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Shale, the Last Oil and Gas Train: Interview with Arthur Berman

Shale, the Last Oil and Gas Train: Interview with Arthur Berman.

How much faith can we put in our ability to decipher all the numbers out there telling us the US is closing in on its cornering of the global oil market? There’s another side to the story of the relentless US shale boom, one that says that some of the numbers are misunderstood, while others are simply preposterous. The truth of the matter is that the industry has to make such a big deal out of shale because it’s all that’s left. There are some good things happening behind the fairy tale numbers, though—it’s just a matter of deciphering them from a sober perspective.

In a second exclusive interview with James Stafford of Oilprice.com, energy expert Arthur Berman discusses:

•    Why US gas supply growth rests solely on Marcellus
•    When Bakken and Eagle Ford will peak
•    The eyebrow-raising predictions for the Permian Basin
•    Why outrageous claims should have oil lawyers running for cover
•    Why everyone’s making such a big deal about shale
•    The only way to make the shale gas boom sustainable
•    Why some analysts need their math examined
•    Why it’s not just about how much gas we produce
•    Why investors are starting to ask questions
•    Why new industries, not technologies will make the next boom
•    Why we’ll never hit the oil and gas ‘wall’
•    Why companies could use a little supply-and-demand discipline
•    Why ‘fire ice’ makes sense (in Japan)
•    Why the US crude export debate will be ‘silly’

Arthur is a geological consultant with thirty-four years of experience in petroleum exploration and production. He is currently consulting for several E&P companies and capital groups in the energy sector. He frequently gives keynote addresses for investment conferences and is interviewed about energy topics on television, radio, and national print and web publications including CNBC, CNN, Platt’s Energy Week, BNN, Bloomberg, Platt’s, Financial Times, and New York Times. You can find out more about Arthur by visiting his website: http://petroleumtruthreport.blogspot.com

Oilprice.com: Almost on a daily basis we have figures thrown at us to demonstrate how the shale boom is only getting started. Mostly recently, there are statements to the effect that Texas shale formations will produce up to one-third of the global oil supply over the next 10 years. Is there another story behind these figures?

Arthur Berman: First, we have to distinguish between shale gas and liquids plays. On the gas side, all shale gas plays except the Marcellus are in decline or flat. The growth of US supply rests solely on the Marcellus and it is unlikely that its growth can continue at present rates. On the oil side, the Bakken has a considerable commercial area that is perhaps only one-third developed so we see Bakken production continuing for several years before peaking. The Eagle Ford also has significant commercial area but is showing signs that production may be flattening. Nevertheless, we see 5 or so more years of continuing Eagle Ford production activity before peaking. The EIA has is about right for the liquids plays–slower increases until later in the decade, and then decline.

The idea that Texas shales will produce one-third of global oil supply is preposterous. The Eagle Ford and the Bakken comprise 80% of all the US liquids growth. The Permian basin has notable oil reserves left but mostly from very small accumulations and low-rate wells. EOG CEO Bill Thomas said the same thing about 10 days ago on EOG’s earnings call. There have been some truly outrageous claims made by some executives about the Permian basin in recent months that I suspect have their general counsels looking for a defibrillator.

Recently, the CEO of a major oil company told The Houston Chronicle that the shale revolution is only in the “first inning of a nine-inning game”. I guess he must have lost track of the score while waiting in line for hot dogs because production growth in U.S. shale gas plays excluding the Marcellus is approaching zero; growth in the Bakken and Eagle Ford has fallen from 33% in mid-2011 to 7% in late 2013.

Oil companies have to make a big deal about shale plays because that is all that is left in the world. Let’s face it: these are truly awful reservoir rocks and that is why we waited until all more attractive opportunities were exhausted before developing them. It is completely unreasonable to expect better performance from bad reservoirs than from better reservoirs.

The majors have shown that they cannot replace reserves. They talk about return on capital employed (ROCE) these days instead of reserve replacement and production growth because there is nothing to talk about there. Shale plays are part of the ROCE story–shale wells can be drilled and brought on production fairly quickly and this masks or smoothes out the non-productive capital languishing in big projects around the world like Kashagan and Gorgon, which are going sideways whilst eating up billions of dollars.

None of this is meant to be negative. I’m all for shale plays but let’s be honest about things, after all!  Production from shale is not a revolution; it’s a retirement party.

OP: Is the shale “boom” sustainable?

Arthur Berman: The shale gas boom is not sustainable except at higher gas prices in the US. There is lots of gas–just not that much that is commercial at current prices. Analysts that say there are trillions of cubic feet of commercial gas at $4 need their cost assumptions audited. If they are not counting overhead (G&A) and many operating costs, then of course things look good. If Walmart were evaluated solely on the difference between wholesale and retail prices, they would look fantastic. But they need stores, employees, gas and electricity, advertising and distribution. So do gas producers. I don’t know where these guys get their reserves either, but that needs to be audited as well.

There was a report recently that said large areas of the Barnett Shale are commercial at $4 gas prices and that the play will continue to produce lots of gas for decades. Some people get so intrigued with how much gas has been produced and could be in the future, that they don’t seem to understand that this is a business. A business must be commercial to be successful over the long term, although many public companies in the US seem to challenge that concept.

Investors have tolerated a lot of cheerleading about shale gas over the years, but I don’t think this is going to last. Investors are starting to ask questions, such as: Where are the earnings and the free cash flow. Shale companies are spending a lot more than they are earning, and that has not changed. They are claiming all sorts of efficiency gains on the drilling side that has distracted inquiring investors for awhile. I was looking through some investor presentations from 2007 and 2008 and the same companies were making the same efficiency claims then as they are now. The problem is that these impressive gains never show up in the balance sheets, so I guess they must not be very important after all.

The reason that the shale gas boom is not sustainable at current prices is that shale gas is not the whole story. Conventional gas accounts for almost 60% of US gas and it is declining at about 20% per year and no one is drilling more wells in these plays. The unconventional gas plays decline at more than 30% each year. Taken together, the US needs to replace 19 billion cubic feet per day each year to maintain production at flat levels. That’s almost four Barnett shale plays at full production each year! So you can see how hard it will be to sustain gas production. Then there are all the efforts to use it up faster–natural gas vehicles, exports to Mexico, LNG exports, closing coal and nuclear plants–so it only gets harder.

This winter, things have begun to unravel. Comparative gas storage inventories are near their 2003 low. Sure, weather is the main factor but that’s always the case. The simple truth is that supply has not been able to adequately meet winter demand this year, period. Say what you will about why but it’s a fact that is inconsistent with the fairy tales we continue to hear about cheap, abundant gas forever.

I sat across the table from industry experts just a year ago or so who were adamant that natural gas prices would never get above $4 again. Prices have been above $4 for almost three months. Maybe “never” has a different meaning for those people that doesn’t include when they are wrong.

OP: Do you foresee any new technology on the shelf in the next 10-20 years that would shape another boom, whether it be fossil fuels or renewables?

Arthur Berman: I get asked about new technology that could make things different all the time. I’m a technology enthusiast but I see the big breakthroughs in new industries, not old extractive businesses like oil and gas. Technology has made many things possible in my lifetime including shale and deep-water production, but it hasn’t made these things cheaper.

That’s my whole point about shale plays–they’re expensive and need high oil and gas prices to work. We’ve got the high prices for oil and the oil plays are fine; we don’t have high prices for the gas plays and they aren’t working. There are some areas of the Marcellus that actually work at $4 gas price and that’s great, but it really takes $6 gas prices before things open up even there.

OP: In Europe, where do you see the most potential for shale gas exploitation, with Ukraine engulfed in political chaos, companies withdrawing from Poland, and a flurry of shale activity in the UK?

Arthur Berman: Shale plays will eventually spread to Europe but it will take a longer time than it did in North America. The biggest reason is the lack of private mineral ownership in most of Europe so there is no incentive for local people to get on board. In fact, there are only the negative factors of industrial development for them to look forward to with no pay check. It’s also a lot more expensive to drill and produce gas in Europe.

There are a few promising shale plays on the international horizon:  the Bazherov in Russia, the Vaca Muerte in Argentina and the Duvernay in Canada look best to me because they are liquid-prone and in countries where acceptable fiscal terms and necessary infrastructure are feasible.  At the same time, we have learned that not all plays work even though they look good on paper, and that the potentially commercial areas are always quite small compared to the total resource.  Also, we know that these plays do not last forever and that once the drilling treadmill starts, it never ends.  Because of high decline rates, new wells must constantly be drilled to maintain production.  Shale plays will last years, not decades.

Recent developments in Poland demonstrate some of the problems with international shale plays.  Everyone got excited a few years ago because resource estimates were enormous.  Later, these estimates were cut but many companies moved forward and wells have been drilled.  Most international companies have abandoned the project including ExxonMobil, ENI, Marathon and Talisman.  Some players exited because they don’t think that the geology is right but the government has created many regulatory obstacles that have caused a lack of confidence in the fiscal environment in Poland.

The UK could really use the gas from the Bowland Shale and, while it’s not a huge play, there is enough there to make a difference. I expect there will be plenty of opposition because people in the UK are very sensitive about the environment and there is just no way to hide the fact that shale development has a big footprint despite pad drilling and industry efforts to make it less invasive.

Let me say a few things about resource estimates while we are on the subject.  The public and politicians do not understand the difference between resources and reserves.  The only think that they have in common is that they both begin with “res.”  Reserves are a tiny subset of resources that can be produced commercially.  Both are always wrong but resource estimates can be hugely misleading because they are guesses and have nothing to do with economics.

Someone recently sent me a new report by the CSIS that said U.S. shale gas resource estimates are too conservative and are much larger than previously believed.  I wrote him back that I think that resource estimates for U.S. shale gas plays are irrelevant because now we have robust production data to work with.  Most of those enormous resources are in plays that we already know are not going to be economic.  Resource estimates have become part of the shale gas cheerleading squad’s standard tricks to drum up enthusiasm for plays that clearly don’t work except at higher gas prices.  It’s really unfortunate when supposedly objective policy organizations and research groups get in on the hype in order to attract funding for their work.

OP: The ban on most US crude exports in place since the Arab oil embargo of 1973 is now being challenged by lobbyists, with media opining that this could be the biggest energy debate of the year in the US. How do you foresee this debate shaping up by the end of this year?

Arthur Berman: The debate over oil and gas exports will be silly.

I do not favor regulation of either oil or gas exports from the US. On the other hand, I think that a little discipline by the E&P companies might be in order so they don’t have to beg the American people to bail them out of the over-production mess that they have created knowingly for themselves. Any business that over-produces whatever it makes has to live with lower prices. Why should oil and gas producers get a pass from the free-market laws of supply and demand?

I expect that by the time all the construction is completed to allow gas export, the domestic price will be high enough not to bother. It amazes me that the geniuses behind gas export assume that the business conditions that resulted in a price benefit overseas will remain static until they finish building export facilities, and that the competition will simply stand by when the awesome Americans bring gas to their markets. Just last week, Ken Medlock described how some schemes to send gas to Asia may find that there will be a lot of price competition in the future because a lot of gas has been discovered elsewhere in the world.

The US acts like we are some kind of natural gas superstar because of shale gas. Has anyone looked at how the US stacks up next to Russia, Iran and Qatar for natural gas reserves?

Whatever outcome results from the debate over petroleum exports, it will result in higher prices for American consumers. There are experts who argue that it won’t increase prices much and that the economic benefits will outweigh higher costs. That may be but I doubt that anyone knows for sure. Everyone agrees that oil and gas will cost more if we allow exports.

OP: Is the US indeed close to hitting the “crude wall”—the point at which production could slow due to infrastructure and regulatory restraints?

Arthur Berman: No matter how much or little regulation there is, people will always argue that it is still either too much or too little. We have one of the most unfriendly administrations toward oil and gas ever and yet production has boomed. I already said that I oppose most regulation so you know where I stand. That said, once a bureaucracy is started, it seldom gets smaller or weaker. I don’t see any walls out there, just uncomfortable price increases because of unnecessary regulations.

We use and need too much oil and gas to hit a wall. I see most of the focus on health care regulation for now. If there is no success at modifying the most objectionable parts of the Affordable Care Act, I don’t suppose there is much hope for fewer oil and gas regulations. The petroleum business isn’t exactly the darling of the people.

OP: What is the realistic future of methane hydrates, or “fire ice”, particularly with regard to Japanese efforts at extraction?

Arthur Berman: Japan is desperate for energy especially since they cut back their nuclear program so maybe hydrates make some sense at least as a science project for them. Their pilot is in thousands of feet of water about 30 miles offshore so it’s going to be very expensive no matter how successful it is.

OP: Globally, where should we look for the next potential “shale boom” from a geological perspective as well as a commercial viability perspective?

Arthur Berman: Not all shale is equal or appropriate for oil and gas development. Once we remove all the shale that is not at or somewhat above peak oil generation today, most of it goes away. Some shale plays that meet these and other criteria didn’t work so we have a lot to learn. But shale development is both inevitable and necessary. It will take a longer time than many believe outside of North America.

OP: We’ve spoken about Japan’s nuclear energy crossroads before, and now we see that issue climaxing, with the country’s nuclear future taking center-stage in an election period. Do you still believe it is too early for Japan to pull the plug on nuclear energy entirely?

Arthur Berman: Japan and Germany have made certain decisions about nuclear energy that I find remarkable but I don’t live there and, obviously, don’t think like them.

More generally, environmental enthusiasts simply don’t see the obstacles to short-term conversion of a fossil fuel economy to one based on renewable energy. I don’t see that there is a rational basis for dialogue in this arena. I’m all in favor of renewable energy but I don’t see going from a few percent of our primary energy consumption to even 20% in less than a few decades no matter how much we may want to.

OP: What have we learned over the past year about Japan’s alternatives to nuclear energy?

Arthur Berman: We have learned that it takes a lot of coal to replace nuclear energy when countries like Japan and Germany made bold decisions to close nuclear capacity. We also learned that energy got very expensive in a hurry. I say that we learned. I mean that the past year confirmed what many of us anticipated.

OP: Back in the US, we have closely followed the blowback from the Environmental Protection Agency’s (EPA) proposed new carbon emissions standards for power plants, which would make it impossible for new coal-fired plants to be built without the implementation of carbon capture and sequestration technology, or “clean-coal” tech. Is this a feasible strategy in your opinion?

Arthur Berman: I’m not an expert on clean coal technology either but I am confident that almost anything is possible if cost doesn’t matter. This is as true about carbon capture from coal as it is about shale gas production. Energy is an incredibly complex topic and decisions are being made by bureaucrats and politicians with little background in energy or the energy business. I don’t see any possibility of a good outcome under these circumstances.

OP: Is CCS far enough along to serve as a sound basis for a national climate change policy?

Arthur Berman: Climate-change activism is a train that has left the station. If you’ve missed it, too bad. If you’re on board, good luck.

The good news is that the US does not have an energy policy and is equally unlikely to get a climate change policy for all of the same reasons. I fear putting climate change policy in the hands of bureaucrats and politicians more than I fear climate change (which I fear).

See our previous interview with Arthur Berman.

X

Dream of U.S. Oil Independence Slams Against Shale Costs | CollapseNet

Dream of U.S. Oil Independence Slams Against Shale Costs | CollapseNet.

Off the World News Desk:

Dream of U.S. Oil Independence Slams Against Shale Costs 

“The path toward U.S. energy independence, made possible by a boom in shale oil, will be much harder than it seems.

Just a few of the roadblocks: Independent producers will spend $1.50 drilling this year for every dollar they get back. Shale output drops faster than production from conventional methods. It will take 2,500 new wells a year just to sustain output of 1 million barrels a day in North Dakota’s Bakken shale, according to the Paris-based International Energy Agency. Iraq could do the same with 60.

Consider Sanchez Energy Corp. The Houston-based company plans to spend as much as $600 million this year, almost double its estimated 2013 revenue, on the Eagle Ford shale formation in south Texas, which along with North Dakota is one of the hotbeds of a drilling frenzy that’s pushed U.S. crude output to the highest in almost 26 years. Its Sante North 1H oil well pumped five times more water than crude, Sanchez Energy said in a Feb. 17 regulatory filing. Shares sank 7 percent.

We are beginning to live in a different world where getting more oil takes more energy, more effort and will be more expensive,” said Tad Patzek, chairman of the Department of Petroleum and Geosystems Engineering at the University of Texas at Austin.

Drillers are pushing to maintain the pace of the unprecedented 39 percent gain in U.S. oil production since the end of 2011. Yet achieving U.S. energy self-sufficiency depends on easy credit and oil prices high enough to cover well costs. Even with crude above $100 a barrel, shale producers are spending money faster than they make it…”

MCR, Rice Farmer, and CollapseNet generally have been reporting on this since this website has been in existence. There is no “free lunch”, and one of the primary problems that comes with Peak Oil is that all the easy to get oil has been found and used (or is being pumped but is in decline), and finding and extracting what’s left will be more energy-intensive and cash-expensive. U.S. “energy independence” is a bigger fucking myth than Santa Claus…at least until the general public can no longer afford their energy-intensive lifestyles and oil demand drops off the cliff, which can also be referred to as the collapse of industrial civilization… – Wes

Dream of U.S. Oil Independence Slams Against Shale Costs | CollapseNet

Dream of U.S. Oil Independence Slams Against Shale Costs | CollapseNet.

Off the World News Desk:

Dream of U.S. Oil Independence Slams Against Shale Costs 

“The path toward U.S. energy independence, made possible by a boom in shale oil, will be much harder than it seems.

Just a few of the roadblocks: Independent producers will spend $1.50 drilling this year for every dollar they get back. Shale output drops faster than production from conventional methods. It will take 2,500 new wells a year just to sustain output of 1 million barrels a day in North Dakota’s Bakken shale, according to the Paris-based International Energy Agency. Iraq could do the same with 60.

Consider Sanchez Energy Corp. The Houston-based company plans to spend as much as $600 million this year, almost double its estimated 2013 revenue, on the Eagle Ford shale formation in south Texas, which along with North Dakota is one of the hotbeds of a drilling frenzy that’s pushed U.S. crude output to the highest in almost 26 years. Its Sante North 1H oil well pumped five times more water than crude, Sanchez Energy said in a Feb. 17 regulatory filing. Shares sank 7 percent.

We are beginning to live in a different world where getting more oil takes more energy, more effort and will be more expensive,” said Tad Patzek, chairman of the Department of Petroleum and Geosystems Engineering at the University of Texas at Austin.

Drillers are pushing to maintain the pace of the unprecedented 39 percent gain in U.S. oil production since the end of 2011. Yet achieving U.S. energy self-sufficiency depends on easy credit and oil prices high enough to cover well costs. Even with crude above $100 a barrel, shale producers are spending money faster than they make it…”

MCR, Rice Farmer, and CollapseNet generally have been reporting on this since this website has been in existence. There is no “free lunch”, and one of the primary problems that comes with Peak Oil is that all the easy to get oil has been found and used (or is being pumped but is in decline), and finding and extracting what’s left will be more energy-intensive and cash-expensive. U.S. “energy independence” is a bigger fucking myth than Santa Claus…at least until the general public can no longer afford their energy-intensive lifestyles and oil demand drops off the cliff, which can also be referred to as the collapse of industrial civilization… – Wes

Energy Crunch: no end to the storms

Energy Crunch: no end to the storms.

by Energy Crunch staff, originally published by New Economics Foundation  | TODAY


Image via tim_d/flickr. Creative Commons 2.0 license.

Three things you shouldn’t miss this week
  1. Big oil stagnates:


    Source: Wall Street Journal

  2. “We can expect growing pressure points around water, food, and energy scarcity as the century progresses…Hovering over all of this is the merciless march of climate change. Because of humanity’s hubris, the natural environment, which we need to sustain us, is instead turning against us.” – IMF’s Christine Lagarde delivers her Richard Dimbleby lecture
  3. Nuclear setback as EC attacks Hinkley Point subsidy deal – Nuclear plant in doubt as European Commission says subsidies of up to £17.6bn risk handing EDF excess profits and may constitute illegal state aid.

 

It took major storm damage and record floods to get energy prices off the front pages, but any ministers hoping for a brief respite on the turmoil over energy policy will be no doubt disappointed.
The government’s nuclear plans look shakier after the European Commission tore into its recent deal with EDF on Hinckley Point C. The EC warns that a guaranteed strike price of £92.50/MW – double the current market rate – risks handing EDF excess profits and falling foul of state aid laws. The Commission also questioned assumptions used to reach this figure, and points out the government’s own research showing that nuclear plants could be built by 2027-30, even without subsidies.
Two new test fracking sites in Lancashire were named by Cuadrilla this week, but the hyperbole around shale was dampened as even Chancellor George Osborne admitted it probably won’t deliver cheap gas. Cuadrilla Chairman and government advisor Lord Browne said that it will take five years to establish the viability of the resource (even longer to start producing gas), and Business Secretary and former Shell executive Vince Cable described shale gas in the UK as “a long-term possibility – no more than that.” Lord Browne was also dismissive of chances for carbon capture and storage, thus inadvertently adding to the climate case against new gas. Meanwhile the industry faces a legal blockade from Sussex landowners and challenges over disposal of radioactive waste water.
DECC did get some positive news this week with the announcement that the UK had met its first carbon budget. But a reality check – much of this was due to the economic crash, and emissions are on the rise again. Both the UK and US currently favour an ‘all of the above’ energy policy, pursuing both fossil and renewable energy sources. While progress on clean energy should be applauded, it will ultimately come undone without plans for an orderly reduction of fossil fuel production.

One such reduction seems likely from our chart of the week, though it’s far from intentional. Oil giants Exxon, Shell and Chevron have been spending at record levels, but production continues to stagnate. Is the industry now reaching a turning point? Commentary such as this from FT blogger Nick Butler would certainly suggest so.

Related Reports and Commentary
Macroeconomic impacts of oil price volatility: mitigation and resilience – Zoheir Ebrahim, Oliver R. Inderwildi, David A. King – final report link (paywall)review copy pdf download.
A Year of Cracking Ice: 10 Predictions for 2014 – Michael Liebreich, Bloomberg New Energy Finance
Nexus Guide: How Food, Water and Energy are Connected – GRACE Communications Foundation

America’s Energy Revolution Transforms International Relations  |  Peak Oil News and Message Boards

America’s Energy Revolution Transforms International Relations  |  Peak Oil News and Message Boards.

North America’s energy revolution is remaking all aspects of the global economy and international relations in what has turned out to be the most profound shift in the second decade of the 21st century.

Policymakers and climate scientists prefer to talk about the transformational potential of clean technologies like wind, solar and electric vehicles.

But in reality the biggest shifts in economic relations and the balance of power at present stem from changes in the production of decidedly old-fashioned and polluting fossil fuels such as oil and gas.

Hydraulic fracturing, coupled with tougher fuel-economy standards and increased use of biofuels, has reversed the growing dependence of the United States on energy imports in less than 10 years.

If fracking has not yet made the United States “energy independent”, it has certainly created a crucial source of competitive advantage and given policymakers much more room to manoeuvre.

Trade Transformed

By the start of the century, the cost of importing energy was one of the largest burdens on the U.S. trade balance, and threatening to worsen in the medium term.

Crude oil and refined petroleum products such as gasoline accounted for most of the imported energy, but there was growing concern that the country would also become a big net importer of natural gas within a few years.

In 2008, the United States ran a net energy trade deficit with the rest of the world amounting to $411 billion, 2.8 percent of GDP.

Crude petroleum and refined products accounted for around one-third of the record trade deficits which the United States ran between 2004 and 2008.

But 2008 proved to be the high-water mark for the net cost of energy imports.

Since 2008, net energy imports have almost halved, to just $217 billion in the first 11 months of 2013.

There is no mystery about the cause of the U.S. energy revolution.

The quadrupling of oil prices between 2000 and 2008 was directly responsible for the biofuel-blending mandates and fuel efficiency standards contained in the 2005 Energy Policy Act and 2007 Energy Independence Security Act passed by the U.S. Congress.

It also indirectly supported the swift rollout of fracking technology, first in natural gas and from 2008 onwards in oil, as well.

But the consequences of the energy revolution are only now being felt fully.

Rippling Outward

For years, policymakers and commentators have played down the revolution’s impact, or even denied there is a revolution at all, because it clashes with climate policies and threatens to re-arrange international relations in ways that are uncomfortable to many of those concerned.

Sceptics first suggested the upsurge in energy production would prove temporary, then that it would be limited to gas, and now that it will be contained by restrictions on U.S. oil exports or environmental campaigns to keep fossil fuels underground unburned.

Doubters say it cannot be repeated in other countries because of their very different geological conditions as well as political and commercial environments.

But the revolution’s impact has spread far beyond the United States.

The United States is set to become a significant exporter of natural gas. It is already the world’s fastest-growing exporter of gas liquids such as propane.

Coal exports have risen as the country’s own power stations turn to cheaper gas. And U.S. refiners are becoming increasingly important exporters of diesel.

Energy trade is already finding ways around the patchwork of antiquated restrictions on exports of oil, gas and condensates.

Comparative Advantage

At the same time, the United States depends less and less on imported energy, especially from outside North America.

In 2013, the country is expected to have imported the fewest barrels of crude oil since 1994.

Even that probably understates the speed of the transformation and its impact on the trade deficit. In real terms, the trade deficit in petroleum and related items in November 2013 was the narrowest for well over two decades.

The economic impact has been profound. Abundant supplies of cheap domestic energy are now a crucial source of competitive advantage compared with rival economies in Europe and Asia.

A decade ago, U.S. policymakers and commentators were worrying about the loss of manufacturing to China based on cheap labour.

Now cheap energy is encouraging talk of bringing some of that manufacturing back. By contrast, expensive energy and inefficient fuel consumption are a seen as a growing threat to China’s competitiveness.

European manufacturers, too, worry they will be significantly disadvantaged by more expensive energy bills.

Loosening Ties

The energy revolution’s impact on international relations has been even greater, and nowhere is it more visible than in the Middle East.

For years, the foreign policy establishments in both the United States and in capitals around the Gulf have insisted shale production will not loosen the close ties between Washington and its regional allies, especially Saudi Arabia.

But the scale of the shift has become too obvious to deny.

Speaking to a security conference in Tel Aviv on Tuesday, Israel’s outspoken Defence Minister Moshe Yaalon complained that the United States is “detaching” itself from the Middle East, according to reports carried in the Jerusalem Post.

Saudi Arabia’s leaders clearly fear their own alliance with Washington is being downgraded as the Obama Administration pursues detente with Iran.

Tensions between Washington and Riyadh erupted into the open last year when Saudi Arabia declined to take up its seat on the UN Security Council and undertook a series of other carefully calculated diplomatic moves to signal its displeasure with the White House.

Such an open breach between the two close allies would have been unthinkable in 2005 or 1995 let alone 1985 or even 1975, when the United States felt its dependence on Saudi oil exports keenly.

Even more remarkably, U.S. foreign policymakers have largely ignored the protests coming from Tel Aviv and Riyadh, and forged ahead regardless.

Ultimately, it is the energy revolution that has emboldened U.S. policymakers to pursue a very different course in the Middle East.

The idea of the United States exporting fossil fuels to the Persian Gulf would have laughable five years ago. But in what has to be the supreme irony, the United Arab Emirates is now openly talking about importing cheap shale gas from the United States to meet its surging electricity demand.

Energy Insecurity

Middle East oil producers are not the only countries that have been disconcerted by the shale revolution. It is also altering the relationship between China and the United States.

In effect, the two superpowers have swapped places. In 1973, the United States perceived its growing reliance on imported crude from the Middle East was a key strategic weakness, while China’s rapidly developing Daqing super-giant oil field promised greater energy independence.

Now U.S. reliance on the Middle East is loosening, while China is increasingly aware of the risks of relying on importing oil from unstable parts of the Middle East and Africa via long supply routes through the straits of Hormuz and Malacca and the South China Sea.

Once again, shale, and the energy revolution more broadly, lies at the heart of the fundamental shift in the balance of power.

China’s own policymakers attach the highest strategic priorities to developing their own domestic energy production (including from shale), cutting energy consumption through improvements in energy efficiency, and protecting foreign supplies by projecting diplomatic and military power into key supply regions and along supply routes.

Just like the discovery of oil in Pennsylvania in the 1850s and the Middle East between the 1920s and 1950s, the North American energy revolution is remaking the world order.

RIGZONE

Testosterone Pit – Home – From “Glut” To Panic: Natural Gas Soars

Testosterone Pit – Home – From “Glut” To Panic: Natural Gas Soars.

On Friday, when stocks were plunging, natural gas soared 9.6% to $5.18 per million British thermal units (MMBtu) at the Henry Hub. Up 20% for the week. The highest close since June 2010.

Back then, the “shale gas revolution” had turned into a crazy no-holds-barred land-grab and fracking boom that veered into overproduction and a “glut” – accompanied by a historic collapse in price. The US could not export its excess production due to export restrictions and the lack of major LNG export terminals. By April 2012, when the Japanese were paying around $17 per MMBtu for LNG on the world markets, natural gas in the US hit a decade low of $1.92 per MMBtu, and predictions that it would go to zero showed up in the mainstream media. That was the bottom.

But nothing can be priced below the cost of production forever. By Friday, natural gas was up 170% from the April 2012 low. Turns out, only a low price can cure a low price.

The low price caused demand to creep up.

Gas exports via pipeline to Mexico have been growing, especially since additional pipeline capacity went into service last year. Mexico is switching power generation from using its own oil to cheap US natural gas. This allows it to export its more valuable oil to the US. Ka-ching. But building gas-fired generating capacity is a slow-moving process.

Other exports are also moving forward – in people’s heads. There are pipelines between the US and Canada, but the US is a net importer. Exports of LNG are at this point still a pipedream, so to speak, though deals are being made, contingent on getting government approvals to export LNG. It’s going to take years before LNG can be exported in large quantities.

But the low price had short-term and structural impacts. Utilities dispatched electricity generation from their coal-fired plants to their gas-fired plants. And there have been structural changes: utilities have built gas-fired power plants and have retired – not mothballed! – their oldest, most inefficient, and most polluting coal-fired power plants. Global industrial companies have been building plants in the US for energy-intensive processes and for processes that use natural gas as feed stock. Even natural gas in transportation is picking up.

The low price destroyed the business model for drillers.

Thousands of unprofitable wells litter the land. Many billions were written off. Real money that had been recklessly thrown around during the boom disappeared into the ground. Investors were lured with false promises. The bloodletting in the industry was enormous. Some of the largest drillers have pulled back from drilling for dry natural gas. Most of the wells that are still being drilled are in fields that are rich in natural-gas liquids and oil, which sell for much higher prices and make wells profitable. Dry natural gas has become a byproduct. In the immensely productive Bakken shale-oil field in North Dakota, where gas occurs along with oil, 30% of it is flared – burned at the well as a waste product. The low price doesn’t justify building pipelines to haul it off.

But shale gas wells have sharp decline rates, and new wells need to be drilled constantly to make up for the decline in older wells. These days, not enough wells are being drilled, and production in all gas plays combined – except for the Marcellus – is already in slight decline. The only production boom left is in the Marcellus: the “shale gas revolution” in the US is now a one-pony show.

In January 2012, according to Baker Hughes, there were 143 rigs drilling for natural gas in the Marcellus – the most prolific parts of which are in Pennsylvania. Today, there are 86. But during the drilling boom, someone forgot to install sufficient pipeline infrastructure. So, wells were shut in, perhaps thousands of them, a giant reservoir waiting for takeaway capacity. That was 2012. Last year, part of a new pipeline network went into service, and bottlenecks were removed, and the gas started flowing to New York City and other places. Drilling is down. Production – the delivery of gas to the markets – is soaring!

How long can it last? Well decline rates in the Marcellus are as steep as elsewhere, and this sudden burst in production, if not supported by a new bout of drilling, will taper off as it has in other fields. And that’s today’s one-pony show of the US “shale gas revolution.”

Then cold fronts swept across the country.

These polar vortices, as they’re now referred to for additional flair, have caused demand for gas as heating fuel to spike to record highs. And more bitter cold weather is being forecast. Natural gas in underground storage dropped to 2,423 billion cubic feet (Bcf) for the weekending January 17. The last time storage levels were this low during an equivalent week was in January 2005!

At the time, gas was selling for $12 to $14 per MMBtu and hit an all-time high of $15.40 in December that year. But demand has changed. In 2013, demand was over 18% higher than in 2005; this year, it might be over 20% higher [my article from nine days ago…. Natural Gas Squeeze? “Panic hasn’t ensued just yet”]. 

And the big money has jumped into the fray.

For years, the favorite game was to short natural gas, playing the glut for all it was worth, a sport that has gotten very complex and, if you get the timing wrong by a few hours, very expensive. Some of the spike late Friday, and some of the action all week, was due to a hard squeeze on these folks – as the big money arrived en masse.

On Wednesday, the big money went public. As reported by MarketWatch, Citi analysts wrote that, “With tight fundamentals, $5 gas is not impossible.” What had been obvious for a while, showed up in the media: “Strong demand is expected to push gas inventories to very low levels with cold weather lingering.” And the price took off once again.

Now everyone is bent over weather data, trying to figure out what nastiness the winter will still serve up, and they’re betting on the weather because cold snaps happen relatively fast and are observable. Watching the fundamentals is like watching paint dry. But it’s the fundamentals that have changed the equation. The polar vortices are merely speeding up the calculus.

Natural gas is famous for its head fakes, unexpected plunges when it should rise, and inexplicable rises when it should drop. It’s being manipulated in a myriad ways. It’s always a bet on the weather, except when it’s not. It can turn around in a second and cause whiplash. It’s a seatbelt-mandatory commodity. And once every few years, there is a panic, and it spikes to dizzying highs.

While natural gas was soaring on Friday, and all week, the rest of the markets were tanking, with emerging markets “trading in full-blown panic mode.” What gives? Read….  A Teeny-Weeny Bit Of Taper, And Look What Happened

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America’s Feel-Good Oil Bonanza

America’s Feel-Good Oil Bonanza.

Think back to early 2004. Oil cost around $40 per barrel1—on the high side compared to the previous few decades but not much out of the ordinary. Gasoline still cost under $2.00 a gallon for most of the country. The evening news was more concerned with wardrobe gaffes by Janet Jackson (too little, at the Super Bowl) and President Bush (too much, on the USS Abraham Lincoln) than with energy prices.

In retrospect, these were the last days of “normal.” Most everyone in business, the media, and government assumed that the world had plenty of cheap oil.2 And hardly anyone outside the fossil fuel industry had heard of peak oil, the idea that we were nearing physical limits to global oil production and a new period of oil price and supply volatility.

We now know that the world’s conventional oil production would effectively stop growing the very next year, setting off a sickening global economic rollercoaster ride. The complacency of 2004 would change to worry by 2005 as the price of oil surged past historic highs, and to outright panic in 2008 when it crossed the once-unthinkable $100 barrier. It would spark massively increased investment in alternatives like tight oil, tar sands oil, shale gas, renewable energy, and nuclear power—all while the global economy made painful adjustments to the new normal of $80-plus oil.

By now you’d think we’d be chastened by the last ten years, and would be planning cautiously and conservatively for our nation’s energy future. Instead, almost everyone is once again assuming that we’ve got plenty of (admittedly more expensive) oil, and that there’s nothing to worry about.

Such shortsightedness isn’t necessarily surprising for Wall Street, where only the current quarter’s figures matter; nor for the news media, where energy-literate journalists are sadly few and far between. But it’s quite another matter to see it in a federal government agency, especially one whose most important functions include projecting the future of the country’s energy needs and resources.

In this respect, the Energy Information Administration’s (EIA) recently releasedAnnual Energy Outlook 2014 (AEO 2014), which foresees impending and long-term US oil abundance, is not just surprising—it’s a dangerous return to a 2004 way of thinking.

California Dreaming

Lest you think the projections issued by a relatively small government agency are immaterial to real-world decisions about the world’s most important resource, consider the case of the Monterey shale. Two years ago the EIA released a 105-page assessment of technically recoverable shale gas and tight oil in the lower-48 states.3 Among other things, it estimated a massive amount of tight oil in California’s Monterey formation: 15.4 billion barrels, or over 64% of the country’s projected total tight oil resource base.

America’s supposed new oil nest egg was quickly accepted as unquestionable fact. The New York Times4Wall Street Journal5, CNN6, and countless other media outlets reported it uncritically. It became a central argument in the fossil fuel industry’s efforts to influence California’s regulations on drilling and new technologies like fracking.7 And one can only assume that the 15.4 billion barrel worm made its way into the ears of politicians and policymakers across the country, whispering, “We’ll have decades of American energy independence!”

Of course, a deus ex machina like this raised more than a few eyebrows, including here at Post Carbon Institute; so we looked into it.8 We found that the EIA report’s authors9 had tallied up 15.4 billion barrels simply by assuming that every square mile of the Monterey would be more productive than practically all the best areas in America’s two best tight oil plays, the Bakken shale (in North Dakota) and the Eagle Ford shale in Texas. That’s it. No consideration of the Monterey’s significant geological complexity compared to the two plays, nor of data from actual Monterey oil production. In other words, our new cornerstone of energy independence rested on a back-of-the envelope calculation that any first-year petroleum geology student would recognize as unrealistic.

But simply because it was published by the EIA, the 15.4 billion barrel worm went on to influence some of America’s most important policy and planning decisions for over two years—unquestioned and unchallenged.

So, what the EIA says matters—regardless of its veracity or substantiation. In this light, let’s take a look at what the EIA is now saying in AEO 2014.

Saudi America

The most-repeated nugget from AEO 2014 is the projection that US oil production will reach 9.61 million barrels per day (mbd) by 2019, matching its historic peak of 1970.10 Less-repeated but just as important is the projection that after 2021 US oil production will start a very gradual decline, leaving us in 2040 with daily production at a respectable 7.48 mbd (which happens to roughly be 2013’s average daily production).11 It’s an energy patriot’s dream come true—an imminent, rapid rise in domestic production to give a boost to the economy, followed by a gradual tapering-off that will allow for an orderly transition to alternative energy sources.

[chart]

This rosy projection is driven by significant and sustained production of tight oil from shale formations (enabled by fracking and other technologies)—a cumulative total of 42.8 billion barrels by 2040. Anyone who’s not a petroleum geologist might be forgiven for assuming this means the EIA has a pretty good idea where that 42.8 billion barrels is and how it will realistically be produced. As we’ll see, this is not the case.

Most of America’s tight oil—about 74%—currently comes the aforementioned Bakken and the Eagle Ford plays. These look set to peak as soon as 2016-2017, although they could possibly recover a total of 11 billion barrels by 2035 if 48,000 new wells can be drilled (five times the current total).12 However, the Bakken and the Eagle Ford are the best we’ve got; none of America’s other tight oil plays look to have such high-producing wells over such large areas. Producing an additional 31 billion barrels by 2040 from increasingly marginal (and thus more expensive) plays is a real stretch.

A quick look behind the EIA’s numbers further undermines confidence. According to the assumptions underlying last year’s Annual Energy Outlook (the equivalent background material is not yet available for 2014), the EIA sees total recoverable tight oil resources of 13.7 billion barrels from the Monterey (a recent downward revision from the original 15.4 billion mentioned earlier), 7.3 billion barrels from the Austin Chalk, 5.3 billion barrels from the Permian Basin, and the remainder from a scattering of other plays. They’re impressive numbers…until one remembers the flimsy case behind the Monterey projections.

The EIA also says nothing about the rate of production from wells in these plays, which is critical to profitability and has proved to be an Achilles Heel in other tight oil plays. Production in Eagle Ford tight oil wells, for example, declines 60 percent on average in their first year; in the Bakken it’s 69 percent.13 This means more wells must constantly be drilled to keep overall production from collapsing. But there is a physical limit to the number of wells that can be usefully drilled in an area; once that limit is reached (in the Bakken and Eagle Ford it could be within the next 10-12 years depending on drilling rates14), production will decline sharply.

A perennial argument against such pessimism is that more oil resources will become accessible as rising oil prices make the more technically challenging oil economic to produce. However, in AEO 2014 the EIA actually expects the price of oil to drop to as low as $88 per barrel by 2018, and thereafter rise at a meager 1.5-2.5% per year15—about the rate of inflation the last few years.

Is the forecast that the United States will hit 9.61 million barrels of day of oil in 2019 credible? Perhaps, if everything goes right and capital inflows don’t falter; the forecast is largely driven by measurable results from the most productive areas of the Bakken and the Eagle Ford.16 But once those are tapped out, there’s scant evidence for a future in which the oil produced from the remaining tight oil plays will amount to nearly four times as much as from the Bakken and Eagle Ford—let alone that tight oil production will decline only gradually over the following 20 years. Indeed, one must conclude that the EIA’s projection assumes that future technological innovations will make it economical to produce currently unprofitable oil despite oil prices hardly changing.

Reality Check

A more prudent, conservative US oil forecast would look very different. It would consider that, although surprises are always possible, the most productive fossil fuel resources do tend to be discovered first and produced first. It would take note of the fact that production in fracked wells declines extremely quickly, requiring an accelerating drilling treadmill to maintain—let alone grow—production, with associated collateral environmental impacts. It would assume that most tight oil plays producible at current oil prices have already been discovered and put into production, and that major new resources—if they exist—are unlikely to be forthcoming unless there is a significant rise in oil prices.17 In short, the forecast would be based on actual data from existing and legitimately forthcoming plays, and leave the feel-good speculation about future resource abundance to Wall Street.

This is no small matter. The projected availability and price of future oil directly impacts decisions being made today about everything from factory expansions to multi-billion dollar transportation projects. It influences federal government policy on encouraging (or discouraging) gas mileage standards, electric vehicles, building efficiency, and renewable energy. And it certainly colors the debate around regulating the exploration and production of fossil fuels in communities and public lands across the country.

That last debate is playing out in California right now, as the fossil fuel industry pushes legislators to relax environmental laws to allow more development of tight oil in the Monterey shale via fracking and acidization. The heightened risk of environmental damage caused by developing Monterey tight oil may seem acceptable to legislators who believe 15.4 billion barrels of oil, $24.6 billion per year in tax revenue, and 2.8 million jobs18 are in the offing—though far less so if the recoverable oil is actually a small fraction of that (which our report Drilling California concluded is likely the case19).

The stakes are also sky-high with respect to the national economy. The EIA sees US oil imports remaining relatively low throughout 2040 thanks to the supposed windfall of domestic tight oil production. If they’re wrong, oil imports would have to make up the difference, adding to our already substantial monthly petroleum trade deficit of $20 billion per month.20 And, of course, the price of oil would go up—possibly significantly—until global demand balances with the new, reduced, global supply.21

Conclusion

The EIA’s yearly publication of the Annual Energy Outlook is, without a doubt, an enormously challenging undertaking. Each year’s AEO pulls together projections that involve extremely large sets of data, endless analysis of industries and economies, and—of necessity—significant assumptions and caveats. The EIA’s own retrospectives on the accuracy of its projections reveal, however, that it generally overestimates oil production and underestimates price.22 Nevertheless, once the EIA’s annual projections are released they’re inevitably treated as future fact by the media and the public.

Although few would disagree that the EIA’s data collection and dissemination activities are world-class, its projections in AEO 2014 are, like most of its previous projections, overly optimistic and unlikely to be realized. The risks to long-term American energy security are obvious if the EIA’s projections of low-priced energy abundance don’t work out.

Good news sells, and doesn’t rock any boats, but policy makers and politicians comforted by rosy forecasts are unable to understand the risks and properly prepare the country for long-term energy sustainability. It’s unfortunate—and yes, dangerous—that rosy forecasts are exactly what the government’s premiere energy fortuneteller continues to offer, despite its dismal track record.
ENDNOTES

1 In 2013 dollars.

2 The EIA’s Annual Energy Outlook 2005 reference case oil price for 2025 was around $30 (~$37 in 2013 dollars). http://www.eia.gov/forecasts/archive/aeo05/pdf/0383(2005).pdf

8 J. David Hughes, Drilling California: A Reality Check on the Monterey Oil (Santa Rosa, CA: Post Carbon Institute, 2013), http://montereyoil.org.

9 The report was authored by a contractor, INTEK, Inc., but published by the EIA with an EIA-written introduction.

10 Energy Information Administration, Annual Energy Outlook 2014 (Early Release); figures include crude oil and lease condensate. These projections are not to be confused with those of the International Energy Administration’s World Energy Outlook 2013 which, because it includes natural gas liquids, sees the United States being the world’s top producer in 2015.http://www.bloomberg.com/news/2013-11-12/u-s-nears-energy-independence-by-2035-on-shale-boom-iea-says.html

11 Energy Information Administration, Annual Energy Outlook 2014 (Early Release), Table 14. The EIA includes non-tight-oil liquids in these numbers that happen to come from tight oil plays.

12 J. David Hughes, “Tight Oil: A Solution to U.S. Import Dependence?,” presentation to Geological Society of America, Denver, Colorado, October 28, 2013,https://gsa.confex.com/gsa/2013AM/webprogram/Handout/Paper226205/HUGHES%20GSA%20Oct%2028%202013%20-%20Short.pdf.

13 J. David Hughes, Drill Baby Drill: Can Unconventional Fuels Usher in a New Era of Energy Abundance? (Santa Rosa, CA: Post Carbon Institute, 2013), http://shalebubble.org/drill-baby-drill/.

14 J. David Hughes estimates this could happen within 10-12 years in the Bakken and Eagle Ford; seehttps://gsa.confex.com/gsa/2013AM/webprogram/Handout/Paper226205/HUGHES%20GSA%20Oct%2028%202013%20-%20Short.pdf.

15 Energy Information Administration, Annual Energy Outlook 2014 (Early Release), Table 14.

16 According to J. David Hughes, $450 billion in capital expenditures (capex) will be required to drill the wells needed for the Bakken and Eagle Ford alone by 2025. The Permian Basin will also make a notable contribution to the 9.61 mbd figure.

17 See especially Art Berman’s comments on capital expenditures in Arthur Berman, “Reflections on a Decade of U.S. Shale Plays,” presentation at Shreveport Geological Society, Louisiana, December 17, 2013. http://www.jeremyleggett.net/wp-content/uploads/2013/12/SGS_Reflections-on-A-Decade-of-U.S.-Shale-Plays_17-Dec-2013.pdf.

18 Per this widely cited report: University of Southern California, USC Price School of Public Policy, The Monterey Shale and California’s Economic Future, (March 2013),http://gen.usc.edu/assets/001/84955.pdf.

19 J. David Hughes, Drilling California: A Reality Check on the Monterey Shale, (Santa Rosa, CA: Post Carbon Institute, 2013), http://montereyoil.org/report.

21 It’s unlikely that a significant amount of “lost” American tight oil would be compensated with increased production elsewhere without higher oil prices, as few areas of the world are expecting significant oil production growth outside of North America.

22 In his book Snake Oil Richard Heinberg notes that “during the past dozen years the [EIA] had underestimated oil prices and overestimated oil production most of the time” based on the EIA’s own AEO Retrospective Review published March 2013.http://www.eia.gov/forecasts/aeo/retrospective/

Shale gas, peak oil and our future

Shale gas, peak oil and our future.

The following interview with Richard Heinberg was originally published in Flemish at the Belgian website De Wereld Morgen. The interview was given in conjunction with the release of the Dutch translation of Richard’s Book Snake Oil: How Fracking’s False Promise of Plenty Imperils Our Future. The Dutch title is Schaliegas, piekolie & onze toekomst.

Selma Franssen: Considering the shale gas and oil reserves in Europe, is there any sense in fracking here, all other objections aside?
Richard Heinberg: Until test wells are drilled, it’s very difficult to know what the actual shale gas and oil production potential is for Europe. All sorts of numbers have been cited, but they are simply guesses. Back in 2011, the US Energy Information Administration estimated that Poland’s shale gas reserves were 187 trillion cubic feet, but a little on-the-ground exploration led the Polish Geological Institute to downgrade that figure to a mere 27 TCF—a number that may still be overly optimistic. My institute’s research suggests that US future production of shale oil and gas has been wildly over-estimated too. So, without attempting to put a specific number to it, I think it would be wise to assume that Europe’s actual reserves are much, much smaller than the drilling companies are saying. We do know that the geology in Europe is not as favorable as it is in some of the US formations, so even in cases where gas or oil is present, production potential may be low—that is, it may not be possible to get much of that resource out of the ground profitably. That being the case, governments should undertake a realistic cost-risk-benefit analysis using very conservative assumptions about likely production potential.
One argument often heard in Europe is that fracking companies have gained knowledge and experience from extraction in the US and will cause less pollution and leaks when they start operating in Europe. Is there such a thing as safe fracking?
The petroleum industry has certainly been trying to clean up its act, and it’s true that progress has been made in improving operational safety. However it’s also true that the industry has systematically hidden evidence of pollution, and of environmental and human health impacts. The industry has often claimed that there are no documented instances of such impacts, and that’s arrant nonsense. Where environmental and health harms are clear, the industry typically offers a cash payment to the parties affected, but that is tied to a non-disclosure agreement, so that no one else will ever find out what happened. The industry also points to studies showing low methane emissions and no groundwater contamination. These studies tend to describe operations where everything is working perfectly, with no mistakes or malfunctions. But of course in the real world well casings fail, equipment breaks, pipes leak, and operators cut corners or make simple human errors. Take a look at regions of the US where fracking is happening right now, presumably with state-of-the-art equipment: have all the bugs really been worked out? Evidently not, because there is still a steady stream of reports of bad water and bad air.
Are unconventional gas and oil, as ‘transition fuels’, buying us extra time in the face of peak oil, or actually halting investments in renewables?
Unconventional oil and gas require enormous financial investments. The petroleum industry as a whole has doubled its rate of investment in exploration and production in the past decade. That’s because companies have run out of conventional production prospects—onshore fields of oil or gas that is easy and cheap to extract. The trend is clear: if we continue increasing our dependence on oil and gas, the levels of required investment will grow exponentially. Where will the money come from to develop renewable energy sources? Available energy investment capital will all have been spoken for. This is not hypothetical: it is exactly what we see in the US. A few years ago, it was understood that the nation had to transition away from fossil fuels, and there was a nascent effort to divert energy investment capital away from coal, oil, and gas and toward the renewables sector. But as shale gas and tight oil came into view, that effort largely stalled as private investors piled onto the shale bubble and government renewable energy programs were sidelined. Once the brief current shale boom is over (well before the end of this decade), America will be in a fix—it will have lost a decade in which it could have pursued the energy transition vigorously and insulated itself against a fossil energy supply crisis that is inevitable and entirely predictable.
Josh Fox, director of the Gasland documentaries, recently said that the fossil fuel industry is so powerful that “democracy in the 21st century is impossible as long as we rely on fossil fuels”. What are your thoughts?
I think there is some sense to Fox’s comment, though I would have to add that there are plenty of other threats to democracy in this century. It’s true that the fossil fuel industry represents an enormous concentration of capital, and money is power. The industry buys political advantage, tax breaks, advertising, public relations, foreign policy, and more. But at a more basic level it controls all of society. That’s because everything we do requires energy. No exceptions. Fossil fuels supply roughly 85 percent of the energy we use, so whoever controls those energy sources exerts a subtle but very real influence on nearly everything that happens in society. That’s why America is a nation of highways, a country designed and built for the convenience of petroleum-fueled automobiles. If, hypothetically, the US had spent the last century getting most of its energy from sunlight, you can bet it would be a very different place today.
Is it possible that fracking has a silver lining to it, in the sense that it is highly visible, comes very close to home and causes a lot of debate among locals, engaging more people in the energy debate and raising awareness around peak oil and the need to transition to renewables?
Possibly so, especially in Europe. There are at least three important factors that might limit fracking socially and politically in the European context. First is the number of wells needed. Because production rates in shale gas and tight oil wells tend to decline very rapidly, petroleum companies have to drill many wells in order to keep overall production levels up. In the US, the current total is over 80,000 horizontal wells drilled and fracked. If Europe says yes to shale gas, prepare for an onslaught of drilling.
The second factor is population density: Europe, of course, has a much higher population density than the US. So taking these first two factors into account, Europeans face a significant likelihood of living in close proximity to one of these future shale gas or oil wells.
The third factor is the legal status of ownership of subsurface mineral rights. In most of the US, landowners control mineral rights; therefore if a company wants to drill on your land, it must obtain your agreement, pay you an initial fee, and also pay a subsequent royalty for the oil or gas actually extracted. (Gas and oil companies actually avoid paying royalties in many instances, but that’s another story.) As a result, citizens have a financial stake in resource extraction, and they therefore have an incentive to overlook or even help cover up environmental and health impacts from fracking. This is especially true in poor communities, where a little lease or royalty money can go a long way. In Europe, national governments control mineral rights. Therefore there is no incentive for local citizens to take the industry’s side if there are disputes over pollution. There has been a strong citizen backlash to fracking in the US; in Europe it is likely to be overwhelming.
The message ‘peakists’ bring, namely that the party’s over, as you put it, is not popular with corporate backed media, for obvious reasons. Is there a media blackout on peak oil?
There is no formal blackout, but there is indeed an informal one. Peak oil is one of the defining issues of our time, yet it is treated as if it were either an esoteric controversy among petroleum engineers, or a conspiracy theory. This much is axiomatic: fossil fuels are finite resources, and we are extracting them using the “best-first” principle. We have bet our future on the continued availability of cheap oil, gas, and coal, but that is quite obviously a very bad bet. So where are the in-depth television, radio, and newspaper discussions of this? Very few programs and articles appear. I think that’s partly because commercial media outlets depend on the fossil fuel industry for advertising, and partly because the peak oil message is threatening to people’s sense of social equilibrium—it makes them start to question the basic premises of consumerism, among other things.
In Snake Oil, you write that we must reduce our dependency on fossil fuels as quickly as possible. Which steps should be taken in this ‘project of the century’ and on what time scale? 
We really need a wartime level of mobilization, prioritization, and implementation. Obviously, one of the priorities must be to build renewable energy generation capacity. But we must also completely rethink transportation, agriculture, and building construction/maintenance. This isn’t just about how we get energy; it is also about how we use it. We have built entire societies to take advantage of the unique properties of energy sources that have no future. For example, oil is energy-dense and portable, making it a perfect transport fuel. Without oil, we will not have an airline industry in any recognizable form. Altogether, society will be less mobile. That means we have to start thinking about how to re-localize production of food and other basic necessities. We also need to redesign our cities so that people do not need cars in order to live. These are enormous projects, and we must accomplish them by mid-century. There is absolutely no time to waste.

U.K. to Pay Up To $3M a Well to Councils Allowing Shale Gas – Bloomberg

U.K. to Pay Up To $3M a Well to Councils Allowing Shale Gas – Bloomberg.

Prime Minister David Cameron will give millions of pounds to local authorities that allow shale gas developments to go ahead, part of a drive to create more jobs and encourage investment in the U.K.

Councils will be allowed to keep 100 percent of the business rates they collect from shale gas sites, double the current 50 percent figure, in a move that may be worth 1.7 million pounds ($2.8 million) per site in central government funding per year, according to figures released by Cameron’s office. Business rates are taxes to help pay for local services, charged on most non-domestic properties.

“That’s going to be quite a significant boost for that local council’s coffers,” Business MinisterMichael Fallon told the BBC. “We want local councils and local people to benefit from this exploration. We expect 20-40 wells to be drilled in exploration over the next couple of years.”

Research by business lobby group The Institute of Directors showed investment could reach 3.7 billion pounds a year and support 74,000 jobs in the oil, gas, construction, engineering and chemicals industries, Cameron’s office said. It also said the industry will make proposals today on how best to secure a role for British companies in the supply chain as shale gas production develops in the U.K.

“A key part of our long-term economic plan to secure Britain’s future is to back businesses with better infrastructure,” Cameron said in an e-mailed statement. “That’s why we’re going all out for shale. It will mean more jobs and opportunities for people and economic security for our country.”

Total SA (FP) today became the largest oil company to invest in U.K. shale gas through a $47 million deal to take stakes in two exploration areas in eastern England.

Europe’s third-biggest oil producer will acquire a 40 percent stake in licenses held by Dart Energy Ltd. (DTE) and operated by IGas Energy Plc (IGAS), the Paris-based company said in a statement.

To contact the reporter on this story: Kitty Donaldson in London atkdonaldson1@bloomberg.net

French firm Total to join UK shale gas search | Environment | theguardian.com

French firm Total to join UK shale gas search | Environment | theguardian.com.

Fracking protesters

Fracking protesters in Balcombe last summer. Photograph: Rod Harbinson/Demotix/Corbis

The French energy company Total will become the first major international oil company to join the exploration for UK shale gas when it announces an investment package on Monday.

Total is to join a shale gas exploration project in Gainsborough Trough in Lincolnshire currently operated by Ecorp of the US, according to the Financial Times. The other partners in the project are Dart Energy and UK-listed Igas and Egdon Resources.

The coalition government has made the exploitation of Britain’s unconventional gas reserves a priority, offering tax breaks to shale developers and promising big benefits. This is in contrast to France where hydraulic fracturing, or fracking, the process by which shale gas is released, is banned.

George Osborne, the chancellor, has argued that shale has the potential to reduce Britain’s reliance on increasing expensive gas imports and create thousands of jobs.

Exploration for shale gas and other unconventional hydrocarbons is taking place or is planned in Wales, Scotland, the south of England and the Midlands and the north.

Opposition from environmentalists has hindered the work. Protesters say the fracking process – injecting water, sand and chemicals underground at high pressure into shale rock to release the oil and gas trapped inside – can contaminate groundwater and cause earthquakes. The operation of rigs and attendant noise and truck movements can disrupt the local area.

Last summer Cuadrilla Resources faced protests in the Sussex village of Balcombe, and protesters are currently camped outside a drilling pad at Barton Moss in Salford where Igas plans to drill an exploratory well.

Geologists estimate there could be as much as 1,300tn cubic feet of shale gas lying under parts of the north and Midlands. One-tenth of that would equal around 51 years’ gas supply for the UK.

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