Shale
Gas: The View from Russia
Dmitri Orlov
8
May, 2012
The
official shale gas story goes something like this: recent
technological breakthroughs by US energy companies have made it
possible to tap an abundant but previously inaccessible source of
clean, environmentally friendly natural gas. This has enabled the US
to become the world leader in natural gas production, overtaking
Russia, and getting ready to end of Russia's gas monopoly in Europe.
Moreover, this new shale gas is found in many parts of the world, and
will, in due course, enable the majority of the world's countries to
achieve independence from traditional gas producers. Consequently,
the ability of those countries with the largest natural gas
reserves—Russia and Iran—to control the market for natural gas
will be reduced, along with their overall geopolitical influence.
If
this were the case, then we should expect the Kremlin, along with
Gazprom, to be quaking in their boots. But are they?
Here
is what Gazprom's chairman, Alexei Miller, recently told Süddeutsche
Zeitung: “Shale gas is a well-organized global PR-campaign. There
are many of them: global cooling, biofuels.” He pointed out that
the technology for producing gas from shale is many decades old, and
suggested the US turned to it out of desperation. He dismissed it as
an energy alternative for Europe. Is this just the other's sides
propaganda, or could Miller be simply stating the obvious? Let's
explore. I will base my exploration on Russian sources, which is why
all the numbers are in metric units. If you want to convert to
Imperial, 1 m3 = 35 cubic feet, 1 km2 = .38 square miles, 1 tonne =
1.1 short tons).
The
best-developed shale gas basin is Barnett in Texas, responsible for
70% of all shale gas produced to date. By “developed” I mean
drilled and drilled and drilled, and then drilled some more: just in
2006 there were about as many wells drilled into Barnett shale as are
currently producing in all of Russia. This is because the average
Barnett well yields only around 6.35 million m3 of gas, over its
entire lifetime, which corresponds to the average monthly yield of a
typical Russian well that continues to produce over a 15-20 year
period, meaning that the yield of a typical shale gas well is at
least 200 times smaller. This hectic activity cannot stop once a well
has been drilled: in order to continue yielding even these meager
quantities, the wells have to be regularly subjected to hydraulic
fracturing, or "fracked": to produce each thousand m3 of
gas, 100 kg of sand and 2 tonnes of water, combined with a
proprietary chemical cocktail, have to be pumped into the well at
high pressure. Half the water comes back up and has to be processed
to remove the chemicals. Yearly fracking requirements for the Barnett
basin run around 7.1 million tonnes of sand and 47.2 million tonnes
of water, but the real numbers are probably lower, as many wells
spend much of the time standing idle.
In
spite of the frantic drilling/fracking activity, this is all small
potatoes by Russian standards. Russia's proven reserves of natural
gas amount to 43.3 trillion m3, which is about a third of the world's
total. At current consumption rates, that's enough to last 72 years.
Russian gas production is constrained by demand, not by supply; it is
currently down simply because Eurozone is in the midst of an economic
crisis. Meanwhile, US production has surged ahead, for no adequately
explored reason, crashing the price and making much of it
unprofitable.
Let's
compare: Gazprom's price at the wellhead runs from US$3 to $50 per
thousand m3, depending on the region. Compare that to shale gas in
the US, which runs from $80 to $320 per thousand m3. At this price,
the US cannot afford to sell shale gas on the European market.
Moreover, the overall volume of shale gas being produced in the US,
even given the feverish drilling rate of the past couple of years, if
cleaned up, liquified, and shipped to Europe in LNG tankers, would
not be enough to book up just the LNG terminal in Gdańsk, Poland,
which is currently standing idle. It seems that Gazprom has little to
worry about.
The
US, on the other hand, does have plenty to worry about. There has
been much talk already about groundwater pollution and other forms of
environmental destruction that accompanies the production of shale
gas, so I will not address these here. Instead, I will focus on two
aspects that are just as important but have received scarcely any
attention.
First,
what is shale gas? Ask this question, and you will be told: “Shut
up, it's methane.” But is it really? The composition of shale gas
is something of a state secret in the US, but information about the
gas produced from the nine Polish shale gas test projects did leak
out, and it's not pretty: Polish shale gas turned out to be so high
in nitrogen that it does not even burn. Technology exists to clean up
gas that is, say, 6% nitrogen, but Polish shale gas is closer to 50%
nitrogen, and, given high production costs, low yields, rapid
depletion and low wellhead pressure, cleaning it up to bring it up to
spec (which is 1% nitrogen) would most likely result in a net waste
of energy.
Even
if shale gas is low enough in nitrogen to burn, the problems do not
end there. It may also contain hydrogen sulfide, which is toxic and
corrosive and has to be removed before the gas can be stored or
injected into a pipeline. It probably contains toluene and other
organic solvents—ingredients in the fracking cocktails—which are
carcinogenic. Lastly, it may be radioactive. All clays are mildly
radioactive, and shale is a sort of heat-treated clay. While Barnett
shale is not particularly radioactive, Marcellus shale, which has
recently been the focus of frantic drilling activity, is. Thanks to
Marcellus shale gas, radioactive radon gas is being delivered
directly to your kitchen, via the burners of your stove, or to a
power plant smokestack upwind from where you live. This is expected
to result in increased lung cancer rates in the coming years.
Second,
why is shale gas being produced at all? Natural gas prices have
fallen through the roof, and are currently around $2 per thousand
cubic feet. This works out to around $70 per thousand m3. If shale
gas costs from $80 to $320 per thousand m3 to produce, it is unclear
how one might make any money with it.
But
perhaps making money with it is not the point. What if shale gas is
just a PR campaign (with horrific environmental side effects)? Going
back to what Alexei Miller said, what if the entire point of the
exercise was to increase the capitalization of shale gas exploration
and production companies? The number one company in shale gas is
Chesapeake Energy, the owner of the Barnett basin and a major player
in the Marcellus basin. This company almost went bankrupt in 2009,
but then managed to claw its way back to profitability in 2010 and
2011 by drilling, and drilling, and drilling, and then drilling some
more. Sixty percent of their revenue is from drilling operations. And
now there is a scandal involving Chesapeake Energy's (former?)
chairman, Aubrey K. McClendon, who apparently awarded himself a stake
in each well his company drilled, used them as collateral for
billions in loans, and used the loans to bet that natural gas prices
will go up (they haven't). In the meantime, natural gas drilling rig
count has dropped to a ten-year low. Given that shale gas wells
deplete very quickly, it looks like the shale gas boom is over.
But
now that it's over, what was it, exactly? It appears to have been
something like the dot-com bubble: companies with no conceivable way
of turning a profit using hype to attract investment and drive up
their valuations. Since 2008, various kinds of hype-based market
manipulations have become the staple of economic life in the US, and
so this is nothing new or different.
One
interesting question is, What sort of bubble will the US attempt to
blow next, if any? There is the Facebook IPO coming up. Facebook is a
ridiculous time-waster and, as such, seems a bit overpriced. Are we
going to attempt blowing up another dot-com bubble? Another round of
subprime mortgages does not seem to be in the works. What's a bubble
boy to do? If there are no more bubbles to blow, then it's back to
just plain printing money.
So
this whole shale gas thing didn't work out as planned, did it? But
could it have? Had it turned out to be much better in every way,
could it have swung geopolitical influence away from Russia and Iran
and back toward the US? Alas, no.
You
see, there is no such thing as a global natural gas market. Yes,
there are some LNG tankers sailing about, but that is very much a
point-to-point trade. There is a closed North American market, a
European market, and another market in the Asia-Pacific region. These
markets do not interact. The North American market and the European
market could have potentially shared just one producer: Qatar. Qatar
once wanted to export LNG to the US, but then decided to export it to
Europe instead, generating less of a loss, because European gas
prices are substantially higher. And the reason Qatar is dumping
natural gas in Europe is because it has gas to dump: its northern gas
field is a very “wet” field, with a substantial percentage of
natural gas condensate. Qatar's OPEC quota is 36-37 million tonnes of
oil per year, but natural gas condensate is not considered to be oil
and is not covered by OPEC quotas. Exploiting the condensate loophole
allows Qatar to export 65.7 million tonnes: 77% over quota. The LNG
is just concomitant production, and Qatar can afford to export LNG to
Europe at a loss. This is a juicy bit of trivia, but really something
of a footnote: an exception that proves the general case: there is no
global natural gas market.
There
is still, however, a global American disinformation and PR hype
market, although this too is changing. The view from Russia is that
it is pretty clear what this was all along: American propaganda and
financial shenanigns. Nothing to see here, people, keep moving.
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