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Lures To Energy Complacency Part III

July 2, 2012

This is Part III of a 5-part blog that addresses the various pressures brought on American society to believe that we have an abundance of oil and gas and therefore no problems with alarmists who warn of impending shortages. “Energy is the key which unlocks all other natural resources”.1 It is essential that we not delude ourselves about its availability so that we can prepare ourselves for the future.

If snake oil2 could be refined into gasoline and diesel fuel, the nation would have no foreign oil dependency problem. It is always plentiful and cheap. Snake oil is the fuel and balm that lures us to curse those we imagine are responsible for high gasoline prices, to grasp at “vast new” fossil energy sources, to ignore peak oil, and to banish fears of climate change, all the while assuring us that technology will solve any impediment to our god-given right to enjoy life as we always have in the past.

1Eugene Ayres and C.A. Scarlott, Energy Sources – the Wealth of the World (McGraw-Hill, 1952)

2The term “Snake oil”, folk etymology has it, originated as a corruption of Seneca Oil. Seneca Indians supposedly had been observed to use crude oil from surface seeps as a liniment. Whatever its origin, it has become a generic name for panaceas or miraculous remedies whose ingredients, unknown to the buyer, are mostly inert or ineffective. That is the sense in which I use it (Wikipedia, http://en.wikipedia.org/wiki/Snake_oil; see also Rosie Mestel, Snake Oil Salesmen Weren’t Always Considered Slimy, Los Angeles Times, July 1, 2002)

Part III. U.S. Natural Gas boom(let)

Unfortunately the increasing production of natural gas from shale formations is duplicating the fantasies of shale oil, including the hype:

“This ‘golden age of gas’ could wean us off foreign, unfriendly oil suppliers.”1

“A massive natural-gas discovery in Louisiana heralds a big shift in the nation’s energy landscape. After an era of declining production, the U.S. is now swimming in natural gas” 2

“The development of shale gas plays has become a ‘game changer’ for the U.S. natural gas market. The proliferation of activity into new shale plays has increased shale gas production in the United States from 0.39 trillion cubic feet in 2000 to 4.87 trillion cubic feet (tcf) in 2010”3

“We have a supply of natural gas that can last America nearly 100 years”4

“The natural gas industry, which less than a decade ago feared running out of domestic gas, is suddenly dealing with a glut so vast that import facilities are applying for licenses to export gas to Europe and Asia” 5

“Energy crisis is postponed as new gas rescues the world. Engineers have performed their magic once again. The world is not going to run short of energy as soon as feared”6

Figure 1. U.S. Natural Gas production, 1900 to 2009

Figure 1 provides a historical perspective of U.S. natural gas production from 1900 to 2009. It is noteworthy that the 2009 production is very close to the 1973 production peak (~22.6 trillion cubic feet–Tcf).7 Data assembled by the Energy Information Administration since the graph was created show that 2010 production (21.6 Tcf) is close to the 1973 peak, and the 2011 production (24.3 Tcf) exceeds the old peak. The history of natural gas production shows annual levels essentially identical to consumption levels until 1987 when consumption began to exceed production. Unlike oil, imports making up the difference between production and consumption have always been low. A sharp increase in production beginning in 2005 is nearly compensated by an increase in consumption, leaving a deficit of 2.5 Tcf in 2010.

As drilling activity in shale deposits blossomed in the late 1990s, the average productivity per well dropped dramatically at the same time as the number of wells drilled increased (Figure 2).

Figure 2. U.S. gas production and number of producing wells 1990 to 2009. Click to enlarge

This is due both to much lower initial production of shale gas wells and their very high production decline rates. These traits, shared with shale oil, result from very low flow rates.

The continued rise in drilling rates reflects the need to replace rapidly declining production of the earlier wells.

Figure 3. Number of wells vs natural gas production 1990 to 2011

Figure 3 shows that gas production was slow to respond during rapidly increasing drilling rates between 1999 and 2008 but rose from the 2008 low to a level nearly 16% above the 2001 level in 2011. Interestingly, however, the rising gas production did not reflect a precipitous drop of 50% in gas drilling rates in 2009. This reflects a shift of drilling focus to shale oil at a time in which gas prices plummeted to below break-even price and oil was enjoying high prices. The continued rise of gas production in spite of this shift is interpreted8 as due to the fact that oil production also produces gas, which masked the decline in gas well drilling.

Another factor affecting the decline in drilling is a 40% increase in average depth of wells drilled for gas and oil (Figure 4), raising capital expenses of drilling. This also increases the energy input required further marginalizing the value of the product (measured by the energy returned on the energy invested, EROEI).9

Figure 4. Total well length drilled vs average well depth. Click to enlarge

Lags in production vs drilling rates also contribute to the behavior shown in Figure 3. For example, declines in Texas gas production in the first 5 months of 2012 over 2011 production are still not as pronounced as might be expected from drilling decline because about 40% of current production comes from wells brought on line in the past 12 months, the time period of maximum well production from shale gas wells. The question remaining to be answered is when the full effects of reduced drilling are combined with rapid declines in well production, will renewed drilling allow production to catch up.10

Even catching up is not sufficient: “The level of drilling activity that [will] be required to maintain and grow U.S. gas production in the future [will] be unprecedented in the history of U.S. gas production.” 11 This cannot happen at the current price of natural gas (~$3.00 per thousand cubic feet), so we must look forward to significant cost increase. Producers are likely hoping for a spike in price, as happened four times in the 2000s,12 but if this doesn’t happen or persists no longer than previous spikes, it will be hard to make money drilling more shale gas wells.

Figure 5. Shale Gas production 2000 to 2011

What is the worth of recent shale gas production in terms of consumption? U.S. consumption for the year 2011 was 24.4 Tcf. Figure 5 shows that in 2011 total U.S. shale gas production amounted to a bit under 3.5 months of current consumption. Since the larger producers in this graph (Barnett, Haynesville, and Fayetteville) appear close to their peak production, sustainability of supply is in question.13 This makes a claim of 100 years supply of natural gas look somewhat hollow.

The 100 years supply claim is based on estimated resources, not reserves—resources are what’s in the ground whether we can get it out or not, reserves are the fraction of resources known to exist that can be produced economically with current techniques. Ignoring speculative resources and giving a conservative estimate of how much of probable resources can reasonably be considered as available, the Potential Gas Committee14 estimates that we have an 11 year supply. Added to existing gas reserves, the supply when developed is a total of 23 years at the present rate of consumption. This is all gas sources, not just limited to shale gas. To make matters worse, there will be less time if projected consumption increases are realized, and a major impending problem if we are dumb enough to export gas.

The assertion that we have 100 years supply of natural gas is basically meaningless. We don’t know what demands will be put on the reserves we do have 5 years from now let alone 100 years from now, and we can’t seem even today to make up our minds what the reserves might be (The Energy Information Administration recently dropped its guess for shale gas reserves 40% to a figure that is barely above 15 years supply at current consumption levels).

Whether reality will make inroads on shale gas extravagance is only slowly surfacing as it is so vigorously hyped by the snake oil merchants. Their success prompted the President to push its agenda15, has led devotees to contemplate North America becoming a natural gas exporting powerhouse16, even to the extent that an industry-sponsored course of instruction was held including this plank17, and has lured mainstream media into its grasp as a cure all for the energy crisis (Figure 6).

Many officials and scientists working in the natural gas industry know better as the New York Times has revealed in a stunning haul of industry e-mails and documents now made public in a form that protects its authors.18 Four samples that show the tenor of the documents:

August 2009 e-mail is in response to an article in an industry publication questioning shale gas economics. The official from IHS Drilling Data, a research company that specializes in energy issues, says that the word among independent oil and gas producers is that shale gas drilling is a Ponzi scheme and that it will be difficult for companies to make money in the Marcellus and Haynesville shale formations

August 2009 e-mail. Official of Anglo-European Energy, an oil and gas company compares the excitement surrounding shale gas to that which led to the mortgage bubble. He also says that after a lot of experience in the industry, he knows what good wells look like — they produce for a long time, they are cheap to operate, they produce large amounts of gas — and shale gas wells do not bear those characteristics.

July 2008 e-mail in which a geologist describes a report he helped to prepare for IHS CERA that took an independent look at the economic prospects for natural gas production in 275 areas in the United States and Canada. After looking at all of the costs of producing shale gas, the analysts reached conclusions that were “not kind” to many plays, including the Barnett shale. The geologist adds that one area where the analysts struggled was finding accurate assessments of how soon production would peter out from shale gas wells.

March 2010 e-mail. What really drives the shale mania? – Conventional exploration doesn’t work. I think managements had their back to the walls and were forced to embrace this Shale enthusiasm because the last 15 years has been so dismal for domestic exploration they were just out of options.

Sources and Notes

1Michael Barajas, Why the Great Shale Rush in the Eagle Ford May Be Over Sooner Than You Think, Current, March 14, 2012

2Ben Casselman, U.S. Gas Fields Go From Bust to Boom, Wall Street Journal, May 1, 2009. The metaphor, “swimming in natural gas”, is a bit misplaced considering buoyancy issues

3U.S. Energy Information Administration, World Shale Gas Resources: An Initial Assessment of 14 Regions Outside the United States, April 2011. The increase in production over a period of 10 years cited amounts to less than 5 days of current consumption. It is further stated that U.S. “Shale gas reserves have increased to about 60.6 trillion cubic feet by year-end 2009”, approximately 3 days of current annual consumption

4Remarks by President Obama In State of the Union Address, January 24, 2012.

5Clifford Krauss and Eric Lipton, Inching Toward Energy Independence In America, New York Times, March 22, 2012

6Ambrose Evans-Pritchard, Energy Crisis Is Postponed As New Gas Rescues the World, The Telegraph, October 11, 2009

7The labeling protocols are somewhat awkward. The production units, left side scale, are in millions of cubic feet, so a value 25,000,000, or 25 million million cubic feet is 25 trillion cubic feet, abbreviated Tcf

8David Hughes, With Gas So Cheap And Well Drilling Down, Why Is Gas Production So High? Post Carbon Institute, January 19, 2012

9Hughes, With Gas So Cheap, January 19, 2012

10“westexas”, The Oil Drum, Drumbeat comment July 25, 2012. Texas gas production figures available at http://www.rrc.state.tx.us/data/production/ogismcon.pdf

11David Hughes, Will Natural Gas Fuel America in the 21st Century? (Santa Rosa, California 2011)

12Jonathan Callahan, Gas Boom Goes Bust, The Oil Drum, February 6, 2012

13Arthur E. Berman, After the Gold Rush: A Perspective on Future U.S. Natural Gas Supply and Price, The Oil Drum, February 8, 2012

14Potential Gas Committee, report 2011, data provided by Berman, After The Gold Rush, February 2012

15Voicing strong support for the natural gas industry, a bipartisan group of eight federal lawmakers from gas-producing states sent a letter to President Obama on Monday asking him to promote continued natural gas development “by any means necessary, but most specifically, by unconventional shale gas recovery.” “The need for the United States to move toward energy independence becomes more crucial as the crisis in the Middle East and North Africa worsens,” the letter said” Nicole Foss, Get Ready for the North American Gas Shock, The Automatic Earth,  July 8, 2011. This is an excellent report covering many issues of shale gas hype.

16Nicole Foss, Shale Gas Reality Begins to Dawn, The Automatic Earth, June 24, 2012

17Electric Utility Consultants Inc. presented a course entitled Shale Gas: Commercial, Regulatory, and Environmental Aspects in May 2012. Description of the course includes the statement: The course will also highlight some of the emerging trends and issues resulting from U.S. shale gas development. One of the most interesting and potentially significant developments is the possibility that increased shale gas production may allow the U.S. to become a major exporter of natural gas as liquefied natural gas (LNG) – a significant shift in thinking from just a few years ago when it was anticipated that the U.S. would become one of the largest importers of LNG

18Over the past six months, the New York Times reviewed documents related to shale gas, including hundreds of industry e-mails, internal agency documents and reports by analysts, available at: http://www.nytimes.com/interactive/us/natural-gas-drilling-down-documents-4.html#document/p2/a23513

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