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Gas Boom Goes Bust
Posted by Jonathan Callahan on February 6, 2012 - 10:15am
The current boom in drilling for ‘unconventional’ gas has helped raise US production to levels not seen since the early 1970′s. This has been an incredible boon to consumers and has kept spot prices contained below $5 per million BTU for the past year, recently dropping below $3/mmbtu. Unfortunately, this price is below the cost of production for many of these new wells. When the flood of investment currently pouring into natural gas drilling operations dries up, the inevitable bust will be as scary as the boom was exciting.
The Problem
A well written and realistic overview of the situation appeared in a Dec. 6, 2011 article in Rigzone: Musings: Imagining The Future for The Natural Gas Industry. In this article, author G. Allen Brooks focuses on the damaging impact low natural gas prices have on the industry. The following excerpt captures the main message of the article:
Gas shale wells are expensive to drill and complete as well are the cost of the leases on which they are drilled. Even though initial gas production from shale wells is huge, the low price has depressed the amount of cash companies are receiving. As a result, producers are spending well in excess of their cash flows. To supplement cash flow, producers have engaged in every known trick in the finance book to boost available funds. These tactics include hedging forward future production whenever high prices are available, tapping Wall Street to raise equity and debt, and seeking out relationships such as joint ventures with larger, and often foreign, oil and gas companies.
In order to access Wall Street capital, producers have needed to demonstrate that they are being successful in exercising a strategy for aggressive wealth creation. That means aggressively buying acreage and drilling wells. Exercising a successful strategy often creates a vicious cycle – more acreage and wells equals increased production and depressed prices. This cycle will continue as long as the music (Wall Street’s money) continues to flow. Once that stops, we will see how many producers can find a chair in the room. In the meantime, the fun continues!
Let’s review the pertinent facts and big trends to try to understand the situation and get a sense of the most likely outcomes.
The Backstory
In recent years, the news media have contained lot of hype and misinformation about energy issues. Energy reporting is plagued with incorrect/inconsistent use of units, misleading charts and a general lack of critical thinking. In order to put the current natural gas crisis in context we need to understand the role of natural gas in the United States economy. A review of publicly available data can help provide unbiased answers to several key questions.
Question 1) How does natural gas figure into our overall energy consumption?
Figure 1) from the Energy Export databrowser shows US energy consumption of the five primary sources of energy: nuclear, coal, oil, gas and hydro-electric. Data are in consistent units of “million tonnes of oil equivalent” (mtoe) as provided in the British Petroleum Statistical Review. [1] The general trend toward increased energy consumption is obvious as are dips due to the 1973 and 1980 oil crises as well as the economic crash in 2008. Initial data for 2010 show a return to increased consumption following the massive injection of Federal stimulus money. We can also see that oil is the primary source of energy in the United States and that natural gas has recently outpaced coal in importance. In 2010, natural gas accounted for 30% of total energy use.
Figure 1) US consumption of energy from primary sources.
Question 2) What is the balance of production and consumption for natural gas?
Figure 2) uses the difference between production and consumption data to estimate net imports/exports of natural gas. Production matched consumption throughout the 70′s and 80′s. Since 1990, the US has had a pretty steady import habit with almost all of the imports coming from Canada. [2] Production has been increasing quite steadily since 2006 but we have also seen increased consumption some years resulting in only a small decrease in imports. Nevertheless, it would only take a modest conservation effort for the US to become “energy independent” with respect to natural gas. Unless, that is, more consumption switches from using oil as a fuel to using natural gas. As we saw in Figure 1), replacing even a fraction of our oil use with natural gas would quickly overwhelm US natural gas supply.
Figure 2) Production (gray), consumption (black line) and imports (red) of natural gas.
Question 3) How is natural gas used in the United States?
The US Energy Information Administration has data on Natural Gas Consumption by End Use. Figure 3) shows the categories tracked by the EIA along with one more that appears to be planning for the future. Natural gas vehicles currently account for only 0.14% of total consumption.
Figure 3) US Natural Gas consumption by sector.
Question 4) How have natural gas prices evolved?
Figure 4) brings together data from three different EIA datasets [3] It is clear that prices before the year 2000 were relatively stable compared with prices after 2000. The increase in drilling rig activity after 2000 is also evident along with a significant increase in marketed production of natural gas beginning in about 2006.
Figure 4) US Natural Gas Production, Active Rigs and Wellhead Price
It’s worth having a closer look at the period since 2000 as seen in Figure 5). Here we can see how the number of active rigs often closely follows the price with a 6-12 month delay. The connection between number of rigs and production is less obvious but it seems clear that the sustained rise in active rigs after about 2002 has been responsible for the steady increase in production since 2006. Surprisingly, the rapid drop-off in drilling activity since 2009 has yet to result in any decrease in production.
A detailed explanation of the four price spikes seen in the chart is given in a March 6, 2009 Oil Drum post: The Anatomy of a Natural Gas Price Spike – Past and Future.
Figure 5) Natural gas production, rigs and price since 2000.
Question 5) How much natural gas is in storage?
According to the EIA Short Term Energy Outlook, a warm winter has left the use US with record amounts of natural gas in storage for this time of year. Figure 6) shows that the US is currently above the upper range of historical levels and are projected to stay there. Nothing is certain, of course. A disruptive hurricane, a bitterly cold and extended winter, or a punishing summer heat wave could bring storage back down. But without any of these extreme-weather events the EIA is projecting that the natural gas glut will continue for at least the next two years.
Figure 6) Natural gas storage levels.
The Finance Story
As is evident in the graphs above, a recent increase in natural gas production, combined with decreased consumption due to a warm winter, is leading to a supply demand imbalance and very low prices in the United States. The question that now arises is: To what extent can current prices support additional drilling? To answer this question, we need to understand how energy companies use the markets to hedge — to sell product forward to lock in a price.
Question 6) How does ‘hedging’ work?
Drilling a natural gas well takes time, typically from 3-6 months from spudding until completion. When drilling begins, companies have an estimate of what it will cost to complete a well. If they hire talented geologists, they will have a reasonable guess as to the amount of natural gas they hope to find. What they don’t know is what price that natural gas will command 6 months – 2 years down the road. For this they have two options: 1) gamble that the price in a year will be high enough to generate a profit; or 2) ‘hedge’ by selling production forward on the futures market.
There is always a market today for natural gas that is to be delivered in the future. (Henry Hub natural gas futures). The sellers of these futures contracts are the natural gas producers who want to guarantee a price minimum. The buyers of these futures contracts are typically large consumers of natural gas like power plants who want lock in a price maximum. It’s basically the same thing as buying a season’s worth of heating oil at a fixed price the summer before the winter heating season.
We can do a little time traveling by looking at what the futures contracts for natural gas were two years ago when the now 1-year-old producing wells were first penciled out on corporate balance sheets. A futures chain simply connects the futures contracts for one month out, two months out, etc. to form a continuous chain when plotted. Figure 7) shows futures chains for natural gas leading up to January 23, 2010. On that date, the futures chain had a seasonal cycle which shows that natural gas prices are generally expected to go up for the winter heating season and then down in the spring. Figure 7) also shows what was expected at that time to be a generally increasing price trend.
Figure 7) Natural Gas futures chain from Jan 23, 2010.
On January 23, 2010, natural gas for delivery in February of 2012 could have been hedged (sold forward) at ~ $7/mmbtu and would have generated a tidy profit if well completion costs ended up in the $4/mmbtu range. (Please note that futures prices are given per million BTU while production is given in units of thousand cubic feet. The conversion factor depends upon the gas stream but is typically somewhere between 1020-1100 BTU/standard cubic feet. A very rough conversion is 1 thousand cubic feet (kcf) ≈ 1 million BTU (mmbtu).)
Things looked a little different in late January, 2012 as seen in figure 8). On January 22, 2012, if companies hedged 100% of their production 6-24 months out they would have gotten less than $4/mmbtu in February 2014.
Figure 8) Natural gas futures chain from January 22, 2012
To make things clearer, lets take a look at the evolution of a single futures contract — the four-month futures contract. If you started drilling a well today you might hope to have significant production in four months and could lock in a price with the four-month futures contract. Figure 9) shows how the price of that contract has evolved over the last two years, briefly touching $4/mmbtu on a few occasions before moving decidedly lower on October 15, 2011.
Figure 9) Evolution of natural gas four month futures contract.
Question 7) Who can make money at these prices?
From figure 4) we know that prices below $4/mmbtu were typical before 2000 but very rare since then. Given our lead off quote’s contention that “gas shale wells are expensive to drill and complete” we need an assessment of which shale gas plays can turn a profit when prices are below $4/mmbtu.
Luckily, Goldman Sachs already did this analysis as reported in a recent presentation by Range Resources. (I would encourage anyone interested in shale gas production and finance to look at this report. While I am often skeptical of corporate reports, this presentation answered a number of questions with detailed information and charts.) Slide 11 from this report contains information from the Goldman Sachs report on the NYMEX price required to produce a 12% Internal Rate of Return — the threshold for a project to receive financing. Transcribing the information from the Range Resource presentation and adding on $3/mmbtu and $4/mmbtu thresholds paints a rather ugly picture for the shale gas industry today as seen in figure 10).
A detailed and even less optimistic study of well performance and potential profitability in various shale gas plays also appeared in an August 5, 2011 Oil Drum post: U.S. Shale Gas: Less Abundance, Higher Cost.
Figure 10) Relative profitability of various shale gas plays
The Bust
The situation depicted in figure 10) is not just theoretical.With current spot and future prices below the cost of production, some companies are in trouble. Here are some newsworthy items to convince you that the jig is up — whatever the President said in the State of the Union speech.
Jan 20: Form 8-K for EQT CORP
In light of lower natural gas prices, the resultant reduction in projected cash flow, and consistent with its determination to live within its means financially, EQT Corporation has decided to suspend development in the Huron indefinitely.
Jan 23: Natural gas glut, low prices, prompt Chesapeake to cut exploration and production
Faced with decade-low natural gas prices that have made some drilling operations unprofitable, Chesapeake Energy Corp. says it will drastically cut drilling and production of the fuel in the U.S.
Jan 24: Prices continue to slide on gushers of natural gas
“It would not surprise me to see gas prices below $2,” Schenker said. “If supply continues to outstrip demand in a massive way throughout the year, it’s going to be hard to find a bottom for the market.”
Jan 26: Carbo Ceramics down almost 20% following disappointing earnings report
Noting “challenges beyond typical seasonality,” the company said the severe decline in natural gas prices during the quarter led E&Ps to reduce capital spending, leading to a sequential reduction of about 70% in its Haynesville proppant sales volumes.
Jan 30: Comstock to focus drilling on oil plays
US producer Comstock Resources has become the latest gas-focused player to shift its investment away from natural gas amid low prices.
Jan 30: Natural gas price drops after Energy Dept. report shows supplies well above 5-year average
Barring any unseasonable swings in the weather, natural gas companies likely will trim production by another 2 billion cubic feet per day this year, independent energy analyst Stephen Smith said.
The Consequences
Clearly, low prices are going to affect many in the industry. But that is not all. Low gas prices put pressure on other sources of energy used to produce electricity. Natural gas competes against coal and wind and solar photovoltaics and is now the lowest cost provider. We should expect 2012 to be a year in which we see a variety of knock-on effects:
- Natural gas producers and investors with poor hedge books and too much debt will end up in bankruptcy court.
- Drilling operations will focus on liquids-rich plays only.
- Jobs creation in the natural gas drilling industry will fall well short of expectations.
- Several older coal-fired plants will close.
- New wind power generation will fall — especially if the production tax credit is not extended.
- Natural gas fueled fleet vehicles should become more popular.
Low gas prices will have positive and negative ripple effects throughout the economy. The final question one has to ask is: “How long will prices stay this low?” And that is one for which there is simply not enough public information available. It would take a serious accounting effort, using the production stats from all producing gas wells to make some decent estimates about decline rates.
The bottom line is that natural gas is a cyclical industry which recently enjoyed a very large boom. As night follows day, a bust is sure to come. Based on the information presented above, I would humbly submit that it has just arrived.
Footnotes:
- In Figure 1) the primary energy values of both nuclear and hydroelectric power generation have been derived by calculating the equivalent amount of fossil fuel required to generate the same volume of electricity in a thermal power station, assuming a conversion efficiency of 38% (the average for OECD thermal power generation). [↩]
- EIA — US Natural Gas Imports by Country [↩]
- Data for Figure 4) include EIA datasets: Gross Withdrawals and Production, Crude Oil and Natural Gas Drilling Rig Activity, and Prices. [↩]
Contact
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- Tech support: support at theoildrum dot com
License
This work is licensed under a Creative Commons Attribution-Share Alike 3.0 United States License.
Hi, as for the decline rates:
A few years ago I had compiled a few data, which resulted in graphs, which are still up in the web:
http://www.flickr.com/photos/30275508@N02/2836548901/in/photostream
This graph shows the decline rates of horizontal and vertical wells, which follow a rather logarithmic function als the following graph (loglinear y-axis) shows:
http://www.flickr.com/photos/30275508@N02/2836548903/in/photostream
As far as I remember I took the data from this source on google archive, which has disapeared meanwhile:
http://209.85.173.104/search?q=cache:HZ-HBMI4rXgJ:blogs.oilandgasinvesto...
So now I uploaded a copy here:
http://home.wtal.de/kaelberer/offen/dt-bank-from-shale-to-shining-shale.htm
I hope this helps, otherwise feel free to ask.
well laid out argument. I am surprised at how short lived this boom was, if you are right.
Are drilling companies more savvy about volatility these days to have a business model that can hibernate between changes in price?
midi - If by drilling companies you're referring to the drilling contractors and not the operators they have been employing an age old strategy of dealing with slowdowns: don't over expand operations/equipment. Back in the last boom of '07-'08 a lot of new drill rigs were built with many heading overseas. And then the price collapse of late '08 hit the operators and many rigs were "stacked" before they recovered their cost. This time around a lot of the support contractors expanded but not as much with the drill rigs. The smaller services required capex expenditures of tens or hundreds of $thousands....not the millions to build a new rig. Additionally a drilling contractor might build a new rig but then came the problem of finding experienced hands to work it. While there were lots of newbies to fill the slots thanks to high pay, they can cause a lot of accidents running up liability. On top of that many operators (such as Rockman) won't use a driller with a bad safety record...again a liability issue.
So they cold stack the drill rigs in their yards and wait. It's a tender balance between the decision to idle a rig or reduce your day rate to keep it working. So far I've seen them chose to idle than cut rates. But it's still early in the slow down. Just as with operators: cash flow is king.
cheers
As this bubble bursts and more aging coal-fired generating plants are closed, replaced by "clean, abundant natural gas", it seems inevitable that gas prices will spike again and follow the same stair-step increases that we've seen with crude oil. Those producers that survive the bust will do very well indeed; not so for consumers who are being boxed in yet again.
Whether by design or circumstance, natural gas and grid customers are being set up for more energy pain. Sorry for restating the obvious....
The latest KustlerCast, from Thursday:
We can only hope. Drilling for America's clean burning fuel provides good paying jobs, generates economic activity at multiple levels, for a fantastic bridge fuel which we certainly have quite a bit of. It would certainly be nice if the promoter/Wall Street aspect of developing these types of resources was minimized, but the drilling business has always had a boom/bust component to it, and always had room for those looking to make a quick buck, flip their acreage position and retire to the Bahamas.
FOR ALL
Since I don't drill the fractured shales I don't have a detailed handle on their economic viability at current low prices. But I do know that my conventional NG plays were 2 to 3 times as profitable as many of the shale plays...even some of the oily ones. There just aren't enough conventional prospects for all the pubcos. But due to the decline of NG prices I've just cut my conventional gas drilling by $40 million which represents a total drilling expenditure of around $100 million. Granted in the big picture that's not a lot but we are a relatively small company. But we're also privately owned so we don't get penalized by Wall Street for not replacing our reserve base as it depletes. For us it's all about profitability. It's difficult to quantify the effect of Wall Street on those pubcos in the shale plays. But I've worked for pubcos and understand the pressure and strategies. If a pubco has a shale prospect to drill that will not make a $1 profit yet add to the reserve base they'll likely drill it. I've drilled more than one well for a pubco when it was known that doing so would be a money loser. But the boost to stock valuation (at least short term) made it the "logical" move. I once spent almost $20 million drilling horizontal wells with the company knowing that capex would never be recovered let alone generate a profit. But the increased companywide flow rate gave Wall Street what it needed to raise our share price 400%.
And yes, the company eventually filled bankruptcy and disappeared. But the original shareholders didn't care: they had already cashed up. The only silver lining was that a WS raider did a hostile takeover of the company and was left holding the empty bag. Unfortunately a lot of unsophisticated investors were flushed down the toilet with hm.
In our system, this is not unexpected. Caveat emptor. And as you have pointed out before, if the business model is to collect acreage to drill a little of, and then flip, it is actually an EXPECTED result. Promoter techniques are alive and well in the oil patch.
thanks for the insight, Rockman. Am a newbie here. Was always curious what fueled the drilling of unprofitable nat. gas wells.
Looking at fracked well profitability, it doesn't seem $2.584/MMBtu is a sustainable price. How much of this stuff bears oil that will help them off-set? And how much of it is just Wall Street mania/overshoot?
I really can't see much good coming from this shale boom. We have artificially low prices that are harming alternatives. We have higher depletion rates within the wells themselves which belie the 100 years of supply claims. But the stuff, except what can be off-set with oil profits, just doesn't seem to be economically viable at much less the $4.50 per MMBtu.
As for reserves, I saw a recent estimate that proved/probable reserves were closer to 25 years at current consumption. Do we really want to increase Nat Gas demand with such an unstable and uncertain supply base?? It just seems to beg for very high volatility.
To quote BTO, "You Ain't seen Nothing yet!"
Super Frackin' Gasolicious Extra Oiliosis!
http://alfin2300.blogspot.com/2012/01/super-frackin-gasolicious-extra.html
Guy - Don't let the marketing hype from the frac companies fool you. There are always some marginal improvements along the way but seldom game changers. The disintergrating frac balls is the most interesting I've heard of lately. I've also heard they aren't working quit as well as advertised. I did my first "super frac" in Lavaca Co, Texas in 1978...34 years ago.
The really big game changer has been horizontal well bores. But frac'ng them isn't done much differently then done 40 years ago in vertical wells.
Disintegrating frac balls...sounds painful. I'm surprised someone hasn't designed a pressure calibrated check valve of some sort, or a combo drilling/fracking bit that can remain in place as they drill/frac; some sort of expanding device behind the bit that closes off the bore as sections get fracked.
Ghung - There are "packers" (envision corks in wine bottles) that can be used to isolate sections of a hz hole. But they are expensive and, more importantly, time consuming to use. And if you screw one up badly enough you could lose the entire well bore.
What frac balls do: as the frac is pumped threw, let's say 600 holes in the casing over a 100' interval the frac fluid goes threw the holes with the least resistance. So if most of the frac fluid goes threw just 20' of the interval the resultant fracture might not be as extensive as hoped for. But the frac balls will obviously concentrate on the holes taking the most fluid and thus plug them off quicker. The fluid is then forced to the next easier flow patch and they are plugged by the balls, etc, etc.
But then the frac balls need to be removed otherwise they continue to function as designed: plugging flow paths. During the production phase there are various restrictions the balls could at least partially plug. But an operators can go in with a work string and flush everyone of the balls out. But, again, that takes time amd money but very doable. The disintergrating frac balls would save that money. Unless, of course, they disintegrate too soon and cause a bigger mess. I've heard that this has happened on occassion. In either case, they aren't game changers IMHO.
I think Baker's disintergrating 'frac'in balls are the frac'in balls that slide the sleave to shut off one interval and open the next.
I hope Schlumberger is using disintergrating fibers too !
The BIG takeaway:
Wouldn't that defeat the purpose?
I don't think so. The purpose of the fibers is to increase viscosity of the frac' fluid, thereby increasing the propant carrying capacity. When the frac' is over, the gell breaks(looses its viscosity) so that the frac fluid will flow back. If fibers are left behind, they would act as a plugging agent, inhibit flow. At least that is my take on it.
Ya know, this is all going to leave a bunch of extremely interesting ichnofossils.
Whatchyall are doing is bioturbating a virgin rock formation. Should be really interesting when these formation daylight in a few million years givortake. HAhahaha
...and this brings up an interesting thought in regards to WILDERNESS definitions.
Rockman,
As you don't think fracking is a game changer, and horizontal drilling has not greatly changed lately except that longer laterals are generally being used, to what do you attribute the change in average Bakken daily well production from about 9 bpd in Novenmber, 2007 to 142 bpd in November, 2011, if not better fracking technology? And by the way how many stages were in your "super frac" in Lavaca Co, Texas in 1978?
Thats easy Carl, the answer is Fracking is a real game changer, I imagine in a year or two Rockman will finally break down and admit it.
guys -- You don't seem to get it: frac'ng was a huge game changer...over 40 years ago when we started doing it big time. Many of the great west Texas oil fields would have never recovered much of their reserves if not for frac'ng. That game change was made a very long time ago. I frac'd my first Eagle Ford well over 25 years ago. I did my first "super frac" over 30 years ago in Lavaca Co, Texas. I drilled 48 horizontal wells into a fractured carbonate shale (Austin Chalk) decades ago. Almost 20 years ago I drilled a series of horizontal wells that increased companywide production 400% in less than 9 months. In 1973 I was in grad school at Texas A&M running mechanical frac models in the petroleum engineering dept. Sorry Corny but you are decades behind in understanding the technology.
Folks don't seem to be paying attention to the details I spew out. I know the terminology can be confusing but please pay attention...it will help avoid confusion. I've never said frac'ng or hz wells weren't game changers. What I've repeated said is that they are not new technologies. A very simple Google will prove it. The shale plays got hot in the mid 2000's because of NG prices ramping up as well as the desperate attempt by pubcos to replace their depleting reserve base. The same reason the fractured carbonate shale plays got hot in Texas decades ago: NG prices rose. Check the rig count in the east Texas dry shale gas play today: going into the toilet big time as NG prices have fallen. Obviously not because we suddenly forgot how to drill horizontally or frac. It's the money, baby. As always: follow the money. If oil were selling for less than $40/bbl you wouldn't be seeing the drilling activity in the Eagle Ford you see today. How do I know? Really freaking easy: oil was selling for less than $40/bbl in 2000. And we knew the oil was in the EF decades before. And we had the same frac and horizontal drilling technology then as we have today. Go pull the data base up (you do have the same detailed data base I do, don't you?) and you'll see the EF didn't start kicking into high gear until 2006....just when oil prices started climbing. Must be a coincidence, eh?
Rocky,
[Edit] Here are my questions again.
As you don't think fracking is a game changer, and horizontal drilling has not greatly changed lately except that longer laterals are generally being used, to what do you attribute the change in average Bakken daily well production from about 9 bpd in Novenmber, 2007 to 142 bpd in November, 2011, if not better fracking technology? And by the way how many stages were in your "super frac" in Lavaca Co, Texas in 1978?
I'd imagine that most of the Bakken wells circa 2007 were verticals. The wells existing in 2007 were conceived in 1990-2005. Bakken oil trades at a discount to WTI (due to transport costs). Right now, it's about 76% of WTI but in years past it might have been closer to 85%. IIRC, the average oil price in 2005 was ~$55/bbl thus bakken oil at the time may have been ~$46. Longer, multistage fraced horizontals may not have made sense at those prices.
Also, I'd imagine that reservoir characterization has improved in the last five years which allows the oil to be more precisely targeted. This has probably had the most significant impact on production in the past few years.
In any event, horizontal wells and fracking isn't new and isn't a "game changer" contrary to what "the street" will tell you.
You mean "reservoir characterization" of "tight shales" "has improved in the last five years".
We are talking about shale here people, this is the BOTTOM of the barrel. The crap. Simplest geology out there. If someone told me WAY back in 1999 that they had improved reservoir characterization in SHALES I would have laughed now I just shake my head. What are you going to do with all your gas anyway? use it wisely???
No, that was 1987. There was a whole boom and bust cycle of hz drilling the bakken from 1987- 93. These were completed open hole without frac'ing. Frac'ing bakken hz wells was first utilized extensively after about 2000. Multi-stage frac'ing in the bakken took off about 2007.
Horizontal drilling wasn't a game changer, niether was frac'ing. Multi stage frac'ing of hz wells was the game changer. That was driven by the a doubling af oil price to about $ 70. That is what made it economical to multi stage frac many of these these long laterals.
To test this theory, see how many of these multi stage frac'ed wells would be economical with oil at $35 and $11.5 million drill and complete costs. $35 oil nets back about $25 after royalty and taxes.
Green,
Why imagine when there are facts to be had. I concur with Banned. He's got his Bakken history down quite well, believe me. I do not rely on "The Street" for any information at all.
There is an animation on the NDIC site under recent presentaions. The 2nd line on the list ' Bakken Shale Production -1985- 2000' 1-25-12 (AVI), (whatever that is) shows the development history.
https://www.dmr.nd.gov/oilgas/
I think this is what Rockman wrote up there, Carl:
.
Carl - pay attention: I've repeated said I'm not that familiar with the Bakken. OTOH did I ever say you couldn't improve Bakken production by frac'ng a hz well in it? You're not paying attention...slow down and read what I've said. Of course frac'ng could improve the performance of a Bakken well. But the frac used in your example may have been similar to one designed 30 years ago. I'll try to make it very clear this time: FRAC'NG AND HORIZONTAL WELL BORES ARE GREAT TECHNOLOGY. Just as they were decades ago when they were first developed.
And I'm sorry but improving the well from 9 bopd to 142 bopd doesn't impress me at all. If they were using some new greatly improved technology they can keep it as far as I'm concerned. LOL. Decades ago I frac'd a 35 bopd well in the Smackover in Miss. and got a 1,200 bopd well. Granted that was something of a lucky fluke. Also don't expect me to be impressed with 6,000' laterals in the Eagle Ford. About 7 years ago I was put up for a contract to drill 30,000' laterals for Maersk Energy in an offshore Qatar field. BTW they hold the current world record...a little over 40,000'. The Lavaca well was a vertical and thus a single stage frac...500,000 pounds of proppant. An impressive row of 26 frac trucks. It was in the back reef facies of the Edwards Limestone. Operator was Howell Petroleum. Didn't make a very impressive well for the effort.
"...your only purpose in being here is to impress others with all your tall tales". Not my only purpose but an important one none the less. As we say it Texas: "It ain't braggin' if it's true". LOL. Quick...a show of hands...who hasn't at one time or another been impressed by the Rockman? More than once I've impressed myself...and I'm not easily impressed.
Rockman,
[edit]
So what is your answer about the 9 to 142 improvement?
People at this site need to know exactly what is the cause of the run up in Bakken oil production, because that's what's going to happen in evry other shale play in the world. If you don't know, then just admit you don't know. All you are doing is bluffing, and this ain't no card game.
Good grief - how many times does he have to tell you. He just said that an improvement to 142 bopd is not impressive at all. And it's not. What is your question?
Why don't you present us with your data showing how impressive the Bakken production is compared to the daily consumption of crude oil in the U.S. I am ready to learn.
Wow! An improvement of 142 bopd is not too impressive in a single well. However, an average improvement of 142 bopd for every Bakken well is pretty impressive in my opinion. Maybe you should go back an re-read his question.
North Dakota probably has the easiest production data to find of any state in the country. It is obviously not going to stop peak oil or supply the the daily consumption of the entire US, but is has increased from around 125,000 BOPD in 2007 to roughly 510,000 BOPD in late 2011. I guess that is not impressive to you or Rockman, but I think it is somewhat noteworthy.
What I find interesting is the rate of depletion of these wells in general:
This chart shows "Normalized Production" for Bakken HZ wells, using oil rate of barrels per day since 2005.
If you squint hard enough, it looks like we might be getting better at maximizing production with worse performance on the tail end.... as time goes by. Look at the difference in curve-shapes between the early wells and the more recent, that's your "big jump" right there; however, the "lifespans" are awful.
And recent coversations between Jim Kunstler and Arthur Berman {Feb., 2012: http://kunstlercast.com/shows/kunstlercast-192-arthur-e-berman-petroleum... } have indicated the tail is not "fat", on average.
Now, we are going to run out of capital just when we need to keep the drills turning. These following charts are equally as interesting to me; this one shows exponential increase in the number of rigs, in the Bakken:
As well as length drilled and depth drilled as per this graph:
WOW! That's a steep decline rate! It's about an 85% decline in three years.
Obviously, if you're drilling in the Bakken, you're in it for a good time, not a long time. And, as you say, the higher the initial production, the steeper the decline.
Not good, not good at all.
Where did this normalized production curve come from and what data went into it? I do not doubt that these wells have extremely high initial decline rates or that many wells drilled in the play are uneconomic. However, I have been around long enough to know that normalized curves can be used to support different arguments depending on how they are constructed and what data is used to develop them. Is it using data from Whiting's Sanish field (one of the better operators in a prime acreage position), or is it using Marathon operated wells? My experience with resource plays is that not all parts of the play are equal and some operators can consistently make even good acreage look bad.
I actually have not ever worked the Williston Basin myself, but I am somewhat familiar with it, and I tried to do a little research into it. I went to the North Dakota Industrial Commission Oil and Gas Division website (https://www.dmr.nd.gov/oilgas/). I was able to find excellent data on general statistics such as state-wide or county-wide production and rig count. However, when I tried to drill down to individual wells to see some actual production data it required an annual payment of $50. Since I do not work this area and since I spend too much of my time doing this on areas where I am working I did not go any further.
I do find it hard to believe that this area can be so pathetic yet it still recieves so much press and activity. Can it really be "not good, not good at all" yet the rig count keeps growing. How can it be so bad yet the oil production rate is skyrocketing (see graph at following website).
https://www.dmr.nd.gov/oilgas/stats/DailyProdPrice.pdf
I just find it hard to believe that the capital is about to run out on this play.
Things that make you go mmmmmmm.......
The Bakken was good enough to develop back in the 80's, and yet its detractors don't appear to think it is good enough to develop today....
Perhaps it is because some people don't believe any resource should be developed, under any circumstances?
Or perhaps there is a difference between incremental increases in production in selected areas, versus making a material difference. I would actually argue that US production is even more important than the industry cheerleaders think it is--because of the global net export situation.
However, I think that the industry cheerleaders are asking for trouble, by suggesting that we have vast energy supplies, and that energy independence is well within our reach, given the trend in global crude oil prices.
It is almost hilarious, in a dark comedic sense, to read some of the "Energy Independence" propaganda coming out, as we have seen global crude oil prices double in six years, from $55 in 2005 to $111 in 2011 (Brent is up to around $117 this morning). Somehow I don't think that the fact that some US oil companies are making sizable profits (by incrementally increasing oil production in selected areas), is going to be much comfort to consumers who are having more and more trouble paying their food & energy bills.
On some days, I just hope that angry consumers don't torture the food and energy producers, before they shoot us.
Hubbert himself suggested that the US had vast energy supplies (without mentioning the exact "reach" required to utilize all of them) so cheerleaders can be safely ignored in favor of scientists I suppose. Energy independence is something else altogether, and of course won't happen as long as the global environment is cheaper to find and develop (excluding geopolitical concerns).
As far as prices, the real price of crude is currently right in the ballpark of the late 70's or so, and certainly there wasn't all that much torture and gunfire going on then (but certainly plenty of bitching and whining).
I've a funny feeling some cheerleaders think we will have achieved energy independence when the ends of the two lines meet. Don't get me wrong I do like the trends. Well a lot of people who can read graphs don't seem to know how to use inflation calculators. Good point on the oil prices.
Funny how the signing of the National Environmental Protection Act was highlighted on this particular presentation of the graph, wonder who put that on there, certainly wasn't me.
Someone trying to prove drilling stopped the day it was signed because of all the lands industry could no longer drill on? I have heard that argument made by drill-baby-drill proponents.
There that's better. Didn't have time last night. Yeah I knew why it was there just wondered who did it. Hate to use the extra bandwith here posting it again, but its a good chart and it helps it isn't trying to spew propaganda.
They're trying to blame the decline in oil production since that time on Environmental policy. It'll all about the silly and irresponsible ideological attacks on the EPA.
I was tempted to replace the Nixon NEPA signing with 'Jim Hendrix and Janis Joplin died' but decided against it. I would have had to redraw the US production peak part of the graph if I erased the big dot labelled 1970 (its presence does detract from the message some in my opinion) but thought it unwise to mess with the plotted lines themselves.
Versus the scientifically based reasonable and justified ones, right?
Don't get me wrong jimb - I agree that both the increase and the total of 510,000 bopd is very impressive - for North Dakota.
I was just under the impression that we were talking about a bigger picture.
Just like we will only acknowledge peak oil in the rear view mirror - I will acknowledge that the current surge in oil production in North Dakota (and Eagle Ford) is a real game changer when and if the US oil production reality really actually, you know, changes. Right now I am still waiting.
Just sayin...
If you go to the EIA website it is pretty easy to find the plot of "monthly US field production of crude oil". It goes all the way back to 1920. It shows where US oil production peaked back in 1971 as 'West Texas' often points out. It shows the steady decline that took place after 1986 when Prudhoe Bay was fully developed. It now shows that US oil production has been rather steadily increasing since about 2009. I do not know if this is a "real game changer", but the data seems to indicate it is far more than just an anomaly. In November of 2005 US production was 4.837 million barrels per day. In November of 2011 (the most recent month) it was 5.842 million barrels per day. This is an increase of 1 million barrels per day. Considering that this increase had to overcome the persistent decline that the base production was experiencing, this seems like a pretty significant change. Maybe not a "game changer" but significant nonetheless.
In the overall scheme of things this is not going to stop peak oil, but I think it has the potential to change the backside of the curve and maybe even prolong the plateau. I have never bought into the bell shape of the production curve. Nearly every individual field has a much longer producing life than early time reserve estimates predict. It just makes sense to me that worldwide oil production will tale off for centuries. Peak rate will be long gone, but production will continue because oil has many valuable properties beyond just day to day transportation.
Following are the EIA numbers for US oil rigs through 2010 (estimated for 2011):
2008: 379
2009: 278
2010: 591
2011: 1,000
The net increase in average US crude oil production in 2009 was 0.4 mbpd*, or about 1,440 bpd per drilling rig per year.
The net increase in average US crude oil production in 2010 was 0.1 mbpd, or about 170 bpd per drilling rig per year.
The net increase in average US crude oil production in 2011 was 0.1 mbpd (through, October). If this number holds, the net increase per drilling rig would be about 100 bpd per rig per year.
*The entire net increase from 2008 to 2009 was due to the GOM (presumably production rebounding from hurricane damage + deepwater). Gulf of Mexico production (federal):
http://www.eia.gov/dnav/pet/hist/LeafHandler.ashx?n=PET&s=MCRFP3FM2&f=A
This is why I tend to use 2004 US crude oil production (5.4 mbpd) as a reference point. We hit 5.4 mbpd in 2009, 5.5 mbpd in 2010, and 5.6 mbpd in 2011 (through October).
Annual US crude oil production (through 2010):
Incidentally, note that the average oil well in Texas produced 21 BOPD in 1972 and 6 BOPD in 2010, and the average gas well in Texas in 1972 produced five times as much as the average gas well in Texas in 2010 (Texas RRC). These numbers are probably indicative of the overall sharp decline in average per well production rates that we have seen in the Lower 48.
The industry wants to consumers to look at very slowly increasing US crude oil production, as a sign that we don't have any oil supply problems, and they don't want consumers to focus on the fact that global crude oil prices doubled from $55 in 2005 to $111 in 2011.
From the point of view of consumers what is the more important metric, an average net rate of increase of about 100 BOPD per drilling rig per year in US crude oil production in 2011, or the annual Brent crude oil price of $111 that we saw in 2011?
If we look at the BP data base (total petroleum liquids), US production rose by 0.3 mbpd from 2004 to 2010, but consumption fell by 1.6 mbpd. My point is that the dominant trend we are seeing is that the US, and many other developed oil importing countries, are gradually being shut out of the global market for exported oil**, as annual Brent crude oil prices doubled from 2005 to 2011.
**ANE, the supply of (net) exported oil available to importers other than China & India fell from 40 mbpd in 2005 to 35 mbpd in 2010, an average volumetric rate of decline of one mbpd per year. I am estimating that the ANE volumetric decline rate will accelerate to between 1.4 and 2.0 mbpd per year between 2010 to 2020.
Two GNE & ANE scenarios, out to 2020:
0.1%/year Production Decline (2010 to 2020), Top 33 Net Oil Exporters:
http://i1095.photobucket.com/albums/i475/westexas/Slide10-1.jpg
1.0%/year Production Decline (2010 to 2020), Top 33 Net Oil Exporters:
http://i1095.photobucket.com/albums/i475/westexas/Slide11.jpg
I think that was a long and detailed post that basically says all of the new wells that the US industry is currently drilling are actually pretty darn weak. If that was the intent then I would absolutely agree with you. I can't believe how much work goes into developing these crappy resource plays compared to how the industry was 20 years ago. I saw it written back around 2005 that this was the oil boom without oil!
However, six year later when you look at the total US production curve it turns out that it is adding up to a steady increase. You can give all the details you want about how crappy the wells are and how much work goes into scratching out the production increase (and I agree with you), but the bottom line is that production is going up.
Now, even though I am somewhat amazed at how much work and effort goes into developing these resource plays compared to what I started out doing 20 years ago, it does not mean that I think they are somehow a fraud or not economic. At current oil prices if you know what you are doing you can do just fine.
The fact of the matter is that the easy oil is gone. The days of Saudi Arabia going out and opening up a few valves are long gone. If you are concerned with helping the average consumer to understand that the gasoline for their SUV is going up in the future then good luck with that. I wonder if you might have more success in finding the next Ghawar.
Finally, what is up with using 2004 as your reference point? I understand that 2005 was a low year because of the hurricanes, but even without the hurricanes the base production was still declining. I also do not agree with your comment that all of the production increase from 2008 to 2009 was due to the GOM. I am sure it made a big impact, but as I remember it, oil price peaked at around $145/bbl and I am pretty sure the industry was drilling plenty of oil wells onshore. I know I was involved with it and finding a rig was not easy. Although, part of the rig shortage was from the Chesapeakes of the world drilling dry gas wells, and we know how that worked out.
PS: I don't really mean to be too critical of your comment. I really appreciate your work on exports, I think it is a critical argument that "the average consumer" needs to understand and I have learned a lot from your writing.
Regarding 2008 to 2009, the year over year increase in US crude oil production (C+C, EIA) was 411,000 bpd, and the year over year increase in GOM crude oil production (federal waters) was 407,000 bpd.
As noted up the thread, there is a huge difference between oil companies making money in an overall post-peak environment (at least a conventional crude oil post-peak environment) as a result of incremental increases in production in selected areas, versus making a material difference. I would actually argue that US production is even more important than the industry cheerleaders think it is--because of the global net export situation.
However, my point is that the industry's position on Peak Oil is a prime example of Pogo's statement, "We have met the enemy and he is us." Angry consumers who increasingly can't afford to pay their food and fuel bills aren't going to have warm fuzzy feelings about oil companies' profits and claims that energy independence is just right around the corner.
if its a real game changer production will increase to 7-10mbd and the price will drop to the sub $40 a barrel
ie take us back to something pre 2005 where In my amateurish and anecdotal but consistently monitored opinion it changed for real for ever
Today's Bloomberg is not waiting; they're jumping right in with positive spin:
Americans Gaining Energy Independence
TE et al - As far as what's impressive or not a change in flow rates will never impress me per se. I don't care if a completion is increased from 9 bopd to 900 bopd. Again, remember what my job is (to make a profit for my owner) and isn't (increasing the flow rate of oil wells). Over 10 years ago I developed a project that would likely take reservoirs making 5-10 bopd per well with a 95% water cut and replace them with wells making 200-400 bopd with no water cut. How many would be impressed with that? Well, you got just got impressed by a money losing effort...proud of yourself? LOL. The problem was that the cost of the horizontal technology was high and the price of oil too low. Any idiot can increase flow rates if you lose money at it. I know...I've worked for some of those idiots and have done just that (see below). BTW: my company has just committed many $millions to developing this same project. Why now? Has the hz completion technology improved and/or gotten cheaper? No...same tech and it's a bit more expensive now. So why now? Again a very easy answer: oil is selling for more than 3X what it was when I first developed the program.
Here you go again...same story...it doesn't change. In the mid 90's I drilled 4 horizontal wells in La. state waters that increased companywide production 400%...10 million mcf/day to 50 million mcf/day. That increased company stock price for $0.75 to over $3.50 per share. Impressed? You shouldn't be: the company lost $18 million in the process. The new wells weren't going to produce $1 more of reserves. The hz wells just accelerated the recovery of the existing reserves...the vertical wells had to be produced slowly to prevent coning and sand production. There was some value to increasing the recovery rate but not for $18 million. But, then again, making a profit from those 4 hz wells wasn't the goal, was it? And yes, after a few years the company filed bankruptcy and disappeared for ever. But goal wasn't to create a vital and successful company, was it? The goal by company management was fully successful: they got the share price up, cashed up and abandoned the sinking ship. Remember this story next time you see a small pubco hyping whatever play they're in. To many promoting companies investors are sheep who were created to be fleeced by them. This has always been the case and always will be to some extent IMHO.
Increasing a completion from 9 bopd to 142 bopd or even 1420 bopd isn't going to impress me if it's not profitable. I've taking wells and increased production from 15 bopd to 25 bopd per well. If you knew how little that cost and what my ROR you would be impressed...very impressed. It ain't about flow rates...never has been. It's about profitability. For all I know that 142 bopd lost money for the investors. Or not. Can't tell from the info presented.
Rockman.
Brilliant. Truly Brilliant. For a moment I forgot that you were talking about gas reserves and thought you were talking about all the hype with biofuels. The parallels are uncanny. Hype up the share prioe and cash out. Or for bioscams it is talk up the IPO, which means I'm Pissing Off with my (your) money. As your quite rightly say investors in these "companies" are sheep who were created to be fleeced. Deja Vu. It is amazing that so many idiots forget to follow the money.
Most people on TOD focus on production, flow rates etc. As Rockman points out, commercial producers optimize for personal profit (not even corporate profit), not flowrates, reserves or any other physical measures.
Rgds
WeekendPeak
EVERYONE,
[Edit] I am experiencing EXTREME difficulty trying to locate the average level of understanding/misunderstanding at this site, so I can better communicate here. But it is extremely difficult to locate, because where ever it is, it's way below my radar range. Too many people here are simply flying way too low. Apparently, a good portion of you are so out of touch with reality, that you perhaps think these two numbers, 9 and 142, are average Bakken well IP rates, or something. And, I don't know if my observation is even correct, or not.
The reason I even use these numbers is because they take into consideration, the much talked about decline rates. Several commentators further down this thread fully realize this, and one has even put up an EUR chart. I'm working intentently on Bakken EUR rates at this moment, as that is an area where there is much confusion, even among seasoned investors. Average IP rates for Bakken wells are between 500 and 5000BOE/p/d. ( I don't dare narrow it down any further) The all time record is 7000+, but had a lot of NGL's and NG in the mix. I believe the cut off point for an economically viable Bakken well is presently at the 250-350 level, but this range obviously depends upon well costs and oil prices, and therefore cannot be strongly relied upon.
As a general rule the higher the IP rate, the greater the pressure, and the more years the oil will flow. The range is roughly between 20-40 years. More and more companies are reporting wells with 800-900,000 EUR's. This is primarily because of recent advances in FRACKING technology, but also a much better understanding of the resevoir characteristics. The increase from 5000 foot laterals on 640 spacing to 10,000 foot laterals on 1280 spacing with a corresponding leap in EUR's occured years ago, so that possibility must be ruled out.
For the record, I have sent the editors at this site an email asking them if they would have interest in publishing an article at TOD, that I have written, which covers all these issues in some detail. They have not responded, as yet. So, you are apparently going to get it in bits and pieces in the form of comments, instead. But anyway, I have referred to this article before, and here's some more of it, somewhat edited.
"The next consideration was for the average EUR's for each well drilled, for which an oil company has used their own average estimate of 500,000 BOE per well, which would typically occur over a time period of about 30 years. This figure was generally equaled, or in some cases even exceeded, by other operators in the designated area at that time (Oct, 12th, 2010). When an oil well produces 500,000 BOE over a 30 year time period, that equates to no more than a 46 barrels per day average."
"For comparison, in North Dakota alone in November, 2011, a total of 3118 Middle Bakken and Upper Three Forks wells were producing 443,425 barrels per day at an average rate per well of 142 barrels per day. For further comparison those numbers then need to be compared to the monthly production statistics for North Dakota (only the Bakken formation, because the Three Forks formation wasn't yet discovered) seven years earlier in November, 2004, when a total of 185 wells were only producing 1734 barrels a day at an average rate of just 9 barrels a day."
"However, it should not be assumed that the average EUR per well is now correspondingly higher, because the statistics are "forward loaded" by the relatively high initial production (IP) well rates presently coming on line, which then usually rapidly decline shortly there after. This effect, however, is somewhat tempered by the fact that a certain percentage of the total number of wells are older, vertical, and sometimes unfracked wells, that aren't producing much oil, which tends to hold the average over all rate per well down. Investors are hereby cautioned to not come to rash or dangerous conclusions based upon such limited and "fuzzy" data. This example was given for comparison purposes, only!"
I'm not sure that I'm going to bother to answer to all of the many responses. I do have a life to lead. But, most of you people need to communicate much more with each other, before you even bother to take on "outsiders". We all operate from a completely different data base, and if you are not even famaliar with our data, and it's source, then all argument against us is in vain. TOD needs to update it's data base, DESPERATELY!!!
Well, if you really want to help out then you found a job. You can help update the "database".... be sure to keep us posted...
Could you point us toward the "real database", then please? A link maybe? What you did up there was text wall us.
All North Dakota well data can be found at the NDIC's website with a two month time lag, if you don't mind waiting until it gets there. End of year data and December data will hit the wires in 5-10 days. Keep your eyes open, and be prepared for a lot of end of year hype from the media. If you want to get more up to date, but sporadic well data, you can get it directly from company websites.
I am not allowed by the editors at TOD to directly refer you to any of the companies, where I access my data, as this is apparently seen as "stock pushing" by some of the members here. If you feel differently, then feel free to voice your opinion to the editors. But I get virtually ALL my data from such places, although I am also presently in close contact with a HIGHLY qualified oil company geologist, who encourages me to toe the line on all geological and technical oil field issues.
If you have any questions about any given company's goings on, then simply send them an email with your questions. That's what I do. They all have several people hired full time just to answer questions. My article is largely the result of several email exchanges based upon such questions. I do not generally operate in the world of opinions. I mostly only operate in the world of facts. My only real interest here is to get it all down correctly. I cannot earn any money by being wrong. I can only earn money by being right. Surely this cannot be difficult to understand. I am an investor.
"I am not allowed by the editors at TOD to directly refer you to any of the companies, where I access my data, as this is apparently seen as "stock pushing" by some of the members here. If you feel differently, then feel free to voice your opinion to the editors. But I get virtually ALL my data from such places, although I am also presently in close contact with a HIGHLY qualified oil company geologist, who encourages me to toe the line on all geological and technical oil field issues."
It seems that you have a dilemma, Carl. May I refer you to the TOD Reader Guidelines, the first 5 of which, IMO, you have repeatedly violated.
If you feel that you're above this sort of thing, I suggest that you go back to where ever you feel comfortable being in charge and having everyone on "your page" rather than slummin' on TOD; wouldn't want to increase your stress level anymore than we already have. We'll manage somehow :-0
That said, I'm sure most here would love for you to vet yourself; provide some background, and support your assertions and claims in some way. Anything would be a good start...
Ghung,
It is not me, that has a dilemma. It is the editors at TOD. They insist, (give me a free ticket to break rule #1.) that I break rule #1. All else stems from that mistake. I have told you indirectly where to go. It will now just require hundreds, if not thousands of hours of your time, to locate all this information, because I'm not allowed to tell you directly where to go.
Oddly enough, all others are allowed to give you such information. Why don't you just ask everyone else? Is their discrimination at TOD? Is it okay to promote one's self, but not some company? What gives? I detect TREMENDOUS amounts of self promotion going on. Every thread put up at TOD eventually gets high-jacked by the same old self promotors. I would rather only discuss energy related subjects.
"It is not me, that has a dilemma. It is the editors at TOD."
It's their site, their rules. I don't see their dilemma. We are all guests here.
"It will now just require hundreds, if not thousands of hours of your time, to locate all this information, because I'm not allowed to tell you directly where to go. "
It's not up to other posters to support your claims. Support your own.
"Is their discrimination at TOD?"
Yes, there is. Certain long-time posters have been well vetted and the value of their contributions has come to be accepted. That said, their comments aren't immune to challenges; it happens all the time.
"I detect TREMENDOUS amounts of self promotion going on. Every thread put up at TOD eventually gets high-jacked by the same old self promotors."
Most folks here post anonymously, and while they may promote a certain point of view or their opinions, some even supporting their industries, promotion of actual companies or investments will be deleted every time. Some make it clear that they support ethanol or renewables, for example, and generally will post disclaimers that they make their living in these industries, but promoting the actual, specific companies or investments is out of bounds. If the editors don't catch it, other posters will. We are pretty good at self-policing the site.
If you see anyone promoting an actual product, company or investment, call them on it.
You seem like a smart guy. If you think that our society should go full speed into natural gas, find a way to support that without promoting specific investments. There's plenty of data, good and bad, to do this without revealing proprietary info, something the editors could be held liable for.
I would like to see your presentation. Meanwhile, a few points you may want to clean up.
The IP rates for Bakken wells are between zero and whatever.
Those are the exceptions. One well, the Petro-Hunt USA 2-D-3-1 has recovered 1.2 million barrels and is still producing about 300 bopd.
Current Operator: PETRO-HUNT, L.L.C.
Current Well Name: USA 2D-3-1H
Pool: BAKKEN Cum Oil: 1221154 Cum MCF Gas: 1721807 Cum Water: 26382
The USA 2-D-3-1 is not the result of a 10,000 ft lateral with 40 frac stages, that well has a 5000' lateral and was completed open hole without frac'ing.
Antelope field was discovered in 1953. The producing zone is the 'Sanish', which is Three Forks.
And finally, the EUR's you reference are company estimates which don't generally relate to actual performance. The sweetest of the sweet spots, i.e. Parshall field will probably recover in the 500,000 barrel/section range.
Banned,
Yes, The IP rates for Bakken wells are between zero and whatever.
but, AVERAGE IP rates for Bakken wells are between 500 and 5000BOE/p/d.
Petro Hunter's well statistics do not disprove my assertion, nor do they reveal the EUR of this well. But it is a very interesting piece of information, none the less. It is, however, only one well, and it's statistics are, of course, then just mixed in with all other well statistics to get the averages I am referring to.
What I mean is that the 3F's wasn't yet determined to be a separate formation from the MB, a point also still not generally acknowledged at TOD. The term Sanish is very confusing, so I try to avoid using it. It's like a shoulder, or something, sitting on the 3F's formation, but shows up in two very far apart, and hence very different locations. Only the one to the East is well known. It has been very productive, but is a very small area.
I believe we have covered this territory before, but the "E" in EUR's does not stand for exact. It stands for estimate. The EUR's of the Bakken can only be estimated, because the wells are expected to produce for about 20-40 years on average. I don't think industry agrees with your 500,000 estimate for the Parshall field, but I can not prove it right now.
Basically, all of any given company's wells have various gauges on them where all well data is sent to one central location on a daily basis. This well data is thereby updated everyday. It is then compared to all other available well data, and temporarily linked, or compared, to another well that has already given similar results. It is then assumed that well "A" will thereafter follow the same trajectory of older well "B", which has been following the trajectory of a still older well "C", and so on.
This procedure obviously entails a certain amount of risk. But, none of this well data is then used to attempt to prove or disprove any PO theories. Oil companies do not have any interest in PO theories. The data is mostly used internally by the company to justify their own economic decisions, but it is also used to signal to pipeline companies, for example, about how much pipeline capacity will likely be needed by a certain date. There are presently plans for 1.8 million bpd total take away capacity on the drawing boards for the whole US Bakken. A game changer? You decide. Investors also use this EUR information to make their investment decisions. It is considered to be one of the the best indicators. The present day issue is how early after the IP rate is known, can a reliable EUR be known. That's what I'm working on. Just keep writing, we are getting there.
No need to prove anything, they don't agree with me and i don't agree with them.
Parshall Field produced 1.517 million barrels in 8-'09 from 154 wells. Parshall produced 0.762 million barrels in 12-'11 from 220 wells. These totals do not include 'confidential wells'.
Production declined by 26 % (annual) while wells increased by 43 %. Cumulative for Parshall Bakken is 53.4 million barrels. Peak occured 28 months ago - I don't expect ultimate to exceed 100 million, 454,000 per well, maybe 500,000 per section.
Based on the current decline trend, remaining is about 30 million barrels.
banned,
I see your point, and very well made. But, there's quite a bit more to the whole picture. I can not offer you any company specific, or historical information at this point. I might run this by this Filloon fellow, because he would be the one to know, but he's always very busy writing his next Bakken article.
This all reminds me of Jonathan's "contention" or perhaps just observation, in his recent Bakken article, that Montana production had peaked. Yes, production hit a relative high, and is now falling from that relative high, because of a relative lack of new wells being drilled, combined with the very high Bakken well decline rates. I'm still trying to determine the ratio of new high IP wells coming on line needed to balance out the high decline rates. But, once that ratio isn't met, then production declines quickly result. And, once started, they'll likely continue unless considerable drilling activity takes place to compensate for the now accellerating decline rate.
But, a closer look at history reveals that there was a change of laws in North Dakota, which made it more economical to drill for oil in ND, which occurred about the same time the area you are referring to was just getting known. My timing and areas might be slightly off here, but that's the general picture. Drilling rigs are presently moving back to M, but in many cases just across the border. So, production levels should soon go up, but we shall see.
Most companies are merely trying to hold their leases by drilling as few wells as possible in each area, and moving quickly on. These are technically exploratory wells, not regular production wells. They later come back and do all the infill production wells. That's when the oil really starts flowing. All the companies are presently running helter skelter all over the Bakken trying to locate the next sweet spot. Extremely high IP rates suddenly reported all over the place, is driving it all. No one knows for sure if it is the geology or the fracking techniques, which is causing it. But, it is happening. Hope that helps. I gotta go again. Hang in there. I've got more on this...
Decline trends can have all sorts of reasons: geologic, financial, legal, political. Anyone using production volumes between 1980 and 1994 to predict future production in the Former Soviet Union would have been way off:
Similarly, there may be more than just geology causing the current decline trends in the Parshall.
I don't know enough to comment intelligently but I recently spoke with a friendly (TOD reader) geophysicist working up prospects in the Bakken who is pretty optimistic about shale oil up there. He knows it won't save us from Peak Oil but thinks the Bakken may ultimately reach 1,000,000 bbl/day.
I'm withholding judgement on the ultimate production from these fields until more data are in.
Jon
Certainly the decline trend can change and probably will. The 26 % annual decline trend quoted above is nearly constant from the peak in 8-'09, spanning 28 months and the drilling of 66 wells.
On a well by well basis, there is indication the decline will moderate. Field wide 'decline' is weighted average decline. As these wells age, average decline will tend to moderate. On the other side:
Gas oil ratio is increasing which will increase oil rate decline.
There are currently no wells drilling in Parshall, although there are permits and wells yet to be drilled. Drilling is included in the past decline, when drilling stops decline may increase.
banned,
Rambling on here....Another issue to consider is that according to the basic plan of oil companies coming back to an area to drill 7 production wells, to add to the production of 1 exploration well to hold the lease per 1280 spacing unit, this means that production will eventually increase 7 fold, and that's alot. But, it also still includes, and is thereby on top of, all the ongoing production of the now declining first exploration well. As about 1-2 years goes by in this drilling sequence, you also have to factor in how much more the company has learned about cracking the Bakken code, to the eventual 7 production wells. Any given company's average Bakken well's EUR's can go up by , say 30% in just one year. However, they will not neccesarily drill all 7 wells at the same time. They might stretch it out over many years, and come back multiple times, each time from higher up the learning curve. There are many above ground factors to consider. Investors are always trying to compare and correctly analyze, exactly where each company is on the general background Bakken learning curve, and why.
One thing I think you need to do is to have a look at all this at the COUNTY level over at the NDIC website. This gives a very different vantage point of the same thing. They have a data base for each county, as well as charts for each county too. CAUTION: Be very careful with the charts, because they are all on vastly different scales, so you have to always remember to revert back to the county data base for correct orientation. But, all the main ND county's production is only going up. By looking at too small an area, it might be leading you to the wrong conclusions, even though as far as I know, all your information is, in fact, correct.
The gas to oil ratio is an interesting aspect to keep your eyes on, especially with the first well results from this completely new exploration of the second bench in the 3F's, just now coming in. I believe they are going to encounter very high gas to oil ratios (not as much oil, proportionally) but can't offer much support for my belief. But, look what happened with the Bakken's all time highest 7,000+ IP rate well. There was not a very high proportion of oil, by Bakken standards.
EOG tried some (Mid Bakken) infill drilling in Parshall with less than impressive results. More recently, EOG tried drilling Three Forks wells with less that impressive results.
Parshall is developed mainly with one well per section, drilled diagonally across the section. There is no indication that drilling additional wells will substantially increase per section EUR's.
ND December 2011 production was 534,880 bopd - preliminary from all pools.
https://www.dmr.nd.gov/oilgas/mpr/2011_12.pdf
This back and forth appears to be a classic TOD theme. When a clear illustration is made of how production can be (and is) dependent on any number of non-geologic reasons, there's a reasonable acknowledgement:
Yet there is no end to a loud and steady drumbeat of it-is-only-the-current-geology predictions:
I don't intend to single out any particular poster, as there are innumerable examples GailTA, 2008:
The term 'collapse' or its synonym seems to usually follow within a post or two.
Jon,
Some very relevant points there. As I'm prone to say, "It ain't over, until it's over." Far too many people are getting so easily and willingly caught in this very obvious trap. The Bakken also peaked decades ago, then miraculously came back to life. Miraculously? Hardly. Not with all the above ground factors in play.
I am rather amused that this "optimistic" geophysicist thinks Bakken oil production may ultimately reach 1 million bpd. Does he not realize, that there are already plans on the drawing board for no less than 1.8 million bpd of take away capacity.? 1 million bpd is expected to be reached in 2015 by the industry, and late 2014 by me. But, who am I to know?
I don't understand your confusion Carl. Answering the question is relatively simple affair. Go fit decline curves to all the Bakken wells and then come back and tell us about it. By doing this you will be able to create IP/EUR plots, you will be able to compare EURs among operators and areas and establish a full distribution of results.
Bruce_S,
Good idea. That's exactly what I'm working on. But don't expect any results any time soon, unless I experience a major breakthrough in basic information flow. It's been very tough going so far.
Carl,
Male posturing aside, I think ROCKMAN did precisely what you suggested when he wrote:
FYI -- I appreciate both your comments and ROCKMAN's. I live by "question authority" and you are both doing exactly that.
Best Hopes for lively and spirited debate -- but let's keep it friendly.
Jon
*Hand up*
It was very useful to impress the cousins brother in law of my neighbour who is the manager of an oil company in Perth Australia. I did mention that the recent gas boom was in line for a bust and he could pick up some very experienced operators for his own business.
Hand waving from this side of the pond too.
Frankly Rock, I'll go with the bloke actually drilling for profit over the paper miners every time.
Thanks Doom. I just hope folks realize I was just being normal my smartass self with that question. On a serious note I wish much of what the oil patch does wouldn't be so focused on profit but that's the obligation to the investors. We can't focus on long term strategies...that's counterproductive to our typical primary charge. As much as I dislike saying it there should be more involvement by the govts. Be it changes in tax laws, incentives, prohibitions, etc. Some either enforced or induced guidance that would better prepare us for the future. We've commented here many times as to how unfortunate the govt didn't start increasing fuel taxes decades ago when small changes over long periods of time could have been absorbed. But the public is no better at rewarding politicians for putting their future above the present than shareholders are with corporations. We've talked ourselves silly with all the "what ifs" And we'll keep doing it as long as corporations, politicians and the vast majority of voters demand short term solutions that almost certainly will make the long term pain worse.
Just as a river is constrained by the valley it creates, the Western capitalist democracies are bound by the same market forces that they've unleashed.
Tragedy of the commons, prisoners dilemma or just plain human nature. Whatever way you frame it, it seems unlikely that we'll be able to make the changes that will be required to ease the situation. We can only make things worse.
Yep, I know it's nothing personal Rock, it's just business ;-)
Please define what you mean by game changer. I don't think the game has changed. The increased price of oil has made it profitable to apply these old technologies to improve the production of a well. The game has always been about investing in drilling according to the profit to be made.
A game changer would be a technology that improved well production at a reduced exploitation cost. Technology didn't drastically change to improve these wells production, the price did.
That would be a good meme for producing a tongue-in-cheek-but-not-really news article:
New "Franking" Technology is a Game Changer
It'd be funnier if it weren't so plausible.
Jon
Ben was a president too? President Benjamin Franklin? When was that?
LOL!
Shhhh! This is hour rumors get started. ;-)
I think you just nailed what was making Rock crazy. Well said.
And yes Rock, you frequently impress me, if nothing else than with the sheer inertia of reality that you report on.
I'm no oil expert but I think the answer you are looking for is easy . . . the answer is the much higher price of oil. The higher price of oil makes going after smaller finds in tight shale economically viable whereas it wasn't economically viable back in the days of $20/barrel oil.
And that seems to be something that a lot of writers are not understanding . . . a technology revolution did not make the Bakken an oil boom, that technology has existed for some time as the oil experts here point out. The higher prices that make smaller plays profitable is what caused the boom. And this is a significant distinction. This means that no matter how much oil is produced from the Bakken, they won't cause the price of oil to crash. Because if the oil were to crash, much of the drilling would stop. Kinda like we are now seeing now with natural gas . . . lots of shale gas drillers are reducing their drilling plans due to very low natural gas prices.
But . . . I guess there could be a temporary dip down to the $50/barrel price if Wall Street keeps shoveling money at them. But I kinda doubt it.
Ultimately I believe your answer is correct. The increase in oil price has driven all of the increased activity. I can guarantee you that every well I have drilled in the last five years would have never been drilled back in the 1990's. The economics would not have made sense.
However, I believe that you, and Rockman, and others are discounting how far the application of these existing technologies has advanced. Sure, hydraulic fracturing and horizontal drilling have been around for decades. Hydraulic fracture made "shooting" the wells with nitroglycerin obsolete roughly 60 years ago. Rockman talks about pumping 500,000 lbs of proppant into a single zone in a well back in the 1970's. He has mentioned the horizontal Austin Chalk play back around 1990. I agree that this is not new technology, but I do think that the industry as a whole has now embraced this technology and taken it to levels that were not even dreamed of back then. If I remember correctly they use to stimulate the average Austin Chalk well with a single stage water pump-in. Now they complete the new Bakken wells with something like 25-30 separate frac stages using several million lbs of proppant in total. Yes, the base technologies are the same, but they are applied in a much more advanced way now.
to what do you attribute the change in average Bakken daily well production from about 9 bpd in Novenmber, 2007 to 142 bpd in November, 2011, if not better fracking technology?
Carl, don't pick on Rockman, he has a difficult job to do - finding oil where there's not very much left.
The correct answer to your question is, "It doesn't really matter". 142 bpd is "sort of okay for the US but not other places", and 9 bpd is "pretty poor". A well may start out at 142 bpd, but if you wait a few years, it will go down to 9 bpd, and given the steep decline rates in the Bakken, it won't take very long.
If you take the well and frac it again, you might get the production back up to 142 bpd. The real question is, "Can you make any money doing this?" I don't know the answer to that because I haven't been involved in the Bakken, but given the decline rates on the curves that PDV posted, I would say you better take the money and run because it's not going to last very long.
It's the "Red Queen Problem" from Alice in Wonderland. You have to run faster and faster to stay in the same place, and eventually you can't run fast enough and fall off the end of the treadmill.
I believe Rockman would answer that the increase in production is due to the application of fracking. He did not say it wasn't a game changer, he said the technology is not new.
I know hydraulic fracturing is not new. I was involved in production monitoring on the Pembina oil field, the largest oil field in Canada, which produces from the Cardium Formation. The Pembina oil field was discovered in 1953, and would not have produced any oil at all without hydraulic fracturing. Some companies drilled right through it without finding it, until some geologists looked at the well logs. The oil is there, it just won't come out without fracturing.
As a result of nearly 60 years of fracturing, the Pembina field has produced over 1 billion barrels of oil and is well on its way to producing its second billion. The Cardium Formation is the new "hot" oil play in Alberta, and has reversed a 40-year decline in Alberta convention oil production - all due to horizontal wells and hydraulic fracturing.
The only thing is, the Alberta oil sands are much, much, bigger than the Cardium Formation. Compare a needle to a haystack. The Cardium Formation is the needle, the oil sands are the haystack.
The Cardium Formation approaches the size of the Bakken Formation, and has produced far more oil in its day. It's all a matter of perspective.
If we are talking about game changing; LPG fracking is looking like a potential game changer (at least for certain basins), this is a quote from the company CEO on E&P magazine:
Regards,
Nawar
Nawaralsaadi,
Very good link. I am quite familiar with this company. EVERYONE should have a look at this link, and especially the cumlative oil graph in it. Then we can put to rest all the nonesense at this site about nothing new happening in fracking. There is also a company out there that has learned how to imitate mini earth quakes, by using pulses to stimulate oil production. They claim the same type of game changing results. Someday, all the data will hit the wires, and we will all know for sure. But there are MANY, mostly small, oil companies using these two technologies today.
From the linked article:
Zeringue added that the company’s biggest challenge is finding the right people and partnerships for success. He expects to double the fleet size in 2012, which will require more employees. “We’ve invested heavily in infrastructure and should have ample proprietary turnkey spreads by the end of 1Q 2012. We are also looking at forming partnerships with companies that can facilitate and complement our process.”
interesting wording, but it really brings out the cynic in me, but then the article ends with this. Quite reassuring with specifics like 'major operators'
Safety features
There has been some understandable industry and regulatory concern about the safety of the LPG fracturing process because of its flammability, Zeringue conceded.
“Our number one goal as a company is to be safety-focused at all times,” he said. “We have put advanced safety features and protocols in place that other traditional fracing processes don’t necessarily need to have.”
Zeringue noted that some of the major operators have spent up to two years vetting the company’s process and performing numerous safety audits. “We were finally able to perform our first jobs for them in 4Q 2011,” he said.
We certainly are a long way of knowing anything for sure after reading that article
Luke H,
The purpose of reading any given article about any given company, is merely to spark your interest enough to go to that compny's website for further education on the subject at hand. The people writing these articles often have no idea of what they are even writing about. It is always best to get all your information right from the horse's mouth. That's what I do, and it ain't difficult.
“We’ve invested heavily in infrastructure and should have ample proprietary turnkey spreads by the end of 1Q 2012. We are also looking at forming partnerships with companies that can facilitate and complement our process.”
Of course this is a direct quote from the CEO--certainly looks like the wrong horse's mouth to go to if you want a straight answer. What I am hearing the guy saying here is 'we are broke and need some sheep to fleece if we want to keep going.' Do you think that is what he wanted me to hear?
Your probably right about the reporter. There weren't any companies that had used the process willing to tell him just how it went? Them's the horse's mouth's I want to here it from, not the CEO--who sounds also to be the companies PR department. The story reads like a drug add with that list of disclaimers sped through at the end.
Well the author gives 'international editor' in his byline. Sounds like the outfit doing the reporting might not have enough budget to actually do a real story either. Maybe they are just another cheerleading squad. If you know an article is lacking and that better ones are out there, say that--and link them--unless cheerleading is just what you are all about.
It is possible to actually throw some specifics into a story on this topic--the author of this story managed
http://www.ugcenter.com/US-Shales/Propane-Butane-Fracing-Gains-Traction_...
Even though initial gas production from shale wells is huge, the low price has depressed the amount of cash companies are receiving. As a result, producers are spending well in excess of their cash flows. To supplement cash flow, producers have engaged in every known trick in the finance book to boost available funds.
If the producers aren't making any profits, are in a negative cash flow situation, and have to indulge in financial tricks to keep going, then it's turning into a Ponzi scheme.
In this case it's not a true Ponzi scheme because there are no payments to investors, just the hope that it will somehow, someday, all work out for them and they won't lose their investment.
This is tangentially relevant, well written, and not too technical:
Saudi well study derives optimal gas well configuration parameters
http://www.ogj.com/articles/print/vol-110/issue-2/drilling-production/sa...
This is an O & G journal article not behind a paywall. Woo hoo ! something for nothing.
Well, apparently there is a problem with that link. A google news search will bring it up in a flash.
ban - Good point. Might be hard to believe but I've probably spent more time trying to talk clients out of drilling a well horizontally than convincing them to do so. Horizontals are not the Holy Grail as some cornucopians like to believe. Useful for sure but only in the appropriate circumstances. I've probably seen first hand over $150 million worth of ill-conceived hz wells drilled.
I find it laughable that Rockman still says Fracking isn't a game changer even as the US hits an all time Natural Gas high and the Bakken soars to new heights. My only thought is that Rockman feels threatened by the availability because it pulls down prices and thus hurts his profitability.
CornyGuy,
Yes, this thread is turning into an extremely interesting and very humorous psychological thriller, as Rockman's words reveal more and more what's really going on with him in the oil and gas business these days. It would be a lot easier and probably a lot more profitable (less losses) to just throw in the towel, and move on.
Carl and Corny,
Can you guys define what you mean by 'game changer'?
Andrew
Further to this, read Jon's post again, Carl, or just look at the pictures. In particular the black line in figures 4 and 5.
The number of active rigs nearly halved. Ask yourself: are the remaining rigs going to be drilling the good sites or just ones selected at random? What would happen to average production based on your answer?
O definitely a game changer alrighty, or an indication that the game has changed already you just havent been watching. What it clearly shows is that we are now literally scraping the bottom of the barrel, with a jet cleaner. Make that a whole mess of jet cleaners, and now that were all going broke out here, were all gonna have to deal with less jet cleaners and because you claim to understand boom bust cycles so well, you should know what this means... Best of luck to ya pal.
homework: phenomenon vs neumenon
At least you see the big picture PDV.
Can you provide a link to where rockman said fracking isn't a game changer? I can't find it? I did find where he said disintegrating balls likely weren't a game changer. You're starting to sound a bit
shillshrill on this one.I suspect some sockpupets in play. All in all, I have been following the oil guys and learning. As for the others I need some more popcorn ;)
NAOM
I was thinking sockpuppets too.
A "technological game changer" is not just doing the same thing on a larger scale and with more money thrown at it. It's a new technology, or using an old technology in a new way. I'm with the others and Rockman. Price was the "game changer".
I would agree. Price is the gamechanger. Without higher prices, none of these resources (the Marcellus shale, the Bakken formation, etc.) would have been developed.
With even higher prices, even more oil and gas will come on production.
The problem for the average American is that they may not be able to afford any of this new oil and gas. And, that is the fundamental difficulty with all the irrational exuberance I see in the US mainstream media. All this new oil and gas probably won't do the average American much good because they won't be able to afford to buy it. If you're part of the 1%, it's great, if you're in the 99%, not so great.
I'm speaking from a different perspective because I'm in Canada and we have a different strategy. If Americans can't afford our oil and gas, we'll sell it to the Chinese. I'm sorry, that's just the way the game works. It's all about money.
From the Canadian perspective, we don't need the oil and gas because we have cheaper energy sources we can use ourselves (hydro, wind, nuclear, etc.). We'll sell the expensive resources to other people.
My self-directed pension plan thanks you for your interest. Leave your generous contributions at the nearest gas station.
Since my first comment was deleted, I guess any suggestion that Canada might lose part of it's sovereignty is a taboo subject. Loss of sovereignty can happen in many ways. The traditional 18th century British method of taking what you want is one way to go. Nowadays, we are a bit more sophisticated about how we go about acquiring resources. The issue for the US is the ability to pay for the resources that we desire. As long as resource rich countries, such as Canada, continue to accept our dollars there isn't a problem. Alternatively, as long as China and the Gulf countries maintain their peg to the dollar the dollar will enjoy a reasonable level of support. But, if this breaks down, which I would expect will happen at some point, other resource rich countries will be encouraged to peg to the dollar in the name of economic stability or whatever other excuse is used. This is what will allow the US to continue to obtain resources without paying too much. It will come at the expense of the resource rich countries which get the privilege of importing US inflation and countries outside the dollar sphere that will see their currency lose value.
This system is what has allowed the US to continually run $600B annual trade deficits. It also is why the US needs to inflate assets inorder to have something to sell foreign entities. Fanny and Freddie were and are all about producing bonds to sell to foreign interests. So, how this relates to oil is that the US has no intention of paying Canada or anyone else $200/bl anytime soon. Europe and others might see these prices and bear the cost but the US will not as long as they can control the world economy. So, without firing a shot we will get first dibs on Canadian oil. Thats the plan anyway until the US looses control at which point all bets are off.
So, how this relates to oil is that the US has no intention of paying Canada or anyone else $200/bl anytime soon.
If the world price of oil is $200/bbl, then the US will have to pay $200/bbl. Nobody is willing to sell oil for much less than market price, and that includes all US suppliers - Canada (25%), Saudi Arabia (12%), Nigeria (11%), Venezuela (10%), and Mexico (9%).
Canada is actually giving the US something of a break on price at the moment - Western Canadian Select is trading at about $69/bbl versus West Texas Intermediate at $97, North Sea Brent at $117, and OPEC oil at $114 - but I wouldn't count on it to last.
Canada is actually your best friend in the international oil market. Everybody else is less of a friend, and some of the oil producing countries are downright hostile.
And in reality, you don't want oil to be cheap in the US. It just gives people the mistaken impression that the world supply situation is better than it really is.
I don't disagree, my only point is that what each country pays or receives for oil will be determined by the value of its currency relative to the dollar. To the extent that the US can "encourage" other countries to keep their currency pegged to the dollar the US will be able to continue to import oil while other countries will see the value of their currency drop in relation to the dollar and thus their price per barrel will increase. This is already happening in eastern Europe and will spread to other countries as the economic collapse, peak credit crises, slowly grinds down countries that do not have the ability to print and get away with it or are net exporters like Germany. To the extent that demand can be suppressed in this way it will moderate the effects of peak oil for those countries that can continue to pay for what is available.
It's best not to get too hung up on what the value is relative to the US dollar. Most other currencies are not pegged to the dollar, and move up and down depending on relative trade balances.
In 2002, the Canadian dollar was trading at CAD$0.62 relative to the US dollar, today it is trading at CAD$1.01 to the US dollar. This just tells you that the Canadian economy has gotten a lot stronger relative to the US economy since 2002. A lot of this has to do with oil prices. In 2002 oil was around $20/bbl, now it's around $100/bbl, and Canada is a major oil exporter.
The oil price relative to the US dollar is 5 times as high as it was 10 years ago, but relative to the Canadian dollar it's only 3 times as high. This means it has hit the US economy much harder than the Canadian economy, despite the fact the US dollar is a reserve currency.
Rocky, I hope your right but I won't be surprised if there is a push for a North American currency union. At a certain point, It's about the only way that I can see that the US economy will be able to continue to function. It also keeps the Canadian economy from being gutted by a currency that is too strong.
Well, back in 2002 when the Canadian dollar was only $0.62 US, people were talking about Canadians using the US dollar, but since it is now trading at par, that talk has gone away.
In reality, if there was a North American currency union it would run into the same problem the Euro has - The countries with the weak economies and frivolous government spending habits would undermine the value of the currency. Also, it would lock Canada into the same economic policies as the US, and at this point in time, Canadian politicians are not at all thrilled about US economic policies.
The US trade balance fluctuates widely. It is hardly 'continual' at $600B or any other figure.
http://www.google.com/publicdata/explore?ds=k3s92bru78li6_&ctype=l&strai...
Very true, but the US has run substantial trade deficits for a number of years and is a net debtor country. How large the trade deficit is at any given time does fluctuate as you have pointed out. The extent that the US is a debtor country is likewise difficult to determine with any degree of accuracy. However, the process of importing goods and selling debt is well established.
Let me check, please, if I have paid enough attention. The current price has closed the gap between technically recoverable and economically recoverable?
NAOM
The current price has closed the gap between technically recoverable and economically recoverable?
No it hasn't. There would be significantly more oil recoverable at $200/bbl than $100/bbl. The real question is, "Can you afford to pay $200/bbl?"
People can always try to ignore economics, but it always matters.
Sorry, my bad, my question wasn't quite what I meant but the point you make is a good one. What I should have asked was 'is closing the gap' not implying that the gap is gone but the economical level is rising towards the technical. Higher pricing enables more technical steps to be taken?
NAOM
I had a boss in 1988, a drilling engineer, he was so 'hot' to drill a hz well that he went out and wasted $ millions trying to drill a successful hz well. As far as I know he never managed to complete a single one.
He ended up wasting a lot of taxpayer's money (DOE funded) on just such a project. They were trying to drill a short radius hz well from an existing cased water injection well. After three attempts, they gave up. All they accomplished was to plug and abandon a perfectly good vertical injection well.
Sorry to take this so far off topic, Jonathan.
This is what worries me. How do we know that one outfit isn't better than the other by a long shot, and how do we know some of these outfits aren't permenently detroying the ability of the formation{s} to produce at some time in the future? May be happenin' may not, you do not know.
It's all good.
Being and industry outsider ("outdustry"?) I love the anecdotes.
Jon
For someone in the line of fire of the natural gas industry here in Central New York, the problems discussed here seem like a different reality from the aggressive battle going on to slow or stop fracking development here. There's a strong environmental crisis debate going on every week locally and apparently big money at stake (but is that just part of an investment show?). New York state can't seem to decide what to do. Our town has banned fracking but is threatened with lawsuit from at least one of the companies. Does it seem like we could dodge the fracking (poisoned water) bullet?
gh - Y'all are in a tough situation. No one wants there water well ruined. OTOH what if you were a mineral owner and could see the possibility of $2 million in royalty to you disappear because your neighbor was concerned over the POSSIBILITY of their water being fouled. And what if you were the land owner with no minerals rights/royalty payments? And what if your community banned the use of fertilizers/pesticides on your farm because of POSSIBLE contamination? Or take it to an extreme: your community banned gasoline/diesel vehicles to decrease pollution/GHG? Or what if they reduced the speed limit it you community to 10 mph to help save lives?
There really isn't an easy answer. Even if you thought the risk to polluting your water was very, very low would you still be OK with frac'ng if you're not getting any of the money? And if that $2 million in mailbox money were coming to you how much risk would be acceptable?
Again, it would great if your community understood what the real risk was. The risk of a frac'd well polluting the fresh water is very low but there is still some possibility. Just as the risk of a child in your community being killed in a school bus crash is very low but still a possibility. Do you ban school buses? But the risk of polluting the ground water is very real but that would be from improper disposal of the produced frac fluids...not directly from the wells. I don't know if it got much play in NY state but many months ago they tracked down the source of much of the frac fluid pollution: local municipal treatment centers were taking the frac fluids in to their systems (for a nice fat fee) and discharging them back into the environment untreated. Both NY and PA made that practice illegal many months ago. We've frac'd many thousands of wells in Texas and you hear almost nothing about ground water contamination. And our rural folks, who often are getting none of the mailbox money, are no less protective of their water than your community. BTW: we get rid of most of the nasties in deep injection wells that are also very regulated.
But our history in Texas is marked with bad polluting activities back in the bad ole days. But we have rules now. And those rules are strictly enforced by the regulators. And by folks like me. I've helped bust two illegal dumpers. I may be oil patch by my 11 yo daughter drinks well water every day. Getting arrested may be the least of the problems an illegal dumper could face if I caught them doing it near her home.
IMHO there is no single nor simple answer to your problem. But if the regulators do their job well I think the risks would be minimal. But never eliminated. No different than most of the risks we face in life.
But if they start frac'ng in your community don't be distracted by those noisey frac trucks. Pay attention to those tanks trucks going down the road at 2 AM. Especially if they are stopped by a bridge. We call them "midnight haulers" in Texas. A disposal company can pocket an extra $10,000 per truck load by having them drop a hose and dump into a creek or field when no one is looking. Multiply that by a thousand truck loads and you can see the temptation. I don't know if your community would have the authority but implimenting some sort of certification that each truckload is disposed of properly might bridge the gap betwee the two sides of the debate. But your regulators still have to watch that process closely. With tens of millions of disposal $'s at stake the temptation wil always be there. In Texas if you get caught cheating the Texas Rangers show up at your door. Texas Rangers...really. They are part of the Texas Rail Road Commission's enforcement unit. And just like in the movies they have no sense of humor. LOL.
Rockman,
You offer little comfort.
Without good water most rural folks land is worth much less, and is possibly worthless.
: )
Andrew
aws - I'm not here to offer comfort...just the facts as I understand them. For comfort folks need to visit a priest...or a hooker. LOL. I'm not trying to minimize folks' concern but after many tens of thousands of wells frac'd in Texas can anyone find one story of any farmer without water as a result of frac'ng? (I not saying you wouldn't find some examples of oil patch pollution causing some nightmares for a few landowners...just not very many). Again, there is no such thing as zero-risk frac'ng. But name one other zero-risk industrial activity. If folks don't want wells frac'd in there area then prohibit it if they have that authority. No company has the god-given right to drill and frac a well anywhere. It's a choice made by majority rule/politicians. Just make the rule and stop whinning. LOL.
Again, since some folks forget where I'm coming from: it's my fondest wish that no one anywhere, including Texas, is allowed to frac another well. I sell NG from conventional reservoirs. All this shale gas isn't helping my profit margin. Again, just as the oil patch ain't your momma, Rockman ain't you NG momma. If the US doesn't have the NG it needs in the future that's a problem for it to figure out. My job is just to make a profit for my owner. I learned a hard lesson when I was 18 yo about fighting windmills...I don't do that anymore. LOL.
Thanks, Your responses are very helpful about how much work, vigilance, and education lies ahead for worried homeowners here in CNY. I was hoping that with new estimates about the amount of NG in the ground here it was looking too uneconomical and unpromising to bother with. If the bans are lifted and the drilling begins here, we'd best follow your advice.
gh - Good luck with it all. And though it may sound a bit melodramtic don't advise folks to approach one of those haulers by themselves at 2 AM when you find one stopped on the side of the road. There's a lot of money involved and you could be dealing with folks who might do something very stupid to avoid getting caught. In Texas you don't have to wonder if they are armed or not: just about everyone here in the oil patch is armed when in the field. The best approach for your folks would be to get the DOT number and call the cops. That's what I did with both the two midnight haulers I helped bust. One drove away but you can't get very far very fast with one of those tankers. The other on I just parked in the middle of the two lane and there was no room for him to turn around. He asked me to move but all he could do was ask: I had a 12 gauge pump resting on my shouder. Sounds a bit too macho, I know. But as I said earlier I have a 12 yo daughter who drinks well water every day. I take illegal dumping very personally to say the least.
It's not that difficult to control those folks as long as they know someone is watching them. Just like the speed limit: when folks see someone getting a ticket the slow down. At least for a while.
Why the guns? What are they protecting themselves against? Anyway I had assumed that the oil patch wouldn't take to kindly to weapons being close to anything that can go BOOM in the night. All it takes is for one guy to get bored and do some target shooting to really mess up everyone's day.
S - A valid point. But matters have gotten so dangerous in S Texas near the border. All operators ban fire arms. But no one checks because everyone is armed. Your basic "Don't ask...don't tell". Most operators don't let the field hands go to facilities in S Texas alone anymore. And at night the rule of thumb is that you don't approach any vehicle on a lease road nor do you allow one to approach you. If push comes to shove you fire a warning shot. If that shot doesn't stop the approach you don't have to aim to miss with the second. Again, I know that sounds like a bad b-movie but when I worked down in the Rio Grande Valley 25 years ago I didn't take chances...and it was a lot safer then. Lots of stories (some true...some not) about caliche pits with bodies that will never be found.
As far as the midnight haulers you're not talking about getting a ticket. They could end up with a few years in the state pen. And more if they have a record. And a lot of these guys have records. You see stories weekly of folks getting killed for a few $100. With these companies you're ta1king many tens of thousands and maybe millions if a company is seized. As I've said before: Texas takes policing the oil patch very seriously. And just like in those old cowboy movies it will really be Texas Rangers hunting you down.
Question: does the GS analysis and resultant showing price required for 12% IRR assume that all of the plays are dry gas only.... i.e. no associated liquids production?
As far as I know, some of the formations in the chart have some wells where liquids are also produced, and where the value of such essentially makes the natgas a little bit of a by-product, albeit with some value...
If one can predict with reasonable accuracy which areas of which plays are likely to yield wet gas, does it not stand to reason that those wells would produce even with natgas prices below $2? Of course, I'm aware that this small number of more profitable wet gas plays would not serve to change very much the over-arching problem of low natgas prices for the larger part of the shale gas world...
I believe the Goldman Sachs analysis does take liquids into account. Slide 13 from the Jan. 10, 2012 Range Resources Presentation gives the following breakdown for 1 mcf of Marcellus:
Total = $6.34 per mcf from which they subtract $0.75-$1.25 for gathering, compression and transportation costs and $0.25-$0.50 for operating expenses.
All of this is based on $4.00 NYMEX Henry Hub; $85.00 NYMEX WTI, 12/10 "gas quality" and 1130 Btu/mcf.
Hope that helps.
Jon
Jon,
Thanks for the link. This puzzled the hell out of me becuase it did not add up, or I am a little simple.
For those who are more inquisitive then pages 32,33 and 34 help clarify the accounting smoke and mirrors.
I remain a little skeptical about all of this as so much depends on the decline rates which will really only be known with time. A bit like Peak Oil, we will only know when we get there, and for conventional oil we are there.
Good post and many thanks to Rockman.
I must get around to a refining udate. Europe is a mess and a half.
From an individual standpoint, the demand necessary for ng ideally is zero.
It's the end of oil, but in a different way, not oil depletion nor peak oil.
Demand destruction may lead to more reduction in demand. Seems that the digital age has bred a new kind of employment where your car is no longer necessary for your work place. The miles driven decreases by a whopping amount in some cases.
It's a good thing too.
Minimal gasoline cost, one car, not two, miles driven are one quarter of previous miles driven, less cost for maintenance, less cost for insurances if bought seasonally, etc. Overall, much less cost.
Becomes a lot less demand. Purdy soon, you'll be able to go without.
You don't have to purchase gasoline if you have no car.
High prices caused it all.
Subverts itself, takes on a life of its own, becomes its own worstest emenimy, the dominant paradigm has shifted.
Probably here to stay. Changes the game.
NG for fuel in cars would change the game too. Manufacturers should build NG fueled autos. The demand would surge, me thinks.
"You don't have to purchase gasoline if you have no car."
Sure you do, indirectly, if you buy food, clothing, electricity, stuff, have mail (or anything else )delivered, eat out ... you are still purchasing gas, diesel, natural gas, coal. I've worked hard to get my family off of fossil fuels but it's impossible. The best one can do is try...
Then why use this partly fossil fuel powered internet machine?
Like I said, it's impossible to divorce one's self entirely from fossil fuels. While my PC has them embodied in it, I built it mostly from salvaged parts and it is run on solar power. How about yours?
This flow chart might help.
If you look closely you will see that "petroleum" goes mostly to "transportation". Since we are discussing liquid fossil fuels here in this thread, "petroleum" is what your looking at. Most of it goes to "transportation". There's one of the problems:
http://upload.wikimedia.org/wikipedia/commons/5/54/LLNL_US_Energy_Flow_2...
Just a tiny amt of "petroleum" goes to your computer relative to your car, aespecially when you use it... hence the the data presented on the far right hand side of the flow chart.
It's impossible to avoid posting on Oil Drum and storing information in some MW sized server data center a thousand miles away? I like to be efficient, but I don't have any problem with using the net, my store bought computer, the nuke plant pushing most of the electrons to it, or the 'machines' in general.
If I don't have to make a direct purchase of gasoline, I am going to save both money and gas.
I may have to indirectly purchase gas, but if I don't have to have physical delivery to an ICE, it is going to make a huge difference for me.
It can't hurt.
You don't have to purchase gasoline if you have no car.
Bingo!! I'll do you one better. You don't have to purchase gasoline if you choose the RIGHT car.
http://static6.businessinsider.com/image/4d7698b54bd7c80009010000/nissan...
That is a thermodynamic FAIL. And really good one for the newly formed BICT: Bureau of Investigation for Crimes against Thermodynamics.
Fortunately, no one here is debating peak thermodynamics. And when the issue is crude based liquid fuels, to heck with them, there is a new ELECTRIFYING sheriff in town. yuck...yuck...yuck...
What do you mean by "thermodynamic fail"? The cars clearly work, so you can't mean that. What is your point?
Electric cars == transferring energy costs to the power plant, with all the attendant losses {transmission, heat, noise} Thermodynamically, you are better off combusting right in the car, unless;
1} your "cars" look and weigh much more like bicycles
2} use rail for most distance and freight transport
3} Much less people walking much more
4} bikes
The "electric car" as you and many, many others describe ends up using MORE energy due to:
thermodynamic losses
advanced materials and availability
manufacturing challenges
waste
Jevons principle {paradoxical increased use}
You should provide your calculations.
Don't forget: EVs mostly charge at night, and windpower and nuclear are a larger part of the mix at night.
And, EVs increase demand for night time power, thus encouraging wind and nuclear.
Win win.
The author does not mention gas leases, and thereby misses one of the main factors driving the excess production, that is behind this gas boom. As it will take several years to work off the inventory of gas leases that still have to be drilled, (use them or lose them) large amounts of gas will continue to be produced at a loss, but in smaller and smaller amounts. Many of the ALL gas companies will likely go bust, and there will of course be various other dislocations, but this only looks like business as usual to me. All the smart gas companies and smart investors got out of gas years ago, because we could all see this was going to happen.
I am unable to confirm this idea that various gas and oil companies do various (and questionable) things in order to increase their reserves to attract investors, as I have never come across it before in the investment space. That doesn't mean, that it's not true, I merely find it odd, that I should come across this idea at a Peak Oil site. This suggests to me, that this is merely a Peak Oil idea, that has no basis in validity. But that aside, can anybody explain where these ideas originally come from, and offer some proof of their claims?
For the record, investors are far more interested in cash flow from operations, which must be published every three months, which is also why all corporations for the most part rightly stand accused of only being concerned with short term profits. All drilling activities must also be reported, unless they are confidential wells, which are usually exploratory. Therefore any drilling at a loss activities just to up reserves would likely be seen as a huge negative by investors, and everyone would bail out as soon as possible.
Investors are somewhat interested in reserves, and will look askance at any company, that doesn't bother to increase them over time, but oil or gas in the ground is always valued very low, because everyone knows how difficult (expensive) it can sometimes be getting it out. Energy companies are not even that interested in producing gas and oil per se. They are only interested in producing money. But, the only way to get money out of the ground in the form of oil or gas, is to pump money into the ground. and, no one at this site seems to realize this very elemental economic fact.
Perhaps this is because most of you are instead looking at, how much energy must be pumped into the ground to get a given amount of energy out of the ground. Eroei is only an accounting issue. It is not used by the oil and gas industry in any way, shape, or form to the best of my knowledge. It is only a Peak Oil concept. Therefore, it's value is highly questionable.
I assume you are referring to the "producers have engaged in every known trick in the finance book" quote which comes not from myself or any other peak oil site but from an article in the industry magazine Rigzone. The author of the article is the Managing Directory of PPHB who describe themselves thusly:
So the idea of companies doing "various (and questionable) things in order to increase their reserves to attract investors" comes directly from investment bankers involved in the energy industry. While researching material for this post, this seemed like a reputable source.
I do agree with you that business decisions are made based on return on money rather than more abstract concepts of return on energy. I also believe that financial interest will do more to motivate people than concerns about the environment or some future "end of oil". Hence the focus on financial concerns in this article.
Jon
Money is just a marker. It is a call, usually in the form of debt service in modern times, on real world goods and services. It has taken many forms over time: gold, silver, clay tablets, sea shells, huge rocks, arrow heads, and paper currency. However, at the end of the day, you need energy (not money) if you are going to build anything. Nature's currency is energy. Just like a business needs to make more "money" than it spends in order to stay solvent, an organism needs to obtain more energy than it expends in order to stay alive. We are not immune to the laws of nature.
You need diesel to run the mining equipment to get metalluragical grade coal out of the ground
You need diesel to ship coal and iron ore to a processing facility
You need metalluragical grade coal to refine the iron ore into steel
You need diesel to extract and ship limestone to a processing facility
You need coal to process limestone (and other ingredients) into cement
You need diesel to ship the steel and cement to a drilling pad
You need diesel to drill the natural gas/oil well and then you need the steel and concrete to line the well (not to mention building the rig et al)
It's an interdependent system. You can substitute coal, natural gas, or other forms of electricity production in some of the areas above and, in some cases, you can substitute these forms of "energy" with efficiency (there are limits to this) but, at the end of the day, THERE IS NO SUBSTITUTE FOR ENERGY.
Politicians and economists (note that I am an economist) fail to recognize that we'll need energy in order to build our future energy infrastructure (whether we go all solar, all nuclear, or some combination thereof).
A significant failing of our current monetary system can be seen in the example that follows:
I was at the second annual biophysical economics conference a couple of years ago (October of...2010?). During one of the group discussions, I posed the hypothetical example of a financier living on an isolated island who recently purchased all of the mineral rights. When asked what he intended to do with the mineral rights he replied "develop the oil and gas and sell it to everyone else on the island." When asked what everyone else on the island will do with the oil and gas he replied "I don't know and I don't care, I'm making money!" When asked what he would do when the oil and gas was all gone he replied "it won't be so great for everyone else on the island but it doesn't matter to me because I will have made millions." The obvious failing of this reasoning is that the financier's own buying power will be severely diminished without the energy supply that heavily subsidized the production of goods and services in the economy during the oil/gas production phase.
I don't intend for this to be a personal affront but as long as you, people such as yourself, Wall Street, Lasalle Street, etc. continue to look at the world through the lens of the dollar bill (yen, euro, gold, etc), it is a near certainty that we will fall into an "energy trap" http://www.theoildrum.com/node/8526
Solow and his residual looms large.
Robert Ayres gets it though (one of the very few),
Rgds
WeekendPeak
You don't really need diesel or coal to do any of those things.
Mining, for example.
Much mining, especially underground, has been electric for some time - here's a source of electrical mining equipment. Caterpillar manufactures 200-ton and above mining trucks with both drives. Caterpillar will produce mining trucks for every application—uphill, downhill, flat or extreme conditions — with electric as well as mechanical drive. Here's an electric earth moving truck. Here's an electric mobile strip mining machine, the largest tracked vehicle in the world at 13,500 tons.
Perhaps you are not familiar with the term BOE and how it is used in the oil industry?
Carl Martin: "Eroei is only an accounting issue. It is not used by the oil and gas industry in any way, shape, or form to the best of my knowledge. It is only a Peak Oil concept. Therefore, it's value is highly questionable."
Society at large doesn't give a damn if it's used in "the oil and gas industry". What they do care about is the net energy available to their society, how much it's going to cost them, and how long it's going to last. Since they're the ones who ultimately foot the bill or freeze, even though they may have never heard the term EROEI, I submit that it is the only thing that really matters in the end. For those of us in the real world, its value is unquestionable.
Ghung,
Nope, it is only believers in PO who don't give a damn. It's a PO concept, not known to society at large, and not used by the industry.
"I submit that it is the only thing that really matters in the end."
Oil companies and their investors don't agree. They all think that money is the only thing that really matters in the end. End of story.
That is because they do not know the difference between money and energy
For example, find me a conversion factor for going from money to energy; it's easy we do it all the time, we all "make use" of the various "units" everyday.
Nobody wants to bite, but there it is right there right in front of you.
I am considering forming the BICT: Bureau of Investigation for Crimes against Thermodynamics :
Read carefully to what was written, Carl: Regarding society at large which ISN"T the oil companies and their investors", but DOES ultimately pay a certain price for a certain usable unit of energy: "What they do care about is the net energy available to their society, how much it's going to cost them, and how long it's going to last. So it isn't "end of story".
You said: "It's a PO concept, not known to society at large, and not used by the industry." So what? Most people don't know what the Consumer Price Index is either, likely never heard of it, but it certainly has an effect on their lives, especially if they're getting Social Security, as it's used to determine their cost of living adjustments. EROEI ultimately has an effect on how much they pay to stay warm, drive their cars, watch their tv, how much their food costs, etc., though it may all be a game to you, and to "the oil companies and their investors".
If you choose to not give honest responses to what others have actually written here, we'll be glad to call you on it. My afternoon is free.
People don't understand EROEI? Then have they never seen what happens to a 3rd world farmer when the weather takes his crops?
They don't know the acronym i'm sure... but that doesn't mean they don't know the concept.
Carl,
Can you explain what 'you' mean when you say "..it is only believers in PO who don't give a damn.."?
Perhaps I read too much into too little but my take away from your statement is as follows:
a. Your use of the 'believers in' is used in a manner that implies you do subscribe to the expectation that global oil production will reach a limit and then decline. Fine - you don't have to 'believe' - what will happen will happen irrespective what you or I want to see occur. (I personally don't want to believe that the house paint I put on 4 years ago that was supposed to last 10 years will need redone in the next one or two years but I can either squint and try to ignore the peeling/fading paint or do something about it).
b. The phrase '..don't give a damn..' however is puzzling. Are you implying that the folks on this site don't CARE about the implications of peak oil? (no - that can't be it because you would need to first 'believe' in the peak oil). About 'what' is it that the folks here 'don't give a damn'? If I am trying to reduce how much oil I use because I DO believe that PO will occur then you should be ecstatic since that means more for YOU to use does it not? From your perspective I might be a sucker but I don't think you can say I 'Don't give a damn'.
While I AM curious about what you 'meant' - you are right that the general population doesn't think in the terms of energy balances and only care about how much it will cost them to drive to and from work, to heat and cool their home, and the increasing costs of food due to increasing costs of fuel. They don't want to think about 'why' the costs are going up, nor will the PTB want them to be thinking about that, not really, the implications would be too scary and lead to more social unrest than we are seeing today when everyone is expecting oil prices to drop back to the more normal range below $40 per barrel.
But, in brief, as the EROEI drops lower and lower the costs to society for the same amount of petroleum based fuel they used to power their vehicles last year will inevitably require a larger (and growing) percentage of their income in the future. Increases in the nominal price are irrelevant if everyone's income rises proportionally but it can't and won't - thus the affordability will decrease and it will negatively impact their standard of living. This is a direct impact of decreasing EROEI. As long as big oil companies can make a profit by pumping oil (even if low EROEI oil) they will - if their upper management think they can make MORE money by spinning a good enough story to pump up their stock price and make a graceful exit selling their stock options before the story collapses I 'believe' some will do that as well.
If EROEI falls below 1.0 (requiring more energy to retrieve and distribute the oil than the energy content IN the oil) then, from an energy balance perspective, it no longer makes sense to continue to pump. As an engineer (Electrical, not Petroleum) that offends my sensibilities but I have been around long enough to know that what doesn't make sense can still occur and someone is bound to find a way to make money off of it at the expense of someone else. I am sure there will be some degree of energy cost arbitrage that will be applied to continue to pump oil - it is just too useful of a product even if not used to propel vehicles (think of installing Nuclear Power stations to create steam to liquify/extract oil from frozen oil sands in the far north) but the costs per barrel will be very high. That will work for awhile but we might be willing to pay those costs as a society to keep our military vehicles/aircraft in action, manufacture petroleum based pharmaceuticals (and to keep the personal vehicles of the very wealthy moving on their personal toll roads).
Ragna,
You seem like a very reasonable fellow, so I will respond to your comment. I was referring to the fact that PO believers apparently don't give a damn, that the oil industry does not operate under the limits of typical PO EROEI thinking...because it all is automatically taken care of, because it all comes under the heading of costs of production, so it's only a cost accounting issue. They are VERY aware of the COST of energy in to get energy out, but don't bother to convert BTU's to dollars, because (oil) BTU's ultimately are dollars. As, $100 dollars these days roughly equals the amount of BTU's in one barrel of oil, you can easily figure how many BTU's are in one dollar.
Perhaps, you are too young to know, but in the late 60's, "green energy" used to mean dollar bills. During WW2 German housewifes used to burn 1 German Mark bills in their kitchen stoves, because they literally contained more BTU's then, they were worth. Entire wooden barns, all wooden fence posts, and even priceless wooden antiques were all burnt, because their BTU value was higher than their monetary value. Wood was money, because BTU's were money. You had to wheel a wheelbarrow full of money down to the market just to buy one loaf of bread. All cars ran on converted coal burners, because of a shortage of gasoline. In Sweden there are (hobby) cars that run on wood. Denmark has a lot of (hobby) cars that run on steam. Do you think people actually care about EROEI?
One mistake you are making is to use energy in general, or BTU's, instead of narrowing it down to the smaller amounts of oil used to get larger amounts of oil out of the ground. For example, everyone knows that a lot of NG is used to produce the oil sands oil. The EROEI in this process is quite low. But what else should this NG be used for? We have a glut of it. This is what the article is all about. Just look at what is happening in the U.S, and it's only going to get much worse.
Obviously, if the U.S, had oil sands all over, the best use for all this excess NG would be to use it produce oil from oil sands. But, what is actually happening is the Canadians are simply converting NG to oil, (Gas to Liquids) in a very round about manner. This tar like oil result, is then cut with NGL's, (wet gas) so it can then flow through pipelines to refineries for further refining. Along the same lines as, dirt + water = mud, heavy oil +NGL's = light oil. "Heavy oil is now the new lite."
The Geat Goddess Gaia also has an oil refinery, but she doesn't always finish her work to our liking. She also spills a lot of oil all over our precious planet. The tar sands is a good example of her incompetence. Now, we humans have to clean up her mess, and make an even greater mess ourselves in the process. But, all the economically viable sand will eventually get cleaned, and put back in place. As it is known to be dangerous to store all this oil in huge tanks all over the planet, it seems best to just use it in more sensible ways, than we are presently accustomed to.
Ragna - Carl gave you nice long explanation. And here's a short real life example. I recently cut my deep NG drilling program by $40 million and filed those projects away. The EROEI hasn't changed for any of those projects: I would be using the same amount of energy to drill them and produce the same amount. But the lower NG prices reduce their value especially when risk factors are taken into account.
And this is why some of us confuse folks when we say EROEI isn't important. It's of no important to me when it comes to drilling a well or not. It's all about the economics for me. But that isn't the same as saying EROEI isn't important in the broader picture. Obviously there has to be some relationship to capex expenditures and those limits of EROEI. But I've yet to see anyone develop a metric to model the relationship. Some folks try to project increased production at lower EROEI values as a result of increasing prices. My example shows that concept to be quite true...in reverse, unfortunately for me. But trying to quantify the situation is very difficult if not impossible IMHO.
Rock-Ragna,
What EROEI really means to me is just that the consumption of energy (oil) goes up exponentially, if greater and greater amounts of it are needed to produce lesser and lesser amounts of oil. But, that aspect is already considered in the rising demand side of the equation. Falling EROEI equates to rising demand, which will cause prices to rise enough to warrant searching after ever more expensive oil. Basically the people who are so concerned about EROEI are just counting it twice. If I counted it twice, I would be concerned too. Rockman would be doubly concerned! But, we are both "cost" men and we only count costs once. That's already enough times for us!
The same mistake is also made when mentioning, for example, that less and less of KSA oil is being exported, (MOSTLY TRUE) because more and more of it is being consumed at home. (ALSO TRUE) But, their increased consumption at home has already been factored into the overall world demand. Increased demand without a corresponding increase in supply will inevitibly result in higher prices in order to re-balance the energy equation. That's all.
If the US should then import less oil, because we don't need it, (because of increased poduction and/or less consumption because of a recession,) then US activities and KSA activities more or less cancel each other out, and the price remains the exactly the same, because it doesn't need to either rise or fall to re-balance anything, because everything is already in a relative balance. (in this one small example, only)
Carl (and Rockman),
Thank you for taking your time to educate me on your perspectives - it was very enlightening!
Ragna,
Both me and Rockman desparately hope that wasn't meant sarcastically. LOL
Ghung,
I used to think that. Over several years of talking to regular people, giving presentations and observing online discussions I have come to the conclusion that Carl is right on this one -- the only important point for most people is: "how much it's going to cost them". Business and military leaders add in "how long it's going to last". But it is only scientists and engineers (a very small demographic) who are concerned about "net energy available to their society".
I think the scientists and engineers are right of course. But my read of history suggests that our society is not going to make decisions based on their opinions.
Again, that's why I've begun framing the issue in monetary terms that the bulk of people and politicians can relate to.
Jon
Oh, I agree that these things "should" be framed in terms that "society at large" can relate to, in a perfect world. But when we minimize these concepts simply because Joe Sixpack doesn't understand them, or isn't paying attention, we actually do damage. Shale gas companies playing a shell game with leases, luring in investors, blowing bubbles, creating false optimism, all add costs and losses, in terms of capital and resources; costs and losses that are ultimately socialized in some way.
Perhaps you're right, but if folks knew that their pension money is being invested at little to no return, and that it's taking a lot more energy to bring them energy, and that it will eventually result in them paying very high prices for the things they're used to,, and especially that the "industry" doesn't care because most of them will have cashed in well before TSHTF, they would demand change or at least get out of the way as I have. I can tell folks that their energy is going to cost a lot more and be harder to get all day with little effect. It's when I explain these concepts, "show them the beef", that they actually get it and begin to make changes, not all, but some. That's the best I can hope for.
Ghung
I'd argue that society cares about net energy (whether they know it or not). For example, if we were able to capture 25% of all incoming solar energy available at the ground at an EROEI of 8:1, society would be far better off than using coal at 20:1 at current production rates.
U.S. Solar: 586,687quads x (7/8) = 513,351 quads of net energy
vs.
U.S. Coal: 38,147quads x (19/20) = 36,239 quads of net energy
Of course, one must contemplate how thorough EROEI accounting is.
I found the graph "Nymex Prices Required for 12% IRR" very interesting. I'm going to do a chart overlaying production volumes from each basin.
Supposedly, the natural gas industry is responsible for ~3.5million jobs (direct and indirect) in this country and many economists (and politicians) were banking on job growth from the natural gas industry. If this bubble does burst it will be yet another unpleasant shock to the system.
There are more jobs to be had from utilizing abundant cheap gas than from producing expensive gas. Where the jobs are will shift, though!
It is interesting to evaluate the profitability of drilling for NG at current prices. Certainly much of the current oversupply was developed based upon much higher prices. However, when considering what the price could be if NG becomes a transportation fuel, consider that $100 oil could equate to an NG price of $10 or so, based upon historical relationships. Energy content equivilance would be $15 for the NG, and that is near what the landed price is in some foreign markets.
In any case, it would reduce reliance on foreign supply for energy while generating the jobs, taxes, and profits within the US. The current oversupply is not the ultimate production capacity as we know that supply is being curtailed and many wells are waiting to be completed, with many more locations yet to be drilled. A price in the $6 range would remain an energy bargain.
Waymore,
You make valid points. The switch to natural gas will definitely occur to some -- perhaps very large -- extent and it is interesting to make informed guesses as to what that will mean.
The reason I framed this post around questions is because I don't really "know" anything other than energy is important to our economy. In my search for Reliable and Actionable Information, all I can do is question authority and look at the existing data. So far, I am fairly convinced of the following:
I use "less affordable" rather than "expensive" because another economic crash in some part of the globe may reduce demand enough to cause prices may decline. As people and companies scramble over the next decade to reduce liquid fuels consumption, many will do that math you suggest and see that NG is a bargain even in the $10 range. As transportation moves increasingly to NG and electricity, this will put pressure on those industries that have relied on cheap natural gas. In North America, this will almost certainly include process drying and building heating.
The trickle down hunt for efficiencies will affect industries across the board and, if I were the investing type, I would put long-term money on companies focused on insulation and passive solar heating as described in the Basking in the Sun post a few days back. There are some huge efficiencies to gain in those areas.
Jon
Jonathan,
With respect I question one of your conclusions.
Given EV and plug-in hybrids are already available it seems that as far as passenger cars go it would be more likely that fleet vehicles will go the EV route because of the natural gas glut. Since electricity generation using natural gas is on the rise it would make sense to use natural gas indirectly with an EV.
Secondly, I think that any fleet buyers who take a longer view may question how long the price of NG will stay low. An EV or plug-in hybrid gives a fleet buyer flexibility when the price of NG eventually rises.
Inter-city truck transport on the other hand seems like a good possibility for switching to NG.
That said, Chris Nelder recently wrote a post questioning how much NG is really available, not entirely unsurprising to TOD readers. Investing in a NG trucking fleet when it's not clear as to how much gas can be economically recovered will take courage, or ignorance.
Cheers,
Andrew
I agree with this assessment.
But there aren't that many operators of *passenger car* fleets, and those that are - like taxis, have a very high duty cycle that Ev's can't match.
For any fleet of vans, light, medium of heavy trucks, NG is, presently, a much better way to go.
There was some article here a week ago about Lays using electric trucks for in town work. To replace a $50k diesel truck with an electric one is $150k. That is one hell of an upfront premium for a 90% fuel cost reduction (and unknown battery life) An NG conversion would likely be less than $10k for a 50% fuel cost reduction and a know engine life. Which one would you bet your kids college fund on?
Agreed that NG prices will rise eventually, but they'll never match oil and in the meantime the Ng fleet operator has saved a lot of money.
I can only see a few niche applications for entire EV car fleets, like postal vehicles (and the closed campus type like universities, airports, resorts etc).
That said, many fleets could put in some proportion of EV's which are the ones that get used for the short trips, but will the fuel savings pay for that? Better to have those cars being something small and simple like a Kia Rio, etc and call it day.
$150K is a ridiculous price. They could probably get away with that with one-off conversions, but they are available for less.
Here are some plumber trucks (that look like UPS trucks) for $70K each:
http://green.autoblog.com/2012/02/03/boulder-electric-vehicle-delivers-f...
I suspect that $70K number is a bit low (perhaps that is after a tax-credit?), but $150K is way too high. At $70K, the fuel savings will pay for the added up-front cost in just a few years.
The trucks they are referring to are bigger/heavier than the Boulder one, they were talking about these sort;
here is the article, from MIT;
http://web.mit.edu/newsoffice/2012/ctl-electric-powered-trucks-0201.html
I agree that a trebling of the price ensures that it won;t be worthwhile. The MIT study found "9to 12% saving, but when you read the report, you realise that only came from using the vehicles battery for V2G.
That Boulder truck looks OK, except I question why it has to weigh 7000lbs empty. By the time the plumbers stuff is loaded, that will be a lot of weight. I am also not sure why they expect this to last 3x as long as the Sprinters. The engines on those (if diesel) are not giving out at 100,000 miles, and I don't see how there would be any real difference in the life of the remainder of the vehicle.
I actually think these sorts of vehicles would be good candidates for carrying an on board generator and a few less batteries, but the idea is to be fuel free...
Should be some good area on the roof for solar panels, but then, they can likely plug in at almost any worksite anyway...
Well electric motors are notorious reliable as well . . . probably even more reliable than diesels that are also well known for their reliability. How often have you had to replace the electric motor in your refrigerator or washer or dryer?
$150K is way too expensive. But if you have a reasonably priced EV truck, it can make back its up-front price in fuel savings . . . especially as liquid fuels get more and more expensive. Of course this only works for local area delivery trucks . . . anything long-haul can't be done with EVs. Local delivery trucks (like postal vans) are GREAT for EV applications though. They tend to go less than 70 miles a day, they have a centralized place at night to charge, they tend to drive slow stop & go city driving, maintenance is often a big cost, etc. It is an application made for EVs.
Well electric motors are notorious reliable as well . . . probably even more reliable than diesels that are also well known for their reliability.
Undoubtedly so. But the elec motors are cheap. It is the reliability/lifetime of the batteries that is really important here, and that hasn't been well established, in real world conditions, for commercial operation.
The postal vehicles are a great application, as is anything else that drives a relatively set route or fixed miles each day.
There is a limited sweet spot though. Not enough miles in a day, and you never recover the cost. Too many and you can;t do it with an EV.
A (short run) school bus might be an example of not enough miles per day. A taxi is clearly too many.
We can be sure UPS and Fedex have already done their numbers on this to see how many and what types fit into the envelope. Same for the foodservice companies, who also drive set routes. Frito Lay is trying a few, but some of their trucks don't drive enough in a day to make it worthwhile!
There are lots of opportunities in the commercial world, it's just a case of making that window between not enough miles and too many as wide as possible. Not enough means using less batteries to reduce cost(somewhat) too many means adding a generator, but if you do that, then you can reduce some batteries anyway.
That's why I think the on board generator - mounted like the refrig units - is a good solution - an 80-90% reduction in fuel cost, it will cost less than the batteries it replaces, and will give greater range.
See, this is where you are getting things fouled up. Energy and money are not interchangeable even though we all attempt it every day. Electric motor are NOT cheap. Homework assignment: How does an electric motor work and where do the components come from? So many of these ideas and socalled "solutions" are completely Rube Goldbergian Hahahaha
Also, you need a much much smaller vehicle. Truly functional and practical "electrified vehicles" are going to look MUCH more like a bicycle than a truck or even a car, and charging any of them using anything but distributed electricity is a Crime Against Thermodynamics.
Andrew,
I did not have inter-city trucking or even passenger cars in mind when I said "fleet vehicles" and was only thinking of corporate and municipal non-passenger vehicles making routes within an urban area. I should have said "non-passenger fleet vehicles" to be more specific.
I expect that fleet managers are a herding species and are likely to make decisions based on whatever is in vogue. To see some important press releases on NG adoption for fleets check out the US DOE page on Natural Gas Fleet Experiences.
And don't forget that for every Chris Nelder post questioning future NG prices, there are numerous official reports that suggest prices will remain low. Just like investment bankers, fleet managers are covered if everyone else is making the same, government sanctioned decision.
Here's a Feb 1, 2012 headline to support my assertion:
AT&T ordering 1,200 compressed natural gas cargo vans
Jon
Jon,
to add to that Navistar, Pickens Group in Natural Gas Truck Deal
Once these become off the shelf items instead of custom conversions, it is a lot easier for fleet operators to choose them.
A fleet of NG fueled trucks would possibly have a life of 10 years if a large company situation with constant useage. It does not take much courage to agree with a forecast that the current NG supply will be available for longer than that. Since fuel costs will be less than half of the costs of diesel, it would be ignorant to not convert. The only condition that needs to be satisfied is the availability at the truck stops. That would require building those hated pipelines.
A question that would be nice if we had an answer: " How much NG is likely to be produced from the various horizontal frack wells being drilled for the value of the liquids?". This production should be insensitive to projected natural gas prices. Have the rigs that used to drill for dry NG, simply switched over to drilling for wet NG (with similar NG prospects)? Could this prevent the pendulum from violently swings back?
Great question! Wish I had an answer.
I believe this is a big part of the problem with gas natural gas pricing. The big trend of all the public companies is now to switch to a more liquid heavy asset base. (This should have been the trend years ago if you believe in PO.) Anyway, a lot of these liquid rich plays produce a lot of associated natural gas. I don't think the dry gas business is coming back anytime too soon.
The CNG price point could be several times industrial gas prices. If a litre of diesel has 35 MJ of thermal energy and costs $1.40 including fuel taxes that is 4c per MJ which is $40 per GJ or mmbtu. Thus if NGVs become popular the price of gas could get too high for non-vehicle users. Start thinking prices like $20 per GJ noting that post Fukushima the Japanese paid $10/GJ for LNG.
In time cars will be either EVs or NGVs with all the petrol guzzlers retired. By then I think the gas price will be unaffordable for users like combined cycle power stations. That is the pie slices in Fig. 3 will expand for Vehicle and shrink for Electric Power. If we generated most electricity with load following nukes and renewables with storage that would free up gas for transport demand. If I recall a recent Drumbeat said Iran was going to build 2.6 million NGVs. Presumably they won't have Bluetooth, rear seat airbags and ABS brakes so it is possible to produce NG powered vehicles much cheaper than current models on offer. People who now drive battered pickups will be driving cheap NGVs.
The price will be going up, without doubt. The facilities for export are being constructed now. That could also be a losing investment as similar shale resources are being located across the world. Israel, Poland, South Africa, China, all have large resources identified and could also become export capable in a few years.
In addition to these NG resources, there are currently Ultra Deep wells nearing completion in the shallow waters of the GoM that may confirm entirely new horizons. These are below the salt weld that has been an exploration barrier because of poor seismic penetration. If these work out it could be something like another Spindletop. time will tell, but it should be an interesting few weeks for the folks at MMR.
Hmm, I wish I were that convinced about NGV. A few points when making comparisons.
Firstly NG when used ina n ICE will need spark ignition and this will require a modest CR such as in a gasoline engine.
Theref ore large heavy vehicels the fuel consumption will be significantly more than diesel.
Secondly there is the aspect of the fuel storage, in this case a large heavy cylinder, not as bad a hydrogen, but still heavy and large.
Thirdly are the energy losses on compressing the gas. Do not underestimate this as it will require high pressures to achieve a meaningful range. On a simple comparison 1 kg gasoline has about 43 MJ energy and 1Kg methane about 49 MJ.
On an equivalent basis 1 US gall gasoline = 2.5 kg NG which is about 3.5 cubic metres at STP, or about 124 scf. Pressure that up to 200 bar or 3000 psi and you still have a volume of 0.62 cubic feet. How big a tank can you have - not very big. Would you want to sit in a giant gas barbecue in the event of a shunt?
I am not against NG but it has a few limitations to consider.
My mother works for a relatively large company involved in natural gas distribution and even they cannot justify conversion to LPG/CNG vehicles. If it doesn't work for a natural gas distributor then it doesn't look good for most other applications, especially when they already have the expertise to convert the vehicles on hand.
Squilliam,
You have provided us with an interesting anecdote. But I don't understand how that can argue against facts on the ground:
Waste Management to Convert Entire Fleet to Run on Compressed Natural Gas
The difference I believe is trucks vs cars and utility vehicles. It simply didn't make sense for them in their particular case to use CNG even with being able to purchase it at wholesale prices. I suspect it is due in large part to the fact that a truck may be expected to last up to 1,000,000 KM whereas a car may be replaced well before 200,000KM.
Firstly NG when used ina n ICE will need spark ignition and this will require a modest CR such as in a gasoline engine.
That's not entirely correct. A diesel engine will run on natural gas as long as you inject a little diesel fuel to ignite it. They have to start on diesel fuel, but they can run on as little as 10% diesel fuel / 90% natural gas once they get running.
Alternatively, you can replace the injectors with spark plugs and put in special pistons to reduce the compression ratio. Natural gas engines can run on a higher compression ratio than gasoline engines.
The best solution is to use an engine designed to run on natural gas, which is what we did in the oil and gas industry. It helped that we almost always had a lot of associated gas with the oil we produced, and we paid more or less nothing for it since it was a by-product.
Splitting hairs a bit I think. Sure you can aspirate NG into diesel but it gets a bit complex. it is not exactly drop in and go. When you change the pistons, add a spark ignition you just about have gasoline engine. It does not solve the fuel consumption issue either as the fuel mix will be close to stoichiometric..
You could run a diesel on the same principle of a pilot flame with carbureted ethanol. A waste of time in my opinion though.
My point was that it is not hard to run an internal combustion engine on natural gas - whether it be a diesel engine or a gasoline one. The devil, as always, is in the details but the problems can be solved, as evidenced by the fact we used to run most of our field engines on natural gas. The efficiency is not much different than a diesel engine or a gasoline engine.
For the average company it would be more difficult than for an oil company, because they don't have natural gas available everywhere in their operations, nor all the equipment on hand to handle natural gas - but they can do it if they want to. All this equipment is available if they want to buy it.
RMG
What efficiency are you talking about? The thermodynamic efficiency of a spark ignition and a diesel are very different. The diesel runs at much higher CR which raises the thermodynamic efficiency.
I thought that the original question was more about CNG in transport type siutations: cars and trucks with varying engine speeds as opposed to fixed or stationary engines. In the latter at constant high output there is probably very little if any difference between a diesel and an NG aspirated diesel. For smallish power generation it would be a very plausible alternative. Likewise the boil off from LNG vessels is frequently used for power/ propulsion but this is a bit off topic.
As you quite rightly say it comes down to cost and availability. I remain a little sceptical about everyday transport, but it can be done. Will it be done by the masses remains to be seen.
Cummins Westport to provide natural gas engines for Navistar trucks
I'm sorry, I haven't commented on here yet, but i was confused reading some of the comments. Are some people saying that BAU can continue, with oil simply being replaced with NG?
I always tell those people to go fill their car up with natural gas and let me know how it works.
It works well in places like Argentina, but they use different method of fuel storage and transfer than you are probably used to :}
Here's one for you to fill up:
http://green.autoblog.com/2009/02/19/argentina-motorbike-manufacturer-la...
We frequently discuss the idea that BAU can continue for some time, in some form, mostly for the sake of argument. It's purely academic and has certain entertainment value. Besides, many of us are science fiction fans ;-)
I don't think anyone has simplified things to that extent. And your question immediately begs the question: "What is 'BAU' and how long counts as 'continue'?"
I try to be more nuanced and more specific in my predictions. In this article and the comments I have made longer term predictions appropriate for this decade:
and specific predictions for the year 2012:
I don't think any of the above count as 'BAU'. Nor do I think they constitute the 'end of the world as we know it'. They are part of the adjustment that is going to happen, one piece of which will be a switch from oil to natural gas for certain uses. But this switch is nothing new. It began in the 1970's with the adoption of fuel efficient vehicles and the switch from oil to gas for home heating. This time around we'll probably also have to reduce total vehicle miles driven and spend more money on building insulation.
So what does the future hold?
Less disposable income? -- Certainly.
Fewer airline trips? -- Yes.
High unemployment? -- Most likely.
Risk of international conflict? -- Yes.
Is this 'BAU'? -- "No" if we compare with the late 1990's. But "Yes" if we compare with the late 1970's.
Jon
But eventually NG will peak too, and if it is used to replace oil+ meet rising demand, the rate of extraction/ consumption is going to soar, no? and when humanity is confronted with peak natural gas AND peak oil, BAU will probably return to the BAU of pre-1850. but when might peak natural gas occur?
My bet is that global Peak Gas is going to happen sooner rather than later, around year 2030 perhaps. Already there are calls for domestic gas to be priced at export parity
http://economictimes.indiatimes.com/news/news-by-industry/energy/oil-gas...
Even some countries have gas rich and gas poor regions. This is true of northern and southern Australia and I understand this may be the case with western and eastern Canada. The gas poor region in the same country has to pay the export price unless the national government legislates for a mandatory allocation. If LNG shipments (by road, sea or rail) not pipelines are used there are additional energy losses.
One effect of carbon taxes and cap-and-trade schemes is that quick build new baseload plant will be combined cycle gas not coal fired. If CNG becomes a major substitute for diesel then gas will be replacing both coal and oil. As the book says thou cannot serve two masters.
Jonathan
Thank you for the informative post and your very useful replies to commentators.
I find it interesting to see a 'glut' in NG production combined with the US being a net importer, if mostly imports from just across the border.
Worldwide, NG is often a stranded asset, remaining in undeveloped fields, or for example flared in association with oil production. A very different commodity than oil, it seems. Does NG need even larger upfront investment in pipeline infrastructure?. Given in addition the rapid individual decline rates seen in much recent US NG production, how much is the legacy or lack of it of NG pipeline infrastructure limiting the utility and take-up of the new sources?
As an afterthought, given that a significant fraction of remaining US onshore oil production comes from remnant 'mom & pop' outfits - a few barrels easily carted - nothing like that can be assumed for future NG production? And who is going to want 'temporary' NG pipelines that soon will not connect with sufficient supply?
Phil,
I don't mean to ignore your valid questions. It's just that I haven't gathered any information on NG pipeline infrastructure and so have nothing to contribute.
Cheers,
Jon
Check out http://www.roperld.com/science/minerals/shalegas.htm
and
http://www.roperld.com/science/minerals/shalegasextractiondurationUS.pdf
Thank you
I haven't seen nitrogen fertilizer discussed, and as most nitrogen fertilizer is derived from natural gas, this is yet another trap we are setting for ourselves as we shift many things to 'currently abundant' natural gas. This link is a bit dated but seems to be a good primer on the gas/fertilizer connection. Note that the natgas price in 2001 was about what it is today. Why Are Nitrogen Prices So High?
As we increase our use of biofuels, we also increase our need for nitrogen fertilizer; corn and sugarcane are especially hungry for nitrogen. Peak natural gas means peak nitrogen. I've seen estimates that natural gas will peak somewhere in the next 12 - 30 years, and while these time frames may be in dispute by some, increasing our reliance on gas for electrical generation, transportation, etc. will certainly shorten the time frame, likely dramatically. Sorry for restating the obvious again.
As production of crude oil declines we will devote more capital and resources to more natural gas infrastructure at a time when food demand is rising and fertilizers are increasingly in short supply and rising in price. Of course, when this gas bubble bursts, the costs will rise (dramatically?) as will associated nitrogen prices. Increasing relative prices for liquid fuels, climate change, depleting water/irrigation sources, soil depletion, increasing populations .... IMO we are in the process of creating a perfect storm of feedback loops in the near future.
Promoting dramatic increases in the use of natural gas as a long term solution or as a bridge fuel (to what?), is clearly a shortsighted fool's game when one looks at it systemically over the next decade or two.
How are natural gas and fertilizer prices linked? Natural gas spiked in 2008,, as did fertilizer:
Itsa fact, we are hurting for potash and phosphate. we're lookin' for it and going after it in some pretty "out there" places....
Apparently the world uses 100 Mtpa of NG derived urea
http://en.wikipedia.org/wiki/Urea
There's no way you can farm millions of hectares of prairie or rangeland with organic compost. Come to think of it it can't be done without diesel powered machinery either. Throw in Peak Phosphorus to make it a trifecta.
Gluten from grain is the most important source of protein for many people and the rest eat too much meat and dairy anyway. It seems like we're sawing off the limb that we're sitting on. More mouths to feed, less oil and gas, more weird weather. At some point possibly in just a few years we'll have to ask whether we should conserve gas for the long haul. Will today's kids have enough food when they are middle aged? For starters we should not use 20-40% of gas supplies to make electricity but redirect or save it for higher priorities.
Ghung, PDV and Boof.
You nailed it. I have said it before and I will say it again. It's the four horsemen that will have the final say.
Low NG prices will simply exacerbate the problem of resource depletion by allowing unchecked consumption and growth to go on for a bit longer. That is all. Meanwhile the remaining reserves of critical minerals and substances will decline even further (not to mention biodiveristy and soil degradation). Time and time again mankind has demonstrated a total ignorance of managing resources and this is going to be no exception.
Just remember - when it gone, it's gone. What then?
Jonathan,
One very bizarre point, that perhaps only you can clear up, is whether this whole idea of "gas boom goes bust" is because:
1.) There is no more gas left, at least at these prices, so all gas companies go bankrupt, so all future gas production is in great doubt. (Gas is peaking) Or something like that? Or,
2.) Major increases in fracking technology, longer laterals, better understanding of geology, better financial instruments for investors in gas etc, you name it, whatever, has already/is going to result in a many year glut, that will cause all kinds of havoc, but on the other side of that, remains tremendous amounts of gas to be produced for eventual export, electricity production, NGV's, heating, industrial production etc, when the price goes back up.
This group of respondants seem to be on at least two or three completely different pages. Can you somehow get everyone back on the same page? I think you perhaps need to better explain what "page" you, (through this article), expected everyone to get on in the first place. Or, perhaps more simply, what page you are on? Just sayin'. I happen to think both you and your article are quite straight forward on these issues. I see no need for all this confusion.
"This group of respondants seem to be on at least two or three completely different pages."
We generally avoid binary thinking here. None of these issues is either/or; there are many pages to be considered. Welcome to TOD...
Carl,
One of the main reasons I like TOD is because everyone is on their own page -- I get to enjoy a robust discussion with many points of view. My background, entire career and current employment has been and is in science. In the world of science, having "everyone on the same page" is a giant red flag that people are not thinking about the world clearly because the real world is a very messy place full of nuance and surprises.
Like many commenters at TOD, I think that we are facing a liquid fuels crisis this decade that will have significant negative financial consequences. (It may also have many positive environmental consequences in the US though perhaps fewer in other countries.) Unlike some, I do not believe that modern civilization will crumble any time soon in the US and Canada.
With respect to your questions I am willing to go on record with the following easy-to-understand statements:
So I am convinced that the US and Canada can produce natural gas at current levels but I do not know whether we will. Here are the outstanding factors:
What does it all mean?
Always remember Keyne's quote:
Regards,
Jon
Jon,
Well, that was certainly a very complete answer. I would say I'm pretty much in agreement with your general point of view, and can see that you have done your research well. How about tackling the shale oil boom/bust, next?
Thanks.
I'd love to spend time on shale oil but doing this kind of research doesn't generate any income for me. Like my other hobby activities, I can only devote so much time to it.
I know the problem all too well.
Me too, prices are up, one benefit is where I live a lot of people make living purchasing cheap gas from Russia and selling it here.
Jon,
So you'd recommend putting a lot of money on far-dated, "long" NG futures??
The first "oil boom" in the United States
began in Texas in 1901, with the discovery of
Spindletop Field, where the Lucas No.1 flowed oil
at 75,000 barrels a day from a depth of 1,006 feet.
After that, the United States was the primary source of oil in the world through the 1940s and produced more than half the world's oil until the 1950's.
https://www.dmr.nd.gov/ndgs/Publication_List/pdf/50th%20Anniversary%20of...
7.5 million dollars per day is a decent return on investment.
Texas-centric gibber jabber. The first boom in the US was obviously started by Drake. The oil fever started by Drake created oil exchanges in Bradford, during the Civil War oil fields were burned to deprive the other side of the resource, hell, the first peak oiler types were already declaring an end to the oil age BEFORE some Johnny come lately in Texas (probably related to someone in Ohio, Pennsylvania or West Virginia because he sure wouldn't have been smart enough to know how to drill without them) got lucky for the first time. The first boom and bust cycle had already happened before new technologies allowed someone to drill Spindletop (the first example of non-easy oil by the way). Hell, there were even blowouts half a century before someone in Texas (undoubtedly told what to do by someone with nearly half a century in well drilling already gained elsewhere) found anything.
First oil boom in Texas....please!
There is a reason for quotation marks for the words 'oil' and 'boom'. It is understood that it isn't the first oil boom, but a first in terms of volumes, then and there. Like the current ng boom, here and now, it is also a first in terms of volumes realized.
So when you have a well that is producing 75,000 bopd, you could call it a boom.
If you are a mineral owner with a 1/5 lease, you'll be swimmin' in gopher gravy.
15,000 bopd provides oil royalties 1.5 million dollars per day with oil at a hundred. It'll be a nice pay day, even after the tax is paid. You're going to need an accountant.
Things will be boomin'.
Thanks for posting this, it's important. In the Pittsburgh region the Marcellus and other unit exploration activity is essentially off-scale.
The resource is really large, there is no doubt.
NG Supply well to watch now : MMR testing the shallow GOM ultra deep theory. Should be an important indicator of potential in the testing of the first well : Davy jones
The idea of posting this article on TOD - a place which likes to talk about resource depletion, etc. - is really rather ironic (and funny). The reason the shale gas boom has gone "bust" is because it was a raving success, not because it was a miserable failure. Production went so high, producers crashed the price. It'll be interesting to see what TOD does if the same success is repeated in the shale oil plays. Maybe they'll produce so much they'll crash the price to $30.
Of course the bust following this boom will eventually send NG prices back up, at which point drillers will start drilling again, and production will go back up, and so on, and so forth. The profile of US natgas production won't look anything remotely resembling a Hubbert curve even after several more decades, a phenomenon which will have peaker theoreticians in future years scratching their heads.
The TOD Mission Statement says:
Nothing ironic or funny about this article appearing on TOD. It's just part of the spectrum of voices that show up here seeking "civil, evidence-based discussions about energy and its impacts on the future of humanity".
Regarding your hypothetical -- I'm generally optimistic about the future. But I think $30/bbl oil without a severe global depression is extremely unlikely. And there are many at this site that have argued against the use of Hubbert Linearization as a predictive technique. I'm not aware that anyone has argued for it in over a year.
What is so successful about the TOD endeavor is the ability of people with widely differing opinions to communicate, and often disagree, but always while making clear arguments backed by sufficient evidence.
Jon
Yeah, that part right there? Someone who knew some of the history of oil should have gotten involved before it was written. Conventional institutions, including the media, government, and what passed for resource economic theory back then were running around like chicken littles before everyone on this website was born, talking about these things. Government agencies were worried about it, talking about, their scare tactics were being repeated in print, the price of fuels was increasing occasionally in bursts of 200-300%, the government was preparing for the predicted running out by buying up land, conservation was the word of the day and holy crap the entire country only had a couple billion barrels left! I'll bet great grandpa was pretty worried there for awhile.
The entire bell shaped curve thing has been pretty thoroughly beaten up at this point. A majority of the worlds volumes just don't perform the way Hubbert hoped, for as many different reasons as can be imagined. The invisible hand gets in there and screws things up, NOCs and political choices, the cartels choices, investment and nationalized companies changing policies. Which is okay, because it means we'll see less nonsense modeling and more bottoms up practical applications hopefully.
Yeah, Hubberts curve will look more like a shark fin.
http://netenergy.theoildrum.com/node/5500
It is claimed. Of course, peak oil was supposed to be a peak as well. And yet a place like Saudi Arabia, which peaked 30 years ago, and then declined, and then apparently peaked again recently, looked like neither a peak, a plateau, nor a shark fin.
Besides, net energy consequence extrapolations don't work. Cutler and Cleveland have already demonstrated why.
There's something wrong with this statement. If the shale gas producers cannot produce gas at a profit at today's prices, then neither the current production nor the high consumption associated with low prices can be sustained. If the sustainable production price is higher than it is today, then the higher prices mean that the demand will be lower than it is today and therefore less will be produced.
Frugal,
I don't think your comment disproves Abundance.Concept's assertion at all. In fact, I don't think you even tried to disprove it. I had earlier mentioned this whole aspect to the author, Jonathan. To me it's a very black/white issue. Either it was a raving success, or it wasn't. So which was it? And far more important, why?
Have you never heard of someone being the victim of their own success? You seem to be pointing out that the gas industry is a victim. If so, I heartily agree. But, is it a victim of it's own success, or is it a victim of it's own failure? As the whole purpose of the gas industry is to produce gas, I can't imagine how anyone can possibly come to the conclusion, that this over production of gas is a complete failure, and not it's opposite...an absolutely smashing success!
Going on, he also mentions applying this same lesson to the oil industry, as they are now applying all the, again, successful drilling and fracking techniques, that originally caused this gas glut, to the oil industry. I might ask you, what do you think is going to happen when the oil industry eventually adapts all these successful gas producing techniques? But, I would rather ask you the same question in the past tense. What do you think already has happened in the oil industry through the adaption of these successful gas production techniques? Then, perhaps we could all start talking about what really matters in the world of energy today, instead of all this other nonsense.
I don't happen to think that more than about 5 people at this site have really understood this article at all, but Abundance.Concept certainly was one of them. Any comments, anyone?
"Any comments, anyone?"
I'll start here:
You said: "As the whole purpose of the gas industry is to produce gas,..."
I would submit that their purpose is to make a profit for their investors. I don't question that they have been successful in this, I question how long this can continue under current conditions. There won't be nearly enough chairs when the music stops, IMO.
Ghung,
Good point. The gas companies have been very successful in over producing gas, but have been very unsuccessful in creating profits for their investors at the same time. This situation can't go on forever. Seems like Jonathan hit the nail right on the head with his article.
Bingo!
Thanks Carl, that pretty much sums it up.
Shot themselves in the foot.
don't know I'd ever call shooting myself in the foot an absolutely smashing success! but that might just be me
?- )
a-c: "As the whole purpose of the gas industry is to produce gas". That's not exactly correct. The whole purpose of the gas industry is to make a profit. If that also helps supply the economy with the energy it needs then that's just a happy coincidence. I drill wells to make a profit for my owner. Chesapeake et al drill the shale plays to keep their reserve base growing which will keep their stock value up. And one result of that effort is supplying the market with enough NG to push prices down. That might reduce the cash flow/profits for the pubcos but it doesn't reduce their reserve base...just the value of it. And as long as Wall Street values those reserves numbers more than profit margin those pubcos won't be hurt too badly. But if the lower prices do reduce drilling significantly and reserves of the pubcos aren't replaced then that's when the real blood bath might begin.
None of this is really new. The cyclic nature of the oil patch has been running since the first well was drilled. Folks just seem to be paying a bit more attention to it today. And like with every bust, if this one carries on for a while the consolidation phase will be next: the stronger buyout the weaker. Folks offer the ExxonMobil acquisition of XTO after the '08 NG price crash as an indication of XOM charging into the SG plays. XOM bought XTO cash flow/reserve base at a huge discount. XOM may be doing some SG drilling but many of the XTO leases have expired without being drilled. And so will the rest of them if they aren't drilled very soon. I could have picked up 20,000 acres in the E Texas SG play for no money...just the promise to drill wells. Those companies had a choice: get me to drill or let the leases expire and get nothing for their investment. If NG prices stay this low for the next 12 months or so we should see a lot of SG players being acquired. Historically the most efficient way for pubcos to increase their reserve base is not by drilling but buying up crippled companies at a discount. Yes...we eat our own. Nothing personal...just business. LOL.
"As the whole purpose of the gas industry is to produce gas". That's not exactly correct. The whole purpose of the gas industry is to make a profit
ROCK I do have a bit of quibble with that. It might be just semantics but I don't think it is. In our system making a profit over time (and in time) for the individual company is paramount to survival. I'm no expert but in the old soviet system-let's go back to Old Joe's time-divisions (companies? haven't but a cursory knowledge of how they it all broke down) making a quota was paramount. Both the US and USSR had oil oil and gas industries so there must be a commonality between the two and I don't know if profit was officially allowed under Stalin. So I would suggest the commonality was the purpose of the industries in each system, which was to produce the product the industry was developed to produce--oil and gas.
But for both systems profit was essential, profit is essential for all organisms' survival. (I just wrung my poor brain dry trying to squeeze this concept down to essentials when discoursing with Bruce S the other day in the BP Outlook discussion). So what I'm saying is profit is necessary at least at the whole system level for the system to survive. We already know that the rigid central planning approach didn't give a powerful military/industrial system a century lifespan. So there definitely seem to be advantages in allowing profit to be realized down through the company and personal level. For all its failings the hybrid system we are using is still bumping along.
Maybe if we look at survival at the system level of the human body it will help. Like any organism it is trying to glean life off the earth and send its genes on into the future (for simplicity I don't want to go into strategies that allow one body to sacrifice its genes in ways that allow the entire species genes to go forward). Now is survival and passing on genes the purpose of that body...there may be some argument on using that term at that level but lets say that is just why the human body has developed in the way it has. But the human body has all sorts of systems and mechanically interrelated parts. The purpose of any of those systems is almost unarguably the help the human body carry on its long term survival mission.
Let's get real simplistic and look at the arm and say its purpose is to gather figs off the trees and shovel them into the mouth. Lets say a bunch of figs were found that forced the arm to work in such a way that it had to build up some muscles which were not ideally located. When those muscles got to a certain bulk they shut down a portion of the blood flow to the arm. At that point the arm would no longer be able to fully function. Fortunately the other systems were able to gather enough food to keep the whole body system going. Eventually the over-sized muscles in the arm shrank (some of their nutrients being given up to other useful muscles in the arm during the process), full blood flow resumed and the arm was able to resume its work getting back at those really tough to reach figs.
Rinse and Repeat--we have boom and bust.
But the purpose of the arm was never to make a profit but rather its purpose was to get food to help the whole organism to make a profit.
Now of course the arm is made up of cells which are organized into systems that all have to work together and all have to make individual profits to carry on overtime. The big central planning brain that recognized the figs as reachable food does not regulate how that all works out from the top down. So when you break it down far enough profit is indeed essential for all parts if they wish to carry on. When you start talking 'purpose' you open up a heck of a can of worms.
Luke - Mucho thanks! I truly love weird analogies. I'd use them more often if it didn't get me run off TOD. LOL. You make a valid point. But to carry the analogy a bit further: the fingers won't hesitate to cut the blood flow off to the arm if in doing so gained some short term benefit even though it might ultimately cause gangrene in those very same fingers. I've seen firsthand management make strategic decisions that were almost certain to destroy a company long term. Real example: borrow money from a bond sale and use that 11% interest loan to pay off an 8% bank loan. Doesn't make sense, does it.? But management walked away with millions and were long gone by the time the company filed bankruptcy.
I cannot overemphasize how very focused and narrow nearly every pubco I've worked for has been. It has always been short term gain. Typically management/staff kept their jobs or got there bonuses based upon what they did in the last 12 months. Thankfully I now work for a man who measure us by our long term successful efforts. I do that well and I'll be handsomely rewarded. Fail and he'll run my butt off without hesitation. Can't be more fair than that IMHO.
too take it out even further it was actually some bacteria or fungus that took control of the fingers and forced them to cut off the the blood flow that eventually killed the fingers but not before the bacteria or fungus grew strong enough to move on to another host, or just die burning off their massive energy reserves living a life of leisure. Yeah, the analogy might get my head handed to me on a platter but it was fun to try out.
I cannot overemphasize how very focused and narrow nearly every pubco I've worked for has been
Could be why Warren Buffet has focused so heavily on privately held companies so much of his career...mind you I'm guessing at that from way off from furthest the edges of the money patch
March 2012 Nat Gas is under $2.50
Jan 2013 is $3.66 LAST
Does it really cost over ten thousand dollars per year to store a contract of natural gas as this contango implies?
dn - "...to store a contract of natural gas?" You kinda lost me there. AFAIK it doesn't cost anthing to "store" a futures contract. You just buy it and then wait to see if you made money or lost it. But it can cost a company $millions to many tens of $millions to store NG. In fact, some companes pay big bucks just to reserve storage space even if they don't end up using it. And I might have paid $X to reserve some storage that I might not need today. But I can sell that right to another company at a profit...or a loss. How much profit? Depends on how much they are willing to pay. I'm wonderng if you think most producers own NG storage. Maybe a very few do but I don't know of one personally. NG storage facilties are built and run by companes that are in the NG storage business. Collectively they've invested $billions to develop those sites. And did so with the intent to make a profit. I've worked on a couple of proposed NG storage facilitiies. Neither happened: the economics couldn't make the financing pay. Perhaps the best simple analogy is bulding an apartment complex. Profit/loss will be determined by not only your occupancy rate but what rent you can charge. I've know two NG storage companies that have gone bankrupt. And I know one group of investors that have made a freaking fortune by moving NG in and out of their facility on a daily basis for a local NG retailer.
With any other commodity if the contango gets this out of wack, one could just buy the spot commodity, and take delivery, and then sell the forward month.
So if the storage costs and financing costs are less than the contango there is a guaranteed profit there.
Obviously the contango in NG easily takes care of the financing costs. This leaves the storage costs.