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Page added on December 12, 2013

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US Energy Independence: Another Pipe Dream

US Energy Independence: Another Pipe Dream thumbnail

Tank cars offload crude, likely from the North Dakota Bakken formation. Photo by Roy Luck. Creative Commons licensed.

One of Canada’s top energy analysts has warned investors and geologists that “the shale revolution” will not meet conventional expectations as a so-called game-changer in energy production.

Speaking at the Denver meeting of the Geological Society of America and later at Queen’s University and an energy conference in Toronto, David Hughes challenged the assumptions of industry cheerleaders by spelling out startling depletion rates for high-cost unconventional shale and tight oil wells.

“The shale revolution has been a game-changer in that it has temporarily reversed a terminal decline in supplies from conventional sources,” said Hughes in both talks given in late October and early November. “Long-term sustainability is questionable and environmental impacts are a major concern.”

The geoscientist, who now lives on Cortes Island, has studied energy resources in Canada for four decades, including 32 years with the Geological Survey of Canada as a coal and natural gas specialist.

After reviewing data from unconventional oil wells, Hughes found that these difficult and high-cost operations deplete so rapidly that between 47 to 61 per cent of oil from plays like the Bakken, the first major tight oil play developed, is recovered within the first four years.

Hughes noted that the Bakken and Texas’ Eagle Ford plays, which currently produce two-thirds of U.S. tight oil and are supposed to take the country into energy independence territory, will actually peak in production by 2016 or 2017.

Incredibly, most tight oil wells, such as in North Dakota’s booming oilfields, will become “stripper wells” (producing less than 10 barrels a day) and be ready for abandonment within 11 to 24 years.

Shale no panacea

Shale gas wells follow a similar decline profile. In Louisiana’s Haynesville play and Pennsylvania’s contentious Marcellus fields, producing wells decline by as much as 66 per cent after the first year.

More than 3,500 wells have been drilled in the Haynesville play, which in 2012 was the top-producing shale gas play in the U.S., yet production is falling owing to the 47 per cent yearly field decline rate. The current price of gas is not high enough to justify the 600-plus wells needed annually to offset the steep field decline (each well costs between $8 to $10 million).

HaynesvilleGraph2_600px.jpg

Data from Drilling Info/HPDI.

“The shale revolution has provided a temporary respite from declining oil and gas production, but should not be viewed as a panacea for increasing energy consumption… rather it should be used as an opportunity to create the infrastructure needed for a lower energy throughput to maximize long-term energy security,” warned Hughes.

Hughes also told investors that they can no longer ignore the real and high-cost environmental issues associated with hydraulic fracturing, including high water consumption; groundwater contamination; methane leakage; land fragmentation; air pollution and property devaluation.

“There has been a great deal of pushback by many in the general public, and in state and national governments, to environmental issues surrounding hydraulic fracturing,” he said.

Quebec, Labrador and Newfoundland have declared moratoriums on the technology of high-volume horizontal hydraulic fracturing. In addition, Canada’s largest private sector union representing a high percentage of energy works has called for a national moratorium.

Although the number of gas-producing wells in Western Canada has reached an all-time high of 230,000 wells, actual gas production has been in decline since 2006.

Hughes also noted that the quality of shale oil and gas plays varies greatly. A few are prolific because they have sweet spots, he said. These special zones are targeted first and lead to an early rise in production followed by a decline, often within five years or less.

As a result, 88 per cent of shale gas production comes from just six of 30 plays, while 70 per cent of all tight oil production comes from two of 21 plays: North Dakota’s Bakken and Texas’ Eagle Ford.

Bad omens for BC

Rapid depletion rates, high capital costs and low market prices do not bode well for British Columbia’s much-hyped plans to export shale gas to Asian markets via a liquefied natural gas (LNG) system that currently does not exist.

“In terms of B.C., the well depletion will be similar. All of the fields outside of the Horn River and Montney plays are in decline,” Hughes told The Tyee in an interview.

“The province would have to nearly quadruple gas production just to satisfy the demands of five LNG terminals.” As many as 12 terminals have been proposed for B.C. “It’s a huge scaling problem.”

The government of Premier Christy Clark has championed LNG development as the province’s new economic miracle by subsidizing geoscience, roads and water for shale gas companies.

It has also lowered royalties. Income from shale gas peaked in the province in 2006 at more than $2 billion and has since fallen to less than $400 million, excluding government subsidies.

BCGasRoyaltyGraph1_600px.jpg

Data: BC Ministry of Finance, Economic and Financial Review and Budget 2013.

The Business Council of British Columbia whose executive council includes representatives from Encana and Kinder Morgan, supports accelerated LNG development on the grounds that global markets will likely not need the gas in the future: “Overall, there is sufficient evidence in the marketplace to suggest that, if the current LNG contract window closes before B.C. is able to secure final investment decisions, there would be potentially lengthy delays before B.C. and Western Canadian natural gas would have another LNG export opportunity.”

Hughes told investors that the shale gas revolution follows a predictable life cycle.

A land-leasing frenzy follows discovery. Then comes a drilling boom, necessitated by lease requirements, which locates, targets and depletes the sweet spots. Gas production grows rapidly and is maintained “despite potentially uneconomic full cycle costs.” (Production provides cash flow even though the well may not have been economic in its own right).

After five years, fields such as the Haynesville reach middle age. At that point geology takes over from technology, and it takes progressively more wells to offset field declines as drilling moves out of sweet spots to lower quality areas.

‘It’s all in the red’

Due to depressed natural gas prices, the shale gas industry has written down billions of dollars worth of assets and refocused drilling on more lucrative liquid rich formations. Other companies have lobbied strongly for government subsidies for LNG exports.

Rex Tillerson, CEO of Exxon Mobil, a multi-billion dollar shale gas investor, exclaimed last year that the industry was making no money: “It’s all in the red,” he said.

Royal Dutch Shell has written down $2 billion in shale assets and even put its Texas Eagle Ford properties up for sale. Meanwhile, one of its senior executives has complained that the industry has “over fracked and over drilled.”

Encana, one of the largest holders of shale gas real estate in B.C., has sold off many assets and laid off 20 per cent of its workforce due to poor investments in uneconomic shale gas plays.

The company pioneered the transformation of landscapes across the West, with industrial clusters of wells combining horizontal drilling with multistage hydraulic fracturing. The 10-year-old mining technique blasts large volumes of water, sand and toxic chemicals into dense rock formations up to two miles underground.

Hughes, head of Global Sustainability Research Inc., will be one of the experts addressing the Transatlantic Energy Forum in Washington, D.C. on Monday. The forum brings together energy and climate change experts from both sides of the Atlantic Ocean.

The Tyee



15 Comments on "US Energy Independence: Another Pipe Dream"

  1. Northwest Resident on Thu, 12th Dec 2013 11:37 pm 

    The only way that America will become “energy independent” is if we power way, way, way down.

  2. J-Gav on Thu, 12th Dec 2013 11:57 pm 

    I’ve just commented on this subject in a recent post concerning another article but, to re-enforce what Northwest is getting at, I’ll add this: the only brand of true ‘energy independence’ available to anybody is that which I/You/We create for ourselves. The rest is book reviews.

  3. GregT on Fri, 13th Dec 2013 12:40 am 

    I wish that all British Columbians could read this. Our Premier, Christy Clark, is spreading so much disinformation, it should be criminal. But then again, since when did most of our politicians ever tell the truth?

  4. Dave Thompson on Fri, 13th Dec 2013 1:00 am 

    In a few years there will be some very upset investors.

  5. DC on Fri, 13th Dec 2013 1:32 am 

    Yes Greg, but we both know Clark is a mental lightweight that simply does what her bilderberger bosses tell her to. And when they say, Drill, Christy Drill, she dutifully squawks back;

    awwkk Drill! and then hops around waiting for her cracker reward.

    With a endlessly swelling population, and forests in decline, her only ‘plan’ is to pay US corporations to liquidate whatever they can find at the lowest possible price.

    She is a stupid woman, even by the undemanding standard politicians are usually judged by. But people re-elected her. Not that the NDP were any better. The great game of more immigrants, and auctioning off the resources is very much on here…

  6. Keith on Fri, 13th Dec 2013 1:52 am 

    I wonder about that too DC. If lack of cheap energy puts economy into decline then what does that do to countries immigration policies? Canada is a cold place, you can’t just throw up a tent city like in the U.S. People need money here to stay warm.

  7. mo on Fri, 13th Dec 2013 2:08 am 

    If you guys in Canada are smart you ‘ll save those resourses for yourselves. The us will only take take take what you’ve got and then walk away.

  8. DC on Fri, 13th Dec 2013 2:28 am 

    You right mo, if we *were* smart, our resources would be nationalized and only sold or exchanged for goods of real value. Not worthless toilet paper representing un-repayable amerikan debt. But my people ‘like’ toilet paper dollars. We also like liquidating our non-renewable resources as fast as we can, for the lowest possible price. We also like electing politicians to high office that like those things as well.

    The take away message is, my people are nowhere near as ‘smart’ as we like to think we are. In fact, we are not smart enough to even ask if what we are doing makes a lot of sense, or is in our own best interests.

    @Keith you got that right! Sure its nice in summers, but last 2 weeks its been close to -15c. And even in my ‘newish’ centrally heated condo, I can easily feel the cold anytime I get near a wall. My place, like most others here,leaks heat like sieve. Me, I just dress a little warmer and barely use the central heating. But, 99% of my fellow citizens no doubt have there furnaces going 24/7. Sigh….

    It is not unheard for homeless people to freeze to death during the winter in my country. What will happen when tent cities start to become a permanent, impossible to ignore fact of life?, I dont know really.

    I guess you can say were the perfect consumers.We dont ask and dont care eh?

  9. yellowcanoe on Fri, 13th Dec 2013 3:12 am 

    What I find odd as a Canadian is that we are willing to sell our non-renewable resources like gas and oil but a sizeable percentage of Canadians are strongly against exports of water even though this is a renewable resource.

  10. dissident on Fri, 13th Dec 2013 3:20 am 

    Politicians do not have the rudimentary math skills to understand what these decline rates imply. These morons are the people deciding on our future. But the electorate is composed of morons as well who keep expecting the politicians to deliver and who believe everything they are told by the media.

    By 2020, the current euphoria will start to disappear. Since no effort will have been made to address the looming oil shortages, the economy will start to unravel.

  11. rockman on Fri, 13th Dec 2013 12:48 pm 

    yellowcanoe – One the one hand I can appreciate your feelings about selling your resources. But OTOH I don’t hear any of the Canadians complaining about how much the royalties from that production funds many of your govt services. If the Canadian govt suddenly prevented exports exactly what services are you willing to give up? Exactly how much of the investments Canadians, including retirees, have in your energy industry would they be willing to lose? How many jobs would the Canadian unions be willing sacrifice? Of course it would be nice to keep your resources in the ground and keep the cash flow coming in. But you can’t have both. And last I saw Canada had democratic elections so if the majority of Canadians wanted to change the current dynamic they need only change out the political base, right?

    About a year ago I ran into a similar situation with a land owner who was willing to lease his property but didn’t want the well drilled on it…wanted me to drill on his neighbor’s property. I explained that while I could do that I would have a somewhat better drainage point on his land. He didn’t care and he also didn’t care that it would cost me a good bit more to directionally drilling from his neighbor’s property under his property. So I respected his wishes: I didn’t lease his land so he didn’t get the $80k lease bonus I would have paid him. I drilled the straight hole on his neighbor’s property and since his lease isn’t a part of the producing unit his neighbor is getting all of the $84k/month royalty payment. I estimate the total royalty payments will be in excess of $8 million. He is not the first landowner I’ve seen negotiate himself out of a big pay day. I should also explain that no one lived on his land…it was just scrub cattle pasture.

    And on a technical note let me explain about the ROC (Right of capture) law in Texas. As long as a well is drilled a minimum distance from another lease I can produce that well even if it drains reserves from the offset lease I don’t own. But the rule is fair: the offset lease can also be drilled and produced legally from a location on that side of the lease line. Unfortunately even though I’ve proved up reserves on his side of the lease the economics don’t justify drilling a second well for this reservoir. And yes: I could have formed a drilling unit that would have included his acreage and he would have gotten half the royalty. But why would I want to reward him for making me spend more to drill my well? In either case I’ll be paying out the same total royalty so it made no difference to me.

    So the same bottom line: if you don’t want to produce the oil/NG under your land that’s OK. But just don’t whine about the revenue you don’t get. IOW be careful what you wish for…you might get it.

  12. Newfie on Fri, 13th Dec 2013 3:55 pm 

    Never ending growth is the central myth of the modern era. 99% of adults are brainwashed to believe in this ridiculous fairy tale.

  13. shortonoil on Fri, 13th Dec 2013 6:13 pm 

    It presently requires more than eight barrels of shale oil to supply the same amount of energy to the general economy as one barrel of conventional crude. We are now getting reports of an oil glut building on the Gulf Coast. Shale oil does not supply enough energy to the general economy to drive its own demand. As a result, marginal conventional wells will be shut-in in the face of falling price. Once shut-in many of them will never be reopened. Just another unintended consequence of monetization, and ZIRP. Enjoy the low priced gas – while it is here!

  14. GregT on Fri, 13th Dec 2013 6:33 pm 

    “By 2020, the current euphoria will start to disappear. Since no effort will have been made to address the looming oil shortages, the economy will start to unravel.”

    Agreed. And all of those paper dollars won’t heat our homes for long. We should have left the reserves in the ground, for when we will really NEED them.

  15. rockman on Fri, 13th Dec 2013 6:53 pm 

    Greg – There’s a looming oil shortage today: there are many hundreds of millions of folks around the globe who can’t afford oil at its current price. Isn’t that the definition of a shortage? By 2020 there will be folks who can afford to buy the oil that will be available then. It might be more expensive or less expensive but it will still be available to buy. We will not run out of oil by 2020 or by 2050 for that matter. Then again there isn’t a shortage of $100/bbl oil today…plenty to buy. In fact record breaking amounts.

    It’s all a matter of context. There’s all the oil available today for those who can afford the price. If you have a $100 bill in in your pocket you’ll have no trouble buying a bbl of oil. If oil is selling for $200/bbl in 2020 and you have $200 in your pocket it will be just as easy for you to buy a bbl then as it is now.

    Oddly enough the world you might have a problem buying oil in is one where oil is $10/bbl. There are far more people with the money to buy that oil then there is enough oil to satisfy everyone’s desire. That is a world where an oil shortage would exist.