The current widely accepted models for generation of methane by thermal cracking of oil and by bacterial fermentation have several serious inconsistencies. Experiments show that high-temperature pyrolysis of liquid (C6+) hydrocarbons does not produce methane even if hydrogen is added to the feed, and condensate, which is generally assumed to be the direct precursor to methane, generally amounts to only a few percent of produced oil. The bacterial origin for methane generation at low temperatures is also flawed because the pores in mudrocks are too small relative to the dimensions of bacteria, making their proliferation unfeasible. Furthermore, it is well known that most of the methane in sedimentary basins is dissolved in the formation water, with only about 1% of the total occurring as free gas in conventional reservoirs, and today’s models for generation of methane cannot account for such enormous volumes.Two alternative models are advocated here: (1) high-temperature (>100-120°C) "thermic" methane -generation from alkylated aromatics in the organic matter dispersed in mudstones and (2) "CO2" methane formation by reaction of CO2 and H2 produced from decomposing organic matter, which occurs from low to high temperatures (throughout most of the burial history). These processes can generate enough methane to saturate formation water using only a few percent of the organic carbon in mudstones. Large accumulations of methane-rich gas in shale-dominated siliciclastic basins, like the Gulf of Mexico or North Sea, can be explained as the products of exsolution from upward-moving formation water. In most basins, the water-pressure profile typically increases from hydrostatic above 2-3 km depth to approach the hydrofracturing isobar (pore pressure between 1.8 and 2 times hydrostatic) at around 3-3.5 km. In this situation, most of the vertical water flow takes place via hydraulic fractures that have originated in highly overpressured high-permeability rock (sandstone) underlying the hydrofracturing isobar. It takes millions to tens of millions of years to form a significant accumulation by this means, but if the hydraulic fractures originate in previous gas accumulations, the time required can be reduced by two orders of magnitude. For the subordinate proportion of methane formed in source rocks, as opposed to the main proportion formed in normal mudrocks, the gas resides in an entirely different pore system than the oil. Most of the free gas is contained in the inorganic pores, whereas the oil is confined within the kerogen.