Fracking’s future an illusion at best by David Olive, February 25, 2013, The Toronto Star
The fantasy of “Saudi America” may end up making one of the speedier exits in the history of catchphrases. As recently as last year, the U.S. petroleum industry was boasting of a new, 100-year supply of oil and gas, mostly from advanced extraction technology — namely, hydraulic fracturing, or “fracking,” of underground rock formations. The industry’s irrational exuberance migrated to the industry-friendly International Energy Agency (IEA). The IEA predicted in 2011 that burgeoning U.S. oil production would overtake that of Saudi Arabia and Russia by 2020, and that America could achieve self-sufficiency in energy by 2035. “OPEC should find it challenging to survive another 60 years, let alone another decade,” a giddy Ed Morse, global head of commodities at Citigroup Inc., said of the Organization of Petroleum Exporting Countries in a Bloomberg interview earlier this month. “The U.S. should see its role in the world as a singular superpower enhanced and prolonged.” Yet while not exactly a hoax, the feel-good news about what The Economist dubbed a “North American hydrocarbon bonanza,” in which Alberta’s undeveloped shale gas and shale oil reserves alone might rival those of the U.S., is at best an illusion. Strip away the new reserves classified as merely “possible” and “speculative,” add in surging demand as world economies recover, and factor in soaring extraction costs as shale formations are rapidly depleted, and the century’s worth of additional petroleum resources quickly plunges to just 11 years’ worth of new supply.
A more sobering report by the Energy Information Administration, a data-gathering branch of the U.S. Department of Energy, puts recoverable shale-oil reserves in the U.S. Lower 48 states at 24 billion barrels. At the U.S. rate of consumption of 6.9 billion barrels in 2011, that’s a mere 3.5 years’ worth of new supply. And that’s ahead of a dynamic recovery in the U.S. economy and in energy consumption by mid-decade. Almost everything about this “bonanza” has been wildly misstated. The industry has exaggerated reserves, recovery rates, prices and economic viability. And it has understated the rapid depletion rates typical of shale plays and the runaway capital costs required to maintain production levels sufficient to make debt and lease payments. We are approaching the end game of yet another boom and bust cycle, no different in kind from the property bubble that triggered the Great Recession. Like that real-estate catastrophe, this bubble was spurred by easy money pushed at start-ups and blue-chip companies alike by Wall Street dealmakers preying on the greedy and gullible.
BG Group, the British gas giant, has taken a $1.3-billion write-down on its U.S. shale-gas investments. ExxonMobil Corp. is sitting on a staggering paper loss of about $20 billion on its 2010 purchase of shale gas producer XTO Energy, having paid $41 billion for XTO at the top of the market when gas prices were about twice their current level. Chesapeake Energy Corp. of Oklahoma City, former shale-energy darling, has seen its stock plunge by almost 20 per cent in the past year as it tries to scare up cash flow by hastily unloading $14 billion in assets. Scores of smaller producers and drillers have hit the wall as natural gas prices have collapsed by about 60 per cent since 2008, to a price far below extraction costs. Each boom-bust episode has been a failure in the allocation of capital. In a capitalist economy, that’s the function we chiefly expect of the private sector, which claims to be better at picking winners than government. In this case, roughly three-quarters of a trillion dollars invested in shale oil and gas has either gone down the rat-hole or been re-directed away from smarter investments in recapturing the lead in alternative energy and fuel efficiency technologies from the likes of China. … The pell-mell drilling of tens of thousands of wells has caused an inevitable natural-gas glut. “We just killed more meat than we could drag back to the cave and eat,” Maynard Holt, co-president of Houston investment bank and energy-project financier Tudor Pickering Holt & Co., told the New York Times. “Now we have a problem.”
Actually, shale gas operators have been losing money since 2008. Their scheme has been to invest heavily in new plays to demonstrate their viability in order to flip them to the likes of ExxonMobil. The buyers generally are suckers, since typically more than half the reserves of a shale play are exhausted in the first year. Shale drilling is woefully inefficient. The U.S. is now drilling about 25,000 wells a year to generate 2000 levels of production. In 2000, the U.S. was drilling just 5,000 wells a year. At last fall’s gathering of the American Geophysical Union, one presenter after another insisted that most of America’s shale-gas and shale-oil reserves will remain forever unrecoverable.
Fracking has been a dubious technological advance. Innovation in consumer electronics yields ever more functional gadgets that are smaller and less expensive. Something like the opposite applies to fracking. “Oil production technology is giving us ever more expensive oil with ever diminishing returns for the ever increasing effort that needs to be invested,” Raymond Pierrehumbert, a professor in geophysical sciences at University of Chicago, wrote this month in Slate. The gas glut has contributed to the lack of urgency in developing alternative energy sources, a transition from environmentally harmful fossil-fuel use that experts say will take a generation to pull off. No surprise there, given the absurdity that the world’s renewable energy industry receives about $88 billion a year in state subsidies, according to the United Nations, while the lucrative fossil-fuel industry has a stupendous $523 billion in government assistance shoved at it. It’s not that we lack the ingenuity for a widespread rollout of wind, solar and other energy alternatives. What’s missing is the willpower to mount a revolution in alternative energy. [Emphasis added]