In 1980, the National Petroleum Council (NPC) published the results of a two-year, multi-company study of unconventional natural gas1 It concluded that low permeability, "tight" gas reservoirs have significant potential for the U.S. domestic energy production. The size of this potential depends on the geological assessment, extraction technology performance, and production economics. The NPC assessment remains the most exhaustive and credible estimate of tight gas potential since its publication.
The Tight Gas Analysis System (TGAS) is a joint project of the Gas Research Institute and the U.S. Department of Energy. It is designed to "automate" the NPC analytical approach to tight gas assessment by creating a comprehensive model that will permit sensitivity analysis of key assumptions, updating as new data become available, and timely reinterpretation of results in light of changing technology and economics.
The TGAS model also introduces the concept of economic rent which was not explicitly reported in the NPC assessment. Economic rentis defined as the difference between the minimum required selling price for producing an incremental unit of gas (i.e., marginal cost) and current sales price. This approach assumes that all costs remain constant in real terms throughout the development of the project. This minimum required selling price is defined as that gas price (per Mcf) which equates the present value of the after-tax net cash flows from a project to zero; that is, the minimum price that fully reimburses all costs, including the risk adjusted cost of capital and taxes. Net cash flow is evaluated at the full cost of exploration and development; all transfer payments to government and royalty holders are included in this price. The reader should note that portions of this economic rent may be distributed among other participants in gas development including drillers, suppliers, royalty holders, and taxing agencies. However, if the NPC assumption that costs remain constant is retained, then economic rent is a useful index of economic attractiveness.