Drill, Baby, Drill Can Unconventionals Usher in a New Era of Energy Abundance? by J. David Hughes, February 2013, Post Carbon Institute
We’re on the cusp of an oil and gas revolution
But what if it’s all just a short term bubble?
Executive Summary
Despite the rhetoric, the United States is highly unlikely to become energy independent unless rates of energy consumption are radically reduced. … And yet, the media onslaught of a forthcoming energy bonanza persists. … The net energy, or “energy returned on energy invested” (EROEI), of unconventional resources is generally much lower than for conventional resources. Lower EROEI translates to higher production costs, lower production rates and usually more collateral environmental damage in extraction. … Thus the world faces not so much a resource problem as a rate of supply problem, along with the problem of the collateral environmental impacts of maintaining sufficient rates of supply.
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Shale gas production has grown explosively to account for nearly 40 percent of U.S. natural gas production; nevertheless production has been on a plateau since December 2011 —80 percent of shale gas production comes from five plays, several of which are in decline. … High collateral environmental impacts have been followed by pushback from citizens, resulting in moratoriums in New York State and Maryland and protests in other states.
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Other unconventional fossil fuel resources, such as oil shale, coalbed methane, gas hydrates, and Arctic oil and gas—as well as technologies like coal- and gas-to-liquids, and in situ coal gasification—are also sometimes proclaimed to be the next great energy hope. But each of these is likely to be a small player in terms of rate of supply for the foreseeable future even though they have large in situ resources.
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Conclusion
The U.S. is a mature exploration and development province for oil and gas. New technologies of large scale, multistage, hydraulic fracturing of horizontal wells have allowed previously inaccessible shale gas and tight oil to reverse the long-standing decline of U.S. oil and gas production. This production growth is important and has provided some breathing room. Nevertheless, the projections by pundits and some government agencies that these technologies can provide endless growth heralding a new era of “energy independence,” in which the U.S. will become a substantial net exporter of energy, are entirely unwarranted based on the fundamentals. At the end of the day fossil fuels are finite and these exuberant forecasts will prove to be extremely difficult or impossible to achieve.
A new energy dialogue is needed in the U.S. with an understanding of the true potential, limitations, and costs—both financial and environmental—of the various fossil fuel energy panaceas being touted by industry and government proponents. The U.S. cannot drill and frack its way to “energy independence.” At best, shale gas, tight oil, tar sands, and other unconventional resources provide a temporary reprieve from having to deal with the real problems: fossil fuels are finite, and production of new fossil fuel resources tends to be increasingly expensive and environmentally damaging. [Emphasis added]
Canadian geologist’s study challenges popular assumptions about ‘fracking’ by Ivan Semeniuk, February 19, 2013, The Globe and Mail
With debate over hydraulic fracturing or “fracking” running at a fever pitch, it seems the only thing everyone can agree on is that, for better or worse, there is plenty of natural gas down there for the taking. Now a provocative analysis of unconventional fuel reserves in the United States aims to slap a big question mark over that assumption. In a comprehensive look at all the major shale gas plays currently being tapped across the U.S., the study focuses on the rapid decline of individual gas wells, along with entire fields, and concludes that optimistic projections for a long-running boom that will unleash cheap gas for decades to come are unwarranted. “The hype around shale gas is just that,” said David Hughes, a geologist and former research manager with the Geological Survey of Canada who authored the study, which was release on Tuesday.
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It’s not that shale gas isn’t abundant, Dr. Hughes says, but that fracking only releases gas from a relatively small volume of rock. And apart from a few “sweet spots,” much of the overall reserve is of relatively marginal quality. Once the sweet spots are tapped out, continuing to get gas out of the ground at the current rate is going to require a vastly ramped-up effort with attendant environmental costs. The likely outcome, he says, is a decline in production and a rise in price, which means that expectations that gas will replace coal as an economically viable, cleaner burning alternative, or enable the U.S. to become a net exporter of liquid natural gas, are off base.
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But Dr. Hughes say those projections are too rosy, and fail to take proper account of the fact that most wells fall to 15 per cent of initial productivity after just four to six years. Maintaining supply in the face of such decline will require much more fracking, at the rate of more than 70,000 new wells per year by 2040, to meet the EIA projection. Increased costs and growing concerns about environmental impact could make such a level of development untenable. The assessment is sure to meet with plenty of resistance. Daniel Whitten, a spokesman for America’s Natural Gas Alliance, based in Washington, said Dr. Hughes`conclusions run counter to several government and academic studies, “all of which forecast robust supplies of natural gas for many generations to come.” Andrew Miall, a professor of geology at the University of Toronto who provided an independent reviewed of Dr. Hughes’ report, said that while it may represent a minority opinion, it is a “clear-eyed look” at the geological underpinnings of the shale gas industry that deserves wider notice. “It shows that this isn`t a resource that flows freely,” Dr. Miall said. [Emphasis added]
The Making of a Natural Gas Glut, Wall Street drives the shale boom like it did the housing mortgage scandal: report by Andrew Nikiforuk, February 20, 2013, TheTyee.ca
A former investment banker says the explosion in shale gas development, such as frenzied activity in northern B.C., was a financial mania largely driven by Wall Street bankers intent on capitalizing upon a record $46-billion worth of mergers and acquisitions that shook up the troubled industry in 2011. In an attempt to meet unrealistic financial production targets (and please Wall Street), the industry drove natural gas prices to uneconomic lows in recent years, throwing the entire industry and its backers into panic mode, says Deborah Rogers in a startling new report for the Post-Carbon Institute. Rogers, who once worked as a financial consultant for Merrill Lynch and is a member of the U.S. Extractive Industries Transparency Initiative (USEITI), adds that shale gas reserves have been vastly overestimated and overhyped. Moreover, new data confirms rapid decline rates and poor recovery levels, which means limited revenue for resource owners such as the people of British Columbia.
As a consequence Rogers recommends that governments such as British Columbia that have actively served as cheerleaders for shale gas development with public subsidies need to urgently revisit their public policy.
Shale gas estimates are not only wildly optimistic, but shale gas fields are consistently under-performing with extreme environmental costs for rural communities. “Every region in the U.S. which has shale development provides a cautionary tale,” says Rogers. “Economic stability has proved elusive. Environmental degradation and peripheral costs, however, have proved very real indeed.” Moreover, the claim that shale gas will propel the continent to “energy independence” is a cruel joke, says Rogers. Multinationals are now scrambling to get governments to subsidize schemes to liquify and export the temporary gas glut to Asian markets for higher prices. “Platform rhetoric about energy independence is nonsense as most people in industry recognize. … If shale developers can export their product to Asia where they will be paid multiples of what they can expect domestically, then that is where the gas will go.”
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‘SHALE AND WALL STREET’: SEVEN CONCLUSIONS
Deborah Rogers’ report for the Post-Carbon Institute makes these assertions:
1. Wall Street promoted the shale gas drilling frenzy, which resulted in prices lower than the cost of production and thereby profited [enormously] from mergers & acquisitions and other transactional fees.
2. U.S. shale gas and shale oil reserves have been overestimated by a minimum of 100 per cent and by as much as 400 to 500 per cent by operators, according to actual well production data filed in various states.
3. Shale oil wells are following the same steep decline rates and poor recovery efficiency observed in shale gas wells.
4. The price of natural gas has been driven down largely due to severe overproduction in meeting financial analysts’ targets of production growth for share appreciation, coupled and exacerbated by imprudent leverage and thus a concomitant need to produce to meet debt service.
5. Due to extreme levels of debt, stated proved undeveloped reserves (PUDs) may not have been in compliance with SEC [Securities and Exchange Commission] rules at some shale companies because of the threat of collateral default for those operators.
6. Industry is demonstrating reticence to engage in further shale investment, abandoning pipeline projects, IPOs and joint venture projects in spite of public rhetoric proclaiming shales to be a panacea for U.S. energy policy.
7. Exportation is being pursued for the arbitrage between the domestic and international prices in an effort to shore up ailing balance sheets invested in shale assets.
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Investment banks promoted the mania even though industry had at the time little or no data on the life, quality and productivity of shale wells over time. Intense drilling resulted in a massive glut of natural gas that dropped natural gas prices to all-time lows, forcing highly indebted companies such as Encana and Chesapeake to sell off assets and do merger deals with foreign firms. … As soon as operators realized the short life span of shale wells, they began to download assets in 2009. The primary players in one of the first shale gas booms, the Barnett play in Texas, including Encana, Range Resources, Chesapeake and Quicksilver Resources, sold off most of their assets by 2011. … “Shale gas accounted for $46.5 billion in deals in the U.S. alone in 2011,” explains Rogers. “The mergers and acquisitions market for shale assets exploded in the prior two years directly in sync with the downward descent of natural gas prices. In much the same way as mortgage backed securities bolstered the banks’ profits before the downturn, energy M&A had now become the new profit centre within these banks.” Meanwhile, a variety of shale gas companies are beginning to post write-downs and losses while other firms have not renewed their leases or slowed down drilling altogether. Most firms switched to exploiting natural gas liquids in shale plays and then drove down the price of that resource too.
Few jobs, little stimulus
Although industry and government have trumpeted shale gas development as a miraculous economic engine that might even solve the common cold, the facts prove otherwise says Rogers. … “Direct industry jobs (for onshore and offshore oil and gas) have accounted for less than one-twentieth of one per cent of the overall U.S. labour market since 2003, according to the Bureau of Labor Statistics,” says Rogers. In Texas, shale gas activity has cost taxpayers billions in road repairs and lost royalties as well as higher levels of air pollution and water contamination. Shale gas is a classic energy bubble, concludes Rogers. It won’t build any bridges to the future other than debt and a dangerous treadmill of accelerated drilling to keep production flat. [Emphasis added]
Shale and Wall Street: Was the Decline in Natural Gas Prices Orchestrated? by Deborah Rogers, February 2013, Energy Policy Forum