Sunday, April 27, 2014

New York state shale gas: Not so much

A drilling foreman once told me, "Don't believe ANY reserve number unless it's linked to a price." And, that is just what petroleum geologist and consultant Arthur Berman and his colleague Lyndon Pittinger have done in a new report on the viability of shale gas in New York state.

Not surprisingly, when Berman and Pittinger considered what it would cost to extract the shale gas beneath New York state at a profit, the mammoth claims about recoverable reserves made by the oil and gas industry appeared heavily inflated.

Source: Business First

The stunning conclusion of the report is that at current prices--in the mid-$4 range per thousand cubic feet (mcf)--NONE of the natural gas trapped in the New York portion of the Marcellus can be profitably extracted. It's possible, of course, that someone would try. But, the economics look very shaky at current prices given what we know about the nature of the underground deposits.

Shale gas, you'll recall, is found in deep shale layers, in this case more than 4,000 feet below New York state. The shale formation the two authors studied is called the Marcellus which stretches from Tennessee to New York.

The natural gas in the Marcellus is deep, and it does not flow in commercial quantities on its own after a well is drilled. A new variant of an old technique called hydraulic fracturing--namely, high-volume slickwater hydraulic fracturing--combined with horizontal drilling has made this resource available for the first time. The fractures that result allow the gas to flow out of the formation, and the horizontal wells provide a relatively economical way to do a lot of fracturing or fracking from just one drilling pad.

Industry spokespersons, analysts and reporters often quote the total technically recoverable natural gas resource when discussing the Marcellus. Berman and Pittinger note a 2009 estimate of 489 trillion cubic feet (tcf) of which about 71 tcf were thought to be under New York state.

There are two problems with this estimate. First, just because something is technically recoverable doesn't mean that it will be profitable to bring out of the ground. Second, these estimates (and they are only estimates) keep going lower as actual drilling reveals just how little of the Marcellus is turning out to be amenable to extraction.

The U.S. Energy Information Administration (EIA) now believes that the entire formation across all states contains only about 141 tcf of technically recoverable gas.

But, just how much of this gas could actually come out of the ground at a profit at a given price? Berman and Pittinger first had to consider New York's rules about setbacks from public and private buildings and protected natural areas such as parks, streams and rivers. They then extrapolated actual drilling experience from Pennsylvania along the border with New York because the prospective drilling areas in New York have many similarities but no track record. New York currently has a moratorium on natural gas development using fracking.

We already discussed the authors' conclusion about the viability of shale gas in New York at current prices in the mid-$4 range. There is none. But at $6 per mcf the report details three scenarios based on what land turns out actually to be available under New York's rules. The range of recoverable reserves is from 0.8 tcf to 2.4 tcf. At $8 the range is 2 tcf to 9.1 tcf.

Compare these to the original estimate of technically recoverable resources of 71 tcf for the New York state portion of the Marcellus, and you'll understand why the industry doesn't like to talk about just how little shale gas might turn out to be profitable to extract.

Berman and Pittinger's work calls into question the industry promise of cheap, abundant domestic natural gas for decades to come. The $8 price tag for the highest estimated recovery from New York state is 300 percent higher than the average price that Americans paid for natural gas in the 1990s ($1.92 per mcf) and almost 80 percent higher than what they are paying today.

But at these higher prices, won't natural gas be abundant? Abundance is in the eye of the beholder. Certainly, there will be more natural gas available for extraction at higher prices. But, there are two issues. First, claims that the United States has 100 years of natural gas at current rates of consumption are completely overblown. The actual statistics on which the claim is based give a number of 92 years.

And, as the report points out, only the so-called "probable" portion of the American natural gas resource has even been drilled to show that it actually is recoverable, and that area represents about 25 percent of the total estimated resource. Of that it is unlikely that more than half will actually ever become reserves--that is, accessible and profitable to extract. That would bring us down to just 12.5 percent of the technically recoverable resources ultimately turning into reserves. And, that would imply a figure of just 17.6 tcf of recoverable natural gas reserves for the entire Marcellus based on the EIA estimate of 141 tcf in resources. The report, however, does not make any such estimate. For comparison, the United States consumed 26 tcf of natural gas in 2013.

So what is Berman and Pittinger's estimate of years of total U.S. natural gas reserves at current rates of consumption? Just 26 years.

Anticipation can be very, very exciting all by itself. And, the oil and gas industry has filled the nation with excitement over an anticipated bounty of domestic natural gas. But with reality setting in, it turns out that natural gas isn't going to be as cheap or as abundant as the industry promised.

Will this disappointment register when New York state considers whether to lift its moratorium on fracking? This is what the League of Women Voters of New York, sponsor of the report, is going to find out. Is this much smaller than anticipated resource with its many admitted drawbacks and risks worth extracting? Should New York and other states consider a different path to a viable energy future?

Perhaps the most important questions to ask are these: What will New York and other states do when the gas runs out? What will they do when all that's left is the mess that shale gas development will inevitably leave behind in the form of disturbed landscapes, disrupted neighborhoods and farms, polluted surface water, abandoned gas wells, long-term dangers to aquifers from injection wells used to dispose of fracking wastewater, and the failure to build a renewable energy infrastructure in advance of this inevitable day?

I wonder if these last two questions will even come up.

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.

Sunday, April 20, 2014

Perverse outcomes: Lifting U.S. oil export ban would mean greater dependence on foreign oil

The United States today is a large net importer of crude oil and refined products. And, yet the story that the country can somehow export crude oil as a foreign policy measure to help reduce Ukraine's dependence on Russia won't die. Oil executives and their surrogates keep bringing it up, and unsuspecting reporters amplify a message that has absolutely no basis.

The reason for this oil industry public relations blitz on the Ukraine is rooted in the industry's desire to end a decades-old ban on U.S. crude oil exports--one which the industry hopes to persuade Congress and President Obama to overturn. There is, in fact, a case regarding market efficiency for overturning the ban, but this is NOT the one the industry is using in its public relations campaign.

Here's why: The major effect of lifting the ban would be to allow domestic producers to sell lighter grades of crude oil--which U.S. refineries have little remaining capacity to refine--to foreign refineries which do have spare capacity. Perversely, that would lead to GREATER imports of foreign oil--mostly heavier grades--more suitable for the current U.S. refinery infrastructure. Net imports would remain unchanged, of course, even as the country's oil supply becomes more vulnerable to events abroad.

But the new arrangement would allow domestic producers to receive a higher price--the world price--for their lighter crude which comes increasingly from wells in deep shale deposits such as the Bakken in North Dakota. This oil has been selling at a discount to world prices since there is more of it in the United States than domestic refiners can currently handle. The oil market would become more efficient, but at some cost to energy security.

You don't have to take my word for any of this. Here's what Ken Cohen, Exxon’s vice president of public and government affairs, told The Wall Street Journal:

Exxon has long supported free-trade policies, and argued that the same rules of trade should apply to oil and natural gas as to any other product made in the U.S.A. Beyond the ideology, too much crude from Texas and North Dakota has been pushing down oil prices in the U.S. Exxon, as the nation’s largest energy producer, wouldn’t mind getting higher prices for its crude.

How do I know that this change in policy would lead to greater imports of foreign oil? Cohen again confirms this:

But when it comes to oil, refiners are particular about the flavor of crude they use. The rise in fracking has unleashed a large volume of light, sweet crude oil – while American refineries along the Gulf Coast are generally set up to handle heavier crudes from Mexico and Venezuela. So there’s a mismatch. U.S. oil producers want the option of exporting some high-value light oil, leaving refiners to import lower-cost heavy oil.

At least in this interview Cohen is being straight about the real reasons the industry wants the export ban lifted. And he has a point when he says that U.S.-based companies--with the exception of oil companies--are generally free to sell their products and services to the highest bidder worldwide. Whether his complaint carries weight depends on whether you believe energy is just another commodity or one that has a special role in the economy. That special role can be simply stated as follows: Nothing gets done without energy and so energy is, in fact, a unique commodity that deserves special treatment.

Now, you can imagine that the above argument is not one that will move Congress or the president to act. So, the industry--which can now say that it has already acknowledged its real argument--is making another argument, albeit a specious one, that we can somehow exert influence on the Ukrainian crisis in a way that will undermine Russia if only the United States would allow oil exports.

I tried to put this nonsense to rest in a previous piece citing America's continuing dependence on imports which remain close to 50 percent of our true petroleum consumption. But, let me try another simpler, visual way to show how ridiculous this argument is. Jim Hansen of Ravenna Capital Management pointed to the following graph available on the website of the U.S. Energy Information Administration. It's a graph of U.S. imports of crude oil and petroleum products from Russia.

U.S. imports from Russia remain above 400,000 barrels per day. Is it the plan of those who advocate U.S. oil exports to the Urkaine to import more oil from Russia so we can export it to the Ukraine? How exactly would this weaken Russia? Or change the world oil supply situation?

It really has gotten that absurd.

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.

Sunday, April 13, 2014

Did crude oil production actually peak in 2005?

"Wait a minute," you must be saying. "Haven't we been hearing from the oil industry and from government and international agencies that worldwide oil production has been increasing in the last several years?" The answer, of course, is yes. But, the deeper question is whether this assertion is actually correct.

Here is a key fact that casts doubt on the official reporting: When the industry and the government talk about the price of oil sold on world markets and traded on futures exchanges, they mean one thing. But, when they talk about the total production of oil, they actually mean something quite different--namely, a much broader category that includes all kinds of things that are simply not oil and that could never be sold on the world market as oil.

I've written about this issue of the true definition of oil before. But Texas oilman Jeffrey Brown has been bending my ear recently about looking even deeper into the issue. He makes a major clarifying point: If what you're selling cannot be sold on the world market as crude oil, then it's not crude oil. It's such a simple and obvious point that I'm ashamed to have missed it. And, Brown believes that if we could find data that separates all these other non-crude oil things out, the remaining worldwide production number for crude oil alone would be flat to down from 2005 onward.

Brown says the current dual approach to price and supply is like asking the butcher the price of steak, and then, instead of finding out how much steak he has to sell, you inquire about how much beef in total he has on hand--which will, of course, include roasts and ground meat. And, then you proceed to calculate the butcher's total supply of steak by lumping everything together and simply calling it steak.

"Basically, crude oil peaked [in 2005], but natural gas and natural gas liquids [including lease condensate] didn't," he believes. Natural gas production has continued to grow, and as it has, its coproducts have also grown--many of which have been lumped in with the oil production statistics.

The general message from the oil industry is that the free market should determine what's best for our energy economy. There is much to dispute in this view. But, if we take the industry at its word, then we should see what Mr. Market has to say about all the things the industry lumps into total oil production.

Here's what's being added to underlying crude oil production and labeled as oil by the oil companies and reporting agencies:

  • Biofuels - Essentially ethanol and biodiesel.

  • Natural gas plant liquids - Butane, ethane, pentanes, propane and other non-methane components of raw natural gas.

  • Lease condensate - Very light hydrocarbons gathered on leased production sites from both oil and natural gas wells, often referred to as "natural gasoline" because it can in a pinch be used to power gasoline engines though it doesn't have the octane of gasoline produced at refineries.

  • Refinery gain - The most puzzling addition of all to crude oil supply calculations. This is merely the increase in the volume of refinery outputs such as gasoline, diesel and jet fuel versus the volume of crude oil inputs. It is due entirely to the expansion of the liquids produced, but indicates no actual gain in energy. In fact, great gobs of energy are EXPENDED in the refinery process to give us what we actually want.

Let's see if any of these non-oil things are acceptable as oil at major exchanges. Perhaps the most recognizable oil futures contract is the so-called Light Sweet Crude Oil contract. The exchange sponsoring that contract details in seven pages (of a much longer rulebook) what is acceptable to deliver to those who choose to take delivery on their contracts.

A search for three of the four items (and their subitems) listed above predictably comes up empty. But, the search for lease condensate produces a hit. Here's what the exchange says about lease condensate when discussing acceptable delivery of oil: "For the purpose of this contract, condensates are excluded from the definition of crude petroleum."

It's true that some lease condensate does make its way into the crude oil production stream of refineries. But, its contribution is small and because of its chemical structure, it's not very versatile compared to crude oil which can be refined not only into gasoline, but also diesel and jet fuel which are more valuable to refiners. Typically, crude oil blended with lease condensate is discounted to refiners in recognition of its lower value. (For the technically minded, this excellent article explains the growth and uses of lease condensate.)

It's worth noting that the same futures exchange that sponsors the Light Sweet Crude Oil contract has separate contracts for biofuels.

Maybe across the ocean in Great Britain where the world's other premiere crude oil futures contract is traded, the exchange is a bit more forgiving. Alas, the exchange sponsoring Brent Crude is exceedingly picky about what it will accept as proper delivery to those who take delivery on their contracts. The exchange accepts crude from only four North Sea fields: Brent, Forties, Oseberg and Ekofisk.

This look at what the market actually prices as oil tells us a lot about why Brent Crude, for example, has been trading at the highest average daily price ever for three years running, higher than even 2008, the year of the nominal all-time price peak.

So, if oil production hasn't really been growing or at least not growing much in the last several years, what's all the hoopla about? As petroleum geologist and consultant Art Berman likes to say, it's a retirement party. There is one last, very difficult, costly and energy-intensive store of oil in low-quality deep shales containing crude. These shales--which are accessed using hydraulic fracturing or fracking--would never have been tapped if we were not already seeing a decline in the production of conventional, easy-to-get crude oil, the kind I refer to as Beverly Hillbillies bubbling crude as seen in the opening credits of the popular 1960s sitcom of that name.

The oil from deep shales (properly called "tight oil") is allowing production to grow in the United States even as production sinks elsewhere in the world. Other countries having shales containing oil will likely try to exploit them. But, the retirement party will only be a few years later for them as a result.

Despite what the public is being led to believe, oil wells in deep shales suffer from very high annual production decline rates--40 percent per year compared to the worldwide average of 4 percent. This implies that swiftly rising production will be followed by equally swiftly declining production in a compressed time frame--a classic boom-bust pattern.

Okay, so what do the worldwide oil production numbers actually look like if we strip out all the non-oil components? Well, we don't actually know. Brown has been unable to find such numbers anywhere. While the search continues, he thought he'd do a back-of-the-envelope calculation of his own. Here's what he came up with:

Estimated Global Crude Oil Production
2002 to 2012 in million barrels per day


2002: 60
2003: 62
2004: 65
2005: 67
2006: 65
2007: 65
2008: 66
2009: 64
2010: 66
2011: 65
2012: 67

(For the technically minded, here are the assumptions behind his numbers: The global condensate to crude plus condensate ratio was 10 percent for 2002 to 2005--versus 11 percent for Texas in 2005--and condensate production increased at the same rate as the rate of increase in global dry processed gas production from 2005 to 2012, 2.8 percent per year, according to the U.S. Energy Information Administration. Crude oil is defined as oil with an API gravity of 45 or less per RBN Energy. Data are rounded off to two significant figures.)

This is really a guess based on incomplete information. But if Brown is roughly correct, his estimate explains why crude oil prices remain near record levels (based on the average daily price) despite all the talk about abundance and an oil renaissance in the United States. Simply put, there is no new abundance. Oil supplies remain constrained.

This does not deny that natural gas production continues to grow and that natural gas and its coproducts (butane, ethane, propane and pentanes) are useful. But our current infrastructure is desperate for oil, particularly the transportation sector which is still dominated by oil derivatives. Some substitution in various areas including transportation and chemical feedstocks is taking place. But the rate is slow and the conversion can be costly.

Moreover, the energy content per unit of volume is significantly lower for natural gas plant liquids, between 30 and 40 percent lower than crude oil. To say that barrels of butane are equivalent to barrels of crude oil is more than just a rounding error.

Brown says the reason for the seeming stall in world oil production is actually quite simple. The remaining oil is harder to extract. We've taken the easy oil out of the Earth first. He explains that in the seven years ending in 2005, the oil industry invested $1.5 trillion on finding and developing new oil and natural gas fields and the capacity to refine and distribute the products that come from them. During that period oil production consistently rose. In the seven years after 2005 the industry spent $3.5 trillion for what Brown believes is no net increase in the production rate of actual, honest-to-god crude oil.

The notion that oil is becoming abundant all over again is contradicted by the levitating price and by the evidence that actual worldwide crude oil production is either flat or growing at an infinitesimal rate. But the industry doesn't want the public or policymakers to know this because the current belief in abundance tends to slow down an energy transition away from fossil fuels and toward renewables.

That transition must come sooner or later. But the industry would like to see it come later. And, if policymakers are fooled by the abundance story, that transition will almost certainly come later.

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.