Wednesday, January 19, 2011

Shale Gas Will Rock the World: October Natural Gas Production Sets Another New All-Time U.S. Record

According to data from the EIA, more natural gas produced was produced in October - 2,330,551 million cubic feet - than in any previous month in U.S. history (see chart above). I couldn't find this reported elsewhere, so I'm claiming this as a "Carpe Diem exclusive"!

As John Tierney reported recently in the New York Times

"The really good news is the discovery of vast quantities of natural gas. It’s now selling for less than half of what it was five years ago. There’s so much available that the Energy Department is predicting low prices for gas and electricity for the next quarter-century."


"Domestic proved reserves of oil and natural gas increased significantly in 2009. U.S. natural gas proved reserves increased by 11 percent in 2009 to 284 trillion cubic feet. This is their highest level since 1971, despite an approximate one-third decline in the prices used to assess economic viability for 2009 reserves as compared to the prices used in 2008. U.S. crude oil plus lease condensate proved reserves rose 9 percent to 22.3 billion barrels in 2009, regaining 1.8 billion barrels of the 2.3 billion barrel decline in 2008. These increases demonstrate the possibility of an expanding role for domestic natural gas and crude oil in meeting both current and projected U.S. energy demands."

As Amy Myers Jaffe wrote in the Wall Street Journal:

"We've always known the potential of shale; we just didn't have the technology to get to it at a low enough cost. Now new techniques have driven down the price tag—and set the stage for shale gas to become what will be the game-changing resource of the decade.

I have been studying the energy markets for 30 years, and I am convinced that shale gas will revolutionize the industry—and change the world—in the coming decades. It will prevent the rise of any new cartels. It will alter geopolitics. And it will slow the transition to renewable energy."

26 Comments:

At 1/20/2011 7:02 AM, Blogger rjs said...

"There’s so much available that the Energy Department is predicting low prices for gas and electricity for the next quarter-century."

i recall them telling us that nuclear power would make electricity "too cheap to meter"

 
At 1/20/2011 8:14 AM, Blogger cluemeister said...

Nuclear power could have been very cheap if the 60's generation hadn't protested every construction jobsite, halting nuclear power in its tracks. It's taken 30 years to get back to starting up nuclear again.

 
At 1/20/2011 8:41 AM, Blogger Dr William J McKibbin said...

Very encouraging report -- here in Pennsylvania, we are quite excited about the future for natural gas via the Marcellus Shale gas find -- certainly, Western Pennsylvania stands to gain as the natural gas industry expands...

 
At 1/20/2011 8:58 AM, Blogger Michael Hoff said...

Dr. McKibbin,

Unfortunately, Harrisburg is den of thieves and grubs. They look at the Marcellus Shale and see a pile of money to steal. Pennsylvania will screw this up yet.

 
At 1/20/2011 9:41 AM, Blogger Eric said...

"And it will slow the transition to renewable energy"

Which is why you couldn't find this reported elsewhere.

 
At 1/20/2011 10:55 AM, Blogger VangelV said...

What nonsense. The shale gas players are now reducing drilling activity and moving on to liquids because they can't make a buck selling shale gas. The recovery rates are much lower than estimated so the economics do not work. The Baker Hughes rig count is going down even as depletion is larger than ever. Obama has made Gulf of Mexico activity very unprofitable and difficult. Instead of listening to hype look at the actions being taken by the energy producers.

 
At 1/20/2011 11:43 AM, Blogger NormanB said...

The silence from Obama is deafening.

 
At 1/20/2011 3:12 PM, Blogger Junkyard_hawg1985 said...

Great Graph! This is indeed encouraging data.

Vangel's statement about drillers stopping work on natural gas just tells me that there will be long term supply available. All it will take to get it is slightly higher prices. In other words, a traditional supply-demand curve applies to natural gas.

 
At 1/20/2011 4:04 PM, Blogger VangelV said...

Vangel's statement about drillers stopping work on natural gas just tells me that there will be long term supply available.

The problem is not the lack of gas. It is the inability to produce shale gas economically because the energy needed to extract and distribute it is greater than the energy content of the gas that is produced.

If shale gas were really such a good idea why are the producers pulling back and issuing bonds at 7.5% to try to fund drilling for shale oil? You can choose to believe stories or you can look at things as they are.

All it will take to get it is slightly higher prices. In other words, a traditional supply-demand curve applies to natural gas.

You are missing the bigger picture. It costs energy to get the energy out. As long as the ratio does not work shale gas will continue to be uneconomic. The pipe that is used to extract the gas takes energy to produce. So does the cement that keeps it in place. So do the chemicals that are in the fracking fluid. And the motors that turn the drills. Add it all up and you see that the production process falls short under most circumstances because shale has a very low energy density.

Money is a great motivator. If the producers can make a profit you will see them selling as much as they can get out of the ground. The fact that they are reducing drilling means that they can't make a real profit.

I do not mean to imply that there aren't major undiscovered gas fields that can't be produced very cheaply. If Mexico allowed foreign companies to explore without expropriation risk I would be investing a lot of money there because it is likely to have some very interesting and rich deposits. There are other great conventional targets elsewhere but those would require massive capital investment that makes little sense at this time.

 
At 1/20/2011 4:14 PM, Blogger Benjamin said...

Glut, glut, glut...this often happens in fossil fuels, and has happened to natural gas.

We would be glutted with oil too, except that Iran, Iraq, Nigeria, Russia, Saudi Arabia, Mexico and Venezuela are all thug states.

With development, you have 40 mbd on the shelf right there--about a 50 percent boost in world output.

Vange is long oil--not a bad bet. But could go the other way. Making predictions is hard, especially about the future.

 
At 1/20/2011 4:17 PM, Blogger VangelV said...

We would be glutted with oil too, except that Iran, Iraq, Nigeria, Russia, Saudi Arabia, Mexico and Venezuela are all thug states.

Russian production peaked quite some time ago. Lie the US, it will never produce any more than it did at its peak. As for the OPEC states, why are they thug states when they are doing exactly the same thing that the US did? OPEC was modeled after the Texas Railroad Commission and is no more or less corrupt than the TRC used to be.

 
At 1/20/2011 4:20 PM, Blogger VangelV said...

With development, you have 40 mbd on the shelf right there--about a 50 percent boost in world output.

There is no support for this claim. Between 2003 and 2008 the world spent hundreds of billions in new investments but levels of production today are less than what they used to be during the 2005 to 2007 plateau. Oil prices did not fall because of a supply response that created a glut They fell because demand collapsed due to an economic contraction.

 
At 1/20/2011 6:27 PM, Blogger Ron H. said...

Iraq is a thug state? I thought Iraq was one of the 57 US states.

 
At 1/20/2011 7:23 PM, Blogger Benjamin said...

Vange-

Despite mismanagement and thug-statism, Russian oil production will hit an all-time peak in 2010, if not then, then 2011.

See http://www.eia.doe.gov/cabs/Russia/Oil.html

Yes, every nation on that list is a thug state, where property rights, free speech and contract law are iffy or nonexistent.

Some say that having oil revenues produces weak government and culture--everyone wants a hand out. Worse than American rural economies.

If these nations had been developed all along in a free enterprise, you would probably have 10 mbd more in Iraq, maybe 5 in Iran, 5 in Mexico, 5 in Saudi Arabia, 5 in Nigeria, 5 in Russia etc.

There is easy 40 mbd on the self in these thug states.

Meanwhile, oil demand fro developed nations goes down, not up, every year.

In China mandates PHEVs, and if the USA ever slaps on a gasoline tax, there are oil gluts to the moon.

BTW, you can make methanol from natural gas at $1.25 a gallon, and Methanex does that today. And we have gas up our rear ends to the moon.

Sheesh, if our 57th state of Iraq hits 12 mbd like
they say they can, we could have oil gluts again.

That said, who knows there may be a run in oil. The NYMEX is not Sesame Street. Anything can happen there.

 
At 1/20/2011 7:35 PM, Blogger Ron H. said...

"If these nations had been developed all along in a free enterprise, you would probably have 10 mbd more in Iraq, maybe 5 in Iran, 5 in Mexico, 5 in Saudi Arabia, 5 in Nigeria, 5 in Russia etc."

Interesting. How did you arrive at these exact numbers?

 
At 1/20/2011 9:50 PM, Blogger VangelV said...

Iraq is a thug state? I thought Iraq was one of the 57 US states.

So did I. I have even invested in a small Canadian oil company that is developing a field in the north. I guess that is Iraq's way of showing its appreciation.

 
At 1/20/2011 10:09 PM, Blogger VangelV said...

Despite mismanagement and thug-statism, Russian oil production will hit an all-time peak in 2010, if not then, then 2011.

See http://www.eia.doe.gov/cabs/Russia/Oil.html


The peak was not in the 2000s, which is what your graph covers but in the 1980s.

http://www.russiablog.org/ComparisonSovietRussianOilProduction.gif

Yes, every nation on that list is a thug state, where property rights, free speech and contract law are iffy or nonexistent.

You are missing the big picture. The USSR was no better than today's Russia. Neither was Saddam's Iraq, or the Saudi Kingdom. They have always been 'thugs.' But in the past they had more oil that was easy to get out of the ground cheaply, particularly the high quality oil that produces more of the high-value product that the world depends on.

If you want to understand the situation you have to follow the producers' actions and the implications of those actions. The producers have already acknowledged that the low hanging fruit has already been picked. A lot of the reinvestment has gone towards unconventional sources of lower grade. But the new heavy oil barrel that produces a lot less kerosene or gasoline and a lot more bunker oil and asphalt is not capable of replacing a barrel of high quality crude lost to depletion. Even if gross production stays flat or goes up slightly the energy content and accrued value-added production will decline.

 
At 1/20/2011 10:10 PM, Blogger Benjamin said...

Ron H-

Iraq has been saying they will hit 12 mbd in 10 years--who knows?

The others are low-ball, back of the envelope guesses.

Venezuela, for example, has heavy oil deposits that may eclipse Saudi Arabia.

Basically, every nation on the list--oh, and I left off Libya--has effectively discouraged oil field development through thuggism.

We would be drenched in oil at $25 a barrel, if the world was a free enterprise nirvana.

As it is, we may see gluts again in a few years.

 
At 1/20/2011 10:17 PM, Blogger VangelV said...

Some say that having oil revenues produces weak government and culture--everyone wants a hand out. Worse than American rural economies.

It is not the revenue but the control of that revenue that is the problem. Most producing nations are run by a cabal of thieves that prey on the general population of the country and the natural resources, which should belong to private individuals. They rob the productive class by a collection of royalties, levies, and taxes and discourage private investment because a stronger investor class would mean less relative power and less control for the thieves.

If these nations had been developed all along in a free enterprise, you would probably have 10 mbd more in Iraq, maybe 5 in Iran, 5 in Mexico, 5 in Saudi Arabia, 5 in Nigeria, 5 in Russia etc.

Actually, the resource would already have been depleted because greater development would mean less available for export in relative terms and a faster depletion rate for the limited resources.

There is easy 40 mbd on the self in these thug states.

There is no evidence of that. The evidence actually points to those states lying about the amount of reserves so that they could export more. OPEC has about half the reported reserves of conventional oil. Saudi oil production will turn down, not go up because the low price of $100 cannot justify the huge expense needed to develop the lower quality reserves at this time. The kingdom is better off using its remaining reserves as a perpetual call on the oil price and limiting production to maximize the total return and maximize purchasing power.

 
At 1/20/2011 10:21 PM, Blogger VangelV said...

Meanwhile, oil demand fro developed nations goes down, not up, every year.

In China mandates PHEVs, and if the USA ever slaps on a gasoline tax, there are oil gluts to the moon.


China will not lower the standard of living for its people. If it wants more oil at a better price all it has to do is let the USD collapse by pricing its oil purchases in RMB that will be used to sell the OPEC producers the products that China makes in abundance. Demand will contract when the developing country economies pull back. But any falls in demand will cause producers to be weary about capital investments. They will take the safe route and prevent long lasting gluts by investing far less than the depletion rate would suggest is necessary to make production grow.

 
At 1/20/2011 10:21 PM, Blogger VangelV said...

Interesting. How did you arrive at these exact numbers?

Either he made them up or is using drugs.

 
At 1/21/2011 3:36 PM, Blogger Junkyard_hawg1985 said...

"Either he made them up or is using drugs." Vangel

Why do you assume he can't be doing both?

 
At 1/21/2011 3:39 PM, Blogger Junkyard_hawg1985 said...

"The problem is not the lack of gas. It is the inability to produce shale gas economically because the energy needed to extract and distribute it is greater than the energy content of the gas that is produced." - Vangel

I strongly disagree with that statement. If what you said were true, then gas prices should have been rising in the past year as we were consuming more energy than we got from shale gas. The reverse happened. Gas prices fell sharply at the same time all other commodities were soaring due to the fed.

 
At 1/21/2011 7:32 PM, Blogger VangelV said...

I strongly disagree with that statement. If what you said were true, then gas prices should have been rising in the past year as we were consuming more energy than we got from shale gas. The reverse happened. Gas prices fell sharply at the same time all other commodities were soaring due to the fed.

I think that I may not have been clear. The total energy cost is imbedded in the production costs for the gas. The market price determines if the production is economic. I am suggesting that if the total input costs were lower than the price received by the producers they would not be borrowing money or issuing shares to pay for drilling for shale liquids because the positive cash flows from their gas wells would be sufficient to pay for expansion. Why dilute shareholders if what you have is a very profitable operation?

In my life I have learned to pay more attention to what people do rather than what they say. In this case the conference calls are full of nice talk about shale gas profitability but the companies are reducing the shale gas drilling budgets and moving on to shale oil. Doesn't that set the alarm bells for you?

 
At 1/24/2011 12:22 PM, Blogger Junkyard_hawg1985 said...

"In my life I have learned to pay more attention to what people do rather than what they say. In this case the conference calls are full of nice talk about shale gas profitability but the companies are reducing the shale gas drilling budgets and moving on to shale oil. Doesn't that set the alarm bells for you?" Vangel

Vangel, I agree with your assessment that what they do matters more than what they say. More important than either of these is how the market responds. The market has responded to the addition of shale gas by dropping price by 20% last year. Meanwhile, oil prices rose by 15%. If the relative price of these two commodities moved by over 35%, the market should respond by diverting capital from gas to oil. This is indeed what has happenned.

 
At 1/25/2011 11:02 PM, Blogger VangelV said...

Vangel, I agree with your assessment that what they do matters more than what they say. More important than either of these is how the market responds. The market has responded to the addition of shale gas by dropping price by 20% last year. Meanwhile, oil prices rose by 15%. If the relative price of these two commodities moved by over 35%, the market should respond by diverting capital from gas to oil. This is indeed what has happenned.

You are missing the bigger picture, which I should have made clearer. The market has not yet done much because it is very difficult to do all of the upfront financing that is required for shale production. We have to think of shale production like building wind farms; all of the big costs are upfront and the capital expense is high. To get the projected production rate in ND I figure that we need to find $5-$8 billion in capital depending on the spacing of the wells. But given the $20 discount of ND light to WTI price you are only looking at cash flows of around $10 billion. That is if everything goes right and there are no problems with water availability or disposal, crude collection or distribution or if fracking does not have to be redone to stimulate flow from wells. When lenders, brokers, and bankers get their fees there isn't much spare cash to play with. That is a serious problem for the sector which is why prices have declined.

 

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