Are Natural Gas Reserves Now Overstated?
Posted by Gail the Actuary on August 16, 2009 - 10:57am
The future of natural gas production is a puzzle. There have been stories about the potential of unconventional natural gas, and natural gas reserves reported by companies have been increasing. Production by companies has risen to the point where there is a supply glut, and there has been a cutback in drilling. Recently, Robert Rapier had a post called How Much Natural Gas Do We Have to Replace Gasoline?.
But Arthur Berman, a contributing editor and columnist for World Oil magazine, says some caution is in order. This past week, he wrote an article for ASPO-USA called Lessons from Barnett Shale Suggest Caution in Other Shale Plays.
Mr. Berman thinks that public companies are way too optimistic in their natural gas reserves, both in the Barnett Shale, and in other shale plays, such as the Haynesville and Marcellus shales. These companies may also be making bad decisions about drilling if they are over-estimating how much gas they can produce from a given well.
I think Mr. Berman's cautions are probably worth thinking about, so have paraphrased what he said, and added some thoughts of my own at the end. The two issues I see are
1. Does extensive fracing move natural gas production forward, so that past patterns, and estimates of reserve life, produce much too high estimates of the volume yet to be extracted? and
2. Are historical decline patterns for tight gas (produced using vertical wells without much fracing) misleadingly good for shale gas with fracing?
The original article is linked above. If you are at all technically inclined, I suggest reading it as well.
Why does Mr. Berman think caution is in order?
Mr. Berman says he examined the experience of the Barnett Shale, based on IHS data, and came to the following conclusions:
• Most reserve predictions based on hyperbolic production decline methods were too optimistic when compared with production performance.
• There is little correlation between initial production rates and ultimately recoverable reserves.
• Average well life is much shorter than predicted.
• The volume of the commercially recoverable resource has been greatly over-estimated.
• Core areas of the play do not have appreciably higher average ultimately recoverable reserves than the play overall.
• The ultimately recoverable reserves from horizontal wells is not significantly greater than from vertical wells.
• Average well performance has decreased consistently since 2003 for horizontal wells.
What are the underlying problems? According to Berman, he sees the following problems:
1. Group curve fitting is misleading. It is easy to think that a hyperbolic decline rate will be predictive of future production. But with all of the fracing, it just doesn't work that way. According to Berman, wells suddenly lose pressure and production drops below what the fitted curve would predict. This can happen anytime between 12 months and 5 years. More fracing doesn't get production back up to the prior curve.
2. Initial production rates aren't very predictive of total production. While high initial production is helpful, what one really needs is a decline rate that isn't too steep. About half of production is in year one.
3. Economic life is of wells is much shorter than expected. Berman reports that operators expect a well life of 30 to 40 years, but in practice, the most common economic life (mode) is only 4 years. He quotes an average life of 7.5 years, and a maximum of 15 years.
4. Horizontal wells are not living up to expectations. Berman indicates that owners are predicting recoveries of 2.5 billion cubic feet per horizontal well, but Berman's estimate is that ultimate recoveries will be about a third of that or .81 billion cubic feet. According to his calculations, horizontal wells produce only 31% more than vertical wells, but cost 2.5 times as much.
5. Terminal decline rates are 15% per year, not 4% to 8%. Berman estimates a much higher decline rate than most operators are using. Also, once production drops below operating costs, it doesn't make financial sense to keep the well open.
6. Lack of improved production per well with improved technology. Berman had expected to see improvement in production per well with improved technology, but instead, Berman's estimate of economic recovery for horizontal wells has dropped from 1.14 per billion cubic feet per well in 2003 to .59 per billion cubic feet per well in 2008.
Berman feels that the USGS technically recoverable gas estimates for Barnett Shale are likely way to high, even though many companies believe the opposite. The USGS estimates total technically recoverable resources of 26 trillion cubic feet in Barnett Shale. Berman estimates that the 11,817 wells drilled to date will only produce about a third of this amount, or 8.8 trillion cubic feet. If this is all that has been drilled to date, Berman estimates that the remaining 23,000 wells will cost over $75 billion dollars, just for the initial work (leasing, drilling and completion costs). According to my calculation, this amounts to $4.36 per thousand cubic feet--more than natural gas is currently selling for, without considering costs for the remainder of the supposed 40 year lifetime.
My Thoughts
I am certainly no expert in this area. I did visit BP's Tight Shale Gas Facility in Wamsutter, Wyoming in 2008. BP's facility is tight gas, not shale gas. Since tight gas facilities have been in operation a long time, and shale gas is quite new, BP's tight gas facility is likely similar to what the new shale mines are trying to model their experience after.
BP's site used only vertical wells. BP was planning on a 30 year, or possibility 40 year, lifetime for their wells. BP has been operating in the area since the mid 70s, so has experience with tight gas wells that have been producing for almost 40 years. Their operation was set up to minimize servicing costs on a large number of wells that have been producing for many years.
I don't know exactly how much fracing BP has been doing on their wells, but I am sure historically it was not anywhere near the level that is being done now. BP mentioned recent changes which had improved productivity, and that likely included fracing. Of course, the question then becomes: Does fracing really increase total production, or does it just move it forward in time, or is it a combination of the two?
In my work as an actuary, quite a bit of my work involves forecasting future claim payouts based on historical claim experience. In many ways, it has a lot in common with what is being done in reserve estimations for these natural gas wells. Insurance coverage often have very long claim payout periods, and one doesn't always have comparable data to look at, so one has to work around the lack of comparable data. The estimates an actuary makes have a big impact on both reserves and on decisions as to what products are profitable to sell in the future.
I can easily understand how someone could jump to the conclusion that if fracing makes recoveries during early production higher, it would lead to close-to-proportionately higher production over the life of the well. I can also understand substituting tight gas experience for shale gas experience, if there is no long term historical experience for shale gas. One might also substitute vertical well experience for horizontal well experience if inadequate long-term horizontal well experience exists.
I can also imagine gas companies not looking too closely at industry experience regarding decline rates. After all, this takes quite a bit of time, analysis skills, and access to the IHS data base to do this. If gas companies are small, and have limited staff, they are likely not set up to do this.
My experience with auditors is that they aren't many steps ahead of the company people. Each auditing firm is likely looking at the reserves of several different natural gas producers. If they are all making the same assumptions, the auditor feels pretty certain that what they are doing is right--or at least consistent with what other companies are doing. The auditing firms check for computational errors, but are not likely to think about whether the decline rate assumptions are wrong (unless someone points out the issue to them.)
Nearly all the players would like things to look good--the USGS, companies setting reserves, the people selling the fracing materials, and investors. Except for Arthur Berman, it isn't clear that there are too many people looking at aggregate decline rates on shale gas deposits. One might think that consulting firms would look at this--for example Cambridge Energy Research Associates (CERA) or Navigant Consulting or Advanced Resources International, but unless someone pays them for this service, it likely won't get done.
Once companies have gone down the wrong road in making estimates, it is my experience that it is awfully hard to turn around. The financial implications get to be huge. It is hard for an auditing firm (or firm selling ongoing consulting services) to do more than nudge the estimated decline rates a bit in the right direction, and hope that things will get better over time.
I would hope that other people will start looking closely at the questions Arthur Berman is raising. Does IHS data really indicate that shale decline rates are a lot worse than companies are forecasting? What are reasonable lower bounds at which production becomes non-economic? Are natural gas companies really being over-optimistic on the long-term benefit of fracing? Have natural gas reserves been raised too much? Could there even be a problem even on tight gas reserves, if fracing moves production forward, and reduces what is producible in the later years?
Contact
- Content: editors at theoildrum dot com
- Tech support: support at theoildrum dot com
License
This work is licensed under a Creative Commons Attribution-Share Alike 3.0 United States License.
I appreciate Mr. Berman's analysis. The only comment I can see is that the data from the Barnett is still evolving and the +/- 6,000 wells drilled since the first 1,977 that he examined might have been completed using different techniques.
I hope he gets invited to speak at the various Unconventional Gas Conferences that have been sprouting up in recent months and is allowed the opportunity to debate his findings with the firms and stakeholders that are promoting the shale plays.
I know that he is on the agenda at the ASPO-USA conference, and that he has been writing on this topic for World OIl.
The problem I see is that all of the reports we see put out about unconventional natural gas have future production assumptions already built into the numbers we see. The numbers look great, but they are only great if the reserve numbers underlying the assumptions are correct.
I know I was one of the early ones following what consultants were saying about improved unconventional gas possibilities. If these consultants were in fact jumping to conclusions about how long (and how much) production could be maintained after increased fracing, they could be completely wrong in their conclusions. The principles are exactly in the same in medical malpractice insurance (where I have worked) as they are in natural gas estimation.
If the life of these wells is much shorter than expected (or proclaimed), then what effect does this have on the ROI? Will it be negative? And how much in the way of subsidy, in one form or another, has there been for these investments? And what's left behind when these operations close down?
And to what extent can rollover into new areas keep production up despite rapid decline at individual sites? In other words, how long can this whole development postpone peak gas?
Shale gas seems to have blindsided us peakers, me certainly.
It seems to me that the effect of building all of the highly fraced natural gas wells is to increase production for a while. But (assuming Berman's allegations are true) once people figure out that natural gas wells built this way are not economic (ROI is very low or negative), the number of new wells built this way will drop to zero, and production will crash.
We know that conventional production was dropping rapidly, before unconventional started rising rapidly to overtake the loss, and raise production even higher. But with the loss of unconventional, conventional will not be nearly enough to meets needs. Natural gas prices are likely to rise a lot--say $12+. At these higher prices, the ROI situation may be better, and some more wells will be built.
So I am not sure exactly how things would work out. We could get bouncing prices, and rapidly dropping total production. Quite a few natural gas companies might end up bankrupt.
If prices are low, I can imagine companies with financial problems having problems maintaining existing wells. Some may lack funds to cap wells they no longer need, and have difficulty finding a buyer for what is essentially a liability. I don't think companies are required to post a bond for closing wells, are they?
And so they have http://investor.shareholder.com/bhi/rig_counts/rc_index.cfm
The drop in rig count is indisputable. What's not clear yet is whether it's a temporary response to the supply glut and very low prices following the economic meltdown, or whether it marks a more lasting disenchantment with the process. If operators are just holding off waiting for prices to recover, that's one thing. But if they're finding that the amount of gas recovered is not much more than the gas they burned to drill and frac the well, then the process is dead.
An alternative hypothesis is that the price of gas will rise. Off of today's $4 a mcf anyways.
"An alternative hypothesis is that the price of gas will rise. Off of today's $4 a mcf anyways." Exactly. $4.00 a mcf for natural gas is almost idiotic. The nation can easily bear a price twice that IF we use it efficiently.
RC
The time duration of a well is not of real importance, it is how much product can be recovered. Firms have various benchmark ROR's they shoot for (20% would be a good average) and if the production for a play can't meet their benchmark, they will move on. Decline at individual wells is inevitable, but firms have been acquiring huge acerage positions in the shale plays and designing hundreds and thousands of well locations for the play. So the rollover is really aggregate development and that is the point of the discussion. Nobody really knows what the shale gas resource base is and the debate about peak gas will go on for years.
Subsidies or tax treatment is currently a hotly debated topic. The President's budget, which will be up for debate when lawmakers return, proposes to change the tax treatment for various aspects of oil & gas development. If it passes, the economics of achieving the ROR noted above will change and IMO less investment dollars will be attracted to development. If you want peak gas sooner rather than later, then you would be for the changes. I hope they get nixed from the budget.
Agreed that time duration is not of real importance; it is how much product can be recovered. But Berman is suggesting that especially for horizontal wells, not enough product can be recovered. I can't image how ultimate production per horizontal well could be dropping as much as he says--from 1.14 Bcf per horizontal well to .59 Bcf per horizontal well. If a company is really aiming for 2.5 Bcf per horizontal well, this is a major issue.
I expect the tax problem is one we are going to see around the world, in both oil and gas. Countries are trying all kinds of stimulus plans, and they need to find tax dollars somewhere. Profit dollars of companies are shrinking, and incomes of the population are shrinking. Oil and gas look like one of the few industries that could be taxed more. Countries with oil and gas production are in particular pushed in this direction, since lower revenues from oil and gas are likely causing a problem.
The problem with higher oil and gas taxes is they raise the cost of production, including taxes. Companies may decide it is not-economic to drill, and lower production. Or if they do drill, they risk having lower profits. If higher prices can in fact be passed on to the consumer, the consumer will have less funds to spend elsewhere, causing the economy to shrink. But tax "experts" don't understand the connection of energy to the economy, and raise taxes on oil and gas anyhow--especially if they think renewables tomorrow will save us.
It is interesting that according to the EIA, US Nat Gas consumption is only down about 3.8% for the first half of 2009 compared to 2008. In other OECD (and non-OECD) countries Nat Gas consumption appears to be down by much more than this (11% in Germany for example). Gazprom would have us believe that consumption is down about 20% over-all in the regions it supplies.
Matt Simmons claims that the current US gas production figures are fiddled. One obvious way to do this and keep the storage figures balanced would be to over-estimate US domestic nat gas consumption. Just a thought.
I think with prices for gas in the US, there has been some switching of coal to gas use in the electricity sector, which may be happening gas consumption. Table 1.1 from Electric Power Monthly http://www.eia.doe.gov/cneaf/electricity/epm/epm_sum.html shows that on a year to date basis, 2009 gas usage is up by 2.4%, while coal usage is down by 12.7%.
I don't know that this would be happening in Europe--my impression was that gas prices in Europe were/are considerably higher, so I wouldn't expect the switching to occur.
I am inclined to accept the EIA data as being probably being pretty close to what it really is. Who would have the motivation and resources to distort it?
Well that's obvious - Dick Cheney and friends. Luckily because energy isn't a national security issue or anything like that none of this is likely to have happened and Simmons is clearly barking mad...
But rest assured no one knows shale like Halliburton. I know that because it says it on their site :-)
And further
http://www.halliburton.com/shale/Default.aspx?navid=823&pageid=2017
Once a company like Halliburton gets behind the idea that there is huge amount more shale gas, it is very difficult to back-peddle. Even if some analyst with Halliburton says, "By the way, production drops off a lot sooner than we have been assuming, so the ultimate recovery per well is less than is economic, unless the price of gas is very high ($12 or $18 or who knows what)," that analyst is likely to be ignored.
The fact that Halliburton is saying there is a huge amount of shale gas gives natural gas companies and their auditors comfort that the reserves they are booking are reasonable. If Halliburton say something is true, it must be so.
One point to make about anything Halliburton has to say about the shale gas plays: they don't make one penny from selling NG. They make their money by charging companies to drill for shale gas. As long as companies are contracting Halliburton to do the work they could care less about operator's profitability. Other then, of course, operators losing the financial motive to drill such wells.
I'll repeat some prior comments. I can be a little more open now that I'm no longer under contract to Devon. Not that that was a big secret but I didn't want folks to give my opinions excess credibility as I wasn't a Devon spokesman. Even before the NG price drop the profits from SG drilling were getting slim. Between ridiculous lease costs and ever increasing drilling/completion costs the profit motive was shrinking quickly. But for public companies in the NG production biz replacing and increasing the reserve base was more critical then profitability. Might not make sense to some but that's how Wall Street values such companies. Disappoint WS in this matter and your stock price suffers. And the boards gets unhappy and management suffers.
There is absolutely no new significant NG development on the horizon. Doesn't matter if most companies see a demand (and price) increase a few years out. There is virtually no significant capital for such efforts today. Except, of course for my new company (and a very few more) that is buying up world class NG drilling prospects at bargain prices right now. We've got $300 million targeted for the drill bit over the next several years. Our owner has made his past fortunes in the commodity markets and sees the current situation as one of the greatest potential in his very long career. Same old saw on how to make money in any market: buy low --sell high. A simple plan: build FF reserves now while drilling and project acquisition costs are cheap and wait for the inevitable price spike and then cash out the company before we throw ourselves into another energy driven recession. Thank goodness my odd habit of being the most successful during industry downturns is still in place. If all goes to plan I'll be heading to the house permanently in a few years. I'm ready: this rollercoaster career has taken its toll. If I were a smarter person I would have found a more stable career then geologist but I was doomed from my earliest days when I found rocks very interesting.
Thanks for your on-the ground observations. It doesn't add any to my confidence, though.
OK, here is a graph built from the EIA data on Energy Information Administration - International Natural Gas Consumption for May:
I'll need to look at this a bit more but at first glance it doesn't look very accurate to me - at least not on a European individual country level (Norway consumption down 47.1% YTD for example?). Taking it up to OECD regions it looks a bit more realistic.
OECD North America -4.2% YTD
OECD Pacific -8.6% YTD
OECD Europe -8.5%
If the North America has lower gas prices than most of the world, the numbers look reasonable to me (ignoring all of the bouncing around).
A quick check on the ICE exchange shows UK September Nat Gas prices at about 23p/therm. Which is about $3.80/million BTU which is only just above US Henry Hub prices. I would imagine prices are comparable in Europe.
StatoilHydro Profit Almost Wiped Out as Demand Slumps
Ok, first off this is actually IEA data not EIA data even though it is linked on the EIA site but it is not accurate on a country level - I've never looked at this report before but I'll try to find time to dig into it later but, for example, Germany is shown only down 1.2% YTD
This from Bloomberg on German consumption.
RWE First-Half Profit Gains 4.7% on Locked-in Tariffs
But the bottom line remains that there has been far less of an apparent consumption drop in the US than there has been elsewhere even though prices seem comparable.
Some ideas:
1. The prices you are quoting are current ones. I thought at the beginning of the year, when the drop in demand was greatest, Russia was using prices that were based on oil prices, but six month lagged, so these prices were quite high. These high prices may have contributed to lower demand in the first part of the year.
2. The US did a fair amount of switching from coal to gas for electricity generation, when prices dropped. My impression is that switching to natural gas did not happen to a significant degree in Europe. The US has a lot of unused natural gas capacity for generating electricity, as well as a lot of electricity generated by coal year around. This combination makes switching to natural gas when the prices drop pretty easy. I haven't looked very much at Europe, but my impression there is much less capability of switching from coal to gas for electricity. (Britain uses coal mainly as a supplement, in winter; France uses little coal period; Norway uses hydroelectric not coal; etc.)
3. The impact of the recession is largest on industry (compared to residential and commercial). Natural gas in Europe may be disproportionately used by industry??? In the US, a lot of gas is used by residential and commercial, which contracted less.
4. Actual supply unavailability in some parts of Europe last winter may have contributed to the drop-off.
And the above may well be the explanations but you have to admit it would be much easier to dismiss Simmons out of hand if the fall in consumption in the US more obviously matched the rest of the OECD. I have no idea where he gets some of his info from but I find it worth noting at least.
None of this matters. The Obama administration and his confederates promised us a uptopia of "alternative energy" that will end our reliance on fossile fuels such as NG and Oil/coal.
Solar, wind, geothermal, biofuels....they are the ticket.
Maybe its the desperation, but the usual (or is it unusual) caution gets tossed to the wind when descriptions of newly discovered energy sources include 'inexhaustible' and 'massive'. This leads to the inevitable, "Maybe we can run our cars off of this ..."
Absent any policy or an industry governor - Gail mentions Arthur Berman and energy consulting firms - the downstream infrastructure is likely to see the 'massive' and 'inexhaustible' investment while an accurate assessment of real reserves remains elusive.
Next, the 'sunk capital' arguments emerge. This is the way things are done all around the US's and world's economies. Shoot first, ask questions later. We have enormous infrastructures that make continuing claims against all resources and these claims are ... non- negotiable.
Not only is an assessment feedback cycle needed but one that starts looking at user priorities. This needs to be done now, when the issue is uncertain and setting priorities can be relatively straightforward. Allottments are commonplace with water rights, the same can be done with gas reserves; even if the amount of reserves turns out to be less, the proportion of gas supply to each user category can be determined ahead of time.
Hello! Department of Energy!
Priorities being building space heating/cooking, fertilizer (nitrate) production, industrial process (plastics, chemical, dyes, process heating), general electricity production (load balancing, base load particularly away from coal), and LNG export. Note that aside from export, all priorities here have fixed plant/bases of consumption. This should be the only qualification gateway allowing the use of gas.
Using gas for private autos would be expressly prohibited. Only commercial transport and mass transit fueled from fixed bases would be permitted, gas used only as a transition fuel to overhead electric from fixed sources.
That's right, as in none, zero auto use, excess would be exported under a rationing regime as LNG to Europe or Japan for hard currency (gold and silver, Phosphate as well as Uranium/Thorium trade). Some sort of economic transition is needed so that when the gas runs out there will be replacement processes. Hard currency will be needed for the post- debt collapse recovery phase.
Get real people! Sacrifices will be required. The first thing to sacrifice will be the cars. It's them or us. Private autos are good only for scrap plastic and metal recycling.
This is opposite to the 'Picken's Plan' which substitutes wind for gas electricity generation and gas for ICE car use. Picken's idea is good for him but a disaster for any possibility of longer term transition use, fortunately this plan is falling by the wayside on account of Picken's money- market difficulties. Nevertheless, the plan illustrates the infrastructure 'bias' that emerges almost instantly to support auto energy consumption. This bias emerges from powerful social (read oligarch) forces that see the profit opportunities that exist within the personal auto ambit.
The gas business is in a difficult situation of having to ration demand particularly when it comes from what could be its best short- term customer, but the longer term requires just this. Until there is a way to manage the gas use along with its production, it may as well not exist. Unless the gas is used properly, environmental issues that are now lodged behind credit and peak oil concerned will elbow the way to the forefront, systematically removing our ability to eventually transition at all. Gas reserves will be gobbled by auto use and consumption would then revert to (depleted) oil/coal sources that the gas would otherwise replace.
One way the industry can do this is to contract for long terms with utilities and long term industrial users which have fixed facilities, this would include prohibitively large royalties back to producers to penalize 3d party sales or resales. High dollar amounts and long time durations written into these contracts would 'lock out' users with non- fixed consumption assets. Per- unit prices would manage demand, the meter price of gas rising and falling to insure that demand does not outrun available supply. The contracts would also provide an investment base for gas producers support ongoing production directly. The same would also provide a royalty structure for (currently bankrupt) states. The opportunity exists for system- wide renegotiation/reform of pricing structures that can be knitted into these contracts.
This includes labor contracts and service environments; the outcome being to solidify a 'gas dollar' relationship that would enhance currency stability, particularly at a regional level. Exports would also do the same on a national level. Exports would also serve to reform our energy relationship with both Mexico and Canada; both would enhance currency (and social) stability in both these countries. How valuable is our gas? Cut it off and see!
What value is our (potential) conservation? Stop using and see! Without getting into current supply- demand imbalances, the current low relative price for gas energy compared to oil energy is a benefit that needs be extended as long as possible. This can only be accomplished through restraint and proper management of both production and consumption and avoidance of the usual 'boom and bust' cycles. This could be an argument for a management conservatorship with both environmental and production responibilities.
A similar system is in place in Costa Rica where Energy production and the Environment are under one ministry.
There will be no change in the energy picture, no solution to the 'crisis' until the public gets serious about personal automobiles. If there is no change from the auto- centric status quo energy starvation will be amplified until all consequencial fuel sources are exhausted.
It won't matter how much gas we have.
We have such a belief in the free market system, I doubt anyone is going to try to make the fixes you say.
At the same time, gas is needed as a backup to wind, so we really need to keep gas going to keep wind going.
We have such a belief in the free market system, I doubt anyone is going to try to make the fixes you say.
At the same time, gas is needed as a backup to wind, so we really need to keep gas going to keep wind going.
No we don't. You obviously don't know that the auto industry could have deployed solar cars, hydrogen and electric cars. Electric cars now get the equivalent of 300 mpg.
Every day we waste putting a single dollar into fossil fuels is a wasted day, a wasted dollar.
Ditto with the heating of our homes (solar/wind) and industry (solar/wind/geothermal).
I am missing something. Electric cars need to run on something. Wind can't do it itself--it is more an extender of natural gas and hydro--perhaps coal.
I am not aware of solar or hydrogen cars being anywhere near a possibility.
Huh? SUNN Solar Electric Kit Car Vehicle. Admittedly it's a bit WWI proto-Armored Personnel Carrier in appearance to turn heads at an auto show:
Revi at peakoil.com tools around in one - he was profiled by CNN last year, where he did a bangup job of downplaying the Doom with Capital D vibe the producers expected.
Not that these will be mass produced tomorrow, or that doing so won't create bottlenecks of various diameter - need for greately increased production of batteries/panel/what have you - but they do exist and work - Revi lives in rural Maine, by the way.
There's also John Howe and his solar tractor - also in Maine - a guest contributor here too, as I recall.
Hi Gail, great article, very timely.
First of all, long term contracts would be in the producers' interests first and foremost. Government could be on the outside except to provide a legal/transparency framework. Companies that committed resources for long time periods would have gas to sell long after other producers have depleted themselves out of business. The contracts, or 'Consumption Licenses' would be investments, having cash value like Taxi Medallions have in New York City.
These contracts would have two features:
- Per- unit prices will be set by producers to control consumption.
Since the investment aspect of the contracts require it, prices would be set to conserve the gas (or oil), not to encourage consumption of it. However, since gas (or oil) is actually worthless while embedded in the earth, some gas (or oil) will have to be produced to service operating costs of the producer and allow dividends, pay salaries, production expenses, etc. Demand itself would set a high per unit price, higher than the cash flow model which assigns greater values to flow rates rather than to value of work outputed using the gas (or oil).
Since capital requirements are met elsewhere, the price per- unit would better reflect the true work value of the gas at the same time the work value would still provide a substantial demand. In other words, gas that is expensive would still be used and still be in demand, rather than the current 'price at the floor' regime which inaccurately prices the work value of the gas (or oil).
- Investment capital would be priced into the contracts independent of per- unit price. The capital requirements would be met by investors directly rather than by the diversion of unit cash flows back into production (in an auto- destructive feedback cycle).
Needless to say, only contracted investors could purchase or use the gas (or oil) at the meter (or at the pump). Third party sales would have to return a large royalty payment back to the original producer, which would make such sales unprofitable.
Separating investment from per unit cost would do two things; allow for more (replacement production) since the contracts would give companies more investment capital than production derived from cash sales might allow at any given time: (see Chesapeake Energy's cash squeeze last summer). Producers would thereby free investment from cash flow constraints. For instance, if there is a 'flood of gas' from cash- flow dependent producers, contract producers could hold their gas off the market because their contracts provide a funds reserve. Contract producers would avoid the price wars while allowing at the same time cash- flow producers to bankrupt each other or deplete each other out of business.
This is somewhat parallel to KSA bankrupting the English and Norwegian North Sea producers in the 1990's by means of an oil price war. The Saudi's 'contract' was their enormous reserves, here the reserve would be investment capital. The capital would be a proxy for the reserve that gains value as the competition depletes itself. Both the natural reserves and the funds that stand for them gain value.
As cash flow producers deplete, they themselves would enter into longer termed production contracts simply to survive. It would be the only sure means of acquiring capital. Eventually, all production would be committed to contract purchasers; it would allow producers to escape the 'depletion trap' or the punitive feedback cycle of capital chasing diminishing cash flow returns.
To buy gas (or oil) one would have to invest in gas contracts denominated in $1 million- to- $100 million increments, only these 'investment licenses' would allow the license holders to purchase gas. Obviously, this would favor utilities and large fixed industrial users. The duration of these contracts would be 50 or 100 years, the producers guaranteeing production for those intervals and returning an inflation- adjusted principal at the end of the contract period. No gas (or oil) left, no return, obviously ... so the producer has the incentive to both produce product but not too much or too fast.
The producer gains the incentive to manage his energy capital, either by using the investment funds wisely to expand recoverable resources, or to purchase other reserves (taking them out of the per- unit pricing regime) to manage/constrain demand and to not damage his fields. A hundred years is a long time to produce an amount of fossil fuel, but if the incentive is there, a producer will do just that!
Shares would be sold in contracts, as with Berkshire- Hathaway.
Selling gas (or oil) for auto use would void the contract with producers having their capital redacted without recourse. There would be other terms (which I won't go into here.) Actually, such an agreement would not be necessary as contract participants would see - and gas would be priced - to insure the supply lasts as long as the term of the contract. This by itself would eliminate auto use of the product, which is stupendously and tragically wasteful.
Applied the crude oil, the same results would occur. Cash- flow operators would deplete themseelves out of business while producers selling into long term purchasing licenses - with unit prices set to conserve product for the length of the contracts - would have oil to sell for the duration of the contracts long after the cash flow producers are ruined.
One producer using these contracts would set the stage for the concept to go 'viral'; depletion is the incentive. Depletion - like rust - never sleeps and producers can easily see the advantage of not self- depleting to chase a market that has proven itself to be witlessly self- destructive.
One way to look at this is that the purchase license would flatten the depletion leg of the Hubbert curve from the dispersal model (see Webhubbletelescope's webpage) to a flat, horizontal line, albeit at a far lower production/consumption level.
Another way to look at this is to consider what a customer here is buying: a guarantee of fuel for his and his children's lifetimes. Not much at any given time, perhaps, but fuel will be there. This is in contrast to the 'buy it and use it up now' alternative. Here, consumption itself is turned into a product that can be bought and sold, with its value increasing proportionate to the overall rate of depletion of whatever the item is that is being consumed.
Ultimately there would be consolidation to a small number of producers with monopoly control over energy sources, but managing/controling monopolies is much easier that having to gin up energy out of nothing!
Or living in a cave as a hunter/gatherer.
This is not a new idea, New York City taxicab medallions have been used since the 1930's. Many NFL teams require a season- ticket buyer to purchase a 'seat license' prior to buying the season ticket itself. One or the other is transferable, making the ticket or the license an investment rather than a consumption item.
Why the 'high- falutin' economists haven't thought of this beats the livid hell out of me. I guess it's the cocaine ...
More here:
http://economic-undertow.blogspot.com/2009/07/modest-proposal.html
Depletion - like rust - never sleeps
Another great one-liner quote.
The idea of "Depletion Management" as a rationale for applying TOD models such as dispersion and HL may provide some practicality and supply a business spin that could generate some interest. The basic premise is that one can not manage a supply of dwindling resources without having a quantitative understanding of the rates and constraints on the supply. I assert that speculation in prices more than anything else arises from uncertainty of the resource base. As far as I can tell, no one really looks at this and it fits in well with Steve's ideas.
This is no longer a free-for-all and we have to start thinking about how to treat FF energy as a precious commodity suitable for real investment.
(Any cocaine references implicitly include Kudlow, of course)
You have obviously thought this through more than I have.
I would agree we would need to make fossil fuels last, but it seems like there is so much other uncertainty in the world that it would be hard to do--peak minerals; government instability; declining availability of equipment for mining; need for pipeline for flows (especially for natural gas) and problems with inadequate flow to fill the pipeline; need for electricity for processing. Somehow it seems like a version of BAU needs to be kept going to make it work.
Hi Gail, WHT ...
Stability can come from anywhere; people look for in in the wrong places now, and since the stability cannot be found in these places they assume it cannot be found.
If price stability can orient itself around some fuel - let's keep w/ the gas - and some discipline crystalizes around it, the difference between the stability in one area will be in high relief against the instability eslewhere. What happens next is a form of self- organizing.
Stability itself is destablilizing, IOW.
Compare to 'rallying the troops after a rout'. Since its an organizing regime rather than a process, entropy is not a central issue. The idea is to direct greed in another, more rational direction. Believe me, the greedy aren't choosey about which tools they have available as long as there is a payment in the end. At some point the greed itself takes over and becomes the organizing principle. At that point, peak whatever isn't a problem it is the solution.
Currently, the establishment is mentally locked into the 'bigger hammer' approach which is in this case the bigger dollar approach. Okay, it doesn't work. Hmmm, where is a 'plan B'?
The idea that resulted in the financial crisis was clever, but the attempts to resucitate it are not which is where the folly lies. A bit more cleverness and the financial crisis itself would not have happened. The distance between a collapse and no crisis becomes very small. It's the approach or fulcrum point or axle or balance point that has to shift.
I realize that 'BAU' is used here as a kind of retort or dismissal, but won't take it as that. The term means to me an understanding that some kind of framework is going to make demands that may appear counter to what the initiated consider to be the most appropriate response to the overall depletion regime. I can agree about the inevitability of such a regime, but the details are left (permanently) blank. These blanks are opportunities for experimentation.
Certainly, the 'normal' BAU is repeating the same- old exploitation routine over and over ... which is, unfortunately the default position. But ... what this means is the gas is giving us a window of opportunity to invent another approach. If those in control - in this case producers - have the wits to grasp the opportunity ... to be clever.
One thing about Oil Drum; nobody here owns an oil/gas company or makes policy. But ... at least in the short term, it probably doesn't matter, the ideas themselves do.
For example; the alternative methods of producting organic agriculture can be found in the USA, already. Mennonite/Amish farmers have been producing crops at a surplus without petroleum inputs or controversy for a very long time. This is an excellent model of sustainable agriculture.
The 'Use License' (or two- tiered investment structure) has been in use in New York City to manage the number of taxicabs. Taxi medallions are excellent investments; the last one sold on the open market brought a return of $600,000! The system also keeps the City from being overrun by taxis.
The ideas are out there in out of the way places. It's a matter of adaptation and then finding a forum of understanding. I personally think the nunber of ideas is inexhaustible and that the 'depletion concept' is so new that most don't understand it enough to make some kind of edifice out of it.
It's like the Industrial Revolution in 1776. Who besides Adam Smith would understand it? So the race is not between civilization (or BAU) and collapse but ongoing depletion and figuring out how to make it work for you (and you and you and ...)
Good posts, Steve.
The problems of the existing market place are IMHO caused by the fact that the market is intermediated by rent seeking "profit maximisers".
I believe that the solution lies in evolving - from the ground up - a "Peer to Peer" market architecture within a partnership framework.
The key tools for peer to peer investment in this are:
(a) Equity Shares - ie "open" proportional shares (rather than "closed" shares with a £, $, € par value); and
(b) Units - redeemable in production.
I have thought for some time that the market in natural gas is the best place to commence a global market in energy - an International Energy Clearing Union - due to the relatively homogeneous nature of gas.
In this model the gas price to consumers is ramped up through the imposition of carbon levies, and the resulting Gas Pool of proceeds is shared proportionally with a networked service provider "cooperative of cooperatives" and the producers themselves.
So transaction intermediaries morph to service provision. We already are seeing this trend as sovereign nations take back production from Big Oil and contract them instead.
The "Carbon Pool" fund from the carbon levy is then used to invest in the future production of viable renewable projects (EROEI due diligence necessary) and the future energy savings (NegaWatts) from energy saving projects eg retrofitting CHP.
This investment (which is an interest-free "energy loan" in the hands of the project) then gives rise to an "Energy Dividend" of Units redeemable in (say) 10 Kilowatt Hours or equivalent. So the result is that the Carbon Levy is essentially a compulsory investment with a return in energy.
By monetising carbon energy in this way, we can also solve the problem of massively profligate energy use in producer nations by replacing subsidies with energy dividends from the profits made by charging a full market price. Unless people perceive something as valuable, they waste it.
Hi Chris!
First of all, I would like sometime to sit down and discuss all this because of the scope and complexity of the puzzle; the bits and pieces added to internet comments don't do the topic justice. But, smy being in the States ... that will have to be put off for the time being.
I've toyed with the idea of going to the ASPO meeting in Denver, but ...
Second, there are a lot of parallels to your pricing regime and mine, I suspect that part of this is because the parameters of the central issue - properly managing depletion and its consequences - only allow a range of outcomes. Going to Saturn to gather methane and ammonia isn't going to do ...
I figure these must allow profit to conservation, properly manage depletion, switch the emphasis from consumption to energy (or some other) return, stablilize the exchange rate (energy for goods/currency), be self- enforcing and price the correct aspect of the energy cycle. i don't know how you personally frame your parameters but I bet they are similar. I think most people who examine peak oil or other resource depletion issues have a similar baseline approach or at least have concluded the current regime has lost usefulness. I would say that is certainly the case for most of the community here.
One advantage of rent seeking in general is it allows for profit without work and is strongly self- enforcing. Anyone who invests into a 'position' will not easily allow that position to be diluted. Over time the relationship between the producer and the rent seeker becomes established. I hate to keep bringing up the NYC taxicabs, but it is a textbook example. New York City cannot add to the number of 'taxi permissions' without a revolt by current permission owners. They have a large investment and will fight to keep it undiluted which is what would happen if the city sold more permissions. At this point there is no need for a revolt because New York knows limiting the number of taxis in Manhattan is good for the city because the high price of permissions increases the value of any permissions the city might sell in the future.
The outcome is a duopoly, where the interests of the producer (the city) and the 'consumers' (the taxi owners) overlap.
That the taxi owners personally benefit from this duopoly does not effect the value of the city's ability to sell permissions or of the value/fonction of the taxi service, itself.
Whatever these 'things' wind up being called, the concept is valid. At bottom is the relationship between the fuel production and the stakes of the users.
As far as the units, I have the idea that the fuel/cash relationship is solidifying. Blame it on deflation. I figure the best way to measure deflation is to calculate the ratio between conventional crude production in 2005 relative to production now. 3- 4%, that the rate of GDP deflation. The alignment is between economic activity and the amount of oil produced, which reinforces the value of the currencies that are proxies for the production.
I guess that is another way to look @ Peak Oil; when production is expanding the currencies that are used to buy oil are proxies of consumption which is inflationary. That would explain why the Yen was not a petro currency during the 90's because of Japan's deflationary contraction; better to borrow Yen and 'invest' in some other high yield currency (Euro) to purchase consumption. Hmmmm ...
As China seeks to internationalize its currency the Petrodollar is becoming established. The world's strongest trade vortex is now USA/KSA rather than USA/PRC or there is at least parity between the two trade environments. This means stability ... where that leads is a long converstation that has no place here. But the key, nevertheless, is selling/trading production. So, basically I agree with you on both of these ...
A tragic waste it is, too. I have the idea that the 'energy deflation' idea is too new, it hasn't had the opportunity to be culturally absorbed. There are a lot of unknowns as well. People don't instinctively understand deflation the same way they grasp inflation, which they and their parents (and grandparents) have lived with all their lives. It's hard to grasp and more experience will be needed before any consensus is reached on how best to cope with this deflation.
Steve,
First off I'll say thanks for your contributions. Always enjoy reading your posts.
How many Mennonite/Amish farmers do you know? Lot of them farming where you live? All without petroleum inputs?
This refrain does not match my direct observations over the past several decades here in western NY. Mostly mennonite here I guess, although I long ago gave up on trying to discern the differences in the various sects.
Hundreds(?) of farms & internal combustion is no stranger either on farm or in their logistic support chain. Tractors are ok as long as they don't have rubber tires. Seems like every other family has a small band saw mill. Personal auto transport is just fine as long as they're not driving, . . .
Kelly, I strongly concur. Amish productivity will go down dramatically without fossil fuel input for many reasons. They are not peak aware or prepared. At best they will hold their own, more realistically they will be poor and hungry with everyone else. In fact, they already are under significant financial and social stress with the economic downturn. (Personal observation.)
I am not panning the Amish or others who are making similar preparations, in fact I am making similar preparations myself. But I think it is beyond foolish to think anyone can live like Amish post-peak and prosper. If my preps provide any benefit, it is only because TEOTWAWKI is upon us. That is not very likely anytime soon. None the less, I'm preping, just in case.
The Amish are as culturally blind as the English to the impending economic and energetic downturn, but at least the Amish have skills that may come in handy and a work ethic that will always be of value. This leaves room for a mutually beneficial relationship if you can see it.
Cold Camel
Of course, there is more variety than I painted with the 'broad brush'. In northern Virginia, the Mennonite farmer raise cattle and use (some) machinery but much less than conventional farmers. When I was a lot younger there were a lot more farms of all kinds. All my family's neighbors were farmers who lived on farm income.
In western Marylend there are Mennonite farmers who use tractors and pull implements. In southern Pennsylvania there are more farmers who till/cultivate with animal power and avoid engines. My parents would explore this area (I grew up in northwest Virginia and we traveled 2- 3 hundred miles in all directions) the 'Amish' were quaint. 40 years later, they are still quaint!
I have never seen a Mennonite watch TV. I've seen Mennonites on TV.
You are absolutely right, everything is a matter of degree. I'm not sure it matters whether the Amish think strategically or not. These farmers do have the right instincts and they have a social structure that reinforces their instincts. Bully for them! Sometimes it's better to be lucky than good.
BTW, most conventional farmers in that part of the world have sold out to RE developers. This makes it hard to compare outcomes.
I have never seen an Amish industrial feedlot/swine confinement or chicken factory. I've never seen Amish run multiple combines or operate 'mega- farms' growing corn/soybean and nothing else. I've seen a lot of Amish horse- drawn wagons. I've seen Amish kids herding sheep on foot, like in the Bible.
I've never seen Amish herd cows or shoot coyotes from a helicopter. In fact, I've never seen or heard of a Mennonite hunt or shoot anything. (I know what you are thinking. Don't go there.) I've never seen Mennonites @ a rodeo or a 4H fair.
The town near where I grew up the town drunk drove around on his tractor constantly. He had no driver's license. I've never seen a Mennonite drive a tractor on the highway for any reason, drunk or sober. That doesn't mean it has never happened, it means I've never come across it.
A friend of mine had Mennonite next- door neighbors. Pleasant but insular and hard to get to know. They kept trying to buy my friend's place. He lost it eventually in foreclosure (I think the Mennonites did indeed buy it.) The farms together were pretty small. Around 100 acres or so. It is hard to succeed on such a small farm - never w/ commodity farming.
No Amish Mercedes- Benz.
:)
cold camel, which state are you reporting from your personal observations?
West Virginia ("failed" Amish community)
Tennessee (Lost their carpentry jobs)
Indiana (English plow, Amish collect rent)
Wisconson (Slow furniture sales- From an Amish man)
Alaska (Nope. They ain't crazy.)
From an American perspective, subsistence farming is a bleak existence, even for the Amish, so most of them are small businessmen. Most of their businesses are not peak-proof, so they are suffering.
Most internet savvy peakniks are concerned about their personal lack of skills. The Amish have those skills but they are exposed to a different set of risk factors caused by blindness. So the trick will be for those of us with understanding to pair up with those with practical skills. Frankly, I'm not sure what will be in short supply.
Cold Camel
Steve,
There are lots of hard up hillbillies running car trunks full of cigarettes up north and selling them on the black market like pot.
All you need is a connection with the son of the bootlegger who bought the booze your old daddy used to make.
I wonder what the penalties are for running a cladestine cab service in NYC on the call girl model.
I expect that if I lived there I could soon accumulate a circle of close friends/customers who would need frequent favors,namely a ride here and a ride there and a ride over yonder too.Cell phones are real game changers!
A church car shuttleing it's members around would be the very thing,and I could minister to my flock as I haul them around in a church owned car.They could meet for worship in my bar,which would close to the public for services and drinks a couple of nights a week.
Whoever vouches for an undercover cop gets kneecapped.
This may be what some people refer to as lateral thinking,but to me it's just survival in the asphalt jungle.
A 600,000 dollar taxi liscense(s) is a very good reason for lots of people and businesses to move to greener pastures where the cost of living and doing business are more reasonable.
But they seem to be doing ok ,don't they?
But I never heard of any body leaving Florida for NYC when they retired.
Ha ha! Poor ol' daddy was in the FBI, don't think J. Edgar would have approved. I knew those old hillbillies were running something, however.
Pot is always a good business!
As for cabs, the medallions apply to yellow taxis. There are also car services, livery or 'black car' services, jitneys and private limousines.
Only yellow cabs can pick up street hails in Manhattan and at the airports. The Taxi and Limousine Commission (and the NYPD) strenuously enforce TLC regulations. License suspension/heavy fines are common for small infractions. Medallions are both excellent investments and provide a 'dividend' in that medallion cabs run 24/7 with the medallion holder claiming 30- 50% 'rent' from drivers - before gas, taxes and other expenses.
Car services use dispatchers to pick up calls. These can take you anywhere - San Francisco if you like - but cannot pick up street hails anywhere in Manhattan. Most won't pick up street hails at all. Limos are usually hired by the event and livery services provide radio call service in Manhattan that used to be performed by yellow cabs. At one point there were no cabs to hail because all were on 'radio calls'. Adding livery service returned more yellow cabs to street pickups.
Taxis used to be run- down jalopies that injured riders in accidents and couldn't arrive @ destinations. Taxis with 1,000,000 miles weren't uncommon. The city decided that reforming taxi service was good for business, particularly tourist business. It mandated new, spacious cars, credit card readers, receipts, and cleanliness. It puts inspectors on the road hailing and calling cabs and car services. Getting a hack license is hard; the work is very difficult, most drivers are foreigners earning small amounts. Drivers don't rock the boat.
There are private transport services (including transporting city school children). Some are fly- by- night operations. There are also jitney services along major arteries. Some are just dudes w/ passenger cars, picking up 'fares' for a dollar or so. Some are tolerated while the rest dodge the NYPD ... as you suggest.
A lot of retirees are moving to the city, it's fun if you have the money. I can likely find stories online. I could see people moving into my old neighborhood. New York is safe, believe it or not, a lot safer than driving.
A $600,000 medallion can be sold to someone else for $700,000.
Business in NY is hurting just like everywhere else, (except Goldman- Sachs). The large market is balanced by the high barriers to entry. Rental rates, electric rates, taxes, business fees, insurance requirements ... all are expensive. The annual lease rate for the sidewalk (for a hot dog cart) in front of the Metropolitan Museum is $650,000.
Dude,
I personally think the electric is on it's way in while the auto itself is headed for a major die off but not extinction.
(I've been stuck in the house without any new books playing nurse for several days,so if I get tedious,regulars can just skip over my post.This one is going to be a long one and it will take several tries to get it all up.But if it doesn't attract some comments I will be suprised.)
No one will deny that the modern US is a country built around the automobile,asphalt, and formerly open spaces.The auto is our culture's single most expensive and pervasive personal status and power symbol,and to your nieghbors,coworkers,and the man on the street you are "what you drive".The power and vitality of the car culture is such hat although there are many people willing to criticize it,there are none in positions of power so foolish as to try to pull a Delilah on it.
Our automotive Samson is with us to stay,and nothing short of the absolute impossibility of supplying him with gasoline can kill him.I doubt that even the combined might of our armed forces could force him into a barbers chair and shave his head.We've already proved that we are willing to support the worlds largest military establishment,and to use it,in order to keep him in gas. My brother in law who recently retired from the regular army says that the young guys would desert if someone comes for thier wives cars,and that an ill tempered general would will just shoot anybody dumb enough to deliver such an order-and that anyway generals know better than to issue orders which will not be obeyed.
My contention is that since we're stuck with him ,we need to manevuer him into the barbershop for a serious haircut if we can.And now that we are the proud new owners of our shiny new GOVERMENT MOTORS car company,I suggest that it just might be possible to pull this tough trick off.The carrot in my scheme is a nice sweet carrot in the form of a gauranteed market,and the stick is withdrawal of visiting priveleges at the tax payer supported hand out cat house.If this is handled right we could take a major step forward towards conserving oil and other scarce resources while at the same time,by combining my schemes adoption with some other changes in the way we do things, we can salvage a lot of the uncountable billions we have in sunk resources such as highways and the millions of houses built in former hay fields.
It probably isn't possible to build a truly sustainable car,in the sense that purists define the term,but it is possible to build a car that is safe,affordable,economical to buy and to operate and that will last almost indefinitely.Such a car as I envision will also be extremely reliable and VERY easy to repair.
Now of course there are many people who think we can somehow turn our backs on the car culture,but in my estimation they are so flexible in thier thinking that they are gazing into the nether end of thier own digestive tract and have no clue as to the realities of politics.They won't support my idea, and the hordes who make thier living servicing the industry will fight it tooth and claw if it ever gets off the ground.To be perfectly honest in this respect,if I can get a nice comfy salary out of it,I'm perfectly willing to go around believeing that it can be done POLITICALLY,at least as long as my salary is funded. THERE IS NO QUESTION WHATSOVER THAT IT CAN BE DONE,AND DONE EASILY, QUICKLY, AND CHEAPLY from the technical point of view.
My plan begins with the establishment of a planning comission composed of about a hundred good engineers and a few specialists from other physical sciences to make sure they stay on course.Plus me of course.I'll be the figure head/tv guest and later the Oprah selected author of a "How an Irish Hillybilly Farmer Saved Western Civilization." Damn I might even get to meet Oprah!I will of course also need a lot of young female engineers,pr flacks,gofers,accountants,etc, on my personal staff in order that they will be positioned to advance professionally by virtue of having participated in this endeavour.....
Not more than tweny percent of these engineers shall have ever worked for a car company, nor be descended from holders of more than 100,000 dollars worth of automotive stock shares,or married to such a stockholder.Not less than fifty percent shall have worked for manufacturers of durable motorized machinery.The twenty percent max that have auto experience shall bring coffee and doughnuts as desired to the others and wave the palm frond fans that keep them cool.They will also be permitted to design the floor mats and the ash trays and any other minor accessories but on pain of death they shall not design any drive line components,or even see the design work thereof in progress.
So the engineers are given four months max to draw up a building code for the future automobile and design the first generation of it.IIrc correctly they did a fine job in WW2 about that fast.Speed is more important than perfection,as a drawm out program would die the death of a thousand cuts.
Chapter two will be up later this afternoon.
chapter two
I'm no engineer but I THINK I have a good layman's understanding of some of the basis principles,and I do know a little about machinery.I'm guessing that the new people's car will be an easily recognizable variation of the front wheel drive ,transverse engined,unitized compact that is so common today.(Besides which I get to interview the engineers ,right?How could I ever be expected to move up in the world w/o a little insider knowledge to help my portfolio along?)My reasoning is that this basic design offers a combination of low wieght,traction,safety,fuel economy,durability and initial cost of production that will be hard to beat.It will probably come "tall",meaning micro of course,venti and grande,as there are legit users of larger vehicles.
It will be unitized because that's the stiffest, lightest,strongest,and cheapest way to build metal boxes in large numbers.It will be built mostly out of the same steel in current use ,but with more aluminum ,etc,as it's longer life and tough fuel economy specs will require keeping the wieght down.More exotic materials can be incorporated later as prices come down,if they come down far enough.
They undercarriage shall be built so that the nooks crannies corners and jig holes are mostly eliminated ,and the remainder of any such dirt and salt catchers are shaped in such a way that a trip thru a car wash cleans them well.The whole bottom ten or twelve inches of the unibody shall be hot dipped in zinc or otherwise treated in such a fashion that it will last forty forty years in salt country if washed occasionally during the winter.
The unibody shall be streamlined to a very high degree but not to such an extent that interior space ,ease of entry exit ,etc, are compromised excessively-after all people are going to fight this car tooth and nail ,at least in the beginning,if it is ever built.I believe a small loss in areo efficiency will be more than made up for in more and more usable interior space.(Ample access space under the hood is also an absolute must.)Body aero design shall extend to the under carriage,radiator air intake,etc.
The reasons I propose building this car to well include but are not limited to limiting the amount of embedded energy used in each car on a per mile or per year basis,and reducing the incentive to trade cars simply because the old one is looking a little shabby.Such a design also reduces the non productive wheel spinning of purchase sales taxes,title fees, used car advertising,etc.if all cars look a like or nearly so there is also a major incentive removed to buy them as status/power symbols.Of course some other product or combination of products would soon fill his void,but it's hard to imagine that these products would be so environmentally troublesome as 4by 4 f 250's and Dodge Vipers or even Impalas.
There will be some who say that by locking in such a design I would lock in obsolescence,but the law of diminishing returns tells us that although a few pounds more could be saved here and there,etc,a few tears down the road,the gains will be small ,and therefore very unlikely to ever offset the savings of a highly standardized design built to last.Firthermore although i do envision the survival of the automobile,IO expect fuel to be very expensive,and more than likely tightly rationed,and that as time goes by,the average driver will drive fewer miles per year,and with more passengers,negating any smallish wieght /areo penalties when compared to a newer marginally better design.
As many components as possible shall be standardized between the size cars,and all components designed to be kept in production for at least five years,unless he redesigned component is fully backward compatible 'plug and play' with the component it replaces.Engine cylinder heads,manifolds sansors, control modules etc can thus be upgraded if significant advances are made in design. Ant engineer who signs off on a component that fails on a regular basis within the first hundred thousand miles other than routine replacement items such as brake padgets his liscence lifted.Engineers can buy insurance to cover this if they want to design cars.;)If the component is internal to the engine or transmission,requiring major disassembly to replace it,he goes to jail and fixes the govt owned ones dropped off there for repair for twenty five cents an hour for five years.;-(
All components that are necessary to the safe and reliable operation of the car such as fuses, relays,starter motors ,alternators ,fuel pumps,fuel filters,light bulbs etc will be so designed and located that they can be quickly and easily replaced with a minimal tool kit supplied with the car as a deleteable but standard feature.
Each car will come with a flash stick or cd or other electronic manual that is open sourced and contains the complete shop manual (often only available to dealers)and all trouble codes will be plain English/Spanish.French,Russian ,Chinese ,etc may be enough extra to cover the costs of translation.If your readout says you need a new oxygen sensor and there is a picture of it, in situ,and you have the wrench that fits it,there is no reason for a young woman to be charged three hundred bucks by a bunch of unscrupled male prostitutes to install it for her when she can slip on her gardening jeans and gloves and do it herself in a half hour,tops..You just unplug it,screw it out,screw the new one in,plug it back up,and go.I know that that's beyond the scope of programmers skills but janitors chane out light bulbs all the time.I've seen a friends twelve year old make harder repairs without supervision.You might have to clear the code,but that should be easy enough for someone who has finished a single course in computers.
All components shall be clearly labeled,as with colored dots or numbers that enable you to find out fast what they are and what they do by booting up your computer.And they stay put for the duration.If the wiper relay is HERE today ,it remains HERE for the duration of the model run.
That way amatuers who under like me who understand how most of this stuff works can findit w/o resort to the manual,and that way we can impress our girlfriends with our expertise.(Half of being a good mechanic is possession of technical knowledge and critical thinking skills but the other half is simply familiarity with the product and the tools.Lots of secretaries cam MANIPULATE WINDOWS XP faster and more accurately than the it professionals who taught them the system)Paint will come in a dozen or so flavors for the public ,and one for the federal govt,and one for state and local govts,excepting police,fire ,ambulance cars of course.There will be just plain paint-not three coats of primer,four coats of color and two clear on top of that.Two tone-sure ,but there will be a five hundred dollar luxury tax for that,to be spent on renewable buildout.Ditto carpeting,all other frills.Let the back yard guys customize cars on the side on Saturday mornings if they want.
Six sets of brake pads(front and rear times three models) and three sets of exhaust pipes and probably only one fuel pump and one fuel filter will cover every one of these cars for five years,and probably longer.Two window crank apps -right and left can cover all three.One kind of tail light bulb will cover all three,etc.
The chassis
THE IDEA IS THAT THE CAR WILL AGAIN BECOME OUR SERVANT AND THAT WE SHALL AGAIN BE IT'S MASTER.
A car company will build cars,and price them to make it on sales revenue,not service revenue.Dealers will sell cars,and do warranty work,and not much else.
Engine and transmission mounting points and wiring and plumbing will be so organized as to allow the entire engine and transmission to come out and go back fast.And a new generation engine and transmission will bolt right in,if it is available and needed.Swap out the engine computer and wiring harness and you're on the road again-in three hours,not three days ,if they can match the job the Germans did on the old Beetle.
And if a good electric power train becomes available in five or ten years,cheapo,you can bolt it right in and put the battery in the floor of the trunk,which in previous times was built flat and strong for that very purpose.
Of course none of this has been worked out in great detail,except the getting mine part.Feel free to disagree,this is but a thought experiment-unless it goes viral.
Chapter three,
If we could get Uncle Sam to gaurantee the purchase of a given number of these cars for the use of our of our masters the bueracrats ,and a certain number more by states,school systems,etc,It would probably be enough to get this project off the ground-if the more enlightened part of the green movement will get behind it,and enough well intentioned talking heads and bloggers and celebrities will endorse it-and if lots of young ladies adopt the attitudes of thier hippie grandmothers who only dated the men who refused to go along with the bau of that day and time.
Govt motors could build the first five million with more loans(gifts) if necessary in order to grease the wheels and cut the deals necessary to getting the program adopted,and after that all other manufactures could participate or not as they desire.But I envision a sliding scale tax that rises every year on the noncompliant models that would make compliance the only real option after a few years.
Doubtless this is strong and bitter medicine but if we can preserve our personal mobility we can preserve our suburbs. Eventually the folks who live close in and retire or lose thier jobs permanently can sell thier houses at a premium and buy farther houses farther out from those squeezed hard by commuting costs.Local stores could be opened inside or near nieghborhoods where they are not presently allowed,or delivery services that pick up medicines ,groceries,etc ,could be encouraged ,cutting fuel use a lot.If the luxury tax levied on non compliant models is spent on renewables or conservation,an enormous amount of support for such a program could be generated from /by non drivers,greens,retirees,etc.
Could it happen? It's at least possible that it could,and stranger things have happened before.
It's not so hard to sit around and blog about the death of the car but living thru it is going to be an incredibly traumatic experience if we let it happen-the housing default /commercial credit mess would go from the present day brush fire that threatens to finish us off to a conflagration that will leave nothing but financial ashes.Who is actually dumb enought to think we can just MOVE millions of people from where they live to someplace where they can walk or bike to work on fairly short notice?
A scheme of this sort has two things going for it;undoubted technical feasibility and the POSSIBILITY that a coalition of interest groups could force it to happen.
Hi OldFarmerMac:
Your post has definite merit. Certainly the reasoning you include in your final two paragraphs it true, however unpalatable to the hardcore. To your logic I would add the convenience of tha auto to the pursuit of the sex trade(s). A quick google search returns some interesting stats. "1) 25% of total search engine requests are porn-related. 2) 8% of total emails are porn-related. Average daily pornographic emails are 4.5 per internet user 3) 12% of total websites are pornographic 4) 25% of internet sales transactions involve porn" Those hoping to eliminate the personal transport system need to evaluate the fact that even the Koran worshipped by Islamic fundamentalists provides for "multiple wives / marriage by personal agreement / divorce by individual decree" primarily as a means to legitimize prostitution: eg. the male client and the prostitute first agree on price, then self-declare themselves "married", then have inmaritial sex, then the man declares divorce. The point is that in OECD societies the personal auto is a key enabler of the "western norm" substitute for this system, which is a quick shag in a roadside motel room or some act in the car itself. If you're planning to eliminate the personal auto in North America, you'd best start planning some system such as the Koran implements or expect HUGE resistance. Even the US Navy realizes that it requires very careful selection to assemble a submarine crew capable of being at sea for many months without access, and even they bring the subs in long before any physical constraint enforces it. The point is that i strongly doubt that proponents of "public transit only" have even considered all the factors involved, and the resistances they will encounter. The personal auto in not simply a means of transport.
As to your solution, my question is "If I were an engineer on you staff of 100 and wanted to introduce common-rail gasoline injection or a gasoline HCCI cycle (Homogenous Combustion Compression Ignition linear generator, over 50% efficiency fuel to electrical), would there be means provided to develop such an improvement?"
I understand and laud you goals (simplicity, ease of maintenance, etc.) but am prepared to state unequivocally that 2010 engine technology has its benefits, and is not compatible with 1950's repair methods. A Prius is NOT a FolksWagon.
I would stay out of the engineers way as to specifics.demanding only that whatever goes into production be easily serviceable and good enough to standardize on it for a good while,say five years.
The object is to allow mechanics,owners,parts suppliers to really know whats what,cars change so fast now that there are mechanics that travel from deakership to dealership to bail out the dealer mechanics,they run into a problem ON A MODEL NO ONE HAS EVER SEEN DISASSEMBLED regularly these days.And it's out of production next year.,so nobody has a chance to get good on that engine/transmission/fuel system,etc.
Also to simplify manufacture and supply.A high volume generic item of excellent quality often costs only a quarter or a tenth of the price of a dealer only or branded equivalent item.Our 92 Ranger truck needed a simple little cable -USED THAT YEAR ONLY-to repair the drivers inside door handle.Available in sets of two only,almost two hundred bucks at the ford dealer,no aftermarket due to low volume!So help me god!!
Fortunately I was able to make up the cable for about five bucks by buying components and assembleing it myself.Took only ten minutes to make it but an hour to buy the stuff needed.
Fenders for my Toyota are only fifteen cents on the dollar at the aftermarket big box in the nearest city.Annual styleing changes ,updates,etc,make it impossible for the aftermarket to keep up.
Any new components that can be made backwards compatible could be changed and updated at any time.For instance if a starter motor, or fuel injector ,or pump,can be improved,and yet made to bolt on and work on the older models,that's great.
Volvo followed this philosophy for many years.A 97 volvo master cylinder fot example is not identical to an 86,but is it interchangeable backwards and usually forward.
The same starter motor fits dozens of different machines fitted with about six different Cat diesel engines.
Exactly what you mean by fifties repairs methods is not clear to me.The methods of building cars that I advocate are in current use by all manufacturers of commercial trucks ,industrial machinery,etc,TODAY,YESTERDAY AND TOMORROW simply because these methods are the best methods available for building economical,reliable,easy to fix trucks and machinery,which is what the customer demands.
A modern computer controlled engine is obviously the way to go with a much improved and more detailed self diagnostic feature.There is no xxxxing excuse for a car to be designed any other way,or for it not to be delivered with a complete manual.And there's noxxxxing reason why It should take all day to and a big box of tools to replace the alternator on a v6 ford contour,but thats the way it is.I can do the same job on a 9000 series roadtractor in fifteen minutes with tools I can hold in one hand.
If you know what the problem is you can simply change out the part. If the self diagnostic system is a good one,you don't need to know much,the hypothetical young lady really can do it herself.
And it is most certainly not necessary to build a car so that even minor repairs require dozens of specialized tools.I can do almost everything under the hood of my Toyota with a third of the wrenches that I need under the hood of my ranger.I can get the fender off the toyota in ten minutes,off the ranger in an hour.
If I have a helper I can get the entire hood and fender assembly off of a 9ooo road tractor in five minutes,it's too heavy for one man.Then absolutely everything is as well exposed as a naked babys butt when you are changing a diaper,or installing a new radiator.
What I really talking about all this time is grinding the life out of the planned obsolescence monster and the styling monster and returning the car to its roots as a tool that enabkes us to get around.Right now its a joke constantly changed and rearranged like pop music in order to sell more every day and every year.
I wouldn't come down so hard as you do on the importance of the car to our sex lives but you do bring back some pleasant memories.!
And my BIG point is that this plan enables us to have cars at a much lower cost in cash and in energy and that such cars will not be nearly so much used and bought as status symbols,as consumption symbols.
Hi Steve,
Although I agree with you 100% - the average US citizen will relinquish his/her grip on the auto steering wheel when we "pry it from their cold, dead fingers". As a bicycle advocate/activist, I see a huge potential for a variety of Human Powered Vehicles, moped type vehicles, electric golf cart vehicles and the like. And, of course, all manner of mass transit. Minor exceptions aside (Sun City Flordia) all I can see is government, industry, labor, etc all conspiring to keep personal autos in place with no alternative vision. Maybe some minor downsizing, maybe some tinkering with the energy source - but no actual change to the BAU model for personal transportation. Changing the US model for personal transportation will make the current health care debate look like a love fest.
As for Americans relinquishing their grip on automobiles, raising the price of gasoline or eliminating their jobs would work wonders. Demand destruction is not necessarily fatal.
Before considering the technical merits of the gas reserve figures we need to keep in mind the relationship between reserve figures and market capitalization. Everyone involved is doing this to make money and short-term incentives for inflating reserves are no doubt substantial. Even the most ethical and sober minded executive will be subconsciously biased in favor of larger reserve numbers. Once someone suggests a big number there is enormous pressure for others to agree and fall in line. To not do so can be a career limiting move. The dissident is often seen as not being a "team" player and risks being marginalized. Unfortunately, the best conscious intentions up front to be accurate, aren't enough to eliminate the unrecognized cognitive and social traps that snare us all.
This is not an indictment of the industry or the players, we are all subconsciously biased and almost never aware of it. We are all social creatures and susceptible to social pressures. However, combine this with corporate compensation structures and almost anyone will develop a blind spot big enough to a drive truck through. Intelligent and ethical people are not immune to these unseen traps.
All of this to say, unless Mr. Berman has an substantial economic incentive involved, or some axe to grind, he will probably see things much more clearly than those who are encumbered with large financial incentives and strong social pressures. It has been noted that perspective is worth twenty IQ points. In this case, I don't think it will take an expert in the gas industry to guess which numbers are more likely to be accurate. If we don't examine the underlying assumptions carefully, and take into account the larger economic, social and psychological context in which the numbers appear, the analysis may not tell us much.
Greg C -
That was a most eloquent description of how consensus develops in large organizations, not just with regard to dodgy reserve estimates in the oil and gas industry but with regard to business in general.
No matter how hard an individual might try to be objective, if that person's well-being and long-term position in an organization depends upon coming up with the politically favored answers, that person will consciously or unconsciously come up with the 'right' answers far more often than the 'wrong' answers.
Data and projections developed from that data do not exist in a vacuum. They are developed by people who often have agendas that bias such in one direction or another. The bias may be blatant, but more often it is so subtle as to be undetectable. A lot of people with an engineering or a scientific background tend to not acknowledge its existence, but it's there nonetheless.
Or to quote one of my favorite Mark Twain sayings:
"You tell me whar a man gits his corn pone, en I'll tell you what his 'pinions is."
I would agree.
Arthur Berman has written several articles, all pointing in this direction. At first, I thought maybe the data was too limited to really know what was going on. But his articles are getting stronger and stronger, and he comes with much less of an agenda than the users of natural gas. So maybe we should be listening to him.
I think we should be listening to him. When I read this article a few days ago, the key point that jumped out to me was that he is asserting that the bulk of the wells are not showing a hyperbolic decline curve, i.e., the decline rate is tending not to fall off with time. The direct implication of this is that the producing life of the wells will be much shorter than what most people expect, which is a point he emphasizes. From the article:
When I had a chance to talk to Matt Simmons about this topic a few weeks ago, he thought that because of the decline in drilling + rapid production decline rates, we could be seeing supply problems as soon as the winter of 2010-2011.
I might be misinterpreting what you are saying, but if the decline curve is not hyperbolic, then it is linear, it falls off with time and the well is plugged & abandoned.
If you read the article he says the decline starts off hyperbolic but then crashes to virtually zero at some point in time.
If we understand the reasons for the types of declines (hyperbolic, exponential, etc) we can probably talk more intelligently about what is going on. Apart from being an empirical heuristic what do people think is the primary reason for hyperbolic (as a starter)?
imo, we will see a hyperbolic decline, just not the type curve force fitted to preconcieved reserves devined by unsubstantiated volumetric calculations.
i have fairly compelling case for this wrt the haynesville shale. i recently emailed art berman with my data.
Greg- That is a articulate, reasoned perspective, and what you are postulating is the essence of why I wish there was a good debate or discourse between analysis and CHKeerleading.
Overall production from the Barnett shale is huge and has grown rapidly in the past 3-4 years. As a result of this, I believe that widespread pipeline and compression constraints may have led to increasing pipeline pressures over the past two to three years.
In my opinion, this in turn has led to temporary and involuntary curtailment of production from many wells, which Mr. Berman may have interpreted as a more rapid natural production decline, and which has led him to downgrade his reserve estimates for Barnett shale wells.
Certainly Devon Energy, the largest operator in the play, and with the most extensive pipeline and compression infrastructure, hasn't seen fit to downgrade its Barnett gas reserves as yet.
...Greg
He's describing the "average commercial life" of these wells, so non-geologic considerations are taken into account. Shouldn't companies be forthright about the reason for curbing well production, too - or obligated to report same to SEC? This would obviously be of interest to investors, and disclosure wouldn't be damaging to a company's prospects, I'd think.
As he states:
I don't think the amount of production decline for producing wells is significant enough to require disclosure. It is merely the outcome of the following circumstances (for example)
2007 production: 500 mcfe/day at 200 psi pipeline pressure
2008 expected production: 450 mcfe/day at 200 psi pipeline pressure (10 percent decline)
But, pipeline pressure increases to 250 psi, causing production to decrease,
now 2008 actual production is 425 mcfe/day (a 15% decline).
Decline analysis now shows a reduction in reserves, even though all of the previously estimated reserves will still be recovered as long as the operating pressure returns to normal. In fact, even if the pipeline pressure stays at 250 psi, most of the calculated reduction in reserves will still be recovered.
The actual difference between the production rates in 2007 and 2008 is attributed to natural decline. Not really worthy of disclosure, as some decline was anticipated, and the amount is not really material.
Most producers would reduce the reserves for the wells affected, but only by the same magnitude as the change in production from that previously estimated (ie. in the example, by 5%).
But they wouldn't change their reserves estimate for new wells or for undrilled locations.
This is an ongoing problem when infill wells are brought on production into a pipeline with older, lower-pressure wells. The new wells have higher pressure, and they "crowd out" the older wells. The way to offset this is to have wellhead compressors installed at the older wells. Sometimes its difficult to get these installed fast enough.
...Greg
There is an Australian version of this debate
http://peakoil.com/modules.php?name=News&file=article&sid=50367
Just last week an $A25bn LNG export deal was signed with India and two years ago a similar deal was signed with China. Some want Australia to be the second biggest LNG exporter after Quatar. This is all predicated on a presumed 500 tcf of natgas and coal seam gas reserves.
The idea seems to be that Australia sells its gas overseas and in return gets wide screen TVs or whatever. However cap-and-trade will drive electrical generation towards gas fired since it produces half the CO2 of coal. As a bonus it will provide ample backup for the wind farms which the public wants to see. I also think that NGVs like the Honda Civic may sell better than PHEVs like the GM Volt. As high liquid fuel prices return many late model SUVs will be converted to CNG. The gas rush will be on for electrical generation, alternative vehicle fuel and in Australia's case LNG exports. We need some kind of priority system.
Interesting if disappointing analysis of 8000 horizonal and 4000 vertical gas wells in the Barrett shales.
An average horizontal well was expected produce 3.6 bcf EUR and vertical well would produce 2.4 bcf EUR.
Thats a total of 17.6 Tcf.
Now he has an average of .8 bcf per horizontal well
or apparently .53 bcf per vertical well for a total of 8.8 Tcf;
.8 x 8000 + .8 x 2/3 x 4000=8.8 Tcf---based on 12000 wells. Then he projects that we can get to 26 Tcf just by drilling an additional 23000 wells costing $75 billion dollars, or 17.2 Tcf for $4.36 per MCF, more than $3.5 per MCF i.e. $4.3/MCF x 2/3 +$2/MCF x 1/3. The enthusiasm of natural gas drillers suggest they are profitable today (at $6 or $8/MCF).
Apparently we can have access to 1200 TCF of NA shale gas if we drill more holes at a higher price. Have high prices ever been a disincentive to drill?
Don't think Berman is correct in analysis. First of all, his analysis only covered 2,000 older wells, not the 10,000 wells drilled since then. And, as I have indicated in earlier replies to this posting, analysis of decline trends of older wells is problematic when operating conditions change, ie. increased pipeline pressures will inhibit production from older wells when producing into a pipeline in competition with newer (ie. higher pressure) wells. This will result in an apparently higher decline rate for the older wells, but this does not really mean that reserves should be drastically cut. Indeed, as pipeline pressures decline in future, the apparent decline rates will flatten out.
Secondly. the Barnett shale varies in thickness from around 100 feet to 300 feet. In the area around Ft. Worth, where Devon Energy has the lion's share of the acreage under lease the thickness is approx 150 feet, and the average horizontal wells here will recover about 2.2 Bcfe on 80 acre spacing (1,000 feet well separation), and are expected to recover around 2.0 Bcfe if drilled on 20 acre spacing. Ultimate recovery on 20 acre spacing may be as much as 40 to 45% of the OGIP. It should be noted that Devon's historical analysis indicates that the average well recovers approximately 80% of its reserves (1.8 Bcfe) in the first 5 years.
XTO Energy expect to recover 3.3 Bcfe per horizontal well. They may be in an area where the Barnett shale is thicker (and has more gas in place per well). They may also use slightly different completion techniques.
Thirdly, the more successful operators use 3D seismic imaging in order to identify the Karst topography (ie. sinkholes) and major and minor faults, and to locate their wells in such a way as to avoid these geological features. Both sinkholes and faults can connect directly to the underlying Ellenberger formation which is water bearing , and reduce gas recovery from wells drilled in these areas. Some of the older wells reviewed by Berman may have been located in these higher risk areas and are possibly not representative of the wells drilled in the past six years.
Lastly, Berman probably underestimates the impact of future refrac operations to restore productivity and increase reserves from older wells. As an example of a successful refrac, Devon Energy has reported on a well from which production had declined from 2,000 mcfe/day to 500 mcfe/day after 4.5 years. A re-frac restored production to 1,600 mcfe/day initially, declining to 1,000 mcfe/day after 3 months, and has probably doubled the remaining reserves from this well.
I have seen nothing from the major operators to indicate that reserve reductions of the order indicated by Berman are likely, especially for recent wells or for future wells.
Berman has more graphs posted in his World Oil column (which is behind a paywall, but he might make it open on his blog later).
He does have data from wells drilled 2003 to 2009. It is clear from those graphs that the average recovery per horizontal well is falling. Depletion is outrunning technology.
This should not be surprising because the Barnett formation is thick in the north east where production started and grows thinner as it heads west. So the total gas in place per well is going to get smaller over time. It has to show up in the data somewhere.
Another thing you can clearly see when looking at plots of EUR by well frequency is that some wells are very high performers, while most wells are poor performers. This makes it easy for gas companies to write press releases highlighting the performance of this well, or that well, and sound like gas is very abundant. But I would not trust those numbers until they start stating the averages and modes of all the wells they are producing.
Actually, you can see the high performer effect when looking at the charts in this article of his on Haynesville:
haynesville-sizzle-might-fizzle
Look at that lone well with 5.5 bcf. If a company only touted that one well, you would think all their wells produced at that level. This is a non-normal distribution. Don't get sucked into the press releases.
It is this kind of data our EIA should be gathering and providing for free to the public. The answers are in the IHS database. We are going to drive off this NG cliff with the map in our hands, but no way to read it.
The link to Berman's blog that Jon provides shows some interesting information.
Berman says that in the Haynesville shale, the decline rate is 20% to 30% per month, with projected annual declines rates of 80% to 90%.
According to him:
In Berman's view, Haynseville needs both a much higher price ($8 netback price) and a much higher reserve per well (2.5 Bcf vs 1.5 Bcf) to be profitable.
Gail -- Easy to throw some support to Berman's thoughts. Back in 1Q '09 Devon cut their rig count in the east Texas SG play (including the Haynesville)from 18 to 4 in just 6 weeks. And I understand more cuts may be underway today. Everyone is free to have their own opinion on the matter but I think Devon's opinion might be a little more valid since the SG play had become their life blood. And they have no way to control the current massive hemorrhage they are suffering. Their efforts in the GOM Deep Water will help some though.
There are too many variables which come into play to run for the exits due to Mr. Berman's analysis. First, much of the gas in all markets was hedged at much higher prices. Second, when gas prices are down, why set new compression to make more gas at lower prices when waiting for higher prices would yield more profits, even given discount rates for the time value of money (which assumes that money has value, while resources do have some amount of value)? Similiarly, why refrac to increase production in a lower priced market?
Much of the drilling is being done to hold acreage, and much is being held under terms favorable to the lessees - a situation which exists because of ignorance of lessors of what terms need to be included in leases to prevent the holding of their mineral rights by lessees for some future production vs. currently producing them. Having an inventory of future drilling prospects is essential if you intend to stay in business, so drillers will continue to seek terms which allow them to build such an inventory without new leasing. If the wells drilled are both holding additional acreage by meeting lease terms and providing the driller with a positive cash flow, they will continue to be drilled.
The other, and possibly main, problem, however, is the prediction of prices into the future in determining the net present value of future net income. If we continue to sub-$4.00 gas, supplies will eventually contract, and drilling will resume until we have another glut, rinsse and repeat. For reservoir engineers, this is a tough problem. Market volatility will not change unless the markets have better regulation, and that does not look like it will occur - changes will be made and we will all feel better about things, but they will not serve to set a long term reasonable price - the highs will be too high and the lows too low. Since PE's stop projecting any production where a property reaches its economic limit, that would be the end of production, except for optimism or other factors making producers hold and continue to produce leases which have gone past their economic limits. There are a lot of now small properties out there which have far exceeded their earlier projected economic limits - they are just not owned by the publicly held entities, for the most part.
I think it is spelled "fracking".
> The method is informally called fracking or hydro-fracking.
http://en.wikipedia.org/wiki/Hydraulic_fracturing
A quick review of actual production data (no subjective EUR extrapolations) during a ten year period from 1997-2006 in 972 wells brought online in Tarrant County suggests that there has been signficant improvement in actual production results with time.
I split the database in half by looking at wells prior to 2005 as compared to wells drilled in 2005-2006 to show improvement.
The top 6 operators completed 901 of the 972 wells or nearly 93% of the wells in Tarrant County. 444 wells were brought online by the Top 6 in '05-'06 or 49% of their wells from '97-'06.
Top operators by total wells drilled in the period
(total/'05-'06/'97-'04/%drld in '05-'06):
XTO (373/225/148/60%)
Devon (281/64/217/23%)
Encana (135/64/71/47%)
Chesapeake (57/56/1/98%)
Quicksilver (31/15/15/48%)
Range (24/20/4/83%)
Average max monthly production (MMcf/mn/well)
(full period/'05-'06/'97-'04/%improvement '05-'06):
XTO (54/66/35/88%)
Devon (38/48/36/34%)
Encana (40/48/33/44%)
Chesapeake (79/80/7/na--only 1 early well)
Quicksilver (43/69/17/307%)
Range (57/66/13/415%)
Average 24 month cums show VERY similar improvement (MMcf/well)
(full period/'05-'06/'97-'04/%improvement '05-'06):
XTO (561/680/380/79%)
Devon (440/544/410/33%)
Encana (468/558/386/44%)
Chesapeake (754/767/37/na--only 1 early well)
Quicksilver (406/672/157/328%)
Range (548/634/121/424%)
Since max month production and 24 month cums show VERY similar % improvement when comparing '05-'06 data versus earlier data, this suggests that their is a good correlation between IP and Cum. Additionally there is significant improvement in '05-'06 cums and max month production. This is directly counter to two of Berman's major points that:
1. The wells aren't improving as technology improves.
2. There's no correlation between IP and Cum (he says EUR).
Berman has been a shale naysayer for 3+ years. His work, that is easily checked, appears sloppy. While it is still possible that the EUR's will be below the 2.5-3.0 Bcf that the company's are promoting. The errors in Berman's work that can be checked suggest that his EUR statements may also be in question.
Shallow.
Hi Shallow,
Thank you for posting. This is the kind of data we hope to see show up on TOD. Are you using a public database? It would be really nice to be able to check Berman and others claims.
-Jon
I used DrillingInfo database. Something similar could be done using RRC database but it would be more cumbersome.
It sounds to me like you are just looking at production in a very short period--the first 24 months, and all of the wells were drilled using similar fracking. So I am not sure this really says very much. The highest month to 24 month cumulative ratios doesn't say much--and it shouldn't be changing if the methodology is the same.
I would expect the results to be pretty much as you found them to be, even if what Berman says is true.
I think someone needs to look at the IHS data base, and look over a longer period. How is the drop in decline rate over a longer period than 24 months?
During that "short" time period Chesapeake drilled 56 of their first 57 Barnett wells and had the best average IP's and best average 24 month cums out of all the players in Tarrant County. Sure you can look at all the data (10 years worth) but then you have all the early "learning curve" wells pulling down the averages.
Berman stated that the Barnett wells were not getting better with time. That statement doesn't holdup under a review of readily published data. Unlike his unsubstantiated decline extrapolations, this statement can be shown to be in error. Look at Quicksilver as an example:
Their first 15 wells had IP's in 17,000 mcfpm range, their next 15 wells average 69,000 mcfpm -- a fourfold improvement. Likewise their average well cumulative production after the 1st 24 months improved over 4x from the first 15 wells to the second 15 wells. If the starting point for the average 2005-2006 well decline is 4x better and the production for the 1st 24 months is 4x better, then it is reasonable to assume that the ultimate recovery will also be better. Perhaps not 4x better, but a well that outperforms for 24 months should likely outperform for life.
Berman says no correlation between IP and EUR. That's funny, since there is an excellent correlation between IP and cumulative production after the first 24 months, especially when you compare the % improvement that the 2005-2006 wells have over the earlier wells.
If the EUR's are really are getting worse, why are the cums after the first 24 months improving across the board from 30-400%, depending on the company, on the 2005-2006 wells? Could it be that Berman the perma-shale-bear is putting a negative slant to his production curve extrapolations? Perhaps, perhaps not, only he knows. He makes some pretty strong statements without backing them up with the actual data (decline plots).
My primary point is that Berman has a habit of being sloppy with his conclusion substantiation (as an example, look at his initial Haynesville write-up on his blog, he does some significant backtracking in his second posting after being hammered on the GoHaynesvilleShale blog site). If you are going to make brash statements with respect to EURs (I consider it brash when you are basically saying that industry is overestimating reserves by a factor three in the Barnett), then you should at least publish your conclusions in a way that others can confirm them.
I suspect some of what Berman is saying is relevant and important, but without substantiation, it's hard to know where he is correct. I have shown where at least two of his major points don't hold water.
In the Old Testament, if a prophet made one wrong prophecy, then he was stoned to death -- it didn't matter if he had made 100 correct prophecies previously. Once a prophet was shown to be in error, then he was done. If we applied similar logic to Berman's work, we'd have to throw it all out.
Shallow