Energy

A note of caution from the Wall Street Journal

The Shale Revolution: What Could Go Wrong?

A funny thing happened on the way to Barack Obama and Mitt Romney's goal of greater U.S. energy independence: American industry got there first, on paper at least. Now the question is: What can go wrong?

WSJ,

6 September, 2012

Thanks to the hustle of innovative U.S. energy companies, the discovery of vast shale gas and oil fields, and stronger national conservation, some forecasts peg energy independence for North America at just a few years off. A Citigroup report calls the region "the new Middle East." Pimco says the trend is a "game changer." Bain & Co. declares it a "new paradigm."

The knock-on effect, some believe, could be historic: millions of new jobs and the "reindustrialization of America" as companies hitch new manufacturing to cheap energy. Shell and Dow Chemical, among others, are already planning new chemical plants fueled by rocketing shale output. Driven by new fields such as the Bakken in North Dakota, U.S. oil production has hit levels not seen since 1998.

So why is John Hofmeister, the former chief of U.S. operations for Shell, sounding an alarm? "Unless something seriously changes in the next five years," he said in an interview, "we'll be standing in gas lines because there won't be enough oil to go around."

The reason is that there's still disagreement over the factors governing the growth of production from the new fields. Among those factors: the direction of global supply and demand, how price will help or hinder exploration, whether new regulation will impede development, and how long it will take to build the infrastructure needed to get more oil to market.

Mr. Hofmeister said he believes forecasts also understate the "decline" rate of shale fields. The hydrocarbons tend to flow robustly in the first months of drilling, then decline before plateauing at lower levels.

To sustain growth, companies will need to drill many wells at a rate "beyond the capacity of the industry as currently defined," he says. "Those who ballyhoo oil shale and say that this will take care of us—no, it won't."

What's more, Bakken oil currently trades at a discount to world market prices in part because of crimped infrastructure: The U.S. currently doesn't have enough pipelines to get the oil to refineries efficiently.

So, until more pipelines are built, buyers are jerry-rigging deliveries. Delta Airlines DAL +0.87% just bought a shuttered refinery in Trainer, Pa., to make its jet fuel. Ed Bastian, the airline's president, said Thursday he's considering buying oil from the Bakken and then shipping it to the plant by train.

In fact, infrastructure is short across the board, from skilled manpower to storage facilities to the broader supply chain that feeds the fields. "Production is going faster than the midstream or downstream can accommodate it," says Frank Verrastro, a former executive at Tosco and Pennzoil who is now with CSIS, a think tank in Washington. By resorting to rail, "all we're doing is moving the bottleneck."

By some estimates, hydraulic fracturing, the innovative but controversial drilling method by which oil and gas are freed from shale or other formations, gets too expensive if oil prices drop below about $50 a barrel. That may be another hurdle for the industry if the global economy slows sharply. Gas producers have already been hammered by plummeting prices from an oversupply of shale gas.

And regulation is another puzzle. States and communities are split over whether to allow so-called fracking in their backyard. Citizens groups have raised concerns about the safety of the procedure, about pollution controls around well sites, and about the dangers posed by drilling through water tables and aquifers. The EPA has already issued some standards for the drilling and continues to examine issues such as the discharge of waste water. It's unclear whether any new rules would affect the speed of exploration. Environmental groups support greater federal oversight of the myriad fracking operations across the country.

But operators, such as Exxon and Devon Energy, like state control. John Richels, the CEO of Devon, which now gets some 50% of its production from shale, says states understand the local geology better than the federal government. "We're spending a lot more time on satisfying regulatory issues," he says. "The potential impediment [to expanded production] is the growth in that additional regulatory layer" from more federal oversight.

Either way, Washington must also marry the new hydrocarbon bonanza with its emission and renewable-energy goals. Public policy, concludes the Citigroup report, may determine whether growth from the new fields stays healthy or fizzles.

"Investors and the industry can live with regulations if they are clear and prospective, if you can price that into your investment decision," says Howard Newman, CEO of Pine Brook, a private-equity firm and early investor in shale exploration. "What will set us back is if the environment remains uncertain and any regulatory scheme becomes retroactive."

It's true that greater energy independence may be just over the horizon. But this won't be a sprint. Get ready for the long-distance hurdles

More actions proving Peak Oil. 1.9 billion barrels is a drop in the bucket, about 20 days' global supply. –

Wes Miller, Collapse Net

Exxon Explores 'Very Promising' Oil And Gas Fields In Afghanistan

A funny thing happened on the way to Barack Obama and Mitt Romney's goal of greater U.S. energy independence: American industry got there first, on paper at least. Now the question is: What can go wrong?

Business Insider,

6 September, 2012

More top-tier energy companies are likely to join the race to explore for oil and gas in Afghanistan after the world's biggest publicly traded firm, Exxon Mobil, changed perceptions of what the country may hold by showing interest in drilling.

Energy majors are exploring new frontiers in pursuit of fresh reserves as they exhaust existing fields and Afghanistan, after decades of conflict, remains little explored.

While the U.S. government estimates the country holds a fraction of the reserves of surrounding giant Middle East producers, its potential is enough to attract Exxon Mobil and that factor, by itself, is likely to lure more.

Kabul, which has long depended on international donations to finance its economy, now hopes revenue from raw materials will help the country stand alone, especially as an impending pullout of most foreign troops by the end of 2014 is creating donor fatigue.

"Exxon would not go into an area unless the areas are very promising. They are not looking for potatoes," said Chakib Khelil, former Algerian oil minister, now an energy consultant in Paris.

The search for fresh assets by big companies such as Exxon, which produce a lot could mean "going to the Arctic, going deep off-shore and going into new areas like Afghanistan," he added.

Eight firms including Exxon this month expressed interest in an oil and gas auction of six blocks in the Afghan-Tajik basin, after a tender was won by China National Petroleum Co (CNPC) late last year.

Afghanistan has about 1.9 billion barrels of undiscovered technically recoverable crude reserves, the United States Geological Survey (USGS) said in 2011, although it didn't say how much of it was economically recoverable.

That compares to Equatorial Guinea, which has proven reserves of 1.7 billion barrels and produces about 250,000 barrels of crude a day, according to BP'slatest annual statistical review.

With oil hovering around $100 a barrel, an output of 250,000 bpd would earn Afghanistan about $9.1 billion a year. That would be roughly half the country's gross domestic product of $20 billion in 2011, according to the World Bank.

The country also has an estimated 59 trillion cubic feet of natural gas reserves, about half that of the proven reserves in neighboring Iraq, according to BP.

The Tajik basin, for which Kabul invited bids earlier this month, has about 946 million barrels of crude and 7 trillion cubic feet of natural gas reserves, the survey found.

The Amu Darya basin, which CNPC, China's biggest oil and gas producer, is exploring after it won the tender last year, has 962 million barrels of crude and 52 trillion cubic feet of natural gas, according to USGS.

SECURITY ISSUES

However, drilling in Afghanistan is fraught with risks, most notably those related to security, and sovereign risk is a serious concern.

Violence in Afghanistan was at its worst this year since the Taliban regime was toppled 10 years ago, United Nations said.

Besides violence, companies operating in the country also have to deal with the still prevalent infighting between groups, which could disrupt their operations.

For instance, CNPC's Amu Darya project has met with severe interference from militia loyal to former warlord and army chief of staff General Abdul Rashid Dostum, the government says.

Dostum's supporters have been allegedly demanding a share of the proceeds, a claim the general's National Front party denied.

Still, for the oil companies, which operate in some of the world's most conflict-ridden areas, including Iraq, Nigeria and Sudan, this is just an occupational hazard.

"Security is an issue but it's not an issue that will bar them from being involved in the country," said Khalil, citing cases such as Iraq, where companies continue to operate and provide their own protection, with the help of the government. "But you need to have a good return to justify the risk."

AIDING GROWTH

The country, among the world's poorest, will need around $6 billion to $7 billion of aid a year to grow its economy, on top of a $4.1 billion bill for security forces to maintain peace after foreign combat troops leave, the head of Afghanistan's central bank said last month.

Mining reserves "is not a magic solution. And we're going to have to see this develop over the longer term. Many of these are very large projects... so it will take time before you see those benefits," said a U.S. embassy official in Kabul.

Still, exploration in the country will be an uphill task as the geology has not been closely studied or well understood, said Alan Troner, head of the Houston-based Asia-Pacific Energy Consulting.

And Kabul has still to put its own house in order before it becomes a destination for more energy companies.

"Looking at the lack of transparency, widespread corruption and no security, I am not optimistic that other powerful companies in the world would invest in Afghanistan," said Yama Torabi, executive director of Integrity Watch Afghanistan, a civil organization promoting transparency.