To
read the headlines, it seems that the USA has emerged out of the blue
to the point of becoming the world’s oil and gas production giant. All
thanks to the Shale Revolution. Recently President Obama made various
noises that the US could solve the Ukraine gas dependency on Russian gas
because of the spectacular growth of extracting natural gas, and more
recently, oil, from shale rock formations across the US. There’s only
one thing wrong with this picture—“It ain’t gonna happen…”
The surface numbers are indeed
impressive to a layman or politician. According to US Government Energy
Information Administration data, between 2005 and 2010 the contribution
from shale gas to total US marketed gas production rose from less than
2% to more than 20%. And 2011 set an all-time record for US production
as the result of shale gas growth.
However the shale gas comes from a small
number of areas with significant and viable shale rock formations that
have trapped gas and oil in the interstices of the sedimentary shale
rocks. The main shale gas areas are the Barnett shale in Texas’
Fort Worth basin; the Fayetteville and
Woodford shales of the Arkoma basin in Arkansas and Oklahoma; the
Haynesville shale on the Texas Louisiana boarder; the Marcellus shale in
the Appalachian basin, and the most recently exploited, the Eagle Ford
shale in southwest Texas.
Two metrics widely used in describing
shale well performance are the initial production (IP) rate and the
production decline rate which together determine the ultimate recovery
(UR) from a well, an essential number in determining economic viability.
A group at MIT university in Massachusetts carried out an analysis of
production data from the major US shale regions. What they found is
sobering. While initial production from most shale gas plays was
unusually high, an essential component of the Wall Street shale gas
bubble hype, the same gas regions declined dramatically within a year.
They found “in general, shale well output tends to drop by 60% or more
from the Initial Production rate level over the first 12 months. The
second is that the available longer-term production data suggests that
levels of production decline in later years are moderate, often less
than 20% per year.”
Translated, that means on average after
only four years, you have only 20% of your initial gas volume available
from a given horizontal drilling investment with fracking. After seven
years, only 10%. The real volume shale gas boom appeared in 2009. That
means in the fields where significant drilling was present by 2009 are
already dramatically depleted by 80% and soon by 90%. The only way oil
or gas drillers have managed to maintain production volume has been to
drill ever more wells, spending ever more money, taking on ever more
debt in hopes of a sharp rise in the depressed US domestic gas price. As
a whole shale energy companies spend more than they are making in net
profit, creating a bubble of “junk” bond debt to keep the Ponzi game
going. That bubble will pop the second the Fed hints interest rates will
rise, or even sooner.
The industry tries hard to pump the
prospects of the shale revolution. One of the most outspoken recently
was the CEO of Conoco/Philips, Ryan Lance. Taking a baseball analogy, he
recently told an energy conference in Houston that the shale gas
“revolution” in the country is only just beginning and there should be
several decades left of successful energy production: “We’re in the
first inning of a nine-inning game on the shale revolution in the United States.” He did not make clear what the scientific connection between baseball and shale gas was.
The reality of the shale gas boom is
increasingly being shown to be quite different. According to Arthur
Berman, a petroleum geologist of 34 years’ experience who has studied
production and other aspects of the shale gas and oil boom, “forecasts
show production in shale plays from North Dakota’s Bakken to Texas’s
Eagle Ford will peak around 2020. Those investing with the expectation
that the boom will last for decades are “way out of line.”
To be concrete, the major shale
formations in the US, and there are not that many geologically-speaking,
will begin an absolute production decline in less than six or seven
years. Unlike conventional gas or oil fields, shale is an unconventional
and difficult way to extract energy by the highly controversial and
toxic practice of “fracking” or hydraulic fracturing of the shale
formations. As the shale runs horizontally, perfection of new horizontal
drilling techniques in the 1990’s opened commercial prospects for shale
gas for the first time.
Fracking the Bakken Formation in North Dakota
The hydraulic fracture is formed by
pumping a fracturing fluid—typically highly toxic and exempt, thanks to
then-Vice President Cheney’s Congressional influence, from EPA Clean
Water Act regulations—into to the wellbore at a rate sufficient to
increase pressure down-hole at the target zone. The rock cracks and the
fracture fluid continues further into the rock, extending the crack
still further, and so on. Often up to 70% of the toxic fracking fluids
leak and in many cases in Pennsylvania and elsewhere seep into the
ground water.
Even the US Government’s EIA projects
that US oil output will peak at 9.61 million barrels a day in 2019. They
see tight-oil or shale oil topping at 4.8 million barrels in 2021.
That’s only seven years out. And if the US Government is trying to
fast-track approval of LNG gas export terminals on coastal ports to
allow US gas companies to export their gas, completion of such complex
terminals including environmental impact approvals typically takes seven
years. Hmmmm.
Wall Street easy money
No one expects the President of the US
to have the time or the scientific background to delve into the
geophysical complexities of shale energy. He naturally relies on
competent advisers. What if the advisers, instead of being competent,
like in so many government agencies today, are in the sway (and
sometimes perhaps pay) of the shale energy companies and their Wall
Street investment bankers who have hundreds of billions of dollars
riding on promoting the shale hype?
The current US Shale boom is being
sustained on steroids, otherwise known as the Fed’s never-ending
Quantitative Easing zero-interest-rate policy, a stance that shows no
sign of reverting to normal interest rate levels as the economy
continues to be depressed since the collapse of the 2007 real estate
mortgage securitization bubble. In effect, shale drillers are able to
keep in business only because Wall Street and other investors continue
to throw money at them like it was falling from trees. Tim Gramatovich,
chief investment manager for Peritus Asset Management LLC, an $800
million fund, notes, “There’s a lot of Kool-Aid that’s being drunk now
by investors. People lose their discipline. They stop doing the math.
They stop doing the accounting. They’re just dreaming the dream, and
that’s what’s happening with the shale boom.”
Given the endless zero interest rate
regime of the Fed, investment funds are desperate to find investments
that yield higher interest. They are so desperate they are pouring money
into shale gas and shale or tight oil companies like never before. The
companies are operating at losses, loaded with debt and the credit
rating agencies rate their debt as “junk”, i.e. in a market downturn,
likely to default. One such company, Rice Energy, sold its bonds in
April with a rating of CCC+ by Standard & Poor’s, seven steps below
investment grade. That is below the minimum risk/quality level that
major investors, such as pension funds and insurance companies, are
allowed to buy. S&P says debt rated in the CCC range is “currently
vulnerable to nonpayment.” Despite that, Rice Energy was able to borrow
at an astonishingly low 6.25 percent.
“This is a melting ice cube business,”
said Mike Kelly, at Global Hunter Securities in Houston. “If you’re not
growing production, you’re dying.” Of the 97 energy exploration and
production companies rated by S&P, 75 are “junk” or below investment
grade. The shale “revolution” is but a Ponzi Scheme disguised as an energy revolution.
F. William Engdahl is
strategic risk consultant and lecturer, he holds a degree in politics
from Princeton University and is a best-selling author on oil and
geopolitics , exclusively for the online magazine “New Eastern Outlook”
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