximations, in this case published by federal officials, for the amount of gas that exists in various shale formations around the country. Ineson is senior director of North American natural gas at the energy strategy company IHS-CERA, and is among the oil and gas industry’s biggest proponents.

“They are usually wrong (in fact almost always) to the low side,” Ineson explained to the EIA staffer, adding, “Our resource estimates exceed EIA’s and one of our geologists has been down to visit and go through our analysis.”

“I think this was a factor in EIA going as high as it has,” Ineson concluded, essentially taking credit for the agency offering oil and gas estimates that now are clearly overstated.

Of course, we now know that Ineson was dead wrong about the agency’s estimates being too low. In fact, they were way too high. And it was less than a year after this email exchange that the EIA had to perform an awkward u-turn and drastically slash its estimates.

But the more informative point in the exchange is what Ineson discloses about the relationship between the industry and energy officials: They have together built a culture where policy-informing government estimates get nudged upward by an overly optimistic industry.

Does any of this impact the environment? (Hint: Yes)

If individual shale gas wells are less productive than industry predicted, companies say they will simply drill more wells or simply re-frack wells repeatedly to get more gas flowing. That means more open spaces lost to industrial activity, more billions of gallons of clean water used, plus billions of gallons of contaminated and radioactive water produced. It means millions of exhaust-spewing truck trips and toxins being churned into the air by drilling-site generators and compressor stations. It also spells bad news for renewable energy sources like wind and solar, as natural gas slowly puts them out of business.

There is also a broader lesson here about good government and the way that federal energy officials go about calculating energy estimates. To a large degree, the EIA outsources its research for these estimates to private contracting firms that have deep ties to the oil and gas industry. This presents a major conflict of interest, since these firms aren’t about to anger their primary clients by questioning the hype about shale gas. That could have dire consequences for Wall Street and foreign investment in these drilling companies.

So the firms use optimistic assumptions drawn from data that comes from company press releases — and in the end, they hand the EIA optimistic reports that the agency peddles as federally backed science. As a result, the EIA is wrong time and again, as members of Congress [PDF] and some transparency advocacy groups have pointed out.

Some federal geologists have been voicing concerns behind the scenes for a while. They’ve complained vigorously, according to emails first published by the New York Times.

For example, in an April 27, 2010 email to a colleague, David Morehouse, a senior petroleum geologist at the EIA, vented about the agency’s lack of rigor and its dependence on industry information to produce its Annual Energy Outlook (or AEO 2011):

AEO 2011’s rosy view of shale gas is what you get when the current senior managers’ predilections are in effect and their modeling minions are forced to rely way too much on data from press releases and journalist’s reports, i.e. incomplete/selective and all too often unreal data.

Talk about a dangerous echo chamber: A government agency relies on industry data to calculate “independent” estimates, then industry proponents point to the government figures to bolster their rosy outlook.

This echo chamber is one powerful explanation for how federal energy officials have, wittingly or unwittingly, become peddlers of the so-called “crack cocaine of the power industry.”

Has the agency cleaned up its act? It has lowered its numbers. But only time will tell whether it has changed how it does its research.

In the meantime, we’ll all have to live with a natural gas boom that may turn out to be a lot more expensive — for both the environment and consumers — than the industry and regulators first believed.