Photo courtesy of FPIF

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.

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."

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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.

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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.

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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

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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."

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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.

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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."

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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?"

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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.