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Despite the claims, shale gas isn't all it's fracked up to be
You would think we were
swimming in oil. The International Energy Agency's (IEA) latest World Energy
Outlook forecasts that the United States will outstrip Saudi Arabia as the
world's largest producer by 2017, becoming "all but self-sufficient in net
terms" in energy production. While the "peak oil" pessimists are
clearly wrong, so is a simplistic picture of fossil fuel abundance.
When the IEA predicts an
increase in "oil production" from 84 million barrels a day in 2011 to
97 in 2035, it is talking about "natural gas liquids and unconventional
sources", which includes a big reliance on "fracking" for shale
gas. Conventional oil output will stay largely flat, or fall.
The IEA has been exposed
before as having, under US pressure, artificially inflated official reserve
figures. And now US energy consultants Ruud Weijermars and Crispian McCredie
say there is strong "basis for reasonable doubts about the reliability and
durability of US shale gas reserves". The New York Times found that state
geologists, industry lawyers and market analysts privately questioned
"whether companies are intentionally, and even illegally, overstating the
productivity of their wells and the size of their reserves." And former UK
chief government scientist Sir David King has concluded that the industry had
overstated world oil reserves by about a third. In Nature, he dismissed notions
that a shale gas boom would avert an energy crisis, noting that production at
wells drops by as much as 90 per cent within the first year.
The rapid decline rates
make shale gas distinctly unprofitable. Arthur Berman, a former Amoco petroleum
geologist, cites the Eagle Ford shale, Texas, where the decline rate is so high
that simply to keep production flat, they will have to drill "almost 1,000
wells" a year, requiring "about $10bn or $12bn a year just to replace
supply". In all, "it starts to approach the amount of money needed to
bail out the banking industry. Where is that money to come from?"
In September, the leader of
the US shale gas revolution, Chesapeake Energy, sold $6.9bn of gas fields and
pipelines to stave off collapse. Four months ago Exxon's CEO, Rex Tillerson,
told a private meeting: "We're making no money. It's all in the red."
The worst-case scenario is that several large oil companies at once face
financial distress. Then, says Berman, "you may have a couple of big
bankruptcies or takeovers and everybody pulls back, all the money evaporates,
all the capital goes away."
Far from fuelling prosperity, the gas glut will generate an
unsustainable debt bubble whose bursting precipitates a supply collapse and
price spike. The New Economics Foundation estimates the arrival of "economic
peak oil" – when the costs of supply exceeds the price economies can pay
without significantly disrupting economic activity – in around 2014/15. Black
gold is not the answer.
Excerpts
from a more complete article by the same author:
The Great Oil Swindle (FPIF)
The report forecasts that the United States will
outstrip Saudi Arabia as the world's largest oil producer by 2017, becoming
"all but self-sufficient in net terms" in energy
production—a notion reported almost verbatim by media agencies worldwide, from BBC News to Bloomberg. Going even
further, Damien Carrington, Head of Environment at the Guardian, titled his blog:
"IEA report reminds us peak oil idea
has gone up in flames."
...
Burning our bridges
On the one hand, it's true: there are more than enough fossil fuels in
the ground to drive an accelerated rush to the most extreme scenarios of climate catastrophe.
The increasing shift from conventional to unconventional forms of oil
and gas—tar sands, oil shale, and especially shale gas—heralds an unnerving
acceleration of carbon emissions, rather than the deceleration promised by
those who advocate shale as a clean 'bridge fuel' to renewables.
…
In
fact, studies show that when methane leakages are incorporated into an
assessment of shale gas' CO2 emissions, natural gas could even surpass coal in terms of
overall climate impact. As for tar sands and oil shales, emissions are 1.2 to 1.75 times higher than for
conventional oil.
…
Scaling the peak
Delving deeper into the available data shows that we are already in the
throes of a global energy transition in which the age of cheap oil is well and
truly over. For most serious analysts, far from signifying a world running out of
oil, "peak oil" refers simply to the point when, due to a combination
of below-ground geological constraints and above-ground economic factors, oil
becomes increasingly and irreversibly more difficult and expensive to produce.
That point is now. U.S. Energy Information Administration (EIA) data
confirms that despite the United States producing a "total oil
supply" of 10 million barrels per day (up by 2.1 mbd since January 2005),
world crude oil production remains on the largely flat, undulating plateau it
has been on since it stopped rising that very year at around 74 million barrels per day (mbd). According to John Hofmeister, former president of Shell Oil,
"flat production for the most part" over the last decade has
dovetailed with annual decline rates for existing fields of about "4 to 5
million bpd." Combined with "constant growing demand" from China
and emerging markets, he argues, this will underpin higher oil prices for the
foreseeable future.
Fudging figures
But
there are further reasons for concern. For how reliable is the IEA's data? In a
series of investigations for the Guardian and Le Monde, Lionel Badal exposed in
2009 how key data was deliberately fudged at the IEA under U.S. pressure to artificially
inflate official reserve figures. Not only that, but Badal later discovered
that as early as 1998, extensive IEA data exploding assumptions of
"sustained economic growth and low unemployment" had been
systematically suppressed for political
reasons according to several whistleblowers
…
The same goes, even more so, for Maugeri's celebrated
Harvard report[1].
By any meaningful standard, this was hardly an independent analysis of oil
industry data. Funded by two oil majors—Eni and British Petroleum (BP)—the report was
not peer-reviewed, and contained a litany of elementary errors. So egregious
are these errors that Dr. Roger Bentley, an expert at the UK Energy Research Centre, told ex-BBC
financial journalist David Strahan that "Mr. Maugeri’s report
misrepresents the decline rates established by major studies, [and] it contains
glaring mathematical errors... I am astonished Harvard published it."
…
What the scientists say
In contrast to the blaring media attention generated
by Maugeri's report, three peer-reviewed studies published in reputable science
journals in the first half of 2012 offered a less than jubilant perspective. A
paper published in Nature by Sir David King,
the UK's former chief government scientist, found that despite reported
increases in oil reserves and tar sands, natural gas, and shale gas production,
depletion of the world’s existing fields is still running at 4.5 percent to 6.7
percent per year. They firmly dismissed notions that a shale gas boom would
avert an energy crisis, noting that production at shale gas wells drops by as
much as 60 to 90 percent in the first year of operation. The paper received
little, if any, media fanfare.
…
In March, Sir King's team at Oxford University's Smith
School of Enterprise and the Environment published another peer-reviewed paper
in Energy
Policy, concluding that the industry had overstated world oil reserves by
about a third. Estimates should be downgraded from 1150-1350 billion barrels to
850-900 billion barrels. "While there is certainly vast amounts of fossil
fuel resources left in the ground,” the authors argued, “the volume of oil that
can be commercially exploited at prices the global economy has become
accustomed to is limited and will soon decline." The study was
largely blacked out in the media (except for a solitary report in the Telegraph, to its credit).
In June—the same month as Maugeri's deeply flawed analysis—Energy published an
extensive analysis of oil industry data by U.S. financial risk analyst Gail
Tverberg, who found that since 2005, "world [conventional] oil supply has
not increased." He argued that this was "a primary cause of the
2008-2009 recession" and that the "expected impact of reduced oil
supply" will mean the "financial crisis may eventually worsen."
…
What happens when the
shale boom... goes boom?
These scientific studies are not the only indications
that something is deeply wrong with the IEA's assessment of prospects for shale
gas production and accompanying economic prosperity.
Indeed, Business
Insider reports that far from being profitable, the shale gas
industry is facing huge financial hurdles. "The economics of fracking are
horrid," observes U.S. financial journalist Wolf Richter. "Production
falls off a cliff from day one and continues for a year or so until it levels
out at about 10 percent of initial production." The result is that
"drilling is destroying capital at an astonishing rate, and drillers are
left with a mountain of debt just when decline rates are starting to wreak
their havoc. To keep the decline rates from mucking up income statements,
companies had to drill more and more, with new wells making up for the
declining production of old wells. Alas, the scheme hit a wall, namely
reality."
Just a few months ago, Exxon CEO Rex Tillerson complained
that the lower prices resulting from the U.S. natural gas glut were
dramatically decreasing profits. This problem is compounded by the swiftly
plummeting production rates at shale wells, which start high but fall fast.
Although, Exxon had officially insisted in shareholder meetings that it was not
losing money on gas, Tillerson candidly told a meeting at the Council on
Foreign Relations: "We are all losing our shirts today. We're making no money. It's all in the
red."
The oil industry has actively and deliberately
attempted to obscure the challenges facing shale gas production. A seminal New York
Times investigation in 2011 found that despite a public stance of extreme
optimism, the U.S. oil industry is "privately skeptical of shale gas." According to
the Times, "the gas may not be
as easy and cheap to extract from shale formations deep underground as the
companies are saying, according to hundreds of industry e-mails and internal
documents and an analysis of data from thousands of wells." The emails
revealed industry executives, lawyers, state geologists and market analysts
voicing "skepticism about lofty forecasts" and questioning
"whether companies are intentionally, and even illegally, overstating the productivity
of their wells and the size of their reserves." Though corroborated by
independent studies, such revelations have been largely ignored by journalists
and policymakers.
But we ignore them at our peril. Arthur Berman, a
32-year veteran petroleum geologist who worked with Amoco (prior to its merger
with BP), on the same day as the release of the IEA's 2012 annual report, told OilPrice that "the decline
rates shale reservoirs experience... are incredibly high." Citing the
Eagleford shale—the "mother of all shale oil plays"—he pointed out
that the "annual decline rate is higher than 42 percent." Just to
keep production flat, oil companies will have to drill "almost 1000 wells
in the Eagleford shale, every year... Just for one play, we're talking about
$10 or $12 billion a year just to replace supply. I add all these things up and
it starts to approach the amount of money needed to bail out the banking
industry. Where is that money going to come from?"
…
The worst-case scenario is that several large oil companies
find themselves facing financial distress simultaneously. If that happens,
according to Berman, "you may have a couple of big bankruptcies or
takeovers and everybody pulls back, all the money evaporates, all the capital
goes away. That's the worst-case scenario." To make matters worse, Berman
has shown conclusively that the industry exaggerated EURs (Estimated Ultimate
Recovery) of shale wells using flawed industry models that, in turn, have
fed into the IEA's future projections. Berman is not alone. Writing in Petroleum
Review, U.S. energy consultants Ruud Weijermars and Crispian McCredie argued there remains
strong "basis for reasonable doubts about the reliability and durability
of U.S. shale gas reserves," which have been "inflated" under new
Security & Exchange Commission rules.
The eventual consequences of the current gas glut, in
other words, are more than likely to be an unsustainable shale bubble that
collapses under its own weight, precipitating a supply collapse and price
spike. Rather than fuelling prosperity, the shale revolution will instead boost
a temporary recovery masking deeper, structural instabilities. Inevitably,
those instabilities will collide, leaving us with an even bigger financial
mess, on a faster trajectory toward costly environmental destruction.
So when is crunch time? According to a recent report
from the New Economics Foundation, the arrival of
“economic peak oil”—when the cost of supply "exceeds the price economies
can pay without significantly disrupting economic activity"—will be around
2014 or 2015.
Black gold, it would seem, is not the answer to our
problems.
[1] "This past summer saw a similar chorus of
headlines around the release of a Harvard University report by Leonardo
Maugeri, a former executive with the Italian oil major Eni. "We were wrong on peak oil," read
environmentalist George Monbiot's Guardian headline. "There's
enough to fry us all." Monbiot's piece echoed a spate of earlier stories.
In the preceding month, the BBC had asked "Shortages: Is 'Peak Oil'
Idea Dead?” The Wall Street Journal pondered, "Has Peak Oil Peaked?", while the New
York Time's leading environmental columnist, Andrew Revkin, took "A Fresh Look At Oil's
Long Goodbye".
The gist of all this is that "peak
oil" is now nothing but an irrelevant meme, out of touch with the data,
and soundly disproven by the now self-evident abundance of cheap unconventional
oil and gas."
(Monbiot joins the ones who say: Not to worry — and all the while the American continent is being destroyed by thousands and thousands of wells to get at the incredibly fast declining sources of shale gas. The continent will become a Swiss cheese and the wells will be empty. All this in the name of Progress!!! – SON)
Nafeez Mosaddeq Ahmed is executive director of the Institute for Policy Research and Development
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