The Darker Shades Of Shale
TUESDAY, AUGUST 20, 2013 4:35 PM
Russell Lee Dust in the Bakken October 1937
by Raul Ilargi Meijer, The Automatic Earth, August 20, 2013
No, I wasn't going to write a third article on shale in 2 weeks, absolutely not. But what I've read these past few days doesn't leave me much choice. It turns out that the entire plethora of doubts I have raised in Shale Is A Pipedream Sold To Greater Fools and London Is Fracking, And I Live By The River are now also being raised on a larger scale: the media are - belatedly as usual - waking up. But that doesn't mean they understand what's going on. They're clueless.
What we see in for instance an article from Bloomberg, and an editorial from the Guardian, is that they do not understand the effect of depletion rates; it's not even mentioned. Neither do they understand how much of a straightforward and outright speculation scheme bubble shale has been to date. Instead, they seem to think that lower than expected reserves are the main topic, or at best environmental concerns.
Neither is true; they are important, but the main question may not be whether fracking is environmentally safe, but if it's economically safe. The economic case for fracking, and the entire shale oil and gas industry, is so shaky it would be criminally stupid to let it continue and risk any environmental damage. Shale is not about energy, it's about speculation. Looking at the numbers, it's obvious the returns don't justify the levels of investment -and I'm not even talking energy returns, and that means it'll all be over soon. Bloomberg:
Oil companies are hitting the brakes on a U.S. shale land grab that produced an abundance of cheap natural gas - and troubles for the industry.
The spending slowdown by international companies including BHP Billiton and Royal Dutch Shell comes amid a series of write-downs of oil and gas shale assets, caused by plunging prices and disappointing wells. The companies are turning instead to developing current projects, unable to justify buying more property while fields bought during the 2009-2012 flurry remain below their purchase price, according to analysts.
The deal-making slump, which may last for years, threatens to slow oil and gas production growth as companies that built up debt during the rush for shale acreage can’t depend on asset sales to fund drilling programs. The decline has pushed acquisitions of North American energy assets in the first-half of the year to the lowest since 2004. [..]
North American oil and gas deals, including shale assets, plunged 52% to $26 billion in the first six months from $54 billion in the year-ago period, according to data compiled by Bloomberg. During the drilling frenzy of 2009 through 2012, energy companies spent more than $461 billion buying North American oil and gas properties, the data show.
Prior to this year, oil and gas transactions ranked among the top two in total deal values every year since 2005, except 2008 when they were fourth. So far this year, oil and gas isn’t among the top five.
Bloomberg notes the numbers, but has no idea what they mean or where they come from. Which may not be all that surprising given that the industry itself is only just finding out, but Bloomberg journalists should do their homework.
The land grab began more than a decade ago when improved drilling methods and a process called hydraulic fracturing, which cracks rock deep underground to release oil and natural gas, opened up new production in previously untappable shale fields.
The rush accelerated in 2004 as more shale fields in North Dakota, Pennsylvania and Ohio were identified, opening new troves of petroleum and the prospect of energy independence in North America.
There was never any such prospect. From the very beginning, it was a manufactured illusion designed to make huge profits on land and assets sales.
As overseas buyers moved in, booming production soon led to oversupplies, and gas prices plunged to a 10-year low in 2012, forcing companies to write-down the value of some of their assets. Companies were also hurt when some fields thought to be rich in oil proved to contain less than anticipated.
That shortfall caused Shell to write down the value of its North American holdings by more than $2 billion last quarter. Shell, based in The Hague, paid $6.7 billion for North American energy assets in seven transactions since 2009, according to data compiled by Bloomberg.
The company told investors this month that it expects its North American oil and gas exploration to remain unprofitable until at least next year. "The major acreage deals are behind us now," Shell Chief Executive Officer Peter Voser said in a conference call with analysts.
BHP said it would cut the value of its Arkansas shale assets by $2.8 billion. During a May 14 conference presentation, CEO Andrew Mackenzie said capital and exploration spending will "decline significantly" to around $18 billion in 2014, and continue to fall after that.
Firms depending on asset sales to help finance drilling may not have enough money to pay for higher oil and gas production, said Eric Nuttall, who oversees C$70 million ($68 million) at Sprott Asset Management LP in Toronto. That could slow output growth, especially as companies try to avoid taking on more debt. "A lot of companies have let leverage get out of hand," he said, speaking about Canadian firms.
Leveraged bets. I smell Wall Street. We'll get back to that. First, a little problem in Ohio, as noted in New Scientist:
Protests against proposed fracking operations in southern England culminated today with the arrest of Caroline Lucas, a Green Party member of parliament. Meanwhile, new geophysical research concludes that over 100 small earthquakes were triggered in a single year of fracking-related activities in one region of Ohio.
[..] The Ohio quakes, centred around Youngstown, were triggered by the disposal of wastewater from fracking operations in the neighbouring state of Pennsylvania rather than by the fracking process itself.
The new geophysical research, by Won-Young Kim at Columbia University in Palisades, New York, is the latest to suggest that the main risk of earthquakes associated with fracking relates to the way the water used in the operations is disposed of afterwards. In Ohio, the wastewater was injected into a deep well. This raised the pressure of water within the rock and triggered 109 small quakes between January 2011 and February 2012. The largest, on 31 December 2011, had a magnitude of 3.9.
And how can you not love this angle?
The Church of England is fighting to claim the rights to minerals beneath thousands of homes and farms, it emerged last night. Legal action has already begun, raising fears the Church could try to cash in on the controversial process of fracking.
Under a new law, landowners have until October to assert their rights over minerals. Residents across the country have now started receiving letters from the Land Registry, informing them that the Church is seeking to register the mineral rights to the earth beneath their property. Church Commissioners – who manage the Church’s investments – are trying to assert ownership of 500,000 acres of land, an area roughly the size of Sussex.
The claim, which lawyers believe could allow the Church to profit from fracking, is being made under laws dating back to the Norman Conquest. The age-old laws give ‘lords of the manor’ the rights to extract anything of value from the earth underneath property on their estates. The Church still holds these rights in several parts of England. These include some places where geologists believe energy can be extracted by fracking – the controversial process of extracting oil and cash by fracturing underground rocks with water and chemicals.
[..] ... the commissioners have started sending legal letters to residents informing them of the Church’s ‘unilateral’ right to benefit from any mines and minerals under their land. One recipient spoke of his concerns that the Church’s claim could be linked to future fracking projects. Dr Richard Lawson, a retired GP who lives in the Mendip Hills in Somerset, said: ‘It’s an ethical question for the Church – will they use their mineral rights to block fracking or to make money out of it?’
[..] ... the Church has released a statement insisting that they have ‘no particular plans to mine under any property,’ adding: ‘This is confined to registering what the Commissioners have owned for many years. There is absolutely no link with fracking.’
Meanwhile, at the Guardian:
The UK government, by appearing to rush to judgment in favour of fracking for gas, has lost any power of persuasion it might have had in the more measured debate that remains necessary but now seems increasingly unlikely. Similarly, by choosing its first exploratory oil drilling site in the south in a picturesque village within easy reach of London just as the politicians go on holiday, the energy firm Cuadrilla has predictably aroused the kind of alliance between celebrities, environmentalists and not-in-my-back-yard Tory voters that has barely been seen in a generation. This is no way to resolve a complex question that could shape the cost and security of the UK's energy supplies for decades.
Taken together, a chancellor with a reputation as hostile to the green agenda as Mr Osborne's, and a department for energy and climate change torn between the greenie Lib Dem secretary of state, Ed Davey, and a business minister, Michael Fallon, who is openly sceptical about key aspects of climate change policy like setting specific objectives to cut carbon emissions, the coalition is always going to struggle to sound open-minded.
Yet it has a case to make. Look at the report the government commissioned from the Royal Society and the Royal Academy of Engineering which concluded in June last year that, given tight regulation and monitoring then in technical health and environmental terms, fracking is safe. The risks of earthquakes, polluted water tables and air pollution were either negligible or capable of management. But what the report also said – and few picked up on – was that the report's authors drew particular attention to the fact they had not considered the impact on climate change objectives of either extracting or burning shale gas.
No depletion rates, no land speculation, but "the cost and security of the UK's energy supplies for decades". The Guardian's editorial staff really has no idea what they're talking about. And THAT, messieurs et mesdames, is "no way to resolve a complex question". Like Bloomberg, the Guardian should do its homework. That is, unless its sees its role as kowtowing to a deluded government and a less-than-honest industry.
Wall Street is not done yet, not by a long shot. You got a good sting, you export it. We already saw earlier how shale is being promoted in China. Here's some South America cheerleading from oilprice.com:
We've talked about unconventional gas drilling underway in Chile. Now it appears another Latin American nation wants to get in on the act: Brazil. U.S. Energy Secretary Ernest Moniz talked shale during a visit to Brazil this weekend. Moniz noted that U.S energy companies are eager to use their unconventional expertise to help exploit Brazil's resources.
There is certainly geologic potential here. Earlier this year, state hydrocarbon agency ANP estimated that Brazil may hold over 500 trillion cubic feet of unconventional gas reserves. [..] The gas market here is reasonable. With Brazil in fact looking to increase domestic supply and move away from expensive LNG. With all these pluses, this might be a place where shale can work. We'll see what the bidding is like November 28 to 29. Here's to the new shale frontiers.
And it's not as if it all the information need be new to these folk. Forbes published this Robert Ayers piece last May, and again it's about the numbers:
[US ] investment in shale in 2010 and 2011 was apparently a trillion dollars, with another $600 billion scheduled for 2012.
Indeed, it does appear at first glance that the kinds of shale deposits that contain recoverable gas and oil are very large. The Bakken and Eagle Ford shales under Montana and North Dakota contain up to 700 billion barrels of fluid oil bound tightly into sandstone. According to the current wisdom of the U.S. Geological Survey, 3 to 4.3 billion barrels of the oil will be recoverable, amounting to 6 months or so of current U.S. consumption. Even if the recovery rate is doubled or quadrupled, it would take care of perhaps two years of current US consumption.
Complicating the issue is the fact that shale gas (and oil) wells peak and decline much more rapidly than conventional wells. The Bakken play declined about 69% in the first year, 39% in the second year, 26% in the third year, etc.
[..] ... drilling for gas in the US trebled from 2000 to 2009, while the quantity of gas recovered remained virtually constant. Drilling for oil in the US in 2012 was at the rate of 25,000 new wells per year, just to keep output at the same level as it was in the year 2000, when only 5,000 wells were drilled. [..]
There will surely be a boomlet in shale gas and oil, but my opinion, for what it is worth, is that the fracking boom is partly – perhaps largely – hype, and that a lot of the small investors now being solicited by various investment publications will lose their shirts. I think the head of the IEA has been quite irresponsible in attaching her institution’s good name to such a dubious proposition. To put it in quantitative terms, I accept David Hughes' conclusion that the peak of shale oil will occur (circa 2020) but will be around only about one third of the IEA’s 10 million bbl/day estimate for natural gas liquids and a similar fraction of Citi-Group’s bloated estimate of about 4 million bbl/day for U.S. shale oil.
But my favorite this week comed form close to home, from Nassim, a commenter at the Automatic Earth, who played around with the North Dakota government's proprietary Historical Bakken Oil Stats:
[Here's] the last 6 months of data - to get a bigger sample.
Number of additional wells = 840
Number of additional barrels/day = 52,828
Average increase in barrels/day/well = 62.89
If it costs $8 million per well, that works out at a capital cost of $127,205 per barrel/day. If their profit margin - just for the sake of argument - is $30/barrel, this suggests that it takes $11.6 of investment to make $1/year of return.
In the table, the average oil production per well is 129 barrels/day. The numbers above suggest it is more like 62 barrels/day for the newer wells. Really scary stuff.
If you want to dig deeper into the role Wall Street plays in the shale bubble, I suggest you read energy banker Deborah Rogers at Energy Policy Forum. Here's is the executive summary, click the link to read the rest.
In 2011, shale mergers and acquisitions (M&A) accounted for $46.5 billion in deals and became one of the largest profit centers for some Wall Street investment banks. This anomaly bears scrutiny since shale wells were considerably underperforming in dollar terms during this time. Analysts and investment bankers, nevertheless, emerged as some of the most vocal proponents of shale exploitation. By ensuring that production continued at a frenzied pace, in spite of poor well performance (in dollar terms), a glut in the market for natural gas resulted and prices were driven to new lows. In 2011, U.S. demand for natural gas was exceeded by supply by a factor of four.
It is highly unlikely that market-savvy bankers did not recognize that by overproducing natural gas a glut would occur with a concomitant severe price decline. This price decline, however, opened the door for significant transactional deals worth billions of dollars and thereby secured further large fees for the investment banks involved. In fact, shales became one of the largest profit centers within these banks in their energy M&A portfolios since 2010.
The recent natural gas market glut was largely effected through overproduction of natural gas in order to meet financial analyst’s production targets and to provide cash flow to support operators’ imprudent leverage positions. As prices plunged, Wall Street began executing deals to spin assets of troubled shale companies off to larger players in the industry. Such deals deteriorated only months later, resulting in massive write-downs in shale assets.
In addition, the banks were instrumental in crafting convoluted financial products such as VPP's (volumetric production payments); and in spite of the obvious lack of sophisticated knowledge by many of these investors about the intricacies and risks of shale production, these products were subsequently sold to investors such as pension funds. Further, leases were bundled and flipped on unproved shale fields in much the same way as mortgage-backed securities had been bundled and sold on questionable underlying mortgage assets prior to the economic downturn of 2007.
So, can we stop talking about shale and move on to more serious topics? Have I sufficiently made the case that shale is a source of waste and nonsense, not of energy? Probably not, right? And it seems so simple, all these people should take one good hard long look at shale in Poland, and they'd understand.
“We have a supply of natural gas that can last America nearly 100 years, and my administration will take every possible action to safely develop this energy.”
President Barack Obama
President Barack Obama
It won't even last 10 years. Far too little recoverable carbon has been bought with far too much borrowed money.
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