Fracking and "Saudi America"

For most of the history of oil exploration, someone would drill a hole straight down and if they were lucky, they would eventually hit an underground pool of oil in mostly porous rock.  They would set up some pipes and a pump and then remove any crude that flowed towards the business end of the well.  At some point, the recoverable oil would stop flowing to the well opening and the well's life would effectively end.  Most of the big oil finds of history worked like this.  If you punched your way into a large formation, the oil would flow for many years.

Fracking doesn't work this way.  The oil and gas are trapped in a shale formation in little cells.  A well is drilled down to the level where oil and natgas are found and then holes are drilled horizontally through the shale.  When these holes are completed, a mixture of chemicals, sand, and water is forced into those holes at a very high pressure which fractures the shale.  The gas deposits are released and then recovered.

If all of this sounds insanely difficult and expensive, it is.  Drilling horizontal holes deep underground is hard and so is forcing fluids under enough pressure to fracture underground rock formations.  The forces are enough to actually trigger earthquakes.  Worse, much of the nation's drinking water is also stored in underground rock formations so fracturing rocks to find oil can very often ruin water supplies.

It would one thing if this sort of oil exploration yielded large new supplies.  It doesn't.  The deposits being found are not large which leads to notoriously high decline rates.  Certainly flow rates are high when the well is new but they can decline by half in less than five years.

Fracking is obviously a recovery technique that has only come into play because we stopped finding those big conventional oil deposits decades ago.  But all these problems have not stopped the boosters from claiming that fracking will turn USA into Saudi America.  Of course, comparing a megafield like Ghawar to the micro deposits trapped in shale formations is utter madness, but then most PR hype is.  Even the International Energy Agency is sounding warnings.

IEA: The World Is Totally Unprepared For When The Great American Shale Boom Fizzles

ROB WILE NOV. 12, 2013

The International Energy Agency says world markets are unprepared for when — and it's a when, not if, it asserts, — the Great American Shale Boom fizzles, The FT's Ajay Makan and Neil Hume report.

In its latest World Energy Outlook released this morning, the IEA forecasts unconventional oil production will require $700 billion annually — basically about where we are now — to sustain current output levels. Even if the industry is able to do so, production will begin to slip in a decade regardless because of shale wells' high decline rates.

At that point lower-cost Middle East production will have to take over again. But those countries haven't been making the necessary investments to prepare for this outcome, the agency warns, meaning the rest of the world will be caught flat-footed.

Here's what IEA chief economist Fatih Birol said in presenting the report this morning, per FT:

"...key Gulf producers have been adopting a 'wait and see approach' to investment, because of the perception that the US shale revolution would produce an 'abundance of oil'.

“ 'I am really worried that we are giving the wrong signals to the Middle East, which may end up with us not having investment in a timely manner,' [Birol] said.

“ 'The wait and see behaviour is definitely not in the interest of consumers or global oil markets because it may mean significantly higher prices in the future.' ”

There remains lots of debate about how long "Saudi America" can last. The EIA just explained how drilling has actually become more efficient in many major U.S. shale plays. It also have raised estimates for recoverable shale oil both at home and abroad. Meanwhile there are lots of factors weighing on oil demand including more switching to natural gas and improving fuel efficiency.

All of which should help extend the life of shale plays.

Plus, as Reuters' John Kemp writes this morning, and as we've pointed out in our Charts That Should Terrify Saudi Arabia, the Saudis could be in trouble if shale production sprouting up in other parts of the world.

But analysts including Bernstein's Bob Brackett and MercBloc's Dan Dicker say the jig will be up sooner than later: production growth is already slowing in the U.S., while global demand will continue to climb. Here's what Brackett said this spring:

In order to maintain current levels of overall production, marginal conventional production must be maintained with high oil prices. We expect marginal cost inflation will continue as well productivity declines, resulting in an oil price forecast that differs significantly from the forward curves. We forecast $96/bbl WTI for 2013, $101/bbl WTI for 2014, and longer term prices above $120/bbl and rising after 2017.

At this point, "hope for the best but plan for the worst" might be in everyone's interest. more

James Kunstler has been following energy issues for years.  He is one of those rare individuals who actually understand how oil is produced.  Not surprisingly, he looks at fracking as this nakedly absurd con job. Or as he puts it, a "delusional stock market psychology, which tends to be a self-reinforcing racket until it reaches a threshold of credulity criticality and then implodes from a sudden loss of faith, ruining even a great many one percenters."

CLUSTERFUCK NATION  November 18, 2013

Schilling Shilling

Such is the power of wishful thinking that a set of fool-making memes now pulses through the word-clouds of financial chatter in America spreading the false good cheer that our economic troubles are behind us and pimping for perpetual motion in wealth expansion. A poster boy for this bundle of falsehoods is financial analyst A. Gary Schilling. Just last week, he was talking out of his cloacal vent about US “energy independence” and “the manufacturing renaissance” that will allow this country to magically decouple from the compressive contraction driving the rest of the world.

Shilling is among the growing chorus of cheerleaders who believe that the shale oil and gas boom will make it possible for so-called “consumers” (what we foolishly call ourselves) to keep driving to Wal-Mart forever — which is the master wish behind all the current fantasies of endless expansion. That idea is going to leave a lot of people disappointed and put the nation further behind in the necessary reorganization of all the key systems that support everyday civilized life, namely: food production, commerce, transport, and the management of capital.

Here’s what’s actually going to happen with shale oil and gas. Best case scenario: shale oil production rises for three more years to about 2.3 million barrels a day and then crashes so quickly that in 10 years the shale oil industry ceases to exist. A less rosy forecast would admit that the exorbitant costs of drilling-and-fracking will not find the necessary capital to even take the industry that far. Rather, dwindling capital will see the shocking decline rates of shale wells (commonly 50 percent the first year and double digits the following) and will run shrieking for other places to hide.

Contrary to Gary Schilling’s blather, America is not practicing “energy conservation.” Rather, an economy engineered strictly to run on cheap oil has gotten crushed by oil that is not cheap. Does Schilling believe, for example, that American suburbia works just as well on $90-a-barrel oil as it did on $11-a-barrel oil, or that it has a future as the basic armature of daily life, or that we are doing anything meaningful to alter the burdens of living this way? My guess is that he has never thought about it.

Likewise, as the American economy got crushed by no-longer-cheap oil, all the working classes in this country below the one-percenters got crushed, hammered, and trashed. Among other things they can no longer afford is gasoline. Total vehicle miles driven has gone down by almost 3 percent since 2007. It will keep going down, and the Happy Motoring matrix will collapse for another reason: capital scarcity will translate into fewer available car loans for Americans, and fewer qualified borrowers, and Americans are used to buying their cars on installment loans.

The shale gas situation is also not the “energy savior” it’s cracked up to be. Because it costs so much to export the stuff, and we don’t have the export infrastructure in place — ocean terminals, fleets of special (expensive!) tanker ships — shale gas is hostage to the US domestic market. The initial boom was so extravagant that it produced a gas glut, which drove the price way below the level that makes it economically rational to drill for the stuff. Now, a lot of those drilling rigs are migrating to North Dakota, where the Bakken shale oil fields require perpetual increases in rig-counts to offset the rapid decline of existing wells.

The shale gas regions of Barnett (Fort Worth), Haynesville (Louisiana), and Fayetteville, Arkansas, are already dwindling. The “sweet spots” turned out to be smaller than the hype suggested. The Marcellus (Pennsylvania and New York) is next. Several of the other hyped shale gas “plays” — the Antrim and the Utica — proved too unpromising to even bother with and never made it out of the wish bag.

The problems with fracking and groundwater pollution are secondary to the economic quandaries as far as the fate of the industry is concerned. At under $8 a unit (1000 cubic feet), shale gas is not worth drilling-and-fracking for. It’s currently around $4. Above $8, Americans are going to have a hard time paying for it. So, enjoy the temporary glut and now stand back and watch the industry begin to dry up and blow away.

As for the “industrial renaissance,” clowns like Gary Shilling can’t put together the obvious trends. The talked-about new factories will be operated by robots, so there would be no employment renaissance to go along with them. Then there is the question of who might the products be sold to? To Americans who have no jobs and no money? To Europeans who are also going broke and also have the ability to roboticize industrial production and impoverish their own working people? To Asia, which is already at industrial over-capacity — and which will only grow worse as Americans and Europeans buy less stuff? I guess that leaves South America and Africa. Well, good luck with that.

Schilling is really only shilling for delusional stock market psychology, which tends to be a self-reinforcing racket until it reaches a threshold of credulity criticality and then implodes from a sudden loss of faith, ruining even a great many one percenters. Money may indeed keep pouring into the US stock markets, especially from other countries, where the money is frightened. I’ll tell you what it ought to be really frightened about: that it doesn’t represent genuine capital, i.e. has no real value. One day not distant, all the nations will discover that their money is only notional and that notions have a way of going up in a vapor. Foolish ideas, though, appear more durable and plentiful. They just keep coming, no matter what’s going on in reality.

My basic wish is that we would quit all our wishing in America and get on with the job of transforming our economic arrangements to a scale and mode that are consistent with the resource and capital realities of these times — before they whap us upside the head and put and end to the project of remaining civilized. more