Shale
gas won't stop peak oil, but could create an economic crisis
Overinflated
industry claims could pull the rug out from optimistic growth
forecasts within just five years
22
June, 2013
A
new report
out last week from the US Energy Information Administration (EIA) has
doubled estimates of "technically recoverable" oil
and gas
resources available globally. The report says that shale-based
resources potentially increase
the world's total oil supplies
by 11 per cent.
Acknowledging
fault-lines in its new study, contracted to energy consulting firm
Advanced
Resources International Inc.
(ARI), the EIA said:
"These
shale oil and shale gas resource estimates are highly uncertain and
will remain so until they are extensively tested with production
wells."
The
report estimates shale resources outside the US by extrapolation
based on "the geology and resource recovery rates of similar
shale formations in the United States." Hence, the EIA concedes
that "the extent to which global technically recoverable shale
resources will prove to be economically recoverable is not yet
clear."
Two
years ago, following the publication of the EIA April 2011 report a
New
York Times investigation
obtained internal EIA communications showing how senior officials,
including industry consultants and federal energy experts privately
voiced scepticism about shale gas prospects.
One
internal EIA document
said oil companies had exaggerated "the appearance of shale gas
well profitability" by highlighting performance only from the
best wells, and using overly optimistic models for productivity
projections over decades. The NYT
reported that the EIA often "relies on research from outside
consultants with ties to the industry."
The
latest EIA shale gas estimates, contracted to ARI, is no exception.
ARI, according to the NYT's
2011 article,
has "major clients in the oil and gas industry" and the
company's president, Vello Kuuskraa, is "a stockholder and board
member of Southwestern Energy, an energy company heavily involved in
drilling for gas in the Fayetteville shale formation in Arkansas."
Independent
studies published over the last few months cast even more serious
doubt over the viability of the shale gas boom.
A
report
released in March by the Berlin-based Energy Watch Group (EWG), a
group of European scientists, undertook a comprehensive assessment of
the availability and production rates for global oil and gas
production, concluding that:
"...
world oil production has not increased anymore but has entered a
plateau since about 2005."
Crude
oil production was "already in slight decline since about 2008."
This is consistent with the EWG's earlier finding that global
conventional oil production had peaked
in 2006
- as subsequently corroborated by the International
Energy Agency (IEA) in 2010.
The
new report predicts that far from growing inexorably, "light
tight oil production in the USA will peak between 2015 and 2017,
followed by a steep decline", while shale gas production will
most likely peak in 2015. Shale gas prospects outside the US are
incomparable to gains made so far there "since geological,
geographical, and industrial conditions are much less favourable."
Consequently,
global gas prices are likely to increase rather than follow the
initial US trend. In the meantime, conventional oil production will
continue declining, dropping as much as 40 per cent by 2030. The
upshot is that the US "will not become a net oil exporter."
The
EGW report follows two other reports published earlier this year also
challenging the conventional wisdom.
A
Post-Carbon
Institute study
authored by geologist David Hughes, who worked for 32 years as a
research manager at the Geological Survey of Canada, analysed US
production data for 65,000 wells from 31 shale plays using a database
widely used in industry and government. While acknowledging that
shale has dramatically reversed "the long-standing decline of US
oil and gas production", this can only:
"...
provide a temporary reprieve from having to deal with the real
problems: fossil fuels are finite, and production of new fossil fuel
resources tends to be increasingly expensive and environmentally
damaging."
Despite
accounting for nearly 40 per cent of US natural gas production, shale
gas production has "been on a plateau since December 2011 - 80
per cent of shale gas production comes from five plays", some of
which are already in decline.
"The
very high decline rates of shale gas wells require continuous inputs
of capital - estimated at $42 billion per year to drill more than
7,000 wells - in order to maintain production. In comparison, the
value of shale gas produced in 2012 was just $32.5 billion."
The
report thus concludes:
"Notwithstanding
the fact that in theory some of these resources have very large in
situ volumes, the likely rate at which they can be converted to
supply and their cost of acquisition will not allow them to quell
higher energy costs and potential supply shortfalls."
Report
author Hughes said that the main problem was the exclusion of price
and rate of supply: "Price is critically important but not
considered in these estimates." He added: "Only a small
portion [of total estimated resources], likely less than 5-10 per
cent will be recoverable at a low price...
"Shale
gas can continue to grow but only at higher prices and that growth
will require an ever escalating drilling treadmill with associated
collateral financial and environmental costs – and its long term
sustainability is highly questionable."
Another
report
was put out by the Energy Policy Forum, and authored by former Wall
Street analyst Deborah Rogers - now an adviser to the US Department
of the Interior's Extractive Industries Transparency Initiative.
Rogers warns that the interplay of geological constraints and
financial exuberance are creating an unsustainable bubble. Her report
shows that shale oil and gas reserves have been:
"...
overestimated by a minimum of 100% and by as much as 400-500% by
operators according to actual well production data filed in various
states... Shale oil wells are following the same steep decline rates
and poor recovery efficiency observed in shale gas wells."
Deliberate
overproduction drove gas prices down so that Wall Street could
maximise profits "from mergers & acquisitions and other
transactional fees", as well as from share prices. Meanwhile,
the industry must still service high levels of debt due to excessive
borrowing justified by overinflated projections:
"...
leases were bundled and flipped on unproved shale fields in much the
same way as mortgage-backed securities had been bundled and sold on
questionable underlying mortgage assets prior to the economic
downturn of 2007."
Seeking
to prevent outright collapse, the report argues, the US is ramping up
gas exports so it can exploit the difference between low domestic and
high international prices "to shore up ailing balance sheets
invested in shale assets."
Rogers,
who testified last month before the Senate Committee on Energy and
Natural Resources, also expressed scepticism about the EIA's latest
assessment:
"The
EIA actually does retrospective assessments of their forecasting and
their track record is dismal... They admit that they overestimated
natural gas production 66 per cent of the time and crude 59.6 per
cent of the time in their March 2013 assessment for 2012."
She
added that "there is definitely a bubble." Though it would
not have an impact as devastating as the banking crisis, she said:
"The
oil majors do have losses, but the smaller independents are being
shaken out. Chesapeake and others are struggling, like Devon,
Continental, Kodiak and Range. Without exception, they all have had a
significant deterioration in negative free cash since 2010. This is
obviously not sustainable."
The
impact of this would be greater centralisation, with smaller
companies and their assets being absorbed by the oil majors through
mergers and acquisitions. Rogers said:
"What
is most troubling to me is that there appears to be a complacency
setting in about transitioning to a more sustainable energy economy.
Shales should be used as a bridge. But we are hearing far too much
euphoric talk about 100-200 years of natural gas. Therefore no need
to worry, it can be business as usual. This is highly problematic in
my opinion. We must globally transition away from hydrocarbons."
Dr
Nafeez Ahmed
is executive director of the Institute
for Policy Research & Development
and author of A
User's Guide to the Crisis of Civilisation: And How to Save It
among other books. Follow him on Twitter @nafeezahmed
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