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Page added on December 23, 2013

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Shale Bubble

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We’re being told that – thanks to technological advances like hydraulic fracturing and horizontal drilling – the US is undergoing an energy revolution, leading us in a few short years to become once again the world’s biggest oil producer and an exporter of natural gas. According to the Oil & Gas Industry and their proponents, “fracking” will provide the US with energy security, low energy prices for the foreseeable future, more than a million jobs, and economic growth.

“There’s no doubt that we’re seeing an industrial revolution… taking place because of the shale revolution.”
–Ed Morse, Global Head of Commodities Research at Citigroup

“We have a supply of natural gas that can last America nearly 100 years, and my administration will take every possible action to safely develop this energy.”
–President Barack Obama

“[The Utica Shale is] the biggest thing economically to hit Ohio, since maybe the plow.”
–Former Chesapeake Energy Corp. CEO Aubrey McClendon

“[The surge of U.S. oil and gas production] is the biggest change in the energy world since World War II.”
–Fatih Birol, Chief Economist at the International Energy Agency

“Many people in the oil industry were skeptical [that we had reached peak oil], and the extraordinary recent expansion of unconventional gas and oil production in North America proved the optimists to be correct.”
–Christof Rühl, Group Chief Economist at British Petroleum

Pointing to record low natural gas prices and increased production, policymakers and the media on both sides of the political aisle, as well as investors and utilities, have bought the hype and are shifting their plans and proposals with the expectation that the shale revolution is here to stay.

The Reality

The Reality is that the so-called shale revolution is nothing more than a bubble, driven by record levels of drilling, speculative lease & flip practices on the part of shale energy companies, fee-driven promotion by the same investment banks that fomented the housing bubble, and by unsustainably low natural gas prices. Geological and economic constraints – not to mention the very serious environmental and health impacts of drilling – mean that shale gas and shale oil (tight oil) are far from the solution to our energy woes.

Diminishing Returns

High productivity shale plays are not ubiquitous and wells suffer from very high rates of depletion.

The Drilling Treadmill

Because depletion rates are so high and drilling locations increasingly unproductive, industry is forced to drill ever more wells just to offset declines.

Unsustainable Prices

Wall Street promoted the shale gas drilling frenzy in order to profit from mergers & acquisitions, resulting in prices lower than the cost of production.

Diminishing Returns

Shale plays suffer from the law of diminishing returns. Wells experience severe rates of depletion, belying industry claims that wells will be in operation for 30-40 years. For example, the average depletion rate of wells in the Bakken Formation (the largest tight oil play in the US) is 69% in the first year and 94% over the first five years.

The Drilling Treadmill

This steep rate of depletion requires a frenetic pace of drilling, just to offset declines. Roughly 7,200 new shale gas wells need to be drilled each year at a cost of over $42 billion simply to maintain current levels of production. And as the most productive well locations are drilled first, it’s likely that drilling rates and costs will only increase as time goes on.

Unsustainable Prices

Wall Street promoted the shale gas drilling frenzy which resulted in prices lower than the cost of production and thereby profited [enormously] from mergers & acquisitions and other transactional fees. The oil and gas industry is now demonstrating reticence to engage in further shale investment, abandoning pipeline projects, IPOs and joint venture projects.

A Shale Bubble

As a result of these realities – high depletion rates, the need to drill ever more wells to maintain production, decreasingly productive wells as the best locations are drilled and depleted, and the higher prices required to justify this investment – our country will have drilled and fracked our way down a blind alley (with huge associated economic and environmental costs) for a short-lived energy boom.

The Reports

In February 2013, Post Carbon Institute and Energy Policy Forum released two ground-breaking reports that belie energy industry claims of U.S. energy independence as a result of newly accessible shale gas and shale (tight) oil. The report findings are based on an unprecedented analysis of over 60,000 U.S. shale oil and gas wells and an investigation of the role of Wall Street investment banks in the explosive growth of fracking for natural gas.

Drill, Baby, Drill

The most comprehensive analysis to date of the prospects for shale gas, shale oil (tight oil), and other unconventional fuels.

Shale & Wall Street

Uncovers the role of Wall St. investment banks in promoting the shale gas drilling frenzy and related drop in natural gas prices.

8 Comments on "Shale Bubble"

  1. Bob Inget on Mon, 23rd Dec 2013 9:13 pm 

    “The lady doth protest too much, methinks.” comes from Shakespeare’s Hamlet, act III, scene II, where it is spoken by Queen Gertrude, Hamlet’s mother. In Shakespeare’s time, “protest” meant “vow” or “declare solemnly”. The context is a play within a play, and the Queen criticizes the Player Queen’s speech on the grounds that excessive avowal of her plan to not remarry after the Player King’s death sounds hollow and insincere. Today, “protest” means “declare an objection”, so the phrase has come to mean that one can “insist so passionately about something not being true that people suspect the opposite of what one is saying.”

  2. Bob Inget on Mon, 23rd Dec 2013 9:44 pm 

    FOR A FEW SHORT YEARS.. not ‘in’ a few short…

    If only we could have this respite period
    to prepare for inevitabilities of climate change and resource depletion.

    Politically impossible, I know.I know.
    But, can constant negativity like the article featured any more productive?

    Well founded fear abroad says the exact opposite. “More money to be made leading up the the end of civilization than at the end”.

    There is progress. Of sorts. China is moving.. slowly, to natural gas if only
    to permit city dwellers something that feels like normal respiration.

    (old, old, as hills joke alert)
    There’s a so called ‘oilman’s prayer’ that goes something like this:
    “Lord, just let there be one more oil boom before I retire”

    I’ll second that. If we did use this period of relative abundance to make tools, infrastructure, instead of arms
    whose best use is not use, we could have shot at survival.

    Commit to change, certainly. Use those tools already at hand to do it.

  3. rockman on Mon, 23rd Dec 2013 9:55 pm 

    An east choice: low oil/NG prices or prolific shale production: you only get to pick one. The current unconventional resource “revolution” is identical to the same “revolution” that started over 20 years ago when the Austin Chalk in Texas was horizontally drilled and frac’d. It was the hottest play on the planet at the time and eventually covered a much greater area than the Eagle Ford Shale does. The only significant difference was that the AC was commercial at much lower oil prices.

  4. Stilgar on Mon, 23rd Dec 2013 11:32 pm 

    The Drilling Treadmill

    “This steep rate of depletion requires a frenetic pace of drilling, just to offset declines. Roughly 7,200 new shale gas wells need to be drilled each year at a cost of over $42 billion simply to maintain current levels of production. And as the most productive well locations are drilled first, it’s likely that drilling rates and costs will only increase as time goes on.”

    Are 7200 new wells (and more in the future) too much to ask in an effort to make the President’s statement of 100 years come true? Ok, so we’re on to the Red Queen part of peak oil/NG, but at least we know if we run in place, i.e. drill ever faster we can continue to extract enough to have BAU for part of that 100 years.

    In the words of Wesley Snipes from the movie Demolition Man when addressing his gang, “Are you with me?!”

  5. John_A on Tue, 24th Dec 2013 2:06 am 

    I wonder if PCI knows any more about the shale oil and gas economics than they do about peak oil and the natural gas cliff in America they were rooting for back in 2005? They are just sore losers that they didn’t see it coming at the exact moment they decided to declare the sky was falling.

  6. GregT on Tue, 24th Dec 2013 4:16 am 

    Well John……..

    If they were rooting about it in back in 2005, looks like they were about three years early. I’m pretty sure that there won’t be many ‘winners’, but lots of ‘sore’ people all around.

    Are YOU prepared? Didn’t think so.

  7. GregT on Tue, 24th Dec 2013 5:45 pm 

    Thanks for the link Dave,

    Should be a mandatory read for all, maybe more people would wake up.

    Then again, maybe I’m giving human beings too much credit.

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