This
is not pleasant reading. Shale production has been capital driven
and plenty of smoke has obscured economic reality.
I
have been in and around oil industry finance for decades. So let us
make it all simple. All the capital costs are up front. After that
a successful well pays back quickly and then on to produce a decent
living for years at a modest percentage of the original production.
The
only important question to answer is just how many months of
production is required to achieve payback. We can live with two to
three years on conventional wells.
In
the present case, the wells cost twice as much, almost all wells
produce, and decline is rapid. So when do we get our money back? It
is here that I have been skeptical until someone shows me a success.
It may turn out that the turnaround time approaches a decade or
never.
It
may still work only because production is certain as in the Tar Sands
which also has a long capital cycle.
The
bad news is that it may be far worse than I would ever have guessed
or thought. We will need to track this because it has certainly been
clouding the under production declines and structural weakening of
the industry. Be very nervous.
Rosy Forecast of
Cheap Oil Abundance, Economic Boom a Myth
Monday, 31 December
2012 00:00By Dr. Nafeez Mosaddeq Ahmed ,
Headlines about this
year's "World Energy Outlook" (WEO) from the International
Energy Agency (IEA), released mid-November, would lead you to think
we are literally swimming in oil.
The report forecasts
that the United States will outstrip Saudi Arabia as the world's
largest oil producer by 2017, becoming "all but self-sufficient
in net terms" in energy production - a notion reported almost
verbatim by media agencies worldwide, from BBC News toBloomberg.
Going even further, Damien Carrington, head of environment at The
Guardian, titled his blog: "IEA report reminds us peak oil idea
has gone up in flames."
The IEA report's
general conclusions have been backed up by several other reports this
year. Exxon Mobil's 2013 Energy Outlook projects that
demand for gas will grow by 65 percent through 2040, with 20 percent
of worldwide production from North America, mostly from
unconventional sources. The shale gas revolution will make the US a
net exporter by 2025, it concludes. The US National Intelligence
Council also predicts US energy independence by 2030.
This last summer saw a
similar chorus of headlines around the release of a Harvard
University report by Leonardo Maugeri, a former executive with the
Italian oil major Eni SpA. "We were wrong on peak oil,"
read environmentalist George Monbiot's Guardian headline. "There's
enough to fry us all." Monbiot's piece echoed a spate of earlier
stories. In the preceding month, the BBC had asked "Shortages:
Is 'Peak Oil' Idea Dead?" The Wall Street Journal pondered, "Has
Peak Oil Peaked?" while the New York Time's leading
environmental columnist Andrew Revkin took "A Fresh Look At
Oil's Long Goodbye."
The gist of all this
is that "peak oil" is now nothing but an irrelevant meme,
out of touch with the data and soundly disproven by the now
self-evident abundance of cheap unconventional oil and gas.
Burning our Bridges
On the one hand, it's
true: There are more than enough fossil fuels in the ground to drive
an accelerated rush to the most extreme scenarios of
climate catastrophe.
The increasing shift
from conventional to unconventional forms of oil and gas - tar sands,
oil shale, and especially shale gas - heralds an unnerving
acceleration of carbon emissions, rather than the deceleration
promised by those who advocate shale as a clean 'bridge fuel' to
renewables. According to the CO2 Scorecard Group, contrary to
industry claims, shale gas "cannot be credited" with US
emissions reductions over the last half decade. Nearly 90 percent of
reductions were caused not by switching to shale gas, but by a
"decline in petroleum use" linked to the "replacement"
of coal "by wind, hydro and other renewables." To make
matters worse, where natural gas saved 50 million tons of carbon by
substituting for coal in electricity, increased gas use in
commercial, residential and industrial sectors generated 66 million
additional tons of carbon.
In fact, studies show
that when methane leakages are incorporated into an assessment of
shale gas' CO2 emissions, natural gas could even surpass coal in
terms of overall climate impact. As for tar sands and oil shales,
emissions are 1.2 to 1.75 times higher than for
conventional oil. No wonder the IEA's chief economist Fatih
Birol remarked pessimistically that "the world is going in
the wrong direction in terms of climate change."
But while the new
evidence roundly puts to rest the "doomer" scenarios
advocated by staunch "peak oil" pessimists, the global
energy predicament is far more complicated.
Scaling the Peak
Delving deeper into
the available data shows that despite being capable of triggering
dangerous global warming, we are already in the throes of a global
energy transition for which the age of cheap oil is well and truly
over. For most serious analysts, far from signifying a world running
out of oil, "peak oil" refers simply to the point when,
due to a combination of below-ground geological constraints and
above-ground economic factors, oil becomes increasingly and
irreversibly more difficult and expensive to produce.
That point is now. US
Energy Information Administration (EIA) data confirms that despite
the US producing a "total oil supply" of 10 million
barrels per day, up by 2.1 mbd since January 2005, world
crude oil production and lease condensate - conventional production -
remains on the largely flat, undulating plateau it has been on since
it stopped rising that very year at 74million barrels per day (mbd).
According to John Hofmeister, former president of Shell Oil,
"flat production for the most part" over the last decade
has dovetailed with annual decline rates for existing fields of about
"4 to 5 million bpd." Combined with "constant growing
demand" - particularly from China and emerging markets - he
argues, this will underpin higher oil prices for the foreseeable
future.
The IEA's "World
Energy Outlook" actually corroborates this picture - but the
devil is in the largely overlooked details. Firstly, the main reason
US oil supply will overtake Saudi Arabia and Russia is because Saudi
and Russian output is projected to decline, not rise as previously
assumed. So while US output creeps up from 10 to 11 mbd in
2025, post-peak Saudi output will fall to 10.6 mbd and
Russia to 9.5 mbd.
Secondly, the report's
projected increase in "oil production" from 84 mbd in 2011
to 97 mbd in 2035 comes not from conventional oil, but "entirely
from natural gas liquids and unconventional sources" (and half
of this from unconventional gas including shale) - with conventional
crude oil output (excluding light tight oil) fluctuating between 65
mbd and 69 mbd, never quite reaching the historic peak of 70 mbd in
2008 and falling by 3 mbd sometime after 2012.
The IEA also does not
forecast a return to the cheap oil heyday of the pre-2000 era, but
rather a long-term price rise to about $125 per barrel by 2035.
Thirdly, oil prices
would be much higher if not for the fact that governments are heavily
subsidizing fossil fuels. The WEO revealed that fossil fuel
subsidies increased 30 percent to $523 billion in 2011, masking
the threat of high prices.
Therefore, world
conventional oil production is already on a fluctuating plateau, and
we are now increasingly dependent on more expensive unconventional
sources. The age of cheap oil abundance is over.
Fudging the Figures
But there are further
reasons for concern. For how reliable is the IEA's data? In a series
of investigations for the The Guardian and Le Monde, Lionel Badal
exposed in 2009 how key data was deliberately fudged at the IEA
under US pressure to artificially inflate official reserve
figures. Not only that, but Badal later discovered that as early
as 1998, extensive IEA data exploding assumptions of "sustained
economic growth and low unemployment," had been systematically
suppressed for political reasons, according to several
whistleblowers.
With the IEA's
research under such intense US political scrutiny and interference
for 12 years, its findings should perhaps not always be taken at
face value.
The same goes, even
more so, for Maugeri's celebrated Harvard report. By any meaningful
standard, this was hardly an independent analysis of oil industry
data. Funded by two oil majors - Eni and British
Petroleum (BP) - the report was not peer-reviewed and contained
a litany of elementary errors. So egregious are these errors that Dr.
Roger Bentley, an expert at the UK Energy Research Centre, told
ex-BBC financial journalist David Strahan: "Mr Maugeri’s
report misrepresents the decline rates established by major studies;
it contains glaring mathematical errors. . . . I am astonished
Harvard published it."
What the Scientists
Say
In contrast to the
blaring media attention generated by Maugeri's report, three
peer-reviewed studies published in reputable science journals from
January through to June this year offered a less than jubilant
perspective. A paper published in Nature by Sir David King,
the UK's former chief government scientist, found that despite
reported increases in oil reserves, tar sands, natural gas and shale
gas production via fracking, depletion of the world’s existing
fields is still running at 4.5 percent to 6.7 percent per year. They
firmly dismissed notions that a shale gas boom would avert an energy
crisis, noting that production at shale gas wells drops by as
much as 60 to 90 percent in the first year of operation. The
paper received little, if any, media fanfare.
In March, Sir King's
team at Oxford University's Smith School of Enterprise & the
Environment published another peer-reviewed paper in Energy
Policy, concluding that the industry had overstated world oil
reserves by about a third. Estimates should be downgraded from
1150-1350 billion barrels to 850-900 billion barrels. As a
consequence, the authors argued: "While there is certainly vast
amounts of fossil fuel resources left in the ground, the volume of
oil that can be commercially exploited at prices the global economy
has become accustomed to is limited and will soon decline." The
study was largely blacked out in the media - bar a solitary report in
the Telegraph, to its credit.
In June - the same
month as Maugeri's deeply flawed analysis
- Energy published an extensive analysis of oil industry
data by US financial risk analyst Gail Tverberg, who found that since
2005, "world [conventional] oil supply has not increased,"
that this was "a primary cause of the 2008-2009 recession"
and that the "expected impact of reduced oil supply" will
mean the "financial crisis may eventually worsen." But
all the media attention was on the oilman's oil-funded report -
Tverberg's peer-reviewed study in a reputable science journal, with
its somewhat darker message, was ignored.
What Happens When
Shale Boom Goes Boom?
These scientific
studies are not the only indications that something is deeply wrong
with the IEA's assessment of prospects for shale gas production and
accompanying economic prosperity.
Indeed, Business
Insider reports that far from being profitable, the shale gas
industry is facing huge financial hurdles. "The economics of
fracking are horrid," observes US financial journalist Wolf
Richter. "Production falls off a cliff from day one and
continues for a year or so until it levels out at about 10 per cent
of initial production." The result is that "drilling is
destroying capital at an astonishing rate, and drillers are left with
a mountain of debt just when decline rates are starting to wreak
their havoc. To keep the decline rates from mucking up income
statements, companies had to drill more and more, with new wells
making up for the declining production of old wells. Alas, the scheme
hit a wall, namely reality."
Just four months ago,
Exxon's CEO, Rex Tillerson, complained that the lower prices due to
the US natural gas glut, although reducing energy costs for
consumers, were depressing prices and, thus, dramatically decreasing
profits. This problem is compounded primarily by the swiftly
plummeting production rates at shale wells, which start high but fall
fast. Although in shareholder and annual meetings, Exxon had
officially insisted it was not losing money on gas, Tillerson
candidly told a meeting at the Council on Foreign Relations: "We
are all losing our shirts today. We're making no money. It's all
in the red."
The oil industry has
actively and deliberately attempted to obscure the challenges facing
shale gas production. A seminal New York Times investigation
last year found that despite a public stance of extreme optimism, the
US oil industry is "privately skeptical of shale gas."
According to the Times, "the gas may not be as easy and cheap to
extract from shale formations deep underground as the companies are
saying, according to hundreds of industry e-mails and internal
documents and an analysis of data from thousands of wells." The
emails revealed industry executives, lawyers, state geologists and
market analysts voicing "skepticism about lofty forecasts"
and questioning "whether companies are intentionally, and even
illegally, overstating the productivity of their wells and the size
of their reserves." Though corroborated by independent studies,
a year later such revelations have been largely ignored by
journalists and policymakers.
But we ignore them at
our peril. According to Arthur Berman, a 32-year veteran
petroleum geologist who worked with Amoco (prior to its merger
with BP), "the decline rates" for shale gas reserves are
"are incredibly high." Citing the Eagleford shale - the
"mother of all shale oil plays," he points out that the
"annual decline rate is higher than 42 percent." Just to
keep production flat, they will have to drill "almost 1000 wells
in the Eagleford shale, every year. . . . Just for one play, we're
talking about $10 or $12 billion a year just to replace supply. I add
all these things up, and it starts to approach the amount of money
needed to bail out the banking industry. Where is that money going to
come from?"
Chesapeake Energy
recently found itself in exactly this situation, forcing it to sell
assets to meet its obligations. "Staggering under high debt,"
reported the Washington Post, Chesapeake said "it would
sell $6.9 billion of gas fields and pipelines - another step in
shrinking the company whose brash chief executive had made it a
leader in the country’s shale gas revolution." The sale was
forced by a "combination of low natural gas prices and excessive
borrowing."
The worst-case
scenario is that several large oil companies find themselves facing
financial distress simultaneously. If that happens, according to
Berman, "you may have a couple of big bankruptcies or takeovers,
and everybody pulls back, all the money evaporates, all the capital
goes away. That's the worst-case scenario." To make matters
worse, Berman has shown conclusively that the industry exaggerated
EURs (Estimated Ultimate Recovery) of shale wells using flawed
industry models that, in turn, have fed into the IEA's future
projections. Berman is not alone - writing in Petroleum Review,
US energy consultants Ruud Weijermars and Crispian
McCredie argued there remains strong "basis for
reasonable doubts about the reliability and durability of US shale
gas reserves," measures of which have been "inflated"
under new Security & Exchange Commission rules.
The eventual
consequences of the current gas glut, in other words, are more than
likely to be an unsustainable shale bubble that collapses under its
own weight, precipitating a supply collapse and price spike. Rather
than fueling prosperity, the shale revolution will instead boost a
temporary recovery masking deeper, structural instabilities.
Inevitably, those instabilities will collide, leaving us with an even
bigger financial mess, on a faster trajectory toward costly
environmental destruction.
So when is crunch
time? According to a new report from the New Economics
Foundation out last month, the arrival of 'economic peak oil' -
when the costs of supply "exceeds the price economies can pay
without significantly disrupting economic activity" - will be
around 2014-15.
Black gold, it would
seem, is not the answer to our problems.
