Monday, November 21, 2011

Without Any Real Input from Washington, The Energy Outlook in America Has Been Transformed


Edward Luce in the Financial Times, "America is Entering a New Age of Plenty":

"Forget Al Gore’s “planet in peril.” Forget also Mr. Obama’s promise that future generations would look back on his nomination as “the day the oceans stopped rising.”

Embrace instead the language of tar sands, shale gas, fracking and tight oil. Without quite knowing whether they were new boondoggles or potential game-changers, the debate in Washington until recently largely ignored these escalating supply shocks. Yet together, they have transformed America’s energy outlook. Because of better technology, notably breakthroughs in drilling, the U.S. all of a sudden realizes it is sitting on a century’s worth of gas supply (see chart above of domestic production). When Mr. Obama came to office, the country faced projections of rising natural gas imports from places like Qatar.

The same technology has unlocked ever-growing estimates of once inaccessible “tight” oil lurking beneath America’s rocks. In its immediate neighborhood, Alberta’s huge expanse of “tar sands” contains oil reserves that rank Canada second only to Saudi Arabia. In Brazil, recent advances in offshore oil drilling will relegate Venezuela into second place in the region.

Without any real input from Washington, windfalls just keep dropping into America’s lap. Welcome to a new age of plenty." 

Conclusion: "A new era of fossil fuel appears to be upon us and nobody saw it coming."

30 Comments:

At 11/21/2011 8:51 AM, OpenID moneyjihad said...

The environmental regulations will have to be rewritten to put this growth to a stop.

There must be some shale bug somewhere that we could declare endangered.

 
At 11/21/2011 9:12 AM, Blogger Hydra said...

A lot of wrok and a lot of changes will have to be made before this source of fuel comes to fruition.

And, unfortunately, moneyjihad is probably correct: some envirionmentalists will find some way to try to worry this to death.

 
At 11/21/2011 10:04 AM, Blogger VangelV said...

Conclusion: "A new era of fossil fuel appears to be upon us and nobody saw it coming."

You are still avoiding the question. How many producers of shale gas can stay in business at even twice the current price level? And if they can't how is the trend sustainable?

You are supposed to be an economist, aren't you? If you are why can't you see what is so clear to anyone who has a few hours to do some reading?

 
At 11/21/2011 10:11 AM, Blogger Tom said...

Technology beats scarcity every time.

 
At 11/21/2011 10:35 AM, Blogger Hydra said...

Technology beats scarcity every time.

============

Try telling that to the passenger pigeons and heath hens.

 
At 11/21/2011 10:37 AM, Blogger Hydra said...

The price is low because the infrastructure and conversion plants to put all that gas to use are not yet in place.

As more uses are developed,the demand and prices will go up until utility and price parity is reached with other sources of energy.

 
At 11/21/2011 10:54 AM, Blogger Cabodog said...

I'm still trying to figure out why oil is still priced so high.

 
At 11/21/2011 10:57 AM, Blogger Benjamin said...

And Vange avoids the question:

Are shale wells ever closed in, or do they keep pumping natural gas?

Also, there is shale globally, where labor costs are much less. Also, the technology and knowhow keep getting better.

Vange, you posit yourself as an expert on fossil fuel drilling. So answer the question, at what price do you shut a well in? $1 or $2 mcf?

 
At 11/21/2011 11:01 AM, Blogger Buddy R Pacifico said...

VangelV continues to challenge Prof. Perry that nat gas needs to stay north of $7.50 msfe, for producers to stay in business.

Range Resources is the bigest natural gas producer in the U.S.

From page 7 of Range Resouces 2010 Annual Report:

"With our recently announced agreement to sell our Barnett properties, this brings our total divestiture proceeds since 2004 to approximately $1.8 billion. Most of this capital has been directed toward the Marcellus Shale play, which is a low-cost and high rate-of-return project. As a result of focusing on this high-quality
asset, we have sharply driven down our costs. Over the past two years our all-in finding and development costs decreased 77% to $0.71 per mcfe, while our lease operating
expense declined 27% to $0.72 per mcfe and our DD&A rate fell 5% to $2.01 per mcfe."


So, Range's exploration and development costs are $.71. Their operating costs are $.72 and their depreciation, depletion and amoritazation costs are $2.01.

Total Range costs $3.14 msfe ($.71 +$.72 + $2.01) and falling vs. VangelV's break-even for nat gas producers of $7.50 msfe.

Range summarizes profitability in the Marcellus region on page 12:

"the
liquids-rich portion of the Marcellus play is the highest
rate-of-return play currently in the U.S. At $4.00 per
mcf and $85 per barrel of oil commodity prices held flat
forever, the rate of return for a Marcellus well in the wet
gas area of the Marcellus is estimated to be greater than
70%."


Why would Range go all in with its own capital from the Texas properties if, it did not absolutely beleive in the pay-off from the Marcellus?

 
At 11/21/2011 11:04 AM, Blogger morganovich said...

i think this chart is a bit misleading.

it is not scaled to zero, so it makes the move look massive, when, in fact, it's just a 15%ish move in over a decade, not even pacing GDP.

15% in 10 years is is what, 1.4% annualized growth? that's hardly setting the world on fire.

granted, the move from 2006 looks impressive, but it was starting from a depressed recession level.

starting from a normalized level of more like 2 million, it's 15% in 6 years, or 2.3% annual growth.

be wary of charts not scaled to zero.

they can make fairly moderate changes look much larger.

 
At 11/21/2011 11:05 AM, Blogger morganovich said...

"There must be some shale bug somewhere that we could declare endangered."

oh, they're on it. they are claiming that fracking contaminates the water table.

to my knowledge, they lack any real evidence, but that has never stopped the EPA in the past.

 
At 11/21/2011 11:06 AM, Blogger morganovich said...

"Try telling that to the passenger pigeons and heath hens."

well, it did save the whales.

not much call for whale oil these days.

 
At 11/21/2011 12:46 PM, Blogger al fin said...

This comment has been removed by the author.

 
At 11/21/2011 12:49 PM, Blogger al fin said...

Shell's Pearl GTL Plant in Qatar is set to earn $6 billion a year in profit (with oil at $70 a barrel)! The plant cost $18 billion to build and will be paid off in roughly 3 years -- as long as oil stays above $70 a barrel.

Do you think oil will stay above $70 a barrel the next 3 years? It just might.

Imagine the profit of such a plant with oil at $150 a barrel or $300? Can you say "price ceiling?"

The natural gas to oil price spread will certainly narrow. But it is unlikely to close to the point of making GTL unprofitable.

 
At 11/21/2011 1:01 PM, Blogger Marko said...

"Try telling that to the passenger pigeons and heath hens."

There is currently no shortage of cheap bird meat. Technology (chicken breeding) solved the problem, but not in a way that we like on a sentimental level.

Wikipedia:

"In 1857, a bill was brought forth to the Ohio State Legislature seeking protection for the Passenger Pigeon. A Select Committee of the Senate filed a report stating "The passenger pigeon needs no protection. Wonderfully prolific, having the vast forests of the North as its breeding grounds, traveling hundreds of miles in search of food, it is here today and elsewhere tomorrow, and no ordinary destruction can lessen them, or be missed from the myriads that are yearly produced."

Some 50 years latter, they were all gone.

 
At 11/21/2011 4:08 PM, Blogger Hydra said...

"Try telling that to the passenger pigeons and heath hens."

There is currently no shortage of cheap bird meat.


===============================

Try telling that to the passenger piceons and heath hens.


As far as that goes, try telling it to people who used to be able to go into practically any woods and and club a heath hen for free.

There is a definitive and permanent shortage of cheap bird meat of certain kinds.
To suggest that factory grown chickens are equivalent is just silly.

 
At 11/21/2011 4:11 PM, Blogger Hydra said...

I'm sure the passenger pigeons would be pleased to learn that we (MAY) have saved the whales.

 
At 11/21/2011 4:17 PM, Blogger Hydra said...

My remark is not about passenger pigeons or whales, or sentiment: it is about the faulty idea that limited resources can be infinitely expanded or replaced given enough technology and innovation.

This is the economics equivalent of the perpetual motion machine, and just as silly.

 
At 11/21/2011 4:22 PM, Blogger Hydra said...

With sufficient energy input we can dissociate water to get hydrogen and use it to create convenient liquid hydrocarbon fuels, plastics and many other things, but just as chickens don't bring the heath hen back, such technology won't bring cheap oil back.

 
At 11/21/2011 4:25 PM, Blogger VangelV said...

This is a far more reasonable view than most on these threads about natural gas. But even it has a problem and that is the very low return on the energy invested. In order to keep shale production flat you need to keep drilling and drilling new wells because you see a 75-90% decline in the first year. That means that in order to increase production you need to drill more wells each year as the previous year. The problem is that the best sites are usually drilled first. That means that in areas that have an established production history newer wells will produce less gas than the older ones. (That happens because the older wells tend to be in the best spots in the core areas.)

Of course, the big factor is the total return before the wells are dry. And for most of the producers the actual depletion rates have been higher than assumed and the actual EURs have been lower than assumed. This is why the producers have been chewing through cash. The problem is that a price increase for the end product will also mean an increase in costs as demand for drilling services goes up and lower grade areas are targeted as the core areas age.

 
At 11/21/2011 5:53 PM, Blogger Benjamin said...

Buddy-

Your answer seems to suggest that shale gas wells will not be shut down until the price is under $1 mcf. In other words, the marginal cost of production is south of $1 mcf.

The driller can hope he made his money in the first three years. But the well will keep going, paying a modest but permanent dividend.

This suggest a long, long time of modest natural gas prices.

Add in Al Fin's comments that Qatar's huge GTL plant is successful, and that other methods of GTL are being introduced.

Park Oil? Or possibly Peak Demand and Peak Price for crude oil?

Game is close to over for the crude team.

 
At 11/21/2011 6:51 PM, Blogger VangelV said...

And Vange avoids the question:

Are shale wells ever closed in, or do they keep pumping natural gas?

Also, there is shale globally, where labor costs are much less. Also, the technology and knowhow keep getting better.

Vange, you posit yourself as an expert on fossil fuel drilling. So answer the question, at what price do you shut a well in? $1 or $2 mcf?


You don't read well or understand much my friend. The wells deplete very quickly. You don't abandon them because of the price level. You abandon them because the collection and compression costs are higher than the market price. Right now the typical shale gas company needs $7.50 gas to break even. That is why the companies are chewing through cash and selling off assets.

 
At 11/21/2011 8:09 PM, Blogger Buddy R Pacifico said...

"Buddy-

Your answer seems to suggest that shale gas wells will not be shut down until the price is under $1 mcf. In other words, the marginal cost of production is south of $1 mcf."


Benji, I have no idea at what cost they would shut down. It looks like they really would want to get at least $3.14 msfe for their production -- see my comment above.

 
At 11/21/2011 9:01 PM, Blogger VangelV said...

VangelV continues to challenge Prof. Perry that nat gas needs to stay north of $7.50 msfe, for producers to stay in business.

That is not what I said. I said that in a typical shale formation the shale industry needs $7.50 gas to break even. There are clearly a few companies that drill in the sweet spots of the best formations. They can do fine until they have to maintain their production levels and find themselves in a position where the negative cash flows and capital consumption that take place when the lower quality reserves are being developed begin to matter.

Range Resources is the bigest natural gas producer in the U.S.

Is it? I don't think that it is close to being the largest producer.

From page 7 of Range Resouces 2010 Annual Report:

"With our recently announced agreement to sell our Barnett properties, this brings our total divestiture proceeds since 2004 to approximately $1.8 billion....


Why isn't this a big red flag for you? After all, the conference calls I was listening to two or three years ago were hyping up the Barnett properties as valuable core areas that would bring Range production at a low cost. Once reality sank in the company abandoned that area and began to hype up its next great play.

Most of this capital has been directed toward the Marcellus Shale play, which is a low-cost and high rate-of-return project. As a result of focusing on this high-quality
asset, we have sharply driven down our costs. Over the past two years our all-in finding and development costs decreased 77% to $0.71 per mcfe, while our lease operating
expense declined 27% to $0.72 per mcfe and our DD&A rate fell 5% to $2.01 per mcfe."


All these numbers depend on the estimated ultimate recovery from the wells. From what I can tell Range is estimating 4 bcfe of gas and around 300K of NGLs and oil. But even though it has hedeged its production at more than $5 mcf it is still chewing through cash and depends on more than 20 different banks for loans. It is not even projecting to be cash flow neutral until around 2014 but by that time the EUR assumptions may no longer be possible as the actual production data shows a very different lifetime production figure than the one being sold to naive investors.

So, Range's exploration and development costs are $.71. Their operating costs are $.72 and their depreciation, depletion and amoritazation costs are $2.01.

If you have invested in this sector you will know that everything depends on the assumptions made. It is easy to have low finding costs if you assume that you have found far more economically viable gas than you actually did. That is why you have to pay attention to statements like, "Although we believe these estimates are reasonable, actual production, revenues and costs to develop will likely vary from estimates and these variances could be material."

Keep in mind that the US does not have an equivalent of Canada's NI 43-101. Shale companies can claim all kinds of things just by guessing. This brings me to another prediction. After the shale gas boom implodes investors who lost their shirts buying into the hype, and you will all know who you are, will whine and argue that more regulation is necessary because without that regulation it was impossible to see the obvious points that I just outlined to you above.

 
At 11/21/2011 9:03 PM, Blogger VangelV said...

Why would Range go all in with its own capital from the Texas properties if, it did not absolutely beleive in the pay-off from the Marcellus?

Because if it throws up its hands and admits that shale gas production is not economic you will see $11 billion of market cap go away in a hurry. It is all about money, just as it always has been.

 
At 11/21/2011 9:07 PM, Blogger VangelV said...

Shell's Pearl GTL Plant in Qatar is set to earn $6 billion a year in profit (with oil at $70 a barrel)! The plant cost $8 billion to build and will be paid off in under 2 years -- as long as oil stays above $70 a barrel.

Do you think oil will stay above $70 a barrel the next 2 years? It just might.


Shell has not bet the farm on shale gas production. It went where the cheap reserves were and it made a bet on being able to deal with the political and security risks.

 
At 11/21/2011 9:09 PM, Blogger VangelV said...

Imagine the profit of such a plant with oil at $150 a barrel or $300? Can you say "price ceiling?"

The natural gas to oil price spread will certainly narrow. But it is unlikely to close to the point of making GTL unprofitable.


Qatar's gas reserves are stranded. They have no market other than the GTL process at this time or anywhere in the near future. Shell should certianly turn its reserves into real cash and profit a lot easier than any of the shale players.

 
At 11/21/2011 10:12 PM, Blogger Richard said...

"Nobody saw it coming"

That's maybe the best lesson of it all.

 
At 11/22/2011 2:50 PM, Blogger VangelV said...

"Nobody saw it coming"

That's maybe the best lesson of it all.


How ironic? Was it meant that way?

 
At 11/22/2011 5:29 PM, Blogger Bob said...

Regarding the price of oil, keep in mind that the "ownership" of most in-ground oil is at the nation level. When a country owns the oil, rather than the producer/lessee, they can set the price anywhere they want, only keeping in mind the cartel of other countries trying to keep the price high.

 

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