Tuesday, December 06, 2011

New Report Shatters the Myth of Energy Scarcity and Highlights America's Vast Energy Resources

Here are some excerpts from a new energy study titled "North American Energy Inventory" from The Institute for Energy Research: 

Letter from the President (Thomas J. Pyle): "Access to affordable, abundant energy is, fundamentally, a means of freedom. But for those seeking to create a crisis that provides an opportunity to direct the way we live, work and act, affordable, reliable, abundant, domestic energy is a threat. In a very real sense, the more energy we have, the less power they will have. Energy abundance ends the justi!cation for central energy decision-making.

Against that backdrop, the Institute for Energy Research (IER) is proud to release the following report. It is the culmination of months of research and investigation by IER experts, drawing on a broad array of government, industry and university data—all of it public information—to provide the reader a more accurate description of what is available in North America now and what will likely be available in the future.

America’s energy future can be bright. Converting that potential into something real and transformative will not be easy—nor is success guaranteed. This report describes in detail what is possible and should serve once-and-for-all to shatter the myth of energy scarcity, and in so doing, empowers American citizens rather than politicians."

Conclusion: "North America is blessed with enough energy supplies to promote and sustain economic growth for many generations. The government’s own reports detail this, and Congress was advised of our energy wealth when the Congressional Research Service released a report showing that the United States’ combined recoverable oil, natural gas, and coal endowment is the largest on Earth.

Despite this overwhelming evidence of energy abundance, many continue to proclaim that an energy problem or “crisis” exists that justifies increased central planning, increased expenditures of public money, increased energy taxes and increased diktats on American citizens in order to solve “the problem.”

For forty years, politicians and special interests have argued successfully that energy production requires more regulations, more taxes, and more restrictions and the result has been less domestically produced energy, less economic growth, and fewer jobs.

Ironically, many of the policies that serve to hamstring energy production were abetted by the same premise: since America does not have enough oil, natural gas, and coal to continue to build its economy and improve the standards of living for all, the impact of proposed policies would negligibly affect energy production and security. The truth that is finally becoming clear is that North America is not only blessed with huge quantities of energy, but also could become the single largest producer in the world, with all of the attendant manufacturing, technological innovation and re-industrialization that would provide generations with good jobs and sustainable futures.

The question Americans therefore need to ask is whether government officials throughout North America will embrace this enormous opportunity or scorn it. Armed only with pessimistic assumptions about technology and an incomplete and misleading understanding of our energy wealth here at home, we should not be surprised that our energy situation has gotten worse the more they intervened.

The era of perceived energy shortages must end, and informed judgments about North America’s energy potential must finally be made.  Millions of new jobs, untold economic growth, and unprecedented wealth creation for North America and the world await a productive and conducive environment for energy production. 

Facing a future of plentiful and affordable energy supplies, Americans can once again reclaim the optimism that has characterized our history, replacing the pessimism of scarcity and government rationing that has placed limits on the growth of our economy and perhaps more importantly, our way of looking at the world."


15 Comments:

At 12/06/2011 9:01 PM, Blogger VangelV said...

Here is an example of the problem. In the report we read, A current example of how reserves can grow is the Marcellus shale deposit that runs through the Appalachian basin. In 2002, the United States Geological Survey (USGS) estimated the area held about two trillion cubic feet of natural gas and .01 billion barrels of natural gas liquids. By 2011, however, the USGS estimated the area held 84 trillion cubic feet of natural gas and 3.4 billion barrels of liquids. Within a span of 9 years, technology increased estimated natural gas supplies in the Marcellus 42-fold, and liquids 340-fold.17 Similarly, the Bakken formation in North Dakota and Montana was estimated to have 151 million barrels of oil in 1995, but by 2008, the USGS had increased its estimate to between three and 4.3 billion barrels, 25 times the 1995 estimate. History is rampant with these types of increased estimates of resources as improved technology enables more resources to be produced."

This all sounds very impressive but there is a problem. The shale gas industry is chewing through capital as it produces gas because the net returns on the energy invested are negative. If you spend time to read the 10-K filings and listen to the conference calls you find that even though thousands of wells are in production cash flows are still negative and CEOs are talking about funding gaps over the next few years. Surely if the USGS were correct in its assessments the reality would be very different. The fact that it is what it is should set off the warning bells for any prudent investors.

Think of it this way. If you have an abundance of gas production from shale the prices will remain low. But at $3.75 gas the producers are losing money because they need at least $7 (for the decent formations) to break even. What that means is that investors in shale are subsidizing gas consumers, not a good way to stay in business for long. But if prices rise to $7 and above it means that there isn't enough gas that is economic to make the production at lower levels economic. Either way the hype is unwarranted.

I hope that everyone reading these threads remembers them in a year or two when we get a better idea of what is going on. Clearly either Mark and the optimists or the realists will turn out to be wrong. If the shale gas bubble does burst I hope that the fools who just wanted to believe and ignored the actual data do not blame the 'greedy capitalists' because they have certainly disclosed enough information to let any careful analyst come to the correct conclusions. If there is a bubble and it bursts as the previous bubbles did the ones to blame are the promoters in the financial sector, the government agencies that lent the charlatans their credibility, and people who were cheer-leading the hype because they wanted a good story instead of the truth.

 
At 12/06/2011 11:20 PM, Blogger juandos said...

I found this to be educational vangeIV: What is the Cost of Shale Gas Play?

 
At 12/06/2011 11:42 PM, Blogger Benjamin said...

Vange is right, it is a boom, and Wall Street is banging the tubs, as they always do.

Still, and globally, wells will stay in production as long as marginal revenues exceed marginal costs, and the industry will continuously get better at extracting fossil fuels.

We could well have a global fossil glut in five to 10 years.

40 mpg is the new 20 mpg, and vehicles can run on CNG.

I would say there is a ceiling on gasoline at $4 a gallon, plus taxes. Shortages are a non-issue, as long as the price signal is allowed to work, or even aided by gasoline taxes.

 
At 12/07/2011 11:13 AM, Blogger Che is dead said...

Jaundos,

The critical source for the article that you linked to is Art Berman a paid consultant for shale gas industry competitors. The NYT was caught earlier failing to indentify his conflict of interest when reporting on shale gas:

"The letter points out that a litany of Times’ standards were violated by Urbina, including failure to “distinguish conscientiously between high-level and lower level executives or officials” and a prohibition against dissembling about sources. In the case of C. Hobson Bryan III, Urbina sources him as “one official,” an “energy analyst,” and “one federal analyst,” without disclosing that these three sources are one in the same. Nor does Urbina inform readers that Bryan held two low-level positions with the Department of Energy – intern and, later, Junior Engineer; instead, he gives the impression that Bryan was a qualified official in a position to know."

"In another instance, Urbina failed to disclose that one of his sources, Art Berman, is a paid consultant to numerous companies and interests that are in direct competition with the shale gas industry. He was identified by Urbina as an industry insider."

"Deborah Rogers was presented as a financial industry professional. In fact, she’s an organic goat farmer involved in a bitter dispute with the natural gas industry."

-- Second NYT Reporter Faces Allegations of Serious Misconduct, PJMedia

Of course, that does not mean that everything he says is wrong, and it's interesting to se what he is willing to concede:

"Canadian explorer Talisman Energy Inc. of Calgary is active in the Marcellus and Eagle Ford shales in the United States and the Utica and Montney shales in Canada. The company’s recent economic analysis shows a steady decline in its shale gas development breakeven price over recent years, from $8.50/Mcf in 2008, to $6.50 in 2009, to $4.50 in 2010, to a projected $3-$4 in 2011."

“One thing we’re seeing is the majors are getting more involved in these plays. They are going to do a different level of science than the independents involved,” he said. “I’m not saying nobody is doing any science,” he added, but the majors can bring a full set of tools to shale play evaluation and development."

So, the breakeven price associated with development has fallen almost 60 percent in three years. The independents are falling to the way side and the better capitalized more efficient companies are taking a leading roll. All of this hardly seems to indicate, as Vange continually implies, that shale gas is a loser. The current boom will give way to efficient and sustainable development by well capitalized, experienced companies - shocking.

 
At 12/07/2011 12:18 PM, Blogger Tom said...

Julian Simon is smiling. Again.

 
At 12/07/2011 2:13 PM, Blogger VangelV said...

I found this to be educational vangeIV: What is the Cost of Shale Gas Play?

I liked the following comment.

"He criticized what he called “foggy economics” put out by shale gas producers. Some operators claim a profit at $4/Mcf gas when required financial filings can reveal their costs are closer to $7/Mcf, he said."

We often hear CEOs talk about costs that seem quite low but when you dig into the details you find that they exclude certain items and depend on depletion assumptions that are not supported by the production data. That may not matter when everyone is optimistic and looking to hit it big by being in on the next big thing but when the financing starts to get tight reality has a way of intervening and punishing the naive. But when we finally have that day of reckoning the one thing that the 'investors' can't argue is that they did not have enough information to figure out what is going on. Thanks to people like Berman there is plenty of it. Refusing to use it is not the fault of the promoters but of the reckless speculators.

 
At 12/07/2011 2:16 PM, Blogger VangelV said...

Still, and globally, wells will stay in production as long as marginal revenues exceed marginal costs, and the industry will continuously get better at extracting fossil fuels.

First, cash flows are negative. Wells are only drilled because of the ability to borrow and to sell equity or assets.

Second, the industry will exhaust the best plays in the core areas at a time when gas prices are low. Even if drilling costs fall total production of new wells may fall even faster. While the concepts are simple the math and accounting has many moving pieces that you need to watch.

 
At 12/07/2011 2:19 PM, Blogger VangelV said...

The critical source for the article that you linked to is Art Berman a paid consultant for shale gas industry competitors.

So? The critical source for Enron was Jim Chanos, who was shorting the stock. He was still correct. And the industry is still chewing through capital because the costs are higher than the price. That is why so many of the industry conference calls mention funding gaps and asset sales.

It is good to be a skeptic. But it is hardly logical to doubt Berman, who shows all his work and is very transparent, while accepting the USGS estimates as gospel. What does it tell you when the most vocal promoter of shale gas in the industry over the past five years is now talking about transitioning his company to shale liquids?

 
At 12/07/2011 2:23 PM, Blogger VangelV said...

"In another instance, Urbina failed to disclose that one of his sources, Art Berman, is a paid consultant to numerous companies and interests that are in direct competition with the shale gas industry. He was identified by Urbina as an industry insider."

Arthur Berman has been on television talking about the gas and oil industry for a very long time. Few energy investors are unfamiliar with what he does. And why does it matter that he is a consultant? He is an analyst who is very knowledgeable. His reports show his work and include the real world production data, which is compared to the company estimates. Unless you can deal with the methodology and show how it is wrong you have no case.

My own case is much simpler. I look at the cash. When you have companies drilling for very long periods still showing negative cash flows there is clearly a problem with the picture that they are trying to paint. And when you have estimates that indicate growing production and cheap natural gas you can't argue for profit for a sector that needs much higher prices.

 
At 12/07/2011 2:29 PM, Blogger VangelV said...

The industry cannot survive on $4 gas. It still needs more than $7 to keep production level. If I drill the best spots in the core areas of a shale play I could do very well at $4 gas. But as soon as that production is gone I need much higher prices. In the case of Talisman a lot depends on the stated EURs. If you assume that you will wind up with 10 Bcfe from a property you might be able to do the math and get a $5 break even price. But if the production data is showing that the likely EUR is 5 Bcfe you need $10 price. Everything depends on the assumptions that are made. And without a NI 43-101 equivalent, the industry can report what it wants. Which is why I look at cash flows. They are what they are and much harder to fake.

 
At 12/07/2011 2:41 PM, Blogger Che is dead said...

"The shale play that started it all, the Barnett of northern Texas, is today producing more than ever (5.6 billion cubic feet per day) despite there being half as many rigs working the land than there was two years ago (when production was 5.3 bcfd). As analyst Dan Pickering of Tudor, Pickering & Holt wrote in a note this morning, “If wells are declining faster than expected, the Barnett would not be at record production with reduced rig count.”

"As to whether the gas is economic to extract? Would drillers be investing billions a year in new wells if they weren’t getting some return out of it? Granted, today’s low price of $4.30 per thousand cubic feet is so low that drillers have literally thousands of wells that have been bored and completed but that are not yet hooked up to pipelines because they’re waiting higher prices. But a lot of the new gas being brought on line now is what’s called associated gas — that is it is produced from wells alongside oil or natural gas liquids like propane and butane. With petroleum selling for $90 a barrel, drillers in places like the Eagle Ford shale or the Bakken can give away their natural gas for nothing and still make 100% annual returns on their drilling dollars."

-- Forbes

 
At 12/07/2011 2:49 PM, Blogger Che is dead said...

"The Times questioned the economic merits of shale gas production in complete disregard and/or ignorance of supply and demand fundamentals as well as recent and forward market natural gas prices. No one would argue that with today's natural gas prices the economics of dry gas projects have lower rates of return than they do at prices of $5.00-$6.00 per thousand cubic feet (mcf), which we believe will ultimately be the prevailing price when higher natural gas demand arrives in the years ahead from the utility and transportation sectors. The primary focus of our current drilling program - as we've said on numerous occasions through our various press releases and conference calls - has been on identifying and developing new natural gas plays in the U.S. wherein natural gas liquids and oil will add significantly to the overall project economics. Nevertheless, we and others in the industry continue to have learning-curve benefits that make U.S. shale gas projects attractive to the global energy industry.

"In addition to Chesapeake, the list of large companies now active in shale gas development in the U.S. includes such world class energy companies as Anadarko, BG, BHP, BP, Chevron, CNOOC, Conoco, Devon, EnCana, ENI, EOG, ExxonMobil, KNOC, Marathon, Mitsubishi, Mitsui, PetroChina, Reliance, Shell, Statoil, Talisman, and Total, among others. Consider whether it could really be possible that all of these well-respected energy leaders, with a combined market cap of almost $2 trillion, know less about the economics of shale gas production than a single New York Times reporter, a few environmental activists and a handful of shale gas doubters?

"It is also absurd to conclude that shale gas wells are underperforming while America is awash in natural gas and benefiting from natural gas prices less than half of what they averaged in 2008. I also note that Chesapeake and other shale gas producers are routinely beating natural gas production forecasts. In fact, in 2009, thanks to shale gas, the U.S. passed Russia as the largest natural gas producer in the world. Today shale gas production represents approximately 25% of total U.S. natural gas production. How can shale gas wells be underperforming if shale gas companies are beating their production forecasts, natural gas prices remain low and U.S. natural gas demand is at a record high?

-- Chesapeake Energy Corporation

 
At 12/07/2011 4:07 PM, Blogger Hydra said...

Globe and Mail Buffet Buys Big Solar Farm
Forbes - ‎44 minutes ago‎

Warren Buffet's wind-energy company plunged into solar energy this afternoon, agreeing to purchase the Topaz Solar Farm project in Central California for more than $2 billion, the company announced this afternoon.

 
At 12/07/2011 6:02 PM, Blogger Marko said...

The people that want us to abandon oil and gas have for years argued that we must give up those resources because they were running out.

When that was shown to be false, they claimed that oil and gas would make us dependent on foreign sources, and so should be abandonded.

When that was shown to be false, they argued that oil and gas must be abandoned because burning them causes the earth to warm to dangerous levels.

When that is finally shown conclusively false (and we are getting closer every day), what will people use to argue that oil and gas should be abandoned? If you could guess, you could probably get rich or famous, cause it is next up.

 
At 12/07/2011 10:18 PM, Blogger VangelV said...

“If wells are declining faster than expected, the Barnett would not be at record production with reduced rig count.”

What nonsense. All you need to figure out the decline rates is the production data. And all you need for higher production is to drill off the core areas first while ignoring the second tier targets.

I think that Berman's analysis needs to be looked at a bit closer because, unlike the general statements above, it is based on actual well production and uses real data to come up with a better picture. Berman wrote:

"In 2007, I projected EUR for almost 2,000 horizontal wells in the Barnett Shale (World Oil, November 2007). At that time, these were the only horizontal wells with enough production history to evaluate. Now, with two additional years of production, I revised the decline curves for the same control set of 1,977 horizontal wells. The overall EUR decreased 30% from my previous estimate, and the average per-well EUR fell from 1.24 Bcf to 0.84 Bcf. The reason is clear: most wells do not maintain the hyperbolic decline projection indicated from their first months or years of production. Production rates commonly exhibit abrupt, catastrophic departures from hyperbolic decline as early as 12-18 months into the production cycle but, more commonly, in the fourth or fifth years for the control group. Pressure is drawn down and hydraulically produced fractures close."

Operators often state that shale plays have about a 30 to 40-year production life, but I found that the average commercial life for horizontal wells is about 7.5 years, although the mode is four years. There are many wells that should have 8-12 years of production but few that will extend beyond 15 years. About 75 percent of predicted EUR in horizontal Barnett wells has been produced by Year 5. In the control group, the first wells were drilled in 2003, and already 15% have reached their economic limit five to six years into their production life cycle.

The average EUR for all horizontal Barnett wells is 0.81 Bcf (the mode is 0.5 Bcf/well). This is about one-third of the 2.5 Bcf/well average predicted by many operators. My decline projections indicate that only about 300 horizontal wells in the play (4% of total) will reach or exceed a 2.5 Bcf threshold. This seems consistent with the average to-date cumulative production of 0.46 Bcf/well.


There is no way to spin the actual performance of the Barnett shale play as anything but a disappointment. Actually, given the environment we won't have long to wait to figure out who is right. I figure that within a year we will have a much clearer picture as all those funding gaps and hedges run their course. My money is on Arthur.

 

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