ASPO-USA Conference, Second Day, Before Lunch

Jim Baldauf, a co-founder of ASPO-USA, provided the opening remarks to the Plenary Sessions of the day. He noted that with a coal mine explosion, the concern over hydrofracks, and the Gulf oil spill, this year could be considered Hydrocarbon Hell. The Macondo well is evidence that we are now having to seek the more difficult oil, with the associated costs.

He also noted that, with a change in Board membership, ASPO-USA will also be moving to Washington, to have a greater ability to influence opinion, and it will also then serve as the site for next year’s Conference.

Michael Klare chaired the first session and introduced Chris Skrebowski to discuss “The Latest Analysis of Future Oil Supply Capacity.” Chris noted that, with the recession hitting in the last two years, it has become more difficult to be predictive, since not only must the capacity available be assessed, but now also the demand levels are a lot more uncertain.

What the years have shown is that there is an oil price, above which the world is driven into recession. There is thus also a maximum price – the Economically Sustainable Oil Price – which will allow the world to keep running while also allowing oil to be produced in the quantities needed to sustain a global growth rate of around 2%. That also requires that the reserves be available to produce that gap, and he did note a gap in recent EIA plots, where the “Unidentified Projects” logo is used to fill the space between anticipated demand, and known supplies.

Simply, it is not resource availability but flow rate that is critical to the future, and economic stability. Cheap oil ended in 2003, and by 2014 there will be problems matching supplies to demand. He based this in part on his Megaproject review of world oilfields. It has been less useful than in the past. In projecting future patterns, he used a depletion rate of 4.7%, (derived from 75% of the fields being in decline at an average rate of 6.7%). The recession, and the drops that it induced, moved the date of the production decline from 2012 to 2014, and his estimate for supply falls between two IEA estimates, which have returned to being a little more optimistic of the future than they were in the recent past. They, however, use a growth rate of 1.4%, but he used a value of 2% since the non-OECD countries are seeing growth rates that may exceed 4%.

Although the end of the plateau may come in 2014, it is likely that there will be price spikes before this that will presage the transition into decline. The date depends on how rapid growth is, and how much there really is in the OPEC spare capacity drawer. While the IEA thinks that this is 6 mbd he thinks it is likely only 4 mbd. But he notes that Saudi Arabia, Kuwait, the United Arab Emirates and Qatar have collectively over 80% of this capacity. Saudi Arabia alone has 66%, and thus effectively now controls oil prices – which are sitting about where they have publically stated that they want them. He quickly toured the other significant producers of oil, and then noted that Saudi Arabia’s spare capacity will soon run out, at which point, in perhaps two years, their ability to control price will also fade.

He noted that in his estimates, which are based on total liquids, NGL volumes have been coming in at about 1 mbd under predictions. He also felt that the anticipated increases in production from tar sands is going to be shown to be optimistic.

Oil is a uniquely critical resource, and its price is controlled by the marginal oil required to meet demand. Thus while this allows oil to be drawn from deep waters, and from tar sands, for those who produce it cheaply, the rising price will provide a great windfall. Where will that money go, and what will be its effect? We can no longer ignore the issues, but must consider what we can do, in the short as well as long term, to mitigate the effects. Improving efficiencies, using alternate sources (though this is a liquid fuels problem) change transportation modes. We cannot however expect that these changes will be fast, since we have too much money invested in the current system.

Jeremy Gilbert began by noting that, unless careful, the “Yes we can” slogan is going to turn into the “No we can’t” reality. In discussing “Uncertainty, Technology and Risk”, he pointed out that in so much of the discussion of the industry there is no recognition of the uncertainty in the numbers cited, or the risks that are increasingly being faced in getting more difficult oil to market. He was more concerned than Chris about what happens after the peak. For it will be the shape of the decline curve at that time that will dictate how fast the world gets into trouble, and how easily the problems can be overcome.

If discoveries are now filling our reserves at 5 billion barrels a year, while we are reducing them by 24 billion then this is not sustainable. We are finding oil, in expensive to produce places, but the rate of discovery is not enough. 50% of the discoveries since 2006 have been in Deep Water, and with more investment it is likely that we could double that volume by 2030, but that won’t be enough.

One problem is that modern technology can estimate the volume of oil in a reservoir quite well. But when it comes to how much can be viably extracted, then this is a much less certain number, and it is also, to a degree, price dependent. Getting those numbers has become more difficult, as the fields that are producing them become owned increasingly by National Oil Companies, rather than the major producers. Those who do not see a problem often cite a) new discoveries b) improved technology and c) improved production to reserves ratios, as evidence that there is no problem. Unfortunately these are not that effective. New reserves tend to be deeper, sourer, more viscous and more remote. Technology can improve performance, but this is typically at the end of the life of the field. The additional volumes recovered then are not greatly significant in the overall scheme, and this will only happen in later years. On the other hand, it should be noted that a 1% increase in recovery efficiency for existing fields would give a year of additional global supply. R/P ratios have a book-keeping use, but since oilfields do not produce at a constant level until one day they stop, it is not that meaningful in reality. The Middle East may be able to sustain a 2% decline rate, but in the rest of the world depreciation is taking an enormous toll.

It should be remembered that it is return on investment – through the price of the product sold, that persuades companies to make the major investments that find and produce oil. There is a long time between the investment and the return, and so stability is a necessary criterion for that investment. Uncertainty as to whether that investment can be recouped means that it may not be made.

Risk is similarly not recognized as much as it should be. He cited the Macondo well fire, noting that as these rigs produce toward the edge of technical capability there is no public recognition of the risks that are involved in that, or where data is available, complacency over the ability to produce the oil. The world has become used to the technical progress that gives more reliable cars and planes. We must balance risk against reward.

And he stressed we have to change from “Yes we can” to “Yes we must,” and that includes the move toward sustainable replacements.

In questions about the nature of recent oil discoveries offshore Ghana and Namibia, these were in fields that were strongly suspected to be there, but are complex geology and in deep water that could not have been profitably recovered a decade ago.

Dr. James Schlesinger then gave the keynote address. He began with a bromide “A resource which is finite is not inexhaustible.” And followed this with others leading to the point that “peakists” have won the argument, though we debate the timing. We should be gracious in victory. Remember that politicians do not want to give pain to their voters, and so they must be reassured as we move into these new times.

We depend too much on the fields discovered 50 years ago, the Ghawar’s and Burgun’s of the world, and while it may not be Twilight in the Desert, it is definitely late afternoon. We are now seeing price spikes for oil based on availability. As fields decline, we will need to find 5 Saudi Arabia’s to replace them, and we can’t even find a second. Iraq may be such a place, and offshore Brazil a second, but neither is in a cheap location to produce. Shale gas may provide some help, but that will likely fade too soon.

In questions he noted again that politicians prefer to be reassurers, but that political tensions are rising as China moves into places such as Iran. The King of Saudi Arabia has talked for some time of the need to leave resources for later generations. The age of subsidies for renewable power sources is likely to be limited, and he pointed to economists who think that demand creates supply.

And he left us to ponder “Sufficient unto the day, is the evil thereof.”

Roger Bezdek then spoke about the problems of writing fuel consumption standards for trucks. For while “Government has to do something,” the bigger question is what?

Trucks divide into 18 classes, but their performance is closely tied to how much load they are carrying, and how they are configures, which increases the complexity, and moves possible classifications into the thousands. Of all the factors energy loss in the engine is most critical. Manufacturers are already working to improve engine efficiencies, but success will only come when the engines are adopted and in use. But what do you regulate, and how do you measure it? And the problem is that there is little data on which to base regulations.

To date it appears that the best practice is better training for drivers, and to give them the incentives. But remember that the drivers may make $35k and if the speed limit, for example, were cut to 55 mph then this could cut their income by 20%. Any changes that are made won’t have any significant impact on consumption for up to 15 years, though it might be wise to buy stock in manufacturers and then sell it at the time the regulations come into effect.

He noted, in response to a question, that natural gas is not a player in truck fuels.

Tad Patzek then chaired a session on Natural Gas, where Arthur Berman gave an evaluation of gas shales, followed by Charles Maxwell who spoke more from the industry’s point of view.

Art began by noting that he expected production from the Marcellus shale to be a disappointment. The questions that he asks relate to the wells being driven, and their possible commercial viability. At best the current data seems to indicate that the wells are marginal, if companies can get $7 to $8 a thousand cubic ft (kcf). (Current prices are under $4 /kcf.)

When he looks at the plays, getting data from SEC filings, he sees that marginal costs are around $7.50 per kcf, (ranging from $5 to $12). Reserves are greatly overstated, and there has been a huge increase in undeveloped reserves. Shareholder equity has thus been hammered. Hedging in the past has helped considerably in covering costs, but that is coming to an end.

Those who cite Eagle Ford as an ideal property that is liquid rich need to do a better economic analysis. When you add up the molecules, there is perhaps a resource that might contain 2,000 tcf. But it is more likely to have only 441 tcf, of which one-third may be technically recoverable. (We use 23 tcf a year).

Similarly in looking at the Haynesville, it seems that only 10% of the 110,000 acre field is going to be economically viable. And this is in “sweet spots” that are scattered even down at the county level.

While the Barnett has 14,000 wells and has provided a lot of data, it is now post peak. And remember that the Earth is not a factory, what is originally found cannot be improved upon. Those who claim profitability may not be factoring in all the costs, since break even may be at $6 or more and they aren’t getting that price.

Further there are overall problems in the flow rates and commercially recoverable volumes for a well. Consider that many wells must produce a minimum of a million cu ft in a month to pay the $5,000 compression costs to put the gas in the pipeline. After 5 years, one-third of the wells can’t make this return. And most produce 45% of total production in the first year.

Oil production from fields such as Eagle Ford need over 100,000 bbl of oil to justify the investment in separators, yet many have only 55,000 bbl of likely production.

Much of the market for the Marcellus shale appeared strong when the field was first developed, but then natural gas in the North East was expensive. Now there are gas pipelines such as the Rockies Express and LNG terminals that will supply cheaper gas. The high population densities and the varying terrain also don’t help.

Charles Maxwell responded that he agreed with the substance of what Art had said but had some different views and opinions. The majors now hold 25% of US production of natural gas, but have been inattentive to shale gas. But at the moment shale gas cannot be sold at a reasonable price. However there are situations where this inactivity is allowing neighboring wells to perhaps recover more natural gas.

The second group of players, with 30%, are the big independents (Anadarko, Devon, Chesapeake etc). They dance to a different tune and a different effective time frame. But they too have made investment decisions based on pricing assumptions that are no longer valid. The excess of natural gas has dropped the price to $3.70 per kcf which was not expected. (Since 6 kcf has the energy of a barrel of oil, this is equivalent to $22.20 bbl oil). They see that while gas is now as cheap as coal, they hope however that there will be a pickup to help and are acting accordingly.

And the remaining 45% of the market plays are held by the smaller “mom and pop” sized investors. They are likely mostly losing money and market share, and may well be in a negative growth mode. Hedging has helped but that will be gone in 18 months. Some (about 75%) have silent partners (often foreign) who are carrying the losses, but how long can this last? He expects the Haynesville to peak in 8 years, the Fayettevile in 4, and the Barnett already has. The Marcellus is too difficult to tell.

He agrees with Art that $7.50 is a good average production cost, and you need a sweet spot to make a recovery. Many small operators do not know how much they are losing. It will be 3- 5 years before prices recover and by this time most of these small operators will be slaughtered. But it will also kill LNG development. He foresees prices going from $3.95 in 2009, to $6 in 2014, but not at an even growth rate.

I liked the "Hydrocarbon Hell" phrase at the top. But I think it describes more than this year--it describes the age.

To paraphrase Bob Marley, "We thought we were in hydrocarbon heaven, but we're living in hydrocarbon hell."

Some MP3s from Friday at the now completed ASPO conference, consolidated here from my postings on recent Drumbeats

Art Berman and Charles Maxwell on shale gas and their subsequent QandA session.

Bob Hirsch Fri evening keynote speech with a few questions.

Jeff Rubin and Nicole Foss QandA on finance after their presentations.

Blame cheap Dell audio hardware for the buzz.

Thanks Peakat...
Could you run these through a filter such as Wavepad to kill the buzz? These are great but very very painful to listen to.

Yea ... this has a sort of post peak oil aesthetic. Like communications are breaking down. Reminds me of those early twentieth century recordings. The sense of the world being a big place and this happening a long way a way is somehow appropriate. Frustrating to listen to as practical but great as an art work.

remember the movie they're watching in 'A boy and his dog'? A super scratched up old 16mm film print.. I sure hope we can keep DVD's playing...

Now replaced with debuzzed versions. Thanks for advice on how to clean them up.

I was on train returning from DC w/ spotty 4G WiMax most of the day so couldn't get to this earlier.

These are great, thank you!

What do others think about Art and Charles's presentation? It sounds like Chesapeak's strategy is 1. find some deep pocketed partners. 2. Drill just enough to find the core acreage and hold down leases. 3. Wait for the low price "slaughter" to take out the mom and pop operations. 4. Recoup when the prices spike again. Thoughts?

Jon - They don’t define the “mom & pop” operators but I suspect they are talking about the promoter operators. Much of the hype in the SG plays was put out by these promoters. They typically put up the seed money (or their base investors do) for the acreage and then pull in partners (typically unsophisticated investors) for the drilling capex. By the time these operators move a rig onto location they’ve recovered their initial investment as well as a nice premium. They’ll seldom put a $ into the drilling phase. A common promote is a “third for a quarter”: investor pays 33% to earn 25% of the revenue. Thus they promoter gets 25% in the well with no capex risked. Thus you can imagine these companies never issue negative press releases: ever prospect they are selling to the investor base is the “next big strike”. So even when one their $10 million wells ultimately recovers only $4 million net they walk away with $1 million. In the late 70’s I watched one such promoter drill 18 straight dry holes and then saw their senior hands retire millionaires. He was a world class promoter to say the lease. And he wasn't promoting unsophsiticated investor but other oil companies. He was very, very good at the hype following the 70's embargo days.

Add the hype from these legal hustlers to the public companies hyping their stock and you won’t find many negative comments about any boom play. And what about the companies who are in the SG plays strictly for the profit generated by their own capex investments? I don’t know - haven’t seen anyone that falls into that category. Some may exist but I haven’t seen one yet. The only "for profit” operators I’ve seen in the SG plays so far are the ones who have bought SG wells which have dropped to marginal rates and thus are only of value to low cost operators like these little guys. These are the same companies that produce the majority of US oil production from wells producing less than 10 bopd.

I agree, Mr. Rockman; mom and pop kind of operators are not in the shale plays as lease bonus costs, in the Eagle Ford in S. Texas for instance, of 1000-2000 dollars an acre has put all that out of reach. If mom and pop means lease brokers and promoters wanting to flip 700 acre blocks they have acquired for 1.5 million dollars, with carried WI or large ORRI's, I don't think they are going to have much of a market to sell to in the shale plays. The area of interest is too large and all the big boys will never get what they have drilled up under primary terms anyway. One Eagle Ford location it appears is just about as good as another in certain windows.

I think mom and pop means folks like me who operate 2-5 BOPD wells with oil water ratios of less than 3% oil, who contours his own structure maps, begs his own way into peoples homes to buy short term leases, does his own title work, runs his own dozers to build roads and locations, spends his own money, or borrowed money to engineer and sit his own wells, nipples up his own tank batteries and otherwise does it all, bottom to top, to make an 8 BOPD well that will pay back drilling and completion costs in 18 months. A 20 BOPD IP and I am at the beer joint that evening buying drinks for everybody and bragging about what an oil man I am.

Guys like me, we ain't going to get slaughtered anymore; we have been thru $10.00 WTI and $ 2.30 gas prices. My incremental lift cost per net barrel drug out of the ground is 19 bucks. You can't hurt me anymore, I have been over the falls in a wooden barrel, shot at and missed, shit on and hit.

3. Wait for the low price "slaughter" to take out the mom and pop operations.

There was a low price "slaughter" right after the peak in 2008 but I don't think there will ever be another one in the near future, if ever. The price spike was caused by the peaking of oil supplies during a period of a booming economy and high demand. Then when the economy collapsed so did the oil price. But then prices slowly rose until they reached an equilibrium with demand in a stagnate economy.

There have been several periods of low oil prices in the past but they have always been caused by a glut of oil. I don't see another glut on the horizon. I think those waiting on low prices to drive those "mom and pop" operations out of business will be waiting a very long time.

Ron P.

Suggest using an EXTERNAL mike rather than the internal mike (which picks up the fan)

Not everyone knows me by my real name, but I am Nicole Foss. The afternoon session was certainly interesting. It was great being on a panel with Chris Martenson. We were very well received, except by Jeff Rubin, whose view of finance I disagree with almost entirely. He didn't feel that a non-economist was qualified to comment.

Since Devon has been tossed out re: the shale gas plays I’ll once again toss out my brief history with them during the best of times/the worst of times. During the summer of ‘08 the exploration dept. told my drillers to contract as many rigs for their E Texas SG as they could find: the day rates and contract terms weren’t important. So by the end of summer they had 18 rigs running in the trend. The motive was absolutely clear: reserve replacement. Their early success in the SG lead to a quick ramp up in value that pushed the stock to $124. And that was the trap: the high decline rate made it an absolute necessity to drill even more wells. For Wall Street the company’s value was strictly based on reserve growth. Profitability was never a part of the conversation. I consulted for the drilling dept. They knew the economic profile of their SG play as well or better than anyone else in these trends.

And that clearly explains their reaction when NG fell below $6.50/mcf. By January 2009, less than 6 months after the ramp up, they reduced the rig count from 18 to 4 and paid $40 million in rig cancellation fees. Their SG play wasn’t dead: they did have some sweet spots that were worth drilling. But most of their acreage wasn’t. The former CEO, Nichols, just last week pointed out that the company wasn’t able to wait out a price rebound. The 100’s of millions of $ paid for acreage isn’t a static investment: leases have two time fuses. The yearly rental, paid on the anniversary of the initial lease date, varies but in the later high priced trends rentals were often equal to the original bonus. So that tract of land they paid $5,000/acre (about 10X what was being paid just a few years earlier) had another big payment just 12 months later. The second fuse was the lease expiration which typically arrives 3 to 5 years after the lease was signed. So much of the acreage taken during the beginning of the boom will expire without being drilled. I suspect this timing was part of Nichols’ motivation for “the end is near” comment. BTW Devon has survived the bust (so far) by selling all their high value assets: DW GOM and Brazil. They are a mire shadow of their former self thanks to the huge bet they made on the SG plays. With NG prices staying low and their wells continuing to deplete I won't be surprised to see them gobbled up by another company in a short while.

The SG trends aren’t dead. Recently Devon still had 4 rigs running in the E Texas play. Sweet spots still persist. But most of the trend won’t support the development costs. And that’s after their has been a big drop in costs. The Eagleford SG play has been offered as an indication that the SG plays are booming back. The hype of the EF SG has nothing to do with NG. It’s the oil yield. Many of these wells produce 5X the value of oil as the value of NG. Like all plays it will take a while to figure out the real potential. Lots of hype over wells that produce 2 million cf of NG with 300 bopd. Don’t see a lot of press release about the 200 mcfpd and 50 bopd wells that will never pay out.

I have a question on NG. If what you are saying: the real condition of NG is being overhyped by all the SG producers with their eurs, as well as their growth in ng reserve potential continuing to increase. If this is so, STO, SHELL, BP, TOT, XOM, etc. all look pretty foolish. Also, if the amount of ng is significantly less than that projected by all the sg E&Ps, that could possibly open them to charges of fraud. Finally, for the eagleford, from EOG's presentation, if I recall correctly, the oil eur projections were somewhere around 400,000 barrels per well. Berman says the average oil well will only produce about 55,000 barrels.

I have a problem with Berman (and Maxwell to some degree) on this. If Berman is correct, NG is going to spike in the near future, because the shale gas will just not be there. Yet, Maxwell's forecast is less than 6 dollar gas until 2014. It seems to me that if the shale gas is grossly overstated, as Berman says, that fact will be known well before 2014. By the way, T. Boone Pickens estimates of available ng track with those of the industry. Who's correct?

I can't comment on shale gas, but there is huge combined LNG capacity coming on-line in the next 5 to 10 years from Australia and the Persian Gulf. The prospect of NG prices rising significantly in the next 5 years -- maybe even in the next 10 -- is dim, in my opinion, unless there is a crash program to convert oil-powered vehicles to NG.

Roger Bezdek: "...That natural gas is not a player in truck fuels."

I assume he means that ng is not currently a player in truck fuels, because ng is capable of being a truck fuel, farm equipment fuel, replacing diesel engines ,etc. I could see an ng centric economy replacing the current oil centric economy. I do believe that is what Shell oil recently indicated.

That caught my eye too. Does anyone know what he meant by it?

My recollection is that he meant that NG isn't a practical fuel for large trucks. But I don't remember why he felt this was the case.

I agree about ng becoming a trucking fuel. Whether Congress gives incentives or not, fleets are moving that way. Clean Energy Fuels just signed a joint deal with Flying J truck stops to put in the ng stations. Clean Energy was started by Boone Pickens, who says we peaked in oil in 2008, so I tend to believe he knows his stuff.

Yeah, the huge increase in LNG capacity will pretty well guarantee LNG / NG will become a significant transport fuel.

And surely in fact, the current low price of NG is a huge bonus. It means as liquid hyrodcarbon production declines, NG will be able to be taken up as an alternative (although I grant it might be a bumpy transition). Just seems common sense.

I don't get the argument that seems to be being put forward here that "NG prices are too low, so we can't develop them, and then go on to say the problem with oil is the price is going to be too high" !! Pretty inconsistent.

As for NG / LNG usage in trucks, there's already existing technology that works. If the expert above stated NG won't be used for in trucks is due to 'practical' reasons, that's pretty poor stuff.

I don't know what is going on in the natural gas as truck fuel market, but I have spent a lot of time around trucks and farm machinery and can say with certainty that if diesel prices rise sharply, in relation to natural gas prices, trucks and tractors can be made to profitably run on it where it is available.

One at a time conversions will probably require slinging the ng tanks underneath the cargo trailers, with connections to the road tractor via quick coupling hoses-this same basic kind of system is used to connect the brakes and lights.

Such trucks could easily travel at least two to three hundred miles between fuel stops,meaning they could be used in any part of the country with piped gas and ng filling stations along major highways.

The technology is mature, dependable, and already in mass production, everything except the larger fuel tanks and hose harnesses designed for mounting on the truck trailer being a possible exception.

Obviously this is going to cost something extra, especially as a truck buyer will probably want a dual fuel capability retained in many or most cases.

But there is no question at all as to whether it can be done, from a technical pov.There are already plenty of machines running on gas where it is convenient to refuel them easily and often , so that small tanks suffice.

Big trucks have places for big tanks, or multiple tanks.

If it becomes necessary, we could convert a very large portion of our heavy truck fleet to ng over a period of a few years.Trucks are much easier to work on than cars because they are highly standardized and designed to be easily and quickly repaired ;cars are differentiated to the maximum extent possible for marketing purposes and very little if any thought is given to ease of repair or modification.

Old farmer mac,

There are companies in the market already in Australia selling the stuff.

Joe - None of the companies will get sued. Check their annual reports: huge sections of disclaimers saying they just offer estimates of those reserves. Just about 5 years ago Shell embarrassed the heck out of itself when forced to do a huge write down of their “proven reserves”. And no one sued them. We’re talking geology and reservoir engineering which have a long precedence of often being incorrect. Shell et al could care less if they look foolish IMHO. These public companies have one primary goal: increase share value. And Wall Street values one metric above all else: increased net assets y-o-y. Very few if any on WS care if there’s much of a profit or not in these plays. It’s all about booking an increase in proved NG reserves.

400,000 bo or 55,000 bo? All BS at this stage IMHO. The play has just begun. There will be wells that do more than 400,000 bo and a lot of wells that will do less than 55,000 bo. The EF is a fractured reservoir play. One well might do 500,000 bo and the next well 1,200’ away might do 20,000 bo. There will be sweet spots and dead spots. The shallow portion of the EF trend is very oil rich. The deeper portion of the trend isn’t. Given a good 3 to 5 year period to get a good handle on decline rates in various sections of the trend I don’t expect reliable numbers for URR to show up for a good 5 to 7 years. And then only if the drilling stays very active.

Who’s correct? Time will tell. But I’ll repeat the same position over and over: any one who offers any number for URR from any trend, SG or otherwise, that doesn’t include price assumptions is a fraud IMHO. I know that sounds harsh but all these folks, TBoone, Art, et all understand the economic side of predicting future resource development. They all know their numbers are meaningless without the price platform factored in. There is a huge URR in the SG plays…at $13/mcf. Not nearly as much at $4/mcf. Devon’s epitaph proves that very well.

Rockman -- You are just plain wrong in saying no one sued Shell for their shenanigans over misstating reserves. They were sued by shareholders, their U.S. employees, the SEC and you name it. They ended up paying more than $400 million to settle these lawsuits (I know this is peanuts to them) and having to do lots of other stuff as well. You can easily verify this information.

Thanks Cat. I thought there were some legal actions but couldn't remember for sure. But I figured if I made such a statement it would be corrected quickly. Good job.

Predictive analysis of oil price based on supply and demand functions.

There has been an historic association of the functions, supply and demand, to the pricing of commodities such as oil. The abundance of these natural resources has led to a taking for granted that price is the determinative factor in assigning supply to the demand function, so that as demand increased, price would increase, sending a 'message' to oilmen that more supply is needed. With this new price, the exploration and recovery operation had not problem obtaining financing, and in fairly short order the supply increased to a point above demand, where price would be depressed, and at sufficient drop in price supply would be diminished (by removal of marginal wells, depletion of others, and so forth).

Today we have a new look at this process. Today, the signals fall on deaf ears as price rises, since even with these higher prices banks and hedge funds are hesitant to lend money where any risk is involved. Supply remains static, or declines, and price continues to rise. Supply is no longer a function of price. And, what is the consequence of this departure?

Where before, a signal to the producers led to increased supply, today either no greater supply is possible, or there is no funding for exploration and drilling. With either inadequate resources or inadequate capital to foster greater production of oil, as higher prices extract ever greater proportionate revenues from the world capital bank, less money is available for other projects as well, all leading to a depressed economy. At this point, demand for oil decreases as a natural concomitant of the decrease in economic activity, and a strange equilibrium is reached with oil remaining at high price levels, while supply again is adequate to meet demand, though not sufficiently so as to depress price to any real extent.

Hence, the usual dynamic between supply and demand for petroleum has been severed. This circumstance has been foreseen and predicted for some time. The fact that is happening on our watch is regrettable, and unavoidable. Individuals at all levels of power have begun to see the progressive nature of the crisis. To date, their response has been to deny the problem, hoping against hope that it will go away. They have set the debunkers to work; the same firms that denied a relationship between cigarettes and cancer, and are today or calling themselves 'climate skeptics,' have been hired to dissemble as to the role that peak oil plays in current global economics. The stakes are seen as high, since these people believe that they can rearrange reality to suit their wants and desires, simply because they have so much money. And yet, are they not also the same folks who are holding on to that money rather than make a truly Herculean effort to increase the supply of oil and 'show' the PO crowd how wrong they are?

At the beginning of 2010, we were asked to predict oil prices at year end. Not having reach that date as yet, we cannot be sure who was closest (it won't be me, because my prediction was that there would be a major disruption of the ME oil fields through some act of terror – but then, that could still happen). Today it looks like the $85-$100 guesses were pretty close. Any real prediction is going to be increasingly risky with the disconnect between oil price and oil supply. If the big players are in serious decline, I would expect prices would not diminish in the future. If they continue upward, economic activity will be diminished, though, and that will further depress the sale of oil at the wellhead. The deniers will say that it was not a supply problem, but reduced demand that caused the decline... and it will go on, gradually dropping as we watch in helpless horror until the end of the Age comes, not in a thunderous wave, but in a mewling trickle, and we are not decapitated, but bled to death from a hundred cuts.


I have a question on NG. If what you are saying: the real condition of NG is being overhyped by all the SG producers with their eurs, as well as their growth in ng reserve potential continuing to increase. If this is so, STO, SHELL, BP, TOT, XOM, etc. all look pretty foolish.
Oman's Oil Yield Long in Decline, Shell Data Show (2004)

The Royal Dutch/Shell Group's oil production in Oman has been declining for years, belying the company's optimistic reports and raising doubts about a vital question in the Middle East: whether new technology can extend the life of huge but mature oil fields.

Internal company documents and technical papers show that the Yibal field, Oman's largest, began to decline rapidly in 1997. Yet Sir Philip Watts, Shell's former chairman, said in an upbeat public report in 2000 that "major advances in drilling" were enabling the company "to extract more from such mature fields." The internal Shell documents suggest that the figure for proven oil reserves in Oman was mistakenly increased in 2000, resulting in a 40 percent overstatement.

The environmentalists and civil engineers (water departments) are very concerned that "fracking" chemicals will contaminate the underground aquifers. Was there any mention of that?

This just out: STO/TLM in a joint venture in the eagleford agree to buy 97,000 acres for 1.325 billion. STO belives it will give them 550 million boe.


Someone needs to send them an email and tell them that world wide energy experts are meeting in Washington DC right now and have decided that shale gas (and oil) is so ridiculous that it certainly can't be dare industry professionals pay real money for these things!

I kind of agree with Reservegrowthrulz2, although I would skip the sarcasm. Have just been browsing Encanas Q2-report. They seem quite enthusiastic about shale gas. They have added their Haynesville play to their key resource plays and have taken a significant position at a another (new) play in Michigan (Collingwood). To me (amateur) Encana seem quite professional and far from incompetent - are they really making a great mistake here.

On the other hand natural gas prod in the USA does not seem to be increasing any more, in the two last data points presently available it even seem to decrease. Although it might be too early to draw any conclusions about stagnating or even decreasing production. This could be due to temporary circumstances not known to me. Still these data might give some support to the sceptics, e.g. for example Berman.

For graph see my post at another thread:

In that post there is also a graph on drilling activity. I am very unsure about how to interpret drilling activity in relation to production, e.g time lags and what portion of drilling activity that goes in the shale plays etc. Any comments on that would be very appreciated.

Yes. Talisman has stated in its press release that it expects the EURs on wells on this acreage will average 660,000 barrels of oil equivalent (50% gas and 50% liquids.) That's 12 times the amount that Arthur Berman said at the ASPO conference this week that he thought Eagle Ford wells would generate.

Maxwell made a dismissive remark. He started by saying that the rock (in Marcellus?) is fairly broken with lots of faults and channels. He suggested that natural gas had been seeping into aquifers for hundreds of years, and the only thing that is different now is that people can now sue Chesapeake. I was kind of shocked that he would say this, really.

Count me in with Maxwell

NG was first extracted in New York in 1825, using hand dug pits and hollowed out logs for pipes. One later line, also of log, ran 25 miles to Rochester. This gas is quite a bit more accessible than you'd expect, so it's no surprise to me that it could make its way into aquifers.

Fracing fluids migrating up a mile is another matter. That should be studied in depth by a third party agency, otherwise you get a Hanford Res type situation, i.e., a very very expensive mess.

Fredonia. 1821. And it was shale gas. Devonian.

Imagine that...commercial gas production 180 years before Art claims it became noncommercial in the Barnett.

2010: The first real analysis of solute transport through disordered porous medium.
So much fun sticking it to RGR.

At the time of Maxwell's talk, there was a woman sitting at my table, and she asked me if I had seen the film Gasland. I hadn't (I have seen the trailer on TV where some guy is able to light his kitchen sink on fire from the gas that was coming up with his water). She then told me that the problem for some people is real and severe, and they are now having to have clean water trucked in.

That's about all I know - some people insist it is a real problem. I don't know any of the specifics, so I can't say where the truth really is. In retrospect, the drilling companies ought to have been monitoring the water quality in the aquifers, and if fracking is really that benign, then the companies that do it would then have the hard data to refute the claims. But for Maxwell to just blow it off as people trying to cash in (without providing any evidence to support this claim) didn't seem right to me.

I once actually obtained a copy of Gasland to show to colleagues... but decided it was just too depressing. But, people here still want to see it. It is like the movie "King Corn": You get to see absolutely straight, rural, earthy people going "We are getting screwed and our way of life, our health, and our community are being destroyed by this."

The beauty of mineral ownership in America, versus a place like, say Canada, is a majority of the ownership is private. So a given community can get together, and decide to not lease their mineral rights to anyone they don't want to, whether their fear of a hydraulic frac fluid migrating through a couple of miles of rock vertically (generally considered to have a permeability 1/10 that of lateral migration without even considering intervening formations acting as a frac barrier or seal let alone any overpressured formations which must be bypassed or at least the laws of physics altered to make this scenario work) is valid or not.

The short form would be, don't lease out your mineral resources if you are afraid of the consequences, imagined or not.

This is simplistic, don't you think? A homeowner with property rights to shale gas probably stands to do better financially by selling their rights to the gas and installing a water filtration system to purify the water than refuse to sell at all. In this case, the homeowner who sells compromises the health of those who choose not to sell and the portion of the community that doesn't have property rights to shale gas.

I don't see what's the problem with natural gas companies disclosing what's in their fracking fluid. If it's perfectly safe, then they shouldn't have any problem disclosing the fluid's contents.

This is simplistic, don't you think?

Not in the least. Its the way the system is designed, and its worked well for a few centuries now. If a mineral rights owner doesn't mind the inconvenience which comes in exchange for the cash, he takes the cash. If some fear, real or imagined, dictates otherwise, he/she can grow dandelions on their property and reap the profits from that. Its their property, they get to do with it as they please.

I don't see what's the problem with natural gas companies disclosing what's in their fracking fluid. If it's perfectly safe, then they shouldn't have any problem disclosing the fluid's contents.

The UIC has been allowing the disposal of NON safe fluids for more than a few decades now...why would it matter whether or not frac fluids are "safe"?

"Its their property, they get to do with it as they please."

Sure. But that doesn't mean natural gas companies can do what they please with the property.

"The UIC has been allowing the disposal of NON safe fluids for more than a few decades now...why would it matter whether or not frac fluids are "safe"?"

The operative word in your statement is "disposal." Are you saying natural gas companies regularly DISPOSE unsafe fluids in people's backyards or underneath their homes?

But that doesn't mean natural gas companies can do what they please with the property.

That would depend on the lease. In some cases, a lease would allow the gas companies to do EXACTLY what they wish with the property, although it might be easier to just buy it outright rather than lease the minerals at that point. My grandmother did exactly this by the way. Sold the 100 acres, lock, stock and barrel.

Are you saying natural gas companies regularly DISPOSE unsafe fluids in people's backyards or underneath their homes?

Nope. I'm saying that the UIC has been permitting the disposal of UNSAFE things for decades and I don't notice anyone claiming that the same technique except with much higher volumes over a much longer period of time is getting around the cement, packers, steel, more cement and more steel to contaminate surface waters. Why not? That stuff is DESIGNED to stay underground, the frac companies reverse the flow and bring back everything they can right after they pump it down. If there was a failure in the design of how these fluids stay miles under the freshwater aquifers certainly 3 headed children showing up in the local population because of chemical contamination of some sort would be headline news WAY before bashing frac jobs became so eco-popular.

I do believe the facts contradict your assertions, but people will need to ascertain that for themselves.

"He suggested that natural gas had been seeping into aquifers for hundreds of years,"

Oil and gas have been "seeping" into the GOM for millenia.

Count me out.

Ghung et al - I’ll jump into the discussion with a simple fact: in the many thousands of DEEP wells that have been frac’d there has not been once case of documented fracs reaching shallow aquifers let alone the surface. Not once. It truly is physically impossible for a well frac’d thousands of feet below ground level to frac to the surface. Companies spend 100’s of thousands of $’s trying to get fracs to propagate 100’+ upwards.

But shallow water aquifers can be polluted by frac’ing activities. Two possible ways. First, rupture of the shallow csg when they are pumping the frac. This is rather rare and becomes obvious by the pressures measured at the surface. The real potential damage to fresh water supplies is the disposal of the produced frac fluids. Thousands of gallons of this nasty stuff is produced back to the surface when they test a well post frac. This fluid is collected in tanks at the well head…can’t dump it legally on the ground. It has to be hauled to a certified disposal well to be injected. Operators hire disposal companies to haul the fluid away in tank trucks. This is an expensive proposition. There is a long history of such disposal companies cheating in Texas. They call it making a “midnight haul”: pull on to the side of a deserted road at 2 AM and dump the load. They prefer to dump it off a bridge: less obvious physical evidence. The operators tend to turn a blind eye because once the title for those fluids change hands they aren’t responsible for them. My Yankee cousins are not keeping their eye on the ball. Stop worrying about those loud frac trucks…they aren’t going to cause a problem. But those harmless looking tankers running up and down the road…that’s who they need to watch. But nothing new there. Industries have been illegally dumping nasty liquids for decades all over New England. Frac fluids are just the new game in town.

Have people been getting methane in their well-water for hundreds of years?
Maxwell reflects the real opinion of the Big Oilers I'm sure.
I wouldn't trust him as far as I could throw on environmental issues (or anything else for that matter).
Same goes for Pickens--they're only interested in finding suckers for the next scam.

Have people been getting methane in their well-water for hundreds of years?

Certainly since I was drinking it in the 70's anyway. For centuries, well, why wouldn't you just drink it out of a stream, why dig a well? Unless of course there was oil scum in the stream....which didn't arrive there by fracing either, but it did come in handy to find oil seeps!

Maxwell reflects the real opinion of the Big Oilers I'm sure.

Nah...just the outcome of the science so far.

Dismissing environmental concerns, bluffing the public with 'expertise' and over-the-top bluster is the norm for oilmen, who believe in science only when it serves their self-interest.

I consult with people who have environmental concerns, specifically about oil and gas activity. I certainly don't have to bluff with my expertise but I certainly have no intention of hiding it under a hat either, particularly during cocktail hour, and not only do I believe in science I get paid to make sure it gets done right.

I certainly don't have to bluff with my expertise but I certainly have no intention of hiding it under a hat either, particularly during cocktail hour

I don't question your expertise, but you spend quite a bit of time preparing your answers so that it won't give away your true identity. So we know that you have written papers but we have no idea what kind of information you can grace us with.

It gets tiresome after awhile the way you dance around the topics. Why don't you just get drunk on your cocktails and spill the beans.

The restrictions on even my hobby time cocktail party conversations are severe. Sorry.

RGR2 is for sure an oilman very probably top management(or retired) as indicated by his slippery sandbagging style of interacting.
This shale gas thing is the biggest thing to happen to US oil/gas since Prudhoe Bay but it's probably very dirty( I'll await EPA evaluation) on groundwater. Big Oil is rapidly turning into Big Gas and it is their last straw.
The US needs to use any EXCUSE to get off oil/gas and on to renewables ASAP.
Big Oil will go down fighting.

maj -- yes...some people have. In fact, about 2 hours west of Houston folks regularly get heads of NG from their water wells. There are commercial NG fields in that area at only 160'. In S Texas there are oil fields at have produced millions of bbls of oil from fresh water aquifers at depths as shallow as 140'. But I don't think those facts shed any light as to whether frac'ing isn't a problem for the folks we're talking about. Again, there is a potential for the SG wells to contaminate the fresh water interval with NG and nasty frac fluids. But not from the induced fractures thousands of feet below the surface...physically impossible. Improper disposal of produced frac fluids is the real threat. And the threat of NG seeping into water wells is real also. But not from the induced fracs. It would be from the leaking casing/bad cmt jobs of the SG wells. An even bigger potential problem would be salt water leaking out of these wells for the same reason. Historicly these circumstances have been the most serious oil field pollution problems in Texas.

Don't you think that the worry people are expressing concerns, not what has happened, but that there is no such thing as risk free? Then, their imaginations take over and you see all the concern about extremely low risk events like seepage from deep well frac'ing.

IMO there are more important problems... NG is a non-player until prices rise in response to need. At that time, having waited until the risk-reward timeline is low, the drilling becomes frantic and, well, haste makes waste.


I agree Craig. The MSM hype over frac'ing has done a great disservice to the public IMHO. There are risks even the regulators aren't very aware of. I made the point some time ago: all those regulators in the NE states should spend a few weeks down here with the Texas Rail Road Commission. In the early days Texas suffered horrible environmental consequencies from oil/NG operations. But over the decades new rules were designed AND ENFORCED with a vengence. As you say: nothing is risk free. But if those states adopted the policies we have in Texas they could eliminate much of the potential damage IMHO.

Pretty much agree with Chris Skrebowskis' assessment. Lower price has seen drilling scaled back in ME, all the while decline is eating away at spare capacity. Next big events are Shedgum and Uthmaniyah dry oil areas in Ghawar watering out.

Kind of wish I was there. When does Obama speak?

Thanks for the mp3, would be great if the quality was a bit better though

Download this:


Process the file under "effects/noise reduction"

It was fast and worked well for me.

Thanks for the info, will try that on the next ones (still managed to go through most of them basically)

Open the MP3 in WavePad. Edit->Select All. Effects->Noise Reduction.

I used "Apply Auto Spectral Subtraction" and selected the Preset for "Apply To Voice" (this took a few minutes).

I then returned to "Noise Reduction" and processed the file under "Apply Multi-band Noise Gating". Select the "Remove Hum and Hiss" preset.

De-select and play the file (or save it first). Not perfect but much better.

So why didn't you upload these filtered files somewhere and post links? There is no reason for everyone to do it.

Sorry! Out of town guests saying their goodbyes ... required my time :-/

The original files were a bit raw. Perhaps there is a more archivable recording or someone with more expertise/time can rework them. Great stuff, though.

Thanks, Peak!

I've replaced them all, thanks ghung for the edit sequence. And apologies to anyone whose stream was killed as the replacement went in.

The DVDs will trump these of course, $150 though.

2014... was hoping for something a little longer.

Chesapeake has also just announced that CNOOC will be paying more than $2 billion for a one-third interest in their Eagle Ford shale acreage -- $1.1 billion in cash and another $1.1 billion in drilling carries through 2012. I think it's ironic that two multi-billion dollar deals get announced in the Eagle Ford shale in the same week that TOD's own Art Berman goes to the ASPO conference and bashes the play saying that 80 percent of the wells in it will be uneconomic. Art seems like a nice guy, but I swear he's got to have some of the worst timing for making off-kilter predictions of anyone in the business. Of course his short remarks about the play at ASPO were strange anyway. He said looked at 53 wells where there was enough production data to make a "wild-assed guess" about potential ultimate production and arrived at an average of 55,000 boe. He said he only looked at oil production and ignored gas because "they are telling us it is passe." Huh? You would think it would make sense to look at both together if you're actually trying to do something of value to assess the economic viability of an important new field with hybrid characteristics.

Cat - I agree that Art picked the wrong trend to knock the SG plays. Above all else it isn't really a SG play per se. I know a half dozen players in the trend and none are there because of the NG. It's the unusually high oil yields that's pushing the play. Some of the better wells are producing 5 to 7 times their value in oil compared to NG. The NG yield isn't insignificant but doesn't rival the flow rates of many of the other SG plays. I also agree that it's a tad premature to be predicting any sort of trend average. The players are still trying to find the distribution pattern of the sweet spots and the not-so-sweet spots. For instance they are finding that the higher oil yields are being found in the shallower areas of the play with much lower oil yields in the down dip areas. And the service companies are still in something of a learning mode on how to drill/complete the EF. While the oil yield makes the EF attractive it also makes the effort much more complex. The EF may also differ significantly from the other SG plays in that the production appears to be coming solely from fractures in the formation. Other SG play produce from their fractures and also the rock matrix. Thus any effort to compared EF declines to other SG plays would be rather faulty IMHO. Also, like every oil boom play in history, we'll see excessive reporting about the good wells and almost nothing about the economic failures. The EF has turned into a promoters wet dream. The early lease speculators picked up a lot of land at $100 - $200 per acre that's now going for over $10,000/ac.

It will be interesting to see how some of the very large acreage positions get developed. As mentioned before there are two critical time factors. Rentals are typically due on every anniversary of a lease which hasn't been drilled yet. These days it's not uncommon for the rental to be the same price as the original lease bonus. The second is lease expiration. Most leases expire in 3 to 5 years from when they are taken. I did a very rough calculation: given the average drill time for EF and the size of some of these bigger acreage positions. It will take more rigs to fully develop those positions than exists in the US today. And I don't mean just in the EF trend. They'll need every rig in the country drilling the EF but even at that leases will be expiring before a rig can get to them. But companies know this as well as the fact that a 10,000 ac position may only have half or less of that area as drillable locations. Whatever one might guestimate to be the key economic metrics in the play today I suspect they'll improve somewhat over time.

There's also a bit of "unintended consequences" from the EF boom: a delay in other NG operations. We're in the process of completing a well in the upper Texas coast and need to frac it. But Halliburton won't even put us on a wait list...told us to check back with them after 1 January. Similar story with tubular supplies. When drilling took a drop all the service companies mothballed equipment and cut back on hands. They are happy with the activity level in the EF but are not going to beef up their ops any time soon.

Rock - You're right on the lease prices. The Chesapeake CNOOC deal came in at $10,800 an acre for 200,000 acres (1/3rd of the CHK position) while the Talisman/Statoil purchase came in at $10,900 an acre for 97,000 acres. Chesapeake plans to ramp from about 10 rigs in the EF now to around 40 rigs in 2012. Talisman has announced that it expects EURs from the Eagle Ford wells to average around 660,000 boe (about half gas and half oil) -- a factor of 12 times the EURs suggested by ART at the ASPO conference. I agree it's early to know with any certainty what the EURs will be. Chesapeake, in its press release, says it could see total production from the EF at 500,000 barrels per day in ten years. If that's anywhere in the ballpark, EF will be a pretty damn significant oilfield.

I find it some ironic that CNOCC can buy mineral rights in Texas, without so much as a urp from the federal government or an angry public after all the rhetoric about evil British Petroleum in the Gulf of Mexico and Swiss ownership of Transocean. If the marraige with Chesapeake goes south I guess CNOCC will file P-5's with the Railroad Commission and we will be working for the Chinese a lot sooner than I thought we would be.

Will 660,000 BOE, at 7 million dollars leasehold, drilling and completion costs per well be enough or will the EF end up a little like the Barnett where only 30% of the wells will actually payout? If those estimated EURs are half gas I fear yes.

Cat - There is something of a precedent for the EF: the Austin Chalk formation. It had gone through a couple of booms in Texas with the last one being horizontal redevelopment. The EF actually just lies a depth of just 100's of feet from the AC. The AC was another fractured reservoir play and went through the same kind of hype we see in the EF today. And some of that hype (in some areas) proved to be valid. NG in the EF has been know for over 30 years. The EF (or its equivalent formation) runs from the Mexican border all the way into Mississippi. What's got everyone excited now is finding an EF province with such a high oil yield. Many folks tried to develop NG in the EF when the AC was booming but those efforts failed for the most part. If memory serves it took a good 7 to 10 years for the value of the AC to be determined in the various parts of its trend. I can remember as many companies that were slaughtered in the AC as ones who made a small fortune. In truth the hype over the EF is really nothing compared to the AC boom days. So many old war little time. LOL.

Are there presentation slides available anywhere?

Anyone have an MP3 of Skrebowski?

Dear TOD -

Thanks to all the speakers, attendees, and reporters!

Dave - Great notes!! Thank you.

For any of this audio please use creative commons: Attribution-NonCommercial-ShareAlike



Similarly, I'd like to find an mp3 or transcript of the Ralph Nader talk.