Shale Gas – Bonanza or Hype?

by Brian Davey

In recent months there have been a lot of very rosy news items about so called “unconventional gas” as a “game changing” new feature of world energy markets. It’s bonanza time…

Maybe….however, before going further, its useful to think about what happens in a gold rush. Very few of those out prospecting get rich. But people who sell wagons, equipment and the banks do.

The problem is that when it comes to any news from the hydrocarbons market one should never take things at face value. Lots of the players have an interest in presenting a particular view of reality, to encourage “optimism bias”. This keeps the capital flowing on easier terms, share prices are kept up and it avoids worrying shareholders who keep off the backs of managers, the politicians are kept sweet. It also means that the companies who supply all the logistics, the equipment and the (highly toxic) chemicals for shale gas recovery – keep their sales and profits high. They come out with profits if there is a bonanza fever, whether the potential of shale gas is substantially real or not. This is a company called Halliburton by the way….

Given that there are more PR consultants in many rich countries than there are journalists, one never quite knows how and why some articles have been written, what the sources are from which they have been written and what the agenda is behind them. Cui bono?

With that in mind let’s look at the recent spate of articles about shale gas in particular and unconventional gas in general. If we take these stories at face value then the world looks like this – with half of the natural gas in the world set to come soon from so called “unconventional sources” all previous assumptions about natural gas depletion are off. An article in Der Spiegel explains, the entire planet is being resurveyed for new sources of gas – which means Australia, China, India, Indonesia, Latin America and Europe. That includes England, Wales, Scotland and Ireland too.

Although unconventional gases in general and shale gas in particular are chemically much the same as conventional gas and useable in the same way, because they are tapped by different kinds of technologies from different kinds of geological formations, one might as well think of them as a new energy source. As such we can no longer just assume that, after peak oil, there will be a relatively soon to follow series of regional events of “peak” gas, followed by rapid gas depletion in these different parts of the world. Maybe there still will be but maybe there will not be too. The exploratory processes are too early yet for us to say. It depends on how much of this is hype.

If it is hype though it has been fairly successful as a PR exercise. The story goes that as a result of recent explorations the estimates about economically recoverable reserves have shot up in the USA.

A review of global energy resources by the Federal German Institute for Geosciences (BGR) reports that the proven reserves of shale gas in the US were assessed to be about 99 Bcm in 1998 but were estimated to be 425 Bcm in 2009. Comparably, the proven tight gas reserves have also been re-evaluated from 1036 Bcm to 2265 Bcm.

This German review is now already out of date. The recent Tyndall Centre report on Shale Gas says

“As is demonstrated by the annual federal assessments undertaken by the EIA, the upward trend is rapid and the estimates
indicate a threefold increase in the estimate of technically recoverable reserve between 2008 and 2010 inclusive, while the early release of the 2011 figures sees an increase of over 100% on the 2010 estimate. This clearly suggests that the full potential volume of the resource is highly uncertain and is likely to increase in future.” ( )

The global potential of shale gas is even more uncertain. The Tyndall Centre Report says that its researchers were only able to find one global estimate – in a report for for the US National Petroleum Council (NPC, 2007). This suggested a world figure of around 450,000 bcm global shale gas resource. They used this figure for exploring what would happen to greenhouse gas emissions if different proportions of this total resource were recoverable according to three scenarios  – one scenario in which 40% of the total resource is actually recoverable (high extraction); a medium extraction scenario of 20% recoverability and a low extraction scenario of 10%. For each of these scenarios it is assumed that 50% of the total recoverable resource is extracted by 2050, with the 100% of the recoverable resource extracted by 2100. Then the cumulative recovered resources over the 39 years to 2050 would be: High Scenario 90,000Bcm; Medium 45,000 Bcm; and low 22,500Bcm.

It is important to stress that these are not predictions merely explorations of what would happen according to different magnitudes – possibilities no more.

The Tyndall report is already out of date on this. Since its appearance the International Energy Agency has weighed in and doubled their estimates of natural gas reserve because of unconventional resources

“The International Energy Agency (IEA) has said that the planet may have to double the amount of natural gas previously thought. In an interview with BBC news, the agency’s senior gas expert, Anne-Sophie Corbeau, said that due to unconventional gas from shale and coal bed methane, the world may have 250 years of gas usage at current usage rates. However, she stressed that the total available resource is highly uncertain, depending on price, technology and the accessibility of supplies. Miss Corbeau said that conventional gas supplies are assured for 60 years, with another 60 years a possibility depending on whether unexploited areas are opened up to gas companies.”

Consultants Wood Mackenzie have also produced an assessment,  ‘The Potential Impact of Global Unconventional Gas Growth’ which looks at the  impact if, in the view of the consultancy, China, India and Europe realise their full unconventional gas production potential. They quote figures on the global gas market of between 140 and 290 billion cubic metres (bcm) per annum by 2030. (For comparison note that the low extraction Tyndall Scenario would bring an average of 576 Bcm on the market each year between now and 2050).
With these explosive growth figures are we looking at a hydrocarbon answer to peak oil and peak conventional gas for the immediate future? We have to accept that it might be a possibility. Perhaps….

On the other hand there are those who claim that the shale gas boom is not all that it seems. For example there’s an article on the North American “Oil Drum” website by aeberman, from October 28th of last year which is titled  “”Shale Gas – Abundance or Mirage? Why the Marcellus Shale will disappoint expectations” . The article looks at 10 financial accounts of companies which are mainly shale gas operations plus the slope of gas well decline curves. It examines industry claims that the life of gas wells could as much as 65 years – in fact gas well depletion rates are much more rapid than claimed. It questions the gas industry assumption that there will be uniformity of production rates at different locations across shale fields. In fact, production is only high yielding  in very specific locations. There can be low yield very close to high yielding wells.

It is true that the shale gas fields have recently produced a high level of output because of the rapidity of expansion. This is the result of a rapid expansion in capacity in the industry in the USA – together with the initial high yield of new wells.  This has brought down the gas price but there are real issues of how long this can be sustained – which calls into question whether, if a low gas price continues, the rapidly depleting fields will wipe out the profitability of the industry at the expense of the shareholders – in the not too distant future.

Given the rapid depletion rate of individual wells what one sees is a rapid decline in the energy return on energy invested – as this blogger argued a couple of years ago:

“Most wells in the Barnett are done in 7 years or less. More disturbing than this is that the overall field has shown the same curve shape, in a fractal relation to wells and groups of wells. In 2000, production in the study area was peaking at 180 MCF / day and declining over 7 years. By 2007, production was peaking much higher at 300 MCF / day, but declining much more rapidly in 3-4 years. The EROI went from 84:1 in 2000 to 38:1 in 2007, and overall volume per well had also dropped to half over the same period. This trend suggests another halving in 7 years, a 10% decline rate. Despite initial positive EROI, Barnett will show lower EROI than the conventional PA play in about 10 years time.”

The studies cited above show a high level of debt financing of the companies producing shale gas. When gas prices are low, and when there is rapid depletion in each of the fracked wells, it is clear that those who put up equity capital stand to lose – when the price remains low and what the wells produce falls away rapidly as the years go by. The  value return from the rapidly depleting gas well will fall away below the debt charges which paid for the technical installations. The loss will be born by shareholders. The lower the gas price, the greater this problem is. The new political awareness of the toxicity of the process and the imposition of greater pollution controls, not to mention possible production moratoriums, will also – and should also –  increase the costs of the industry. The outcome of the political battle on this will have immense implications for profitability.

If however we assume that the money junkies can keep control of the regulatory situation by leaning on politicians and officials – perhaps on the scare of energy security arising from a middle east crisis then, to keep things going as long as possible, and before the shareholders lose confidence, these shareholders can be kept reassured by booking optimistic figures about the value of new gas on new land that has been acquired. The high initial returns on the new fields pay off the first round of debt.

The question is how long a process of this kind can be kept going when less productive shale fields are taken on with even higher costs and more rapid depletion rates. Perhaps with oil and gas price hike, because of political instability in the middle east, the show might be kept on the road a bit longer.

Another way of interpreting this situation is to see it as the gas industry equivalent of a speculative bubble which is being kept inflated as long as possible. By spreading the bonanza mentality and PR to other countries, there is more interest back in the USA where it all started – as foreign majors invest in the US to learn how to tap shale resources with the intention of applying the lessons in their own countries. Meanwhile well connected companies like Halliburton have an interest in promoting  soaring estimates which picture a future golden age of shale gas production – taking advantage of the increasing fears of climate change on the one hand and national “energy security” vulnerabilities on the other. No doubt if the democracy movement spreads into Saudi Arabia, and the price of oil goes up even higher, pulling the gas price up too, this will keep the shale gas show going longer.

So yes, shale gas has transformed the US gas market and – and it could transform the global gas market too – but perhaps for a shorter time than the current euphoria suggests. The Bush administration was aware that the US was dangerously dependent on foreign supplies of energy. Their energy strategy was to develop new sources of hydrocarbons out of the US itself using new technologies – for which they relaxed environmental standards – and the result is that about half of the natural gas consumed in the United States is now coming from these so called unconventional sources. “The country has already replaced Russia as the world’s leading natural gas producer” (Der Spiegel)

But for how long? Perhaps this is a game changer and perhaps, as suggested, it is a bit of a mirage. Trading on the desire for energy security, as political instability drags up oil prices and gas prices with them, there are grounds for wondering whether the gas price will crash or whether an oil and gas price surge, on the back of a Middle east and North African revolution, would continue to drive the costly development of thousands of what might turn out to be short lived wells. As we now know from the film ‘Gaslands’ , as well as from recent exposes in the New York Times, a continued boom is likely to have disastrous effects on water supplies, farm lands and public health. It could delay the energy transformation and the introduction of renewables. It could release extra greenhouse gas methane into the atmosphere from leaking wells.

If a large amount of capital is ploughed into producing gas where the well yields in initial years are high, but there is very rapid depletion rate, then you will get an early glut which crashes prices but the early successes might not last. If the capital keeps coming in and keeps chasing new wells  in a speculation, hyped by the pr and political system, then eventually a lot of fixed capital will have been installed. Its possible that this capital may have a vanishingly small payback on it – but in the meantime a lot of people will be living with poisoned water, poisoned farm land and food supplies, more methane and ghg emissions and Halliburton and Dick Cheney will have done very well out of it thank you very much.

More on fracking

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