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US Energy Independence: Another Pipe Dream, Says Analyst

US Energy Independence: Another Pipe Dream, Says Analyst.

by Andrew Nikiforuk, originally published by The Tyee  | TODAY

Tank cars offload crude, likely from the North Dakota Bakken formation. Photo by Roy Luck. Creative Commons licensed.

One of Canada’s top energy analysts has warned investors and geologists that “the shale revolution” will not meet conventional expectations as a so-called game-changer in energy production.

Speaking at the Denver meeting of the Geological Society of America and later at Queen’s University and an energy conference in Toronto, David Hughes challenged the assumptions of industry cheerleaders by spelling out startling depletion rates for high-cost unconventional shale and tight oil wells.

“The shale revolution has been a game-changer in that it has temporarily reversed a terminal decline in supplies from conventional sources,” said Hughes in both talks given in late October and early November. “Long-term sustainability is questionable and environmental impacts are a major concern.”

The geoscientist, who now lives on Cortes Island, has studied energy resources in Canada for four decades, including 32 years with the Geological Survey of Canada as a coal and natural gas specialist.

After reviewing data from unconventional oil wells, Hughes found that these difficult and high-cost operations deplete so rapidly that between 47 to 61 per cent of oil from plays like the Bakken, the first major tight oil play developed, is recovered within the first four years.

Hughes noted that the Bakken and Texas’ Eagle Ford plays, which currently produce two-thirds of U.S. tight oil and are supposed to take the country into energy independence territory, will actually peak in production by 2016 or 2017.

Incredibly, most tight oil wells, such as in North Dakota’s booming oilfields, will become “stripper wells” (producing less than 10 barrels a day) and be ready for abandonment within 11 to 24 years.

Shale no panacea

Shale gas wells follow a similar decline profile. In Louisiana’s Haynesville play and Pennsylvania’s contentious Marcellus fields, producing wells decline by as much as 66 per cent after the first year.

More than 3,500 wells have been drilled in the Haynesville play, which in 2012 was the top-producing shale gas play in the U.S., yet production is falling owing to the 47 per cent yearly field decline rate. The current price of gas is not high enough to justify the 600-plus wells needed annually to offset the steep field decline (each well costs between $8 to $10 million).

HaynesvilleGraph2_600px.jpg

Data from Drilling Info/HPDI.

“The shale revolution has provided a temporary respite from declining oil and gas production, but should not be viewed as a panacea for increasing energy consumption… rather it should be used as an opportunity to create the infrastructure needed for a lower energy throughput to maximize long-term energy security,” warned Hughes.

Hughes also told investors that they can no longer ignore the real and high-cost environmental issues associated with hydraulic fracturing, including high water consumption; groundwater contamination; methane leakage; land fragmentation; air pollution and property devaluation.

“There has been a great deal of pushback by many in the general public, and in state and national governments, to environmental issues surrounding hydraulic fracturing,” he said.

Quebec, Labrador and Newfoundland have declared moratoriums on the technology of high-volume horizontal hydraulic fracturing. In addition, Canada’s largest private sector union representing a high percentage of energy works hascalled for a national moratorium.

Although the number of gas-producing wells in Western Canada has reached an all-time high of 230,000 wells, actual gas production has been in decline since 2006.

Hughes also noted that the quality of shale oil and gas plays varies greatly. A few are prolific because they have sweet spots, he said. These special zones are targeted first and lead to an early rise in production followed by a decline, often within five years or less.

As a result, 88 per cent of shale gas production comes from just six of 30 plays, while 70 per cent of all tight oil production comes from two of 21 plays: North Dakota’s Bakken and Texas’ Eagle Ford.

Bad omens for BC

Rapid depletion rates, high capital costs and low market prices do not bode well for British Columbia’s much-hyped plans to export shale gas to Asian markets via a liquefied natural gas (LNG) system that currently does not exist.

“In terms of B.C., the well depletion will be similar. All of the fields outside of the Horn River and Montney plays are in decline,” Hughes told The Tyee in an interview.

“The province would have to nearly quadruple gas production just to satisfy the demands of five LNG terminals.” As many as 12 terminals have been proposed for B.C. “It’s a huge scaling problem.”

The government of Premier Christy Clark has championed LNG development as the province’s new economic miracle by subsidizing geoscience, roads and water for shale gas companies.

It has also lowered royalties. Income from shale gas peaked in the province in 2006 at more than $2 billion and has since fallen to less than $400 million, excluding government subsidies.

BCGasRoyaltyGraph1_600px.jpg

Data: BC Ministry of Finance, Economic and Financial Review and Budget 2013.

The Business Council of British Columbia whose executive council includes representatives from Encana and Kinder Morgan, supports accelerated LNG development on the grounds that global markets will likely not need the gas in the future: “Overall, there is sufficient evidence in the marketplace to suggest that, if the current LNG contract window closes before B.C. is able to secure final investment decisions, there would be potentially lengthy delays before B.C. and Western Canadian natural gas would have another LNG export opportunity.”

Hughes told investors that the shale gas revolution follows a predictable life cycle.

A land-leasing frenzy follows discovery. Then comes a drilling boom, necessitated by lease requirements, which locates, targets and depletes the sweet spots. Gas production grows rapidly and is maintained “despite potentially uneconomic full cycle costs.” (Production provides cash flow even though the well may not have been economic in its own right).

After five years, fields such as the Haynesville reach middle age. At that point geology takes over from technology, and it takes progressively more wells to offset field declines as drilling moves out of sweet spots to lower quality areas.

‘It’s all in the red’

Due to depressed natural gas prices, the shale gas industry has written down billions of dollars worth of assets and refocused drilling on more lucrative liquid rich formations. Other companies have lobbied strongly for government subsidies for LNG exports.

Rex Tillerson, CEO of Exxon Mobil, a multi-billion dollar shale gas investor,exclaimed last year that the industry was making no money: “It’s all in the red,” he said.

Royal Dutch Shell has written down $2 billion in shale assets and even put its Texas Eagle Ford properties up for sale. Meanwhile, one of its senior executives has complained that the industry has “over fracked and over drilled.”

Encana, one of the largest holders of shale gas real estate in B.C., has sold off many assets and laid off 20 per cent of its workforce due to poor investments in uneconomic shale gas plays.

The company pioneered the transformation of landscapes across the West, with industrial clusters of wells combining horizontal drilling with multistage hydraulic fracturing. The 10-year-old mining technique blasts large volumes of water, sand and toxic chemicals into dense rock formations up to two miles underground.

Hughes, head of Global Sustainability Research Inc., will be one of the experts addressing the Transatlantic Energy Forum in Washington, D.C. on Monday. The forum brings together energy and climate change experts from both sides of the Atlantic Ocean.

 

Analysis of Well Completion Data for Bakken Oil Wells

Analysis of Well Completion Data for Bakken Oil Wells.

The following analysis uses “well completion information” contained in a newspaper called the Bakken Weekly, a paper covering western North Dakota.  The Bakken Weekly started providing well completion information for North Dakota counties in the Bakken region in early 2012.  The analysis below is for 2012/2013 from the week of April 1, 2012 through the week of Oct. 28, 2013.

Figure 1 is a map of North Dakota counties so that the reader can relate the data below to the counties within North Dakota.

Figure 1-Map of North Dakota 

The well completion information in the Bakken Weekly includes initial production data for approximately 50% of wells.  I suspect that many wells don’t have initial production data because there was little or no initial production, although that is generally not stated.  There are a few cases where either 0 b/d is given or it is stated that the well was dry, but that is rare.

A fact that suggests that many of the completed wells don’t produce oil is that the sums of well completions in the Bakken Weekly increases significantly more rapidly than the number of producing wells provided by the state of North Dakota.  In this analysis, I will assume that initial production was 0 b/d for wells in which initial well production data was not included.

Based upon oil production data from the state of North Dakota, the counties of Dunn, McKenzie, Mountrail and Williams made up 89.0% of the Bakken region oil production in 2013 through August.  Based upon well completion data, it’s easy to see why oil companies have concentrated on those 4 counties: initial production/well values are considerably higher in those 4 counties compared to the values for other Bakken counties, excluding Stark.  Table I contains initial well production data for the 4 main counties based upon all wells drilled within the counties in 2013, through the week of Oct. 28.

Average Initial Well Production for Top 4 Counties

County

Dunn

McKenzie

Mountrail

Williams

Initial production/well (b/d)

658

924

716

643

Table I

Compare the values in Table I with the values for other counties, excluding Stark, contained in Table II.

Average Initial Well Production for other Counties in the Bakken Region

County

Billings

Bottineau

Burke

Divide

Others*

Initial production/well (b/d)

104

53

262

269

60

Table II

*Bowman, Golden Valley, Ward, Renville, McLean, McHenry and Slope counties combined

I combined and separated out Bowman, Golden Valley, Ward, Renville, McLean, McHenry and Slope counties because there have been few wells drilled in those counties.  Based upon the initial production/well data, it’s not surprising that far fewer wells have been drilled in the counties contained in Table II relative to the 4 main counties.

I did not include Stark County in the tables above because Stark County is unique.  Relative to the 4 main counties, not very many wells have been drilled in Stark County.  There appears to be an area within the county where wells are quite productive but outside of that area, well production is minimal.  Oil companies appear to be delineating where the sweet spot is within Stark County and concentrating on that sweet spot.   The average initial production per well in Stark County is 676 b/d in 2013.    For all Stark County wells drilled thus far in 2013 through Oct. 28, 28.6% had an initial production >1000 b/d while 44.0% were <300 b/d.

Table III contains data for the percentage of wells that had initial production of >3000 b/d, >2000 b/d, >1000 b/d and <300 b/d in the four main counties.

Percentage of Wells per Initial Well Production Rate for Top 4 Counties

County

Dunn

McKenzie

Mountrail

Williams

>3000 b/d

0.4

4.9

0.4

1.7

>2000 b/d

8.0

15.7

6.1

7.3

>1000 b/d

23.9

29.6

24.9

17.9

<300 b/d

58.8

53.6

50.2

48.3

Table III

The high numerical values for <300 b/d in Table III is largely due to the large number of wells without production data.

The other counties, excluding Stark, have few wells with initial production >1000 b/d and a high percentage of wells that have initial production of <300 b/d (see Table IV):

Percentage of Wells per Initial Well Production Rate for Other Bakken Counties

County

Billings

Bottineau

Burke

Divide

Others*

>1000 b/d

1.5

0.0

3.7

0.9

0.0

<300 b/d

86.3

100

64.8

44.0

95.8

Table IV

Oil companies are high-grading their drilling, drilling in the most favorable locations first.  In 2013, McKenzie County has become the prime location to drill as seen in the data of Table V (The number of wells without initial production data are included in Table V):

Well Completion Data for Top 4 Counties

County

Dunn

McKenzie

Mountrail

Williams

Number of well completions in 2013 through week of Oct. 28

524

905

478

480

Number of Wells Without Production Data

291

464

230

218

Table V

I attribute the high drilling rate in McKenzie County to the higher probability that a highly productive well will be drilled there, based upon data in Table III.

Table VI contains the high and low reported initial production rates for the 4 main counties so far in 2013 (This excludes wells for which initial production data was not provided):

High and Low Initial Well Production Rates for Top 4 Counties

County

Dunn

McKenzie

Mountrail

Williams

High Rate (b/d)

4,331

12,248

8,683

4,174

Low Rate (b/d)

53

23

52

23

Table VI

Promoters of the oil industry who claim that production in the Bakken region will continue to increase for many years to come appear to assume that the area outside of the 4 main counties will be as productive as within the 4 main counties.  The data above provides compelling evidence that future production outside of the 4 main counties will not be comparable to present production within the 4 main counties. At some point in the not-too-distant future, the 4 main counties will be saturated with oil wells.  It’s reasonable to assume that production within the 4 main counties will decline fairly rapidly after that point is reached.

The average yearly percent declines for wells in the Bakken region, based upon data in a presentation by geologist David Hughes, Tight Oil: A Solution to U.S. Import Dependence?, given at the Geological Society of America meeting on Oct. 28, 2013, are given in Table VII.

Average Decline Rates for Bakken Oil Wells Based Upon the Hughes Report

Year

% Decline

1

70

2

34

3

23

4

21

Table VII

Based upon the values in Table VII, the rate of drilling in the Bakken region has to be maintained at a high level to prevent a rapid decline in Bakken region oil production.  It also means that much of the production from new wells is replacing declining production from older wells.

How does the 2013 data compare to 2012 data?  Because the Bakken Weekly does not have well completion information for the early part of 2012, the data in Table VIII for 2012 is from the first week of April through the end of 2012. I’ve also included data for July-October 2013.

Average Initial Well Production Comparison between 2012 and 2013 for Top 4 Counties

County

Dunn

McKenzie

Mountrail

Williams

Average Initial Well Production 2012 (b/d)

700

928

883

760

Average Initial Well Production in 2013 (b/d)

658

924

716

643

Average Initial Well Production for July-Oct. 2013

680

844

606

677

Table VIII

Another interesting aspect of drilling activity in the Bakken region is that the number of well completions and the sum of initial well production in the Bakken region during the period April-August 2013 has been substantially higher than in the same period of 2012, as seen in Table IX:

Bakken Oil Production Relative to Well Completions

and Initial Well Production

Year

2012

2013

Percent Increase

Well Completions (April-August)

868

1,302

50.0

Sum of Initial Well Production in b/d (April-August)

674,207

923,728

37.0

Bakken Oil Production Increase in b/d (August relative to March)*

123,072

125,950

2.3

Table IX

*Data from the State of North Dakota

The data in Table IX indicates that far more effort has been required in 2013, compared to 2012, to obtain a comparable production increase for Bakken region oil production.

 

The Coming Great American Foreclosure | project chesapeake

The Coming Great American Foreclosure | project chesapeake. (source)

Prior to 1913 the U.S. treasury issued treasury notes as currency that was backed by gold. The Gold and Silver certificates could be converted into silver and gold on demand. This kept the government on a financial leash to prevent over spending. The treasury printed its own money so they did not have to borrow it. They could print as much money as they had gold to back it.

In 1913 a non-elected body called the Federal Reserve, which is owned by some of the largest banks in the world, became the issuer of U.S. currency. This establishment went on to replace all of the sound money in the U.S. with what is today a totally fiat currency. In 1971 we were taken off of the gold standard thus allowing the FED to print as much money as they wished with absolutely no backing other than the good faith of the U.S. Government.

When the government wants to borrow money they print treasury bonds which are sold by selected traders. The bonds are sold as an interest bearing investment. The more credit worthy the issuer is, the lower the interest rate will be. This is an indication of how safe the bond is.

Just like an IOU, the bonds are the same as cash. The perception of cash value is based on the perceived ability of the issuer to repay the IOU. If it is suspected that the IOU may not be honored, it may be sold at a discount to unload it onto someone else before the issuer defaults on repayment and it becomes worthless.

When the demand for bonds is not sufficient to absorb all of the new bonds, the FED must buy them to prevent a failed auction. A failed auction would bring the credit worthiness of the U.S. into question. This would cause the interest rates to go up to reflect the increased risk.

When the U.S. issues bonds as repayment for the loan, the holders of these bonds have the ability to call the loan if they want. This is done by demanding payment at maturity of the bond rather than rolling it over into more bonds.

As the U.S. increases its’ deficit spending, its’ credit worthiness will come into question. This will cause those holding U.S. bonds to dump them for something more secure. When no one else will buy them anymore, the FED must purchase them to keep the dollar stable. We are seeing this happen now. Eventually the FED will own all of the outstanding bonds if the crisis goes on long enough. When the FED has to buy bonds it must print new money to buy them. This is called monetizing the debt. This is very inflationary.

Keep in mind that the FED is owned by other banks. What the FED owns, they actually own.

Since the U.S. government no longer prints its’ own money, it must go to the FED to get more currency if government revenues are insufficient. If the FED should one day say it will no longer issue currency to the government until the bonds it is holding are satisfied, what would the U.S. government be able to pay them with? If you borrow money from a bank and cannot repay it, they ultimately come for your assets to satisfy the loan. That is a lesson the Greeks are now learning.

The U.S. government has some very nice assets in the form of pristine real estate, much of it with a great deal of mineral wealth beneath it. If they cannot pay the banks, the bankers may demand assets in return. If you don’t think the banks would do something like that, you obviously have not been paying attention to world events lately. It may not even be the FED bankers. It could be anyone with the funds to buy up all of the worthless bonds. Someone like the IMF perhaps.

This is a larger version of what happened during the great depression. People that owned land but had no money would get a line of credit at a store to buy food. The store would continue to extend credit until it reached a certain level then they would suddenly demand payment. The people were unable to pay their bill so the store owner would demand their land as payment. This was the intention of the store owner all along. I know because this is how some of the largest farms in my county came into existence at that time.

The people never agreed to use their land as collateral for the credit, but after the debt was created, they had no other recourse. This is the position the U.S. will likely be placed in to deprive Americans of the land the rightfully own. Those in power that get a piece of the pie will willingly support this option. Americans will lose the land their forefathers fought for, all for a pile of worthless paper printed out of thin air that ultimately destroyed their standard of living.

This may not be the future of this country but at this point in time it seems likely. Unless the public understands how this could happen and resolve to fight it if it ever does come to pass, we could lose it all overnight. One thing is for certain. Whoever comes to foreclose on America will not be willing to give up easily.

 

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