The shale gas bubble

By Peggy Tibbetts on September 24, 2013 • ( 0 )

The Delaware Riverkeeper Network is producing a series of interviews with experts discussing the environmental and economic impacts of shale gas extraction. In this segment Delaware Riverkeeper Maya van Rossum asks energy industry expert Arthur Berman about the profitability of the shale gas industry. Berman’s answer: “Nobody’s making any money.”

Who is Arthur Berman?

According to The Oil Drum, “Arthur Berman is a petroleum geologist with 32 years of industry experience. He has been an independent geological consultant since 1999 and worked for Amoco Production Company for 20 years before then. He is an editor of The Oil Drum and a member of the National Petroleum Council. He has published more than 50 articles on petroleum, geology and technology over the past several years. He has made more than 30 presentations to investment and petroleum industry conferences, scientific society meetings, and E&P companies over the past year. He has done television interviews on CNN and BNN, and is widely quoted in the national and world press for his views on the oil and gas industry. He has a BA from Amherst College and an MS from the Colorado School of Mines.”

Read more about Arthur Berman’s analysis in The Fracked-up USA Shale Gas Bubble

Basing his analysis on actual well data from major shale gas regions in the US, [Arthur] Berman concludes however, that the shale gas wells decline in production volumes at an exponential rate and are liable to run out far faster than being hyped to the market. Could this be the reason financially exposed US shale gas producers, loaded with billions of dollars in potential lease properties bought during the peak of prices, have recently been desperately trying to sell off their shale properties to naïve foreign or other investors?

Berman concludes:
“Three decades of natural gas extraction from tight sandstone and coal-bed methane show that profits are marginal in low permeability reservoirs. Shale reservoirs have orders of magnitude lower reservoir permeability than tight sandstone and coal-bed methane. So why do smart analysts blindly accept that commercial results in shale plays should be different? The simple answer is found in high initial production rates. Unfortunately, these high initial rates are made up for by shorter lifespan wells and additional costs associated with well re-stimulation. Those who expect the long-term unit cost of shale gas to be less than that of other unconventional gas resources will be disappointed…the true structural cost of shale gas production is higher than present prices can support ($4.15/mcf average price for the year ending July 30, 2011), and that per-well reserves are about one-half of the volumes claimed by operators.”

Therein lies the explanation for why a sophisticated oil industry in the United States has desperately been producing full-throttle, in a high-stakes game laying the seeds of their own bankruptcy in the process—They are racing to offload the increasingly unprofitable shale assets before the bubble finally bursts. Wall Street financial backers are in on the Ponzi game with billions at stake, much as in the recent real estate securitization fraud.

[Here’s another little nugget from the article, though it’s unrelated to the shale bubble I had to point it out: “The Obama White House energy adviser, Heather Zichal, has even shifted her focus from pushing carbon cap ‘n trade schemes to promoting America’s ‘shale revolution’.” Where have you heard her name before? Heather Zichal is the deputy assistant to the president for energy and climate change who “monitored and managed developments behind the scenes as U.S. EPA prepared to release its findings that hydraulic fracturing had contaminated groundwater in Pavillion,” Wyoming.]

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“They tell us we’re on the cusp of an oil & gas revolution. But what if it’s all just a short-term bubble?”

That is the question asked and answered at Shalebubble.org.

Shalebubble.org is the joint effort of Post Carbon Institute, Energy Policy Forum, and Earthworks, with the goal of providing critical analysis — using industry and government data — to counter the false claims that domestic supplies of shale gas and shale oil (tight oil) will ensure energy security and significant long-term economic benefits to the US.

The website features two ground-breaking reports from the Post Carbon Institute and Energy Policy Forum.

Drill Baby, Drill

J. David Hughes, a Fellow with the Post Carbon Institute, is a geoscientist who has studied the energy resources of Canada for nearly four decades, including 32 years with the Geological Survey of Canada. In his report, “Drill Baby, Drill,” Hughes concludes: “The U.S. cannot drill and frack its way to ‘energy independence’.”

Highlights from the report:

“Despite the rhetoric, the United States is highly unlikely to become energy independent unless rates of energy consumption are radically reduced.”
“The much-heralded reduction of oil imports in the past few years has in fact been just as much a story of reduced consumption, primarily related to the Great Recession, as it has been a story of increased production.”
“At best, shale gas, tight oil, tar sands, and other unconventional resources 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.”
Although shale gas production has grown explosively to account for nearly 40 percent of U.S. natural gas production; its production has been on a plateau since December 2011. A whopping 80 percent of shale gas production comes from just five plays, several of which are already in decline.
Shale gas is ridiculously expensive: some $42 billion per year is spent to drill more than 7,000 wells, just in order to maintain production.
Tight oil does not fare much better and is a bubble of “ten years duration.” Once again, tight oil plays “are characterized by high decline rates, and it is estimated that more than 6,000 wells (at a cost of $35 billion annually) are required to maintain production.” That’s nearly $80 billion just to stand still.

A couple of Russian oilmen agree with Hughes. On March 30, 2013, RT.com reported that the CEO of Russian gas giant Gazprom said the American shale gas project is a bubble about to burst:

The extraction of shale gas in the US is unprofitable and this “soap bubble will burst soon,” believes the CEO of Russian gas giant Gazprom Aleksey Miller.

“Currently, there aren’t any projects that we know of where shale gas production would be profitable,” Miller stated, adding that “absolutely all the boreholes” are in the red.

There is an opinion that the whole thing is just a “soap bubble,” Gazprom head pointed out in an interview with Rossiya 24 TV channel.

The US “is not a competitor” for the Russian energy giant, Miller stated.

“We are skeptical about shale gas,” he said, as cited by Interfax. Therefore, Gazprom sees “no risks” for itself in the development of shale gas energy in the US. America still remains a country with a deficit of gas – it is the largest gas market and the largest consumer of this fuel, Miller said.

According to experts, the increase in volume of shale gas production corresponds with the dip in natural gas extraction on US territory, Gazprom CEO noted.

Apparently, one of the reasons behind the development of shale gas production in the US is to ensure the country’s “energy security,” Miller suggested. He added that Russia has exactly the same technologies. For instance, it extracts gas out of coal in Kuznetsk Basin in southwestern Siberia.

Earlier this month, the head of another Russian energy giant – Lukoil – also expressed some skepticism over the excitement around “shale gas revolution.”

“Of course, it is a great achievement on the part of US engineers that America is now producing oil and gas from shale. In order to do it, they had to drill very tricky wells and do hydraulic fracturing,” Lukoil President, Vagit Alekperov told RT. That way the US managed “to cut the cost of producing this gas and liquid hydrocarbons from these layers.”

“Undoubtedly, this is an achievement, but I wouldn’t call it a revolution,” the head of the oil company stated.

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Shale and Wall Street
Was the decline in natural gas prices orchestrated?

Deborah Rogers is a former Wall Street financier and now the founder of Energy Policy Forum, a consultancy and educational forum dedicated to policy and financial issues regarding shale gas and renewable energy. In her report, “Shale and Wall Street,” Rogers explores the role of Wall Street investment banks in the recent shale gas drilling frenzy and related drop in natural gas prices. She concludes: “Wall Street firms are intricately married to [shale gas and oil corporations] … With the help of Wall Street analysts acting as primary proponents for shale gas and oil, the markets were frothed into a frenzy.”

Highlights from the report:

“Wall Street promoted the shale gas drilling frenzy, which resulted in prices lower than the cost of production and thereby profited from mergers & acquisitions and other transactional fees.”
Such has been the frenzy that U.S. shale gas and shale oil reserves have been overestimated by a minimum of 100% and by as much as a massive 400-500% by operators. The reality is that “Shale oil wells are following the same steep decline rates and poor recovery efficiency observed in shale gas wells.”
The reason that the price of natural gas has been driven down is largely due to severe overproduction in meeting financial analysts’ targets of production growth for share appreciation.
“Unconventional oil and gas from shales has been claimed to be a game changer, revolutionary, “a gift and national treasure,” however “shale development is not about long-term economic promise for a region, nor is it about job creation or long term financial viability of shale wells.” It’s all about a quick financial win for the bankers.
“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.”

Independent energy analyst Bill Powers agrees with Rogers in an interview published September 19 at The Energy Collective. Powers (author of Cold, Hungry and in the Dark: Exploding the Natural Gas Supply Myth) said this:.

In addition, the Securities and Exchange Commission (SEC), after heavy lobbying, changed its rules in 2010 to allow for a significant increase in proven undeveloped reserves to be booked, so the SEC was also complicit in the perpetuation of the shale gas myth. Without this change in how shale gas reserves were booked in 2010, most shale operators would have been forced to take large write-downs rather than booking increases in reserves. I believe this rule change by the SEC grossly distorts the value of a company’s reserves since it allowed for a large increase in the booking of proven undeveloped reserves.

TER: What other economic consequences do you see if and when your views become reality?

BP: I think it will be similar to the housing crisis, where a handful of people saw it coming and profited from it. There was significant evidence that housing prices were unsustainable, but most people were surprised when the housing bubble popped. People from Alan Greenspan to Ben Bernanke and others had a lot of information about the economy and how unsustainable house prices were, but did not want to talk about it publicly. There’s a saying that “the impossible can become the inevitable in the blink of an eye.” I think this will happen with natural gas. For example, in the first week of December 2000, gas prices went from around $4/Mcf to over $10/Mcf in only a few trading sessions. This was due to falling production, lower storage levels and a cold spell that set in across much of the United States. This price spike was the first of numerous spikes during the last decade.

About an hour after I published this post there was breaking news:
Oil shale goes bust again