Natural Gas: Advanced Exercises

Five exercises are provided for the student with advanced interest in resources. They challenge you to build, verify and improve upon Naill's original model.

1. Build and Verify

Build the model in Figure 4 and verify that it behaves as shown in Figure 5. As further verification, generate a time graph of the cost of exploration, the price and the reserve production ratio. Do these three variables also match the results in Naill's unregulated baseline run?

2. Double the Resource Base

Change the initial value of the unproven reserves to 2,000 TCF and verify that the Stella model delivers the same results as published by Naill. Do you agree with his conclusion that "an increase by a factor of two in the actual quantity of initial unproven reserves results in postponing the transition in supply for only ten years"?

3. Changing Estimates of Gas Resources During the Course of the Exploration Life Cycle

Naill describes a large range of uncertainty in the initial value assigned to the stock of unproven reserves. Review his explanation of why geologists arrive at such widely ranging estimates. Then review the work by Sterman and Richardson (1985) to simulate how geologists' estimates can change over time. Their model of the US petroleum industry is strikingly similar to Naill's model of natural gas, but their purpose is quite different. They wish to explain how geologists' estimates of a resource base change as more and more information becomes available.

To appreciate their purpose, think of the following possibilities:

The geologists get the estimate right early in the life cycle.

The estimates are too low in the early years, but they gradually approach the correct value over time.

The estimates start out too low, but they increase rapidly as more information becomes available. Unfortunately, they shoot past the correct amount, and downward corrections are needed later in the life cycle.

Review the 1985 article to learn which of the possible patterns is most characteristic of the nation's petroleum industry. Review the updated study (Davidsen 1990) to learn if they held the same view five years later. Do you agree with their characterization of oil resource estimation? Do you think their reasoning would apply to natural gas as well?

4. Gas Production in the 1980s and 1990s

Figure 5 shows natural gas usage peaking at over 20 TCF/yr in the year 1977 and declining rapidly thereafter. By 1997, gas use is projected at less than 5% of the peak value! This projection does not match recent history due, in part, to the absence of price regulations which were imposed in the 1960s. Review Nail's simulations and compare them with the actual data on gas production during the 1970s, 1980s and 1990s (CRA 1983; DOE 1996; Fisher 1994). You will learn that gas production did not climb as high in the 1970s, nor has it declined as rapidly in the 1980s and 1990s. Experiment with changes in the model parameters based on information that has become available in the past 25 years. Can you obtain a reasonable match between simulated gas production and historical production?

5. Coflow Approach to the Embedded Discovery Costs

Richardson (1997) has developed an interesting exercise involving Naill's use of a smooth function to approximate the total discovery cost of a cubic foot of gas when it reaches the retail market. Naill sets the length of the smoothing delay to the reserve production ratio because the ratio "gives a measure of the average time gas remains in the proven reserve category" (Naill 1973, p. 224). In effect, he is using the simple smooth function to keep track of the embedded costs of discovery over time.

Richardson advises that the "coflow" provides an improved method to track embedded costs. Coflow is short for coincident flows which are useful to track an attribute associated with a material flow (see the extra exercise for chapter 10). In this case, the main flow is gas discovery. The attribute to be tracked is the cost of each discovery. Expand Naill's model by introducing a coflow. Introduce a new converter for the price based on the total cost calculated from the coflow structure. Simulate the new model and document your results with a time graph of total cost and the price of natural gas. Does the improved simulation of embedded costs lead to significant changes in the results in Figure 5?