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Shale gas boom hardly shaking up the world

By Cameron Leckie - posted Thursday, 1 November 2012


Julie Bishop’s recent OLO article Shale Gas revolution shaking up the world typifies the wishful and uncritical thinking so prominent in discussions of our energy future. Ms Bishop’s article reads like a glossy advertisement for the unconventional energy industry, promising that long held dream of U.S. Presidents and Presidential candidates alike of “energy independence.” But as is generally the case claims that seem too good to be true generally are. Rather than a ‘revolution,’ this article suggests that there is a ‘boom’ in unconventional energy production in the U.S. that will be relatively short lived and falls far short of what one may call a game changer.

It is not surprising that unconventional oil and gas has captured the imagination of government’s, media and business. If their perceived potential is realised they could provide an enormous quantity of energy and ward off production declines from conventional sources due to depletion. For example there could be 1.8 trillion barrels of potentially recoverable oil shale across the U.S. and 300 billion barrels of tight oil in the Bakken formation alone (compared with Saudi Arabian proved reserves of 265 billion barrels according to the 2012 BP Statistical Review of World Energy). Combined with the boom in tight oil and shale gas production this has led to a spate of claims from: the death of peak oil; the U.S as the new Saudi Arabia of oil; and energy independence for the U.S. 

Given the importance of energy to the economy and the impact of shortfalls in the energy supply demand equation, a more detailed examination of unconventional energy potential is required before blindly accepting claims such as made in Ms Bishop’s article and elsewhere.

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The defining factor for both tight oil and shale gas production is the extremely high production decline rates. For example the decline rate of total US natural gas production has increased from 23 per cent to 32 per cent over the last 10 years largely as a result of increasing shale gas production. Individual shale gas wells show production declines of 60 per cent or more in their first year of operation, requiring a continual increase in new shale gas wells just to maintain production levels. The average well in the Bakken formation has a decline rate of 40 per cent with production only growing due to an accelerating number of new wells.

So what triggered the boom in shale gas/tight oil production in recent years? Despite many claims to the contrary (including by Ms Bishop), neither the knowledge of unconventional energy sources nor the technology required to extract them are new. For example the first shale gas was produced in 1821, horizontal drilling first occurred in the 1930s and the first well was “fracked” in 1947. Perhaps price was a factor here.

Back in 2004, Daniel Yergin suggested that the long-term ceiling for the price of oil would be US$38 a barrel (colloquially this price has come to be known as the Yergin, a new unit of measurement for the price of oil). If oil had stayed at the one Yergin level, it is almost certain that there would not have been a shale oil boom in recent years. It is only that oil (depending on your benchmark) is trading at two to three Yergin’s that this revolution has taken place. Even at these lofty prices however, tight oil is only marginally commercially viable in some areas. For example a recent study found that the estimated break-even price for the average well in the Bakken formation in North Dakota is US$80 - $90 a barrel, uncomfortably close to current oil prices in the US.

The situation for shale gas is even worse with the recent glut of production, triggered by a spike in natural gas prices to US$13/MMBTU (compared with prices in the $2 range in the 1990s), which resulted in a major slide in natural gas prices such that they are not profitable (a shale gas well can cost US$10 million to develop and require gas prices around US$8/MMBTU to breakeven. The current price is around US$3.50/MMBTU) for the majority of shale gas wells. This has led to a halving of drilling for dry natural gas over the last year.

This leads to the unsustainable financing model of the shale gas industry. Deborah Rogers argues that the investment bank community has been the driving force behind the shale gas industry since the global financial crisis, not based on the viability of shale gas but rather the profit that can be made from the fees associated with funding the industry. Nicole Foss suggests that the shale gas “bubble” has all of the hallmarks of a Ponzi scheme which is approaching its natural limits. The experience of BHP and numerous investors in the shale gas industry suggest that this is indeed the case.

Whilst the shale gas bubble appears to be already deflating, what is the potential for tight oil? Can the US become oil independent? The US currently produces around 10 million barrels of liquid fuels a day (mb/d) and consumes nearly 19 mb/d (that is it imports nearly 9mb/d of oil).  Tight oil production is currently around 900,000 barrels a day. The most optimistic predictions for tight oil production foresee only three to four mb/d (more pessimistic projections are in the range of 1.9mb/d) by the 2020s but these forecasts are already behind schedule. Thus even in the most optimistic scenario the U.S. will still be a major oil importer. Whether this oil will be available for importation is another critical question with Citigroup indicating that even Saudi Arabia, the world’s largest oil exporter is at risk of ceasing oil exports by 2030.

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The U.S., as previously mentioned, also has enormous resources of oil shale. Oil shale is made up of kerogen – partially cooked oil, which requires significant energy and water intensive processing to convert it into a usable product. Resources (the total amount of oil in place) are not reserves (the amount of oil that can be recovered economically with existing technology) however. Robert Rapier, an experienced engineer within the energy industry and author of Power Plays: Energy Options in the Age of Peak Oil suggests that U.S. oil shale reserves will remain close to zero for the foreseeable future due to the technical and physical issues associated with oil shale production.  

There is no doubt that unconventional energy resources, namely tight oil and shale gas, have and will continue to provide a useful source of energy to the US economy for many years to come. Tight oil production will likely continue to grow for some years to come, offsetting the decline from older conventional oil fields and reducing some of the US’s demand for oil imports. Shale gas production will find a balance where the industry becomes profitable but at higher prices and lower production than currently. And companies will continue tinkering with oil shale, as they have for decades, attempting to develop a commercially viable method of exploiting oil shale. This hardly describes a revolution. What it does indicate however is how desperate the race to exploit what energy security analyst Michael Klare terms extreme energy.

A cynic might suggest that thought stopping slogans such as “energy independence” are no more than incantations, aimed at lulling populations into a false sense of security, supporting the status quo and making money for the minority. Unfortunately magical, or economic, thinking and an effective public relations campaign will not alter the laws of physics and geology that have led to the label of unconventional being applied to tight oil, shale gas and oil shale, no matter how much we want it too. They are at best marginal substitutes to the relatively low cost crude oil and conventional natural gas that they are attempting to replace.

Rather than wishing that there will be the energy to support the indefinite expansion of the global economy, its well past time to consider how we can organise our economies and societies such that they can function with far less and more expensive energy. Such a change in thinking would indeed be revolutionary!

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About the Author

Cameron Leckie has a Bachelor Science and a Graduate Diploma in Education. Employment experience includes a range of management positions both in Australia and overseas in the telecommunications industry. He is a member of the Australian Association for the Study of Peak Oil and Gas (ASPO Australia). Since finding out about peak oil in 2005, he has written extensively on the topic and in particular, its impact on the aviation industry.

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