Science Heresy - January 2012

United States Gas Supplies

What do the experts say about shale gas?

Who are the experts?

A little learning is a dang'rous thing;
Drink deep, or taste not the Pierian spring:
There shallow draughts intoxicate the brain,
And drinking largely sobers us again.

Alexander Pope

A couple of headlines:
 

Vast new gold reserves discovered
Scientists have discovered new gold reserves containing 25 billion ounces --- eight times as much gold as has been dug from the ground in all of recorded history. . . . . .

Scientists find huge new source of hydrocarbons
Scientists have announced the discovery of a previously unexplored region containing “hundreds of times more liquid hydrocarbons than all the known oil and natural gas reserves”. . . . . .

The problem with the gold story is that the gold is in the world’s oceans (sparsely distributed at 10 grams per cubic kilometre) and while some of it can technically be recovered it cannot be recovered economically. The gold is therefore a resource, not a reserve (an important distinction I have referred to in previous correspondence). The problem with the hydrocarbons story is similar ---- the methane and ethane are on Hyperion, one of Saturn’s moons.

The point that I am trying to make with these hypothetical examples is that merely discovering the physical location of hydrocarbon resources doesn’t guarantee that they will be available for the use of humankind. It’s all about flow rates, not just the flow rate of the hydrocarbon but also the flow rate of capital. If you cannot raise enough capital to build your extraction and transport facilities or if you cannot get the oil or gas to flow out at rates sufficient to pay off your capital costs and running expenses then the reserves, no matter how large, will become uneconomic. (Though, as we shall see, many US shale gas companies are presently operating without making a profit.) The global debt problem is making it increasingly difficult for many parts of the petroleum industry to raise all the capital they need. And, as the links provided below indicate, the initially high flow rates of many US shale gas wells tail off very quickly, meaning that after only a very few years the amount of gas being extracted is only a small fraction of the original flow rate.

Chris Nelder’s excellent article, “Why Energy Journalism Is So Bad” is worth reading.  Nelder also has a good article explaining the curious economics at work in the US shale gas industry. As more data about these relatively young operations becomes available, it is tending more toward the more lower estimates of the sceptics than the initial estimates of the operators. For example, Berman’s analysis of wells in the Haynesville Shale suggested that they would produce about 3 billion cubic feet of gas on average, not the 6 to 10 bcf claimed by the operators — estimates which were based on the high initial productivity of the wells, without taking their lower, later output properly into account. Objective third-party research from Louisiana State University has just confirmed Berman’s estimate. . . . . .

The uncomfortable truth is that, at this point, we simply don’t know how big our shale gas resources are, how much of the gas can be technically or economically produced, or how profitable producing the gas actually is. And that should give us pause. Apart from the rancorous debate over the environmental impact of shale gas fracing, we would do well to consider how much faith we’re placing in the questionable economics of shale gas, and how much of our future we’re betting on it

In case you think that it is only peak oil advocates who have a cautious attitude towards much of the shale gas hype see this article in the Oil and Gas Financial Journal, a leading petroleum industry publication.

And, presumably, military analysts and organisations (usually regarded as pretty conservative) cannot easily be dismissed as crackpot alarmists--- see the long list of military examinations of peak oil here .(Since that list was compiled the Wehrmacht has issued a very comprehensive and somewhat sombre study on this topic.)

Another thing to keep in mind is that oil and gas are not fungible (exactly interchangeable)---the range of products that can be derived from crude oil differs in critical ways from that derived from gas (for example, there is no bitumen for road making to be derived from natural gas----- and if you think that is not important then consider the number of US rural counties who, because of increased bitumen prices, cannot afford to maintain their sealed roads and are now returning them to gravel. )

Or consider diesel oil:
During 2011 it became apparent that the demand for diesel is becoming a worldwide problem. While the demand for gasoline has been falling, at least in the OECD nations, the demand for diesel has been increasing. As electricity production falters around the world mainly due to droughts, aging equipment, and unaffordable fuel prices, the demand for diesel generated backup electric power has surged. Vital uses for electricity such as in hospitals, public safety, and water pumps will continue no matter what the cost. It should be noted that much of the increase in "oil" production in recent years has been made up of natural gas liquids and ethanol which are not commonly used to produce diesel, leaving the quantity of feedstock for diesel production stagnant: http://www.energybulletin.net/print/60425

Furthermore, the capital costs of converting machinery (including cars) from petrol to gas (or electricity for that matter), are not trivial in terms of both time and money.

Someone you should have a look at is Dave Summers (who blogs as “Heading Out”), a recently retired professor of mining engineering who is also one of the founders of the Oil Drum website (he lives in the US but was born in one of the coalmining regions of the northern UK). He has his own personal website now (Bit Tooth Energy) where you can also see that he writes intermittently on climate change. Summers is also interested in volcanoes (he follows the activity of the one that blew up in Iceland a few years ago). He is also doing some interesting work on the actual historical temperature records of each of the US States—very interesting stuff.

Dave Summers did a very sober end of year review in which, while acknowledging that natural gas reserves are increasing around the world, he did not deviate from his view that energy supplies continue to be a problem:

However, as we come to the end of 2011, it seems as though there is a gloss, or spin, being applied to stories about the state of global energy supply, which implies that concerns about future energy supply are overstated. Instead the impression is left that there will be, in the immediately foreseeable future, no return to shortages. So this post will be a more general view of the topic, less concerned with absolute numbers and references but rather seeking to suggest that these perceived words of wisdom are, like the promises of a return to $30 oil that we heard only three or so years ago, likely to fade into oblivion once they have served their immediate purpose. . . . .

The bent of the stories that have recently appeared seem to imply that the United States is moving toward significantly greater crude oil production, and thus a greater independence from foreign suppliers than will actually be the case. Folks such as Dr Yergin are projecting production of oil from the shales around the country as rising to some 2.9 mbd by 2020 and being sustained through time – neither of which is likely since the Bakken in North Dakota may well start declining and be significantly below 600 kbd within four years, and the likelihood of new developments bringing in more than this on a sustained basis are not great.

In Christopher Wren’s greatest work, St Pauls cathedral, there is the inscription: si monumentum requiris, circumspice --- “If you seek his monument look around you”. Similarly, if you seek evidence of peak cheap hydrocarbons just look around at the state of the world economy since crude oil production peaked a few years ago. Peak oil is principally an economic phenomenon indicating that the easy-to-get cheap oil on which our affluence has been built has gone for good.

As Chris Skrebowski, former Senior Analyst for the Saudi Oil Ministry, defines it:

Peak Oil is, in fact, a complex but largely an economically driven phenomenon that is caused because the point is reached when: The cost of incremental supply exceeds the price economies can pay without destroying growth at a given point in time. While hard to definitively prove, there is considerable circumstantial evidence that there is an oil price [which] economies cannot afford without severe negative impacts.

The current failure of most western economies to achieve anything more than minimal growth this year (2011) is most likely because oil prices are already at levels that severely inhibit growth. Indeed, research by energy consultants Douglas-Westwood concludes that oil price spikes of the magnitude seen this year correlate one-for-one with recessions.

There are many factors contributing to the current world debt crisis. Many of them relate to the manifest failures of market mechanisms and inadequate government regulation and monitoring. These were also significant factors that led to the 1930s Great Depression, the last time we faced an economic crisis of this magnitude. The difference this time is that during the 1930s we had abundant reserves of cheap energy immediately to hand (mainly oil and coal) to help us out of the Depression as soon as the financial system was ready to resume growth. This time we do not. There are promises and expectations concerning cheap energy supplies but that is not the same as “cheap energy immediately to hand”.

Admittedly, Australia has been cushioned from the current energy and debt crisis, mainly because of China’s appetite for our raw materials which has pushed up the value of our dollar and thus shielding our consumers from the significant rise in crude oil prices in recent years. The signs are, however, that the Chinese economy is slowing, so it will not be surprising if ours slows down too. And if the situation in Europe continues to deteriorate we could have a world-wide recession, or even a depression. Australia should fare better than most places, however.

Postscript
I have just discovered this recent (29 December 2011) article by Chris Nelder which has some excellent graphics about shale gas. I have also just come across this interesting short interview with a former analyst for the International Energy Agency.
 

Wayne Hooper

January 2012
 

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