Are fracked oil and natural gas really "snake oil"?

It's not exactly clear where the term "snake oil" comes from. But, most everyone knows that it refers to any number of concoctions sold by traveling salesmen in the 19th century and claimed to have miraculous healing powers. Key to the pitch of these salesmen was the shill, a person working with the salesman, but who appeared to be a member of the audience. The shill feigned infirmity or illness and then offered to be treated on the spot with astonishing results.

The snake oil analogy seems apt for the hype surrounding the future supply of oil and natural gas extracted using the technique called hydraulic fracturing or fracking, for short. In his new book Snake Oil: How Fracking's False Promise of Plenty Imperils Our Future, Richard Heinberg takes on overblown claims from both the oil and gas industry's salesmen--its top executives, industry trade groups and PR firms--and its shills--fake think tanks, paid consultants, and captive analysts who are often quoted and interviewed (mistakenly) as independent experts.

Here in one volume laypersons seeking to make sense of the fracking story can find clear guidance. Heinberg separates the hype from the facts, demonstrating that fracking is not a panacea for the world's energy needs. Rather, it is the last short-lived gasp of the fossil fuel age as the industry seeks out ever more expensive and difficult-to-extract oil and natural gas deposits in order to forestall an inevitable decline--a decline which must be addressed decades in advance if we are to make a successful transition to an alternative energy economy.

How does Heinberg know all this? He knows this by looking at the data which he explains in a way that those who are not experts can readily absorb. Naturally, the industry assiduously avoids talking about the actual data from its own fracked oil and natural gas fields for that data bodes ill for the industry's future.

Heinberg takes pains to point out the industry's successes and its ingenuity in figuring out how to get oil and natural gas out of previously inaccessible deposits. But, the problems are fourfold. First, it's very expensive to do this. The industry's promise of cheap oil and natural gas for decades to come is an impossibility based on its own cost numbers.

Second, production from new wells runs down very quickly; some 30 to 50 percent of fracked natural gas must be replaced EACH YEAR before supplies can grow. The decline in the rate of production for fracked oil is up to 60 percent in the first year for new wells in the Eagle Ford deposit in Texas. I've seen an estimate of 42 percent PER YEAR for all wells there, new and old; but, that's still a wicked number. I've likened the situation to trying to run up a down escalator while the downward speed is increasing.

Third, as the industry drills these new deposits, government agencies and independent researchers are reducing dramatically their estimates of what the industry will ultimately produce. Information from actual wells tells them that these deposits are turning out to be like conventional oil fields with sweet spots in a few places and vast areas that will never yield profitable hydrocarbons.

Fourth, the environmental costs such as polluted and depleted water; contaminated soil; poisoned air; and induced earthquakes are growing with each drill bit that pierces the ground. In fairness, the industry is learning how to reduce these problems as it gets more experience with fracking. But the sheer scale of the drilling is likely to offset better practices as tens of thousands of new wells spread across the landscape to make up for the previously mentioned huge yearly production declines in existing wells.

A boom that was forecast by the industry to last for decades or even a century is therefore likely to end before this decade is out, Heinberg concludes. We ought be taking some of the energy from this newfound oil and natural gas, he says, and use it to build the renewable energy economy that we will surely need in the decades to come.

Instead, the industry, by spending relentlessly on public relations and broadcast advertising, has convinced policymakers and the public that the boom will extend for decades. And, so the United States remains on course to squander this temporary and modest windfall of oil and natural gas on a final orgy of energy consumption.

This is the heart of Heinberg's message. While other nations have long since accepted the need to move away from fossil fuels--both because they are finite and because they are major contributors to climate change--the United States is being lulled into a false sense of energy security. In the bargain the country is also increasingly ignoring the ravages of climate change that are becoming more apparent with each passing day.

The oil and gas industry knows that the promise of cheap, abundant energy is like a siren song to the American public. That's why the industry keeps pounding away in the media with its cornucopian message. But, like a siren song, that message, if not resisted, will lead to the equivalent of a shipwreck on an energy-starved island called the future.

Kurt Cobb is an author, speaker, and columnist focusing on energy and the environment. He is a regular contributor to the Energy Voices section of The Christian Science Monitor and author of the peak-oil-themed novel Prelude. In addition, he has written columns for the Paris-based science news site Scitizen, and his work has been featured on Energy Bulletin (now Resilience.org), The Oil Drum, OilPrice.com, Econ Matters, Peak Oil Review, 321energy, Common Dreams, Le Monde Diplomatique and many other sites. He maintains a blog called Resource Insights and can be contacted at kurtcobb2001@yahoo.com.

The hype cycle: How the oil and gas industry manipulates investors and the public

What would you expect them to say?

That's the question you should ask whenever spokespersons for the oil and gas industry (or fake think tanks funded by the industry or analysts whose bread is buttered by the industry) announce a new find that is going to be a "game-changer" (or bigger than another well-known world-class field or enough to make America energy independent again).

Prepare yourself for another hype cycle in the U.S. oil and gas industry. The industry says it has found a deposit of oil that may turn out to be the largest in the world. The deep tight oil deposit goes by the name Spraberry/Wolfcamp and is located in West Texas. It's no surprise then that the industry is trotting out the America-as-the-new-Saudi-Arabia theme once again, a theme that many including me have shown to be pure bunkum.

[Clarification: If you click on the Spraberry/Wolfcamp link above, you'll read that it is not a new discovery, but rather discovered in 1943 and has been producing some oil since then. But the CEO quoted in the story cited just before that link stated that "Spraberry Wolfcamp could possibly become the largest oil and gas discovery in the world," thus leaving the impression that it was recently discovered. I can only surmise that this was part of the attempt to exaggerate what is actually happening. What's new is the application of high-volume slickwater hydraulic fracturing to the deposit, a specific and admittedly new variant on a 60-year-old technique. What I'm questioning in this story is whether that technique will, in fact, deliver what the executive promises. He says one thing; the data say another.]

And, the chief executive officer of Pioneer Natural Resources Company, which is currently touting its dominant position in the Spraberry/Wolfcamp deposits, added some bunkum of his own when he told The Dallas Morning News, "We’re more like a manufacturing operation than a traditional oil drilling operation.” This is the discredited notion that in tight oil and shale gas deposits, a company can drill anywhere and extract economical volumes of oil and/or natural gas. The idea has been discredited by the record of every tight oil and shale gas deposit drilled to date, deposits which settle down into a pattern of tightly focused "sweet spots" where drillers can make money and vast areas that are not profitable to drill--mainly because the oil and natural gas are too difficult to get out.

Though there are plenty of other reasons to doubt the claims about Spraberry/Wolfcamp, no one will know for certain what's true until the area is drilled and produced [much more broadly using high-volume slickwater hydraulic fracturing]. But, in order to drill it, oil and gas companies must raise billions in capital to pay for drilling and production costs. And, in order to do that, they have to get investors interested in plowing money into the drilling of actual individual wells through what are called private placements.

These placements are riskier than shares of oil and gas companies because they relate to specific drilling projects which may or may not succeed. On the other hand, such projects can be quite lucrative when they do succeed. Hence, the continuing attraction for the speculative investor.

Now, investors are not going to make such risky investments unless they believe the potential return is very high. Here's where the industry hype machine comes in. To raise the necessary capital, it is essential to get investors excited about particular oil and gas plays. The best way to do that is to create buzz in the media about the estimated size of the resources in the play. And, an easy way to do that is to invoke comparisons with Saudi Arabia and its giant oil fields as is being done in the case of Spraberry/Wolfcamp.

Many investors in such deals are not particularly sophisticated about oil and gas investments and so the hype works. The money flows in, the wells get drilled, and then the oil and/or natural gas flows or it doesn't. Or it flows, but not enough to justify producing it. Or it flows and is produced at a loss in order to get back at least some money.

Let's see what's already happening at Spraberry/Wolfcamp. First, we have the claim that Spraberry/Wolfcamp has 50 billion boe. For the uninitiated, boe is short for "barrels of oil equivalent." So, it's a mixture of oil and natural gas, but we are not made privy to how much of each is supposedly there. (About 6,000 cubic feet of natural gas contain the same amount of energy as a barrel of oil.) It's an important distinction since North American natural gas prices are so low that few operators are making any money from gas. Any emphasis on natural gas production in Spraberry/Wolfcamp should make investors skeptical about the profitability of selling more natural gas into an already glutted market.

Second, this number is labeled as "recoverable reserves" when it ought to be labelled "technically recoverable resources" which are based on very sketchy data that are continuously revised as drilling proceeds. And, just because something is technically recoverable doesn't mean it is economically recoverable.

What will ultimately be economical to extract will actually be only a tiny fraction of what is technically recoverable. And, in any case, we should remember that previous large estimates of technically recoverable resources in America's shale gas fields were later rather dramatically downgraded. Furthermore, neither technically nor economically recoverable resources represent "reserves" which are, of course, only that very small fraction of resources which can be produced profitably from known--that is, drilled--fields using existing technology at today's prices.

Third, one has to ask why Pioneer Natural Resources, one of the largest holders of drilling rights in the Spraberry/Wolfcamp deposit and the chief cheerleader for its exploitation, would almost immediately sell 40 percent of the company's stake to a foreign investor.

There are many reasons to sell a stake such as raising money for new ventures. But, Pioneer is telling the public that this deposit may be the largest in the world. Does the company really expect to do better than that with the money it received from the sale of a large portion of its interest? Or does the sale tell us that the company doesn't have as much faith in Spraberry/Wolfcamp as its pronouncements seem to indicate? Furthermore, this outside investor will also shoulder 75 percent of the "drilling and facilities costs" as part of the deal. Alas, the problem of finding money to drill the actual wells has in this case simultaneously been solved with other people's money.

The last time foreign investors came rushing into U.S. oil and gas deals was at the tail end of the shale gas boom, and they subsequently got clobbered. It has often been an indication that a boom is ending when foreigners flock to a particular American investment theme since foreigners are usually the last ones in.

This may have to do with the fact that even in the age of instantaneous electronic communication, it is still difficult to get a read on what is happening an ocean away until something has become a fairly big story in the media. (And, so it's no surprise that companies like to talk to reporters in highly optimistic tones as they seek outside investors.)

What ought to worry these late-to-the-party investors is the fate of those who invested not only in shale gas, but also in certain tight oil plays. (Tight oil is often mistakenly called shale oil which actually refers to oil made from oil shale, but that's a different story). Investors believe oil should be a better investment than natural gas since world rather than regional markets dictate the price, and that price continues hover near all-time highs based on the average daily price over the last three years. There is something to this logic unless the amount one is able to extract is small. And, that's what is happening to investors in the Colorado and Ohio tight oil deposits who thought they were in for a bonanza. Both regions were heavily touted, and both turned out to be huge disappointments.

A few reporters are starting to catch on to the pattern and including dissenting voices in their coverage. And, a just recently retired industry CEO has now said publicly that the shale gas and tight oil story is overblown. Mark Papa, former CEO of EOG Resources, which has extensive positions in both shale gas and tight oil, told Forbes recently: “The chances of the U.S. being independent in oil are very slim.” He added, "We’ve studied this from the rocks’ point of view. There’s a whole lot of plays that will have zero significance."

It's possible that Spraberry/Wolfcamp will turn out to be a very profitable venture for oil and gas companies with holdings there. Pioneer Natural Resources has already made a considerable sum by selling a 40 percent share to someone else. And, it's possible that even individual investors in wells may end up glad they invested. No one can know for certain. But all indications are that these investors should not base their decisions solely on the information coming from the industry.

Unfortunately, the public--which mistrusts the oil and gas industry almost universally--for some reason takes the industry's self-interested pronouncements about supply at face value. Perhaps this is because the public does not understand the true purpose behind these pronouncements.

Beyond the industry's desire to raise capital and sell off assets at a profit, the hype cycle aids industry trade groups such as the American Petroleum Institute (API) in propagating doubtful stories implying America is about to become energy independent. (The API has stopped making explicit statements on this subject which it knows are unsupported by the data. Instead, it keeps repeating the word "abundance" to give the impression that the country is or will soon be energy independent.)

The purpose of such stories is not particularly patriotic. Rather, these stories are designed to slow the transition to alternative energy sources by making such a transition seem far less urgent. In the process, the API is able to protect the value of its members' underground inventories of oil and natural gas, some of which might become stranded or at least less valuable in the event of a rapid transition to alternative energy.

As the reality of tight oil and shale gas sets in, even energy analysts--who so often parrot what the industry tells them--are starting to look skeptically at industry claims:

"Oil companies take production data from existing wells and extrapolate it over an entire field that might be millions of acres. And the oil business is rife with cases of fields that were the next big thing but ultimately produced nowhere near early estimates," said Benjamin Shattuck, an analyst with the energy research firm Wood Mackenzie.

If the analysts are finally looking skeptically at industry pronouncements, you should, too. Don't fall victim to the emerging hype cycle over Spraberry/Wolfcamp or the next cycle over something else, or the next one after that.

PLEASE NOTE: Clarifications are in brackets [].

Kurt Cobb is an author, speaker, and columnist focusing on energy and the environment. He is a regular contributor to the Energy Voices section of The Christian Science Monitor and author of the peak-oil-themed novel Prelude. In addition, he has written columns for the Paris-based science news site Scitizen, and his work has been featured on Energy Bulletin (now Resilience.org), The Oil Drum, OilPrice.com, Econ Matters, Peak Oil Review, 321energy, Common Dreams, Le Monde Diplomatique and many other sites. He maintains a blog called Resource Insights and can be contacted at kurtcobb2001@yahoo.com.

America: Exporting our way to energy independence?

Never let the facts get in the way of a good story. That's the credo of the oil and gas industry as it continues to lobby for increased oil and natural gas exports from the United States. After all, the industry claims, we're on our way to achieving energy independence, and we can help our balance of trade by exporting the extra hydrocarbons we produce. The data, however, contradict the industry's claim.

Even as the Obama Administration approved the country's third natural gas export terminal, the United States remained a net importer of natural gas. Production in the United States averaged 69.5 billion cubic feet (bcf) per day this year through May, the latest month for which data is available. But the country consumed 76.9 bcf per day. It IMPORTED almost 7.8 bcf per day from Canada. And, then it EXPORTED about 1.8 bcf per day to Mexico, a number that is likely to rise as pipeline export capacity to Mexico expands. (Both Canada and Mexico are part of an integrated North American natural gas pipeline system.)

The latest approval would lift the capacity for daily liquefied natural gas (LNG) exports from the United States to 5.6 bcf per day or about 8 percent of what we currently produce. The exports would be shipped using special freighters to Europe and Asia. Strangely, these exports would make it necessary for the United States to IMPORT more natural gas in order to support current consumption! The situation seems surreal, and yet, additional approvals for LNG exports are likely in the future.

Natural gas producers keep telling the public and policy makers that U.S. natural gas production is set to grow continuously for decades as they tap large shale gas resources using hydraulic fracturing. But the story isn't holding up. U.S. natural gas production has been moribund, bouncing along a plateau from January 2012 through May of this year (the latest month for which data is available). Monthly production last year averaged 2.11 trillion cubic feet (tcf), but was slightly less through May of this year at 2.10 tcf per month. This is despite prices that have nearly doubled from the lows in April 2012.

It's possible that the situation could change, but unlikely for two reasons. Production decline rates for natural gas wells in the United States are averaging around 32 percent PER YEAR. That means about one-third of U.S. production must be replaced EACH YEAR just to stay flat. And, that's really all that we've been doing for the last year and a half.

But the situation is likely to get much worse. Here's why: Gas from shale deposits is rising as a percentage of total U.S. production. Shale gas wells decline much faster than the current overall rate (which includes conventional gas wells), between 79 and 95 percent in the first three years. That means some 80 to 90 percent of all existing shale gas production must be replaced every three years. With shale gas, it is as if we are on a down escalator trying to go up; but, the down escalator, in this case, is increasing its speed, making any upward progress difficult, if not impossible.

Now, the Congress and the president could make the argument that oil and natural gas producers ought to have the right to sell their products to the highest bidders wherever those bidders are in the world--just as farmers and manufacturers in the United States do. This is a plausible and defensible position, well within the American experience. But this is NOT the argument they are making. And, it's doubtful that it would be a very popular one, for it means higher energy prices for Americans.

It's possible that the Congress and the president are just pretending that natural gas production is continuing to rise. In that case, they are knowingly deceiving the public--not the first time, of course, that public officials have done this. But, what would be worse is if they simply don't know the actual data. Then, they they must be labeled as grossly incompetent since the production, consumption and import data discussed here are all available online from the government's own U.S. Energy Information Administration.

The same analysis applies to American oil exports, but even more so. U.S. crude oil imports remain slightly higher than U.S. crude oil production. It's true that a portion of those imports are turned into finished products such as gasoline and diesel and then exported. But even after adjusting for this, the country continues to import just under 50 percent of its crude oil needs.

So, the rapidly increasing rail shipments of oil to Canada that we are witnessing do NOT reflect an America producing more oil than it needs. These shipments simply reflect an oil industry taking advantage of the higher prices that customers in eastern Canada are willing to pay.

(Wait a minute, you must be thinking, I thought Canada was a major oil exporter. It turns out that Canada is both an importer and exporter. For a more detailed explanation of this strange situation, see "Canadians could free themselves from oil imports, but will they?")

So, the real reason that the oil and gas industry wants a loosening of restrictions on exports of American-produced oil and natural gas is so that it can take advantage of higher prices abroad. This is particularly true for natural gas which sells in the United States for $3.32 per cubic feet (Henry Hub - August 9), but $11.60 in Europe (July 31) and $17 in Japan (July 31), a good proxy for Asian prices. There are costs involved in liquefying the gas for shipment via freighter. But, the profit margins are far greater than the profits currently available from domestic sales. In fact, there is reason to believe that major international oil companies which bought huge positions in U.S. shale gas plays a few years ago have been losing money ever since on those positions when all costs including the costs of acquisition are taken into account.

As a matter of policy, higher natural gas and oil prices within the United States would spur the deployment of renewable energy by making it more competitive. Maybe this is the secret agenda of the Congress and the White House. I very seriously doubt it. I think both are simply bowing to the wishes of the oil and gas industry, while hoping the public doesn't find out what's really going on. Worse yet, the Congress and the president may not really understand what's going on themselves.

Kurt Cobb is an author, speaker, and columnist focusing on energy and the environment. He is a regular contributor to the Energy Voices section of The Christian Science Monitor and author of the peak-oil-themed novel Prelude. In addition, he has written columns for the Paris-based science news site Scitizen, and his work has been featured on Energy Bulletin (now Resilience.org), The Oil Drum, OilPrice.com, Econ Matters, Peak Oil Review, 321energy, Common Dreams, Le Monde Diplomatique and many other sites. He maintains a blog called Resource Insights and can be contacted at kurtcobb2001@yahoo.com.

Of boiling frogs and oil prices

Many readers will know about the claim that a frog plopped into boiling water will hop right back out if it can, while one put into cold water which is then slowly heated will remain until it is cooked. The claim is wrong, but the story is quite useful in understanding some human behavior. Gradually changing circumstances are typically more difficult for humans to detect and react to than circumstances that are changing rapidly.

Such is the case with oil prices. The velocity with which oil prices rose in 2007 and 2008 transfixed the public and policymakers. The price vaulted from $60 a barrel on the first trading day of 2007 to above $147 on July 11, 2008, the (so far) all-time high.

At the time many believed that oil production might be reaching a limit that would never be breached, a possibility with dire implications for a society deriving more than a third of its energy from oil and dependent on the substance as a basis for myriad products such as plastics, pharmaceuticals, herbicides, pesticides, lubricants, heating fuel, fabrics, paints, solvents, and asphalt, just to name a few.

When oil prices then plunged as a result of a crashing economy, no one knew what to expect except those of us who had been following the supply picture carefully. That supply picture suggested rapidly recovering prices as the economy rebounded. As it turned out, the spot price rose from just under $34 per barrel on December 26, 2008 to $126 on April 28, 2011. Again, the spectre of limits hung over the market and the public.

Now, the strange thing is that the worldwide average daily price hit records in both 2011 and 2012 if we go by the Brent price which has come to represent the true world price. And, we may be headed for another record this year. But the rise has been so incremental from $111.26 in 2011 to $111.63 in 2012 that it can hardly be called a rise. Like the proverbial frog in gradually warming water, the public has become used to high oil prices and so doesn't often think about what they imply--namely, continued constrained supply despite all the distracting and misleading histrionics from the industry claiming that we've entered a new era of abundance. Oil's persistently high price is, of course, an embarrassing and decisive indicator that the claim is nonsense.

So far this year, the daily Brent crude price through July 30 has averaged $107.43. Will it rise enough from here to top 2012's average? We cannot know. But the fact that oil prices have remained in or near record territory for two years running no longer elicits alarm from the public, the industry or policymakers. High prices have become the new normal. This is the ever so slightly warming water in which we frog-humans are sitting while no longer noticing the change (or remembering how unnerving it was as prices rose rapidly to this level).

It's worth remembering that the current average price for the year remains well above the average daily price for all of 2008, the year that stunned the world with the highest oil price ever. The 2008 average was only $96.94, again using Brent crude prices as a proxy for world prices.

Like the frog, for us humans it is the velocity of price changes which grabs our attention, not the persistent high price. The reason for the high price is clear. Demand remains robust, especially in Asia, and supply remains constrained. As I pointed out last week, supply has only advanced a paltry 2.7 percent in seven years vs. about a 1.5 percent increase on average EVERY YEAR prior to that (from the early 1990s onward) for crude including lease condensate (which is the proper definition of oil).

We have come to accept high-priced oil, and we will probably accept it until the next crisis causes prices to bolt quickly upward getting our attention again. As Nassim Nicholas Taleb, the former hedge fund manager, self-styled philosopher of risk, and author of The Black Swan tells us, the longer a system appears stable, the greater the disruption will be when stability breaks down.

Oil prices have been on average at their highest ever for the past two years and may reach a record again this year. But they have also essentially been stable because the change in the average daily price has been so slight. Watch out for what comes next after that stability evaporates.

Kurt Cobb is an author, speaker, and columnist focusing on energy and the environment. He is a regular contributor to the Energy Voices section of The Christian Science Monitor and author of the peak-oil-themed novel Prelude. In addition, he has written columns for the Paris-based science news site Scitizen, and his work has been featured on Energy Bulletin (now Resilience.org), The Oil Drum, OilPrice.com, Econ Matters, Peak Oil Review, 321energy, Common Dreams, Le Monde Diplomatique and many other sites. He maintains a blog called Resource Insights and can be contacted at kurtcobb2001@yahoo.com.