When the believers stop believing: Chesapeake dumps shale gas assets

Only two years ago Chesapeake Energy Corp. president Aubrey McClendon was telling us about the limitless future of natural gas in North America. It was going to free us from foreign oil by allowing us to convert our vehicle fleet to run on domestically produced natural gas from vast shale deposits. Technology was now making these deposits accessible, and McClendon offered up "research" done by a nonprofit largely funded by his company that showed that these deposits could power America for another century.

It is a good thing that McClendon, who still runs Chesapeake, isn't taking his own advice these days. Back in mid-2008 when natural gas prices leapt above $13 per thousand cubic feet, the company was riding high as the darling of the shale gas drillers.

Since the crash in late 2008, natural gas prices have been mired in the $3 to $4 range, not high enough to justify the high costs associated with most shale gas drilling. And that means, of course, that natural gas drilling is taking place only in those spots which are deemed easy enough and cheap enough to exploit profitably at these prices. Gas drilling rig counts in North America slipped from more than 1,600 at the end of August 2008 down to fewer than 700 during the worst of the bust in mid-2009 and settled at 906 last week, according to Baker Hughes.

In testimony before the U.S. Congress in 2008 McClendon said to our elected representatives: "Many of you think of our industry as being part of the 'oil and gas industry' and therefore attached at the hip to the oil industry. However, nothing could be further from the truth." (PDF) He went on to say:

Imagine tomorrow if your hometown or national newspaper proclaimed that you had introduced a plan that would, in one stroke, cut gasoline's cost in half, reduce our oil imports, improve our air quality, enhance national security, strengthen the dollar, reduce greenhouse gas emissions and create tens of thousands of new jobs in the U.S. in the automotive, truck, steel, natural gas and related industries. The papers might say you just have changed the course of American history.

It was an inspiring vision even if delivered in a somewhat obsequious manner. With the high-minded help of America's domestic natural gas drillers, the country could free itself from the tyranny of oil, McClendon told the House Select Committee on Energy Independence and Global Warming.

Fast forward to today. So poor is the natural gas business now that McClendon has decided to sell off a good portion of Chesapeake's shale gas assets in order to concentrate on oil trapped in shale. Why? Because the price of oil is so much higher relative to natural gas, proving that price is the key driver in exploiting hard-to-get hydrocarbon resources. Since McClendon's 2008 testimony, the natural gas industry seems to have been rejoined at the hip to the oil industry (or perhaps it was never really separated). So much for cheap, abundant natural gas for the next century. So much for freeing ourselves from the tyranny of oil.

In truth, I don't blame McClendon for doing what he's doing. His job is to make money for his shareholders, and unlike many presidents of public traded companies, McClendon owned a huge stake in the company before a margin call nearly wiped him out. Since then he has bought back about 900,000 shares according to Chesapeake's latest proxy statement (PDF). Before the margin call he owned more than 33 million shares representing about 5 percent of the company, far more than most corporate chief executives.

But just because McClendon's interests are aligned with his shareholders doesn't mean they are aligned with the interests of the American public. And, the notion that a self-interested energy company executive can give solid advice to Congress about long-term policy is nonsense. Of course, policymakers need to collect information from the oil and gas industry in order to understand our current energy situation. But that is altogether different from expecting objective policy advice.

So, where does that leave us with respect to natural gas in the United States? We are not quite back to where we were before the shale gas boom. But domestic natural gas supplies aren't going to be as plentiful as previously believed. The shale gas boom that had seemed to raise U.S. domestic gas production by 11 percent turned out to be a mirage. The U.S. Energy Information Administration (EIA) announced in early 2010 that as a result of poor methodology, it had been overestimating U.S. domestic gas production by (surprise) about 10 to 12 percent, almost the same amount as the growth attributed to the shale gas boom.

And, the same agency--an agency known for its persistently optimistic energy supply forecasts--now shows domestic gas production stagnant through 2020 and barely meeting tepid growth in demand through 2035. (The EIA has been known in the past to simply match production to projected consumption and assume that supplies will somehow come from somewhere.) The stated reason for the less-than-buoyant projection is that growth in shale gas production is expected only barely to offset declines in production from other sources of natural gas.

Natural gas prices are low now because the U.S. economy remains in low gear. Should it accelerate to high gear, count on much higher natural gas prices as demand picks up. Then perhaps we'll have a shale gas boom again followed by a bust.

Both the murky projections of future natural gas supplies and the wildly cyclical nature of the industry make it a questionable platform for energy security. What America and the world needs now are new steady, dependable and climate-friendly sources of energy, sources as steady as the rays of the sun and as clean as the wind on plains.

My congressman has selective science disorder

My congressman has selective science disorder. He's been much in the news of late as chairman of the Committee on Energy and Commerce of the U.S. House of Representatives. His name is Fred Upton, and he told us as recently as April 24, 2009 that "[c]limate change is a serious problem that necessitates serious solutions."

But now that he has finally gotten a little power, he has contracted selective science disorder. And, who can blame him? He's been in the wilderness for so long. He held no important posts even when his own party was in power in Congress from 1995 to 2007 because Republicans considered him too moderate. It seems his first taste of real power has thrown off his mental balance.

When it was clear that he would become the chairman of the Energy and Commerce Committee, I told friends that the country could do a lot worse, that others who were being considered for the post were flat-out climate change deniers who didn't believe in science as a basis for public policy. I was relieved when Upton was finally confirmed as the choice of the Republican leadership.

But my relief was short-lived. The signs of selective science disorder began to show up immediately. Now, I suppose you are all wondering what this strange, new-fangled, but fast-spreading disease is. It consists simply in accepting the fruits of science when it provides you the comforts and conveniences you desire (and comports with the financial interests of your campaign donors) and rejecting particular findings of science when those findings conflict with your continuing desire for those comforts and conveniences (and run counter to the financial interests of your campaign donors).

It's an affliction that also strikes many religious conservatives who reject compelling geological evidence of Earth's 4.5-billlion-year history in favor of the creation story, and then get on their computers or cellphones to tell you about it--not reflecting that if they reject science as a basis for modern society, then, to be consistent, they would have to give up all the gadgets that modern science has made possible. (I don't blame these people for not abandoning their conveniences. But I do fault them for being so oblivious to the logical conclusions of what they are saying, namely, that since science can't be trusted, the products of science can't be trusted. And, yet they trust them!)

Now, Fred Upton is no religious conservative, and he is no troglodyte when it comes to science. In fact, Upton embraces the complex findings of science when it comes to nuclear energy. And, he supports scientific research to develop so-called carbon capture and sequestration technology that is being touted as a way to make coal "clean." He also likes other energy-producing products of science such as wind turbines and solar panels.

So when the overwhelming evidence from scientific inquiry concluded that humans were making a very large contribution to global climate change through the burning of fossil fuels, Upton embraced this conclusion. After all, he was on the side of technologies that could potentially address that problem.

But now he says he is not convinced that anything needs to be done to regulate carbon emissions. He describes the greenhouse gas regulations that the U.S. Environmental Protection Agency (EPA) is promulgating as a "power grab." He is, of course, being disingenuous. He knows full well that the U.S. Supreme Court ruled in 2007 that the EPA has the authority to regulate greenhouse gas emissions under the existing Clear Air Act. Actually, it would be a power grab to undo this.

With his newfound revulsion for science, will Mr. Upton now toss his cellphone into the trash or turn off the fuse box in his house or refuse to fly on airplanes back to his district because the science of flight is still evolving and may not be completely settled in every respect? Of course, he will do none of these things. That's because selective science disorder creates a built-in blindness to contradictory thinking and a susceptibility to campaign campaign contributions from special interests who only like science when it increases their own wealth.

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P.S. If you are a climate change denier, before you comment on this post, read my Comments Policy. You may decide it's not worth your time to comment here.

Prelude interview on WJR now online

My interview on Detroit radio station WJR about my peak oil novel, Prelude, is now online. The interview, which aired February 13 as part of the regular Sunday night program “The Greening of the Great Lakes,” can now be heard by clicking here and then clicking on the arrow underneath “Kurt Cobb talks with Kirk Heinze on WJR.”

The week of the game changer in oil, or was it?

This past week was supposedly the week of the game changer in the world of oil. Leaked U.S. diplomatic cables from Saudi Arabia called into question the ability of the globe's largest oil exporter to raise production to satisfy a world increasingly thirsty for petroleum. In the United States a technique called hydraulic fracturing--which has seemingly unlocked vast natural gas resources--will now be applied to oil trapped in shale deposits. Are these two developments really the so-called game changers they are claimed to be?

Let's take the Wikileaks revelation that Saudi Arabian oil reserves--thought to be the biggest in the world--have been vastly overstated. It turns out that what the former head of exploration and production at Saudi Aramco--the state-owned oil company that controls all oil and gas development in the country--told American diplomats in late 2007 was too nuanced for their unbriefed brains to capture correctly in diplomatic cables.

Sadad al-Husseini, the man in question, did tell the diplomats that world oil reserves are probably overstated by 300 billion barrels. The diplomats got confused and thought he was talking about Saudi Arabia alone. (Al-Husseini responded with a press release last week to clarify the matter.) Al-Husseini probably did tell the diplomats that Saudi Arabia would likely never exceed its planned expanded output of 12.5 million barrels a day, something he said publicly during that period. Perhaps back in 2007 al-Husseini saw the bottleneck in construction resources needed for such an expansion and equivocated about whether the Saudis would actually meet their 2009 deadline for developing that capacity. In the end they did.

This should all be seen against the backdrop of U.S. Energy Information Administration projections at the time that had Saudi Arabia supplying the world with 15.4 million barrels a day of oil in 2030. This number seemed like mere fantasy to anyone who was reading the news carefully as the Kingdom of Saudi Arabia in the person of the king himself appeared to affirm the 12.5 million barrel limit previously hinted at by his oil minister.

But U.S. diplomats did catch the basic message of al-Husseini. He was trying to warn them that projections for oil production out of Saudi Arabia were too optimistic and that this had serious implications for world supply. And, yet few countries seem to be preparing for this eventuality.

In a rather contradictory way al-Husseini told the diplomats that while he "does not subscribe to the theory of 'peak oil'...a global output plateau will be reached in the next 5 to 10 years and will last some 15 years, until world oil production begins to decline." That's a rather clear statement of peak oil theory. Probably al-Husseini was trying to distance himself from the doomers in the peak oil community, and the diplomats did not have enough background to understand what he was trying to do.

That was 2007. Oil flows may have recently just barely exceeded their 2008 highs, but world oil production has essentially been stagnant since 2005. One doesn't need secret diplomatic cables, however, to understand a story last week on the Saudi plan to require insulation in homes to reduce energy demand. Why would a country regarded as the most energy-rich in the world have to embark on an efficiency program? It was right there in the story: "Without reducing the rate of energy consumption growth, the kingdom could see oil available for export drop some 3 million barrels per day (bpd) to less than 7 million bpd in 2028, Khalid al-Falih, the chief executive of state oil firm Saudi Aramco said last year."

Were the Wikileaks revelations a game changer in the world of oil? Hardly. All the basic, but horribly muddled, information in the cables was already public. And, the flat trend of oil production for the last several years has been plain for all to see. Still, governments and societies largely prattle on as if nothing is wrong. Well, perhaps one thing did change. U.S. government officials are now known to have spoken the words "peak oil," albeit in secret cables. At last the feckless corporate media has reason to ask them why. But will they?

But wait, there was another supposed game changer last week as well. This one was supposed to allay our fears about future oil supplies. Oil companies have discovered that the same fracturing technologies used to extract natural gas trapped in shale can now be applied to certain deposits of oil trapped in shale. In the United States alone the new process could mean 2 million barrels a day by 2015 from previously neglected fields once thought too difficult to develop. “It could potentially be a real game changer,” Peter Tertzakian, chief energy economist at Calgary-based ARC Financial Corp, told The Globe and Mail.

But is it really a game changer? Well, it certainly is if you are an oil company on the prowl for the last scraps of oil hidden in hard-to-reach places under the earth. And the hype serves to entice investors into putting money into ventures to extract oil locked tightly in shale, referred to as "tight oil."

But if you are merely a consumer of oil, these new finds won't mean much to you. If the projections are correct, then oil flows from tight oil in the United States will represent about 2 percent of world production in 2015. And if the more pessimistic estimates of the U.S. Energy Information Administration come closer to actual U.S. tight oil production in 2015, that production will represent about 0.5 percent of world production. Neither amount is enough to move the price of oil. Of course, not one word is spoken about declines in production from other U.S. fields which in aggregate have been in decline for 40 years. Will this supposed new bounty reverse that ongoing decline? Not a word in the press about this.

There is reason, however, to doubt the claims now being made for tight oil supplies--reasons beyond the fact that the companies making them are often publicly traded and therefore have incentive to manipulate their stock prices. The original shale gas promoters believed that natural gas would be uniformly available from the giant shale basins found in the United States. They were wrong. Only a few sweet spots have been profitable.

As humans have done throughout the age of oil, tight oil developers will target the sweet spots first since they are the cheapest and easiest to exploit. Then, they'll move on to areas that are progressively harder and thus more expensive to exploit. Over time tight oil won't become easier to get; it'll become harder to get just like shale gas.

Another caution is that tight oil development only thrives in high oil price environments. The shale gas technology which is being applied to tight oil was supposed to herald an ongoing boom in natural gas. Instead when natural gas prices plummeted in 2008 and stayed low, shale gas drilling became far less economical and much of the industry teetered on bankruptcy. The fact that Chesapeake Energy Corp., one of the darlings of the shale gas boom that fell on very hard times, is now focusing on tight oil extraction tells you all you need to know about the viability of tight oil. The technology works when prices are high. But, as we've seen above, it won't be a panacea for strained world oil supplies even if high prices persist.

One final stumbling block will be concerns about drinking water aquifers because of the water and chemicals forced under high pressure into the oil formations to fracture the shale and release the oil. Already several states are considering tougher regulations--which will, of course, drive up costs--and one municipality, Buffalo, New York, banned hydraulic fracturing within the city limits and banned as well "storing, transferring, treating or disposing fracking waste within the city." The measure was largely symbolic since there are no plans for such drilling in the city. But it marks a watershed for municipal regulation and provides a template for others who feel uneasy about the millions of gallons of wastewater mixed with chemicals injected into each well that never return to the surface.

In the end it is the flow rate of oil that matters, not the size of the putative resource. No matter how big each new find is, no matter what new technology is applied, if we can't achieve production rates consistent with our need for economic growth, we will be in trouble. Look at the rebound of oil prices since the 2008 crash, and you will know that we already are in trouble.

I've said this before, but it bears repeating: If you inherit a million dollars with the stipulation that you can only draw out $500 a month, you may be a millionaire, but you will never live like one. When it comes to oil, there may still be very large resources left. Yes, we may technically all be the equivalent of "oil millionaires." But it looks very much as if we are still destined to have lower and lower flow rates for that oil in the decades ahead--which was the already the situation before this week of game changers that weren't.

Prelude makes The Huffington Post

Prelude has been mentioned in a peak oil-related commentary on The Huffington Post by writer Kelpie Wilson. I met Kelpie at a conference a couple years ago. She's currently the communications editor at the International Biochar Initiative. In that regard I recently wrote a piece reviewing Albert Bates' The Biochar Solution. Albert is active in the IBI as you might expect. The Huffington Post mention offers by far the most visibility for Prelude to date.

Is the modern anti-tax movement a product of increasing complexity?

The anti-tax movement in the United States has evolved from a fringe component of American politics 40 years ago into one that is central today. And certainly, the country has had a long history of tax protests, right? Actually, wrong.

While the Boston Tea Party is often cited as the inspiration for today's so-called Tea Party, the Boston Tea Party was an outgrowth of a movement to end "taxation without representation." The American colonists didn't object to taxes per se; they objected to taxes levied by a body--in this case the British Parliament--in which they had no representatives. That's hardly the situation with the modern Tea Party. The members of the modern movement may not like their elected representatives, but they do have them.

The Whiskey Rebellion is the only significant tax revolt in American history prior to California's Proposition 13, a 1978 ballot initiative which limited property taxes. The Whiskey Rebellion of the 1790s was about the unfair way in which the distilled spirits tax was structured. It was deeply regressive (i.e., small operators paid significantly higher effective tax rates than large ones) and designed by then Treasury Secretary Alexander Hamilton to drive small farmers and distillers in the West out of business in favor of large farmers and distillers in the East. Far from desiring a smaller federal government, the protestors wanted money spent on greater government protection against Indian raids and better roads to transport their goods to eastern markets.

And so, the historical animus that Americans supposedly have toward taxes has been largely manufactured to facilitate the propaganda machine of the modern anti-tax movement. This means that the long hiatus between the Whiskey Rebellion and Proposition 13 must be considered the norm in American history and that some recent change in American circumstances must be responsible for the modern anti-tax movement.

Joseph Tainter, author of the Collapse of Complex Societies, may have an answer. In a 1996 essay entitled "Complexity, Problem Solving, and Sustainable Societies" he explains the basics of his theory, namely, that increased complexity is a mode of problem solving; that it requires additional inputs, especially energy inputs; and that it eventually leads to diminishing and then negative returns. Diminishing returns make a society less resilient in the face of shocks and more subject to collapse--not complete destruction, Tainter says, but a simplification process that can be very painful and harrowing to live through and result in many casualties.

It is Tainter's notion of diminishing returns that sheds light on the modern anti-tax movement. It seems no accident that the movement grows up in an era, the 1970s, of constrained energy supplies. These supplies are essential to maintaining the complex functioning of industrial societies. In the earlier part of the century the colossal achievements of the Federal Government led people to respect its efficacy. It softened the blow of the Great Depression, led the country to victory in World War II, and built a superhighway system that connected the entire country as well as other infrastructure to power the economy and to protect the environment. But these were the low-hanging fruit.

Today, adding lanes to highways relieves congestion only until enough development takes place next to it to clog it all over again. We've reached the point of diminishing returns.

When the astronauts first set foot on the Moon, it was a staggering achievement. But the achievements in space since then have been less spectacular and more incremental. We have reached the point of diminishing returns.

Government spent lavishly on higher education and public schools in order to educate a new generation for a more complex society. There were dreams as recently as the mid-1990s that so-called distance learning would make college-level classes available to nearly everyone. But the dynamics of learning worked against this new complexity. People, it turns out, learn best in small groups with an actual teacher present. And, the increasingly complex information and techniques which students must now master call for even more personal attention, not less. We have reached the point of diminishing returns.

We need ever more educated people, but we have no way of turning them out more efficiently. So we must invest ever greater funds into educating the ever growing number of specialists we need. And, in education as in many other areas, these funds are showing diminishing returns. The returns are not zero, but no longer so hefty as they were.

Public health systems virtually wiped out many infectious diseases including polio through mass vaccination and better health practices. The results were profound and the costs were small. Now we spend lavishly on medical research to make incremental advances in treating chronic conditions such as heart disease and cancer which are in some respects products of industrial civilization.

A public used to such grand strides in all areas of life--strides aided in many ways by government expenditures--became increasingly frustrated by the declining returns for each additional dollar spent on government programs. They attributed this decline, however, to poor teachers or lazy civil servants. They could not think in terms of declining marginal returns; nor could they imagine that in a complex society the failure to maintain increasing investments in infrastructure and education would only make matters worse. So, they revolted. They looked for enemies and found them, namely, public employees. And, they began a campaign to defund them believing that they were taking too many of society's resources and not producing the results the public wanted.

The defunding campaign has weakened our infrastructure and left our children undereducated for the complex world they now find themselves in. The stresses created by increased complexity have caused Americans to embark on a path that can only lead to collapse, the kind that Tainter imagines. The public has been lulled into believing that "efficiency" in government such as we supposedly see in large corporations will solve the problem of declining marginal returns from investment in complexity. But corporations, as Tainter points out, face the same headwinds. The easy and obvious technical discoveries have been made. Huge investments are now needed just to obtain incremental progress. That doesn't mean technical progress isn't possible, only that it will not leap forward in the way it did in the first half of the last century.

There are those who will point to the computer revolution and now the biotech revolution and say that in these fields the leading businesses have overcome the problem of declining marginal returns. First, it is worth pointing out that both of these industries have significantly added to the complexity of society. And so, their connection to the declining marginal returns and even negative returns of technology cannot be dismissed. The effects of these industries must not simply be judged in a vacuum but within the context of the society they serve.

In fact, we have already seen some of the negative returns of a highly networked society in the form of the worst economic crash since the Great Depression and in the dangerous effects of biotechnology produced by companies that understand nothing of ecology and are therefore blind to the unintended effects of their inventions.

Tainter suggests that declining marginal returns from complexity may not be a soluble problem for a society structured as ours is. We have relied on copious amounts of fossil fuels to allow us to overcome many of our challenges. This cheap energy source has been perhaps the key input enabling increased complexity as an efficacious problem-solving strategy.

It is not obvious how we as a society could climb down off the cliff of complexity gracefully in the absence of increasing supplies of fossil fuels. But it is obvious that the anti-tax movement is pushing us toward that cliff more quickly because of its failure to comprehend that we need to plan for a less complex future using tools that are not so blunt as a simple-minded tax revolt. And, yet given the poor level of understanding among the public and the ruling elite about complexity and society, it is completely understandable that the debate is being governed by the false premises propagated by the anti-tax movement.