Is Shale Gas a Fracking “Ponzi Scheme”…?

I’ve long been skeptical of the hype surrounding Shale Gas for some time now. The media, the fossil fuel industry and Cornucopian’s frequently make wild and overambitious projections as too what Shale gas can achieve (e.g. making America or Britain energy independent). As I have previously pointed out, the facts and figures behind such claims simply do not stack up.

Shale Gas Extraction [Credit: BBC News/Science]

Then there is also the environmental issues to consider. A 2009 Cornell University study suggests that Shale Gas may be worse than coal for greenhouse gas emissions. Substantial levels of methane have been tracked leaking from underground via Shale Gas operations, and numerous reports are circulating of contaminated drinking water (the Proceedings of the National Academy of Sciences has now established a link between hydraulic fracturing and contaminated drinking water), as famously explored in the recent Academy Award Nominated film “Gasland ”. There’s also those mysterious earthquakes in and around Morecambe bay, which only started happening after exploratory Fracking in the area.

 

Anti-shale Gas protestors [Credit: The Guardian.com]

 However, in the last few weeks a number of revelations (on the back of a number of leaked documents released via the NY Times last year) from within the shale gas industry have seemed to confirm the skeptic’s suspicions, that all was not rosy in the Shale gas garden (nice summary article from Forbes on this here). These documents paint an image of an “…ENRON like” (to quote one executive) industry, with numerous technical and environmental problems casually swept under the rug. Of an industry more interested in good public relations and attracting investors (“…con Wall street” to quote another executive) than pumping out gas. According to some of the sources, a number of shale gas operations are essentially “…uneconomic”, while some are unlikely to yield any sort of return at all. In one leaked e-mail an executive describes how many “plays” (that is drilling operations) are “…just giant Ponzi schemes”.

 The Great Shale Gas Myth

 In part my scepticism of Shale Gas has been driven by the sort of wild speculation  I’ve often seen and heard from those promoting it. For example, I’ve heard it regularly stated by many media sources that shale gas “solves” peak oil and they America could become a net energy exporter as a result of shale gas.

 As the expression goes, if something looks to good to be true it generally is. As I’ve previously pointed out estimates from the DoE are for a maximum shale gas output in the US (which has some of the largest reserves in the world) of 4.8 Trillion cfg/yr by 2020  (I’ve found another  more up to date estimate, also from the DOE (indirectly), which suggests 12B cfg/day x365 = 4,400B cfg/yr by 2020 and 17B cfg/day by 2035), that’s roughly 79.6 mtoe (123 mtoe if we take the speculated 2035 figure). Current US primary energy consumption is hovering around 2,200 mtoe. So shale gas can, at most, meet 3.6 – 5.6% of total current US energy needs (remember we’re comparing future production to present demand).

Now, while it appears that the above DOE projections might be behind the curve somewhat (or they know something we don’t know!), EIA figures for 2009 suggest a production level of 3.4 Trillion cfg/yr (67.7 mtoe), with dramatic increases in the years before, and one assumes since then (data fields available online haven’t caught up with this yet!). However, it should be remembered that US primary gas consumption is running at 24.3 trilion cfg/yr (it was 22.9 trillion cfg/yr back in 2009). You would therefore need to increase shale gas production 6 fold just to meet US domestic gas needs.

And inevitably with gas demand growing (typically by about 3% per year) that would imply a demand for around 30 trillion cfg/yr in 2020, requiring a 10 fold increase over 2009 levels to match. To replace current US oil demand (about 19.15 million bbl/day or about 962 mtoe) would require us increasing that 2009 production figure by a factor of 14 (if we devoted all shale gas supplies to replacing oil) or a 24 fold increase if we want to match both US gas and oil demand.

In short, the numbers don’t add up, and indeed I am, if anything, vastly understating the situation above. As I’ve pointed out before “Peak oil” represents a “liquid fuel crisis” (or more to the point a “cheap liquid fuels crisis”) not an energy crisis as such. Switching to shale gas as a substitute for oil would by and large mean converting much of the transport infrastructure to run on gas. Aside from the practical difficulties involved here we also have to factor in the effect of cycle efficiencies. Currently the bulk of natural gas is consumed by Gas fired power stations (30-45% efficient) and combustion processes (such as home heating, about 70-90% efficient). By contrast the standard IC engine is only 20-30% efficient. Also, in order to utilise Natural gas in vehicles, you need to pump it to storage tanks and pressurise it, accept a few leaks here and there along the way as well as the occasional burning off of gas as a safety measure (I cover these issues in the context of hydrogen here). Weight up all these factors and trying to use Shale gas to replace oil would essentially involve taking the figures I mentioned above and multiplying them by between 1.5 and 2 (i.e. you’d need 36 to 48 times the 2009 production figure to meet domestic US gas and oil demand!).

All in all, I doubt the oil sheikhs or Russian oligarchs will be losing any sleep over US or European shale gas reserves anytime soon (nice article on that here). Indeed some of the long term price projects for shale gas (more on that later) suggest that if anything, they’ll be in a position to increase exports to the US, as there large reserves of gas are much cheaper to import and sell in America than domestic shale gas.

 Power play

 The problems with shale gas, leaving aside the environmental issues, boils down to a number of simple problems. Firstly the EROEI’s factors for Shale gas wells, while certainly positive, may not be terribly high. This author suggests an EROEI of 19:1, although this source suggests a figure closer to 70. Either way, this means substantial amounts of energy are expended drilling, fracking and piping the gas to market.

Also, as noted earlier, a good deal of this gas is ultimately wasted . This wasted gas, being the methane that winds up in people’s faucet’s or those high methane emissions that drove the Cornell university study’s eye wateringly high carbon footprint calculations. A good video is available online (here) from the Cornell researchers in which they discuss this problem with venting and wastage of gas as part of their methodology.

 Also gas wells need to be fracked not once, but multiple times. Each time brings about diminishing returns, until you have many wells that are little more than energy and financial sinks, rather than revenue raising energy sources. This is why the drop off rate for Shale gas wells is so dramatic compared to traditional oil and gas wells, as discussed in this article here.

Declines in Shale Gas Prospects [Credit: The Oildrum.com and Arc Financial Research]

 It’s about the economy…stupid!

 One of the factors that is often misunderstood as regards energy, is the dynamic of price and its implications. Several “limited resources” peak oil pessimists, such as Ehrlich and Matt Simmons have lost bets on such topics as they have assumed that post peak, the price of a particular resource will always go up. Not true.

The price of any commodity is driven by Supply and Demand. If demand is high and supplies limited (or declining), then the price does indeed go up. And post-peak oil we would expect it to keep rising without any upper ceiling until the price hits some magic number that kills off demand……But!…..during the lengthy recessions that will hit during the post peak oil era, when demand will be slack, the price of energy resources will fall.

 The “ultimate resource” Cornucopian’s often argue that this jump in prices will suddenly make previously non-viable resources (such as shale gas or tar sands) economically viable, which will offset final depletion. While they have a point here, they often neglect the practicalities of utilising such resources, notably as discussed with Shale gas above that the EROEI’s for such resources tend to be poor and there’s only so much of the stuff that can be produced at any given time, as I discuss in relation to Tar sands oil here (which can only supply about 6% of global oil demand and has an EROEI of at best 9 but probably closer to 4). More importantly, the price drops mentioned above, during periods of economic stagnation, will drive down the price of energy to well below the break-even threshold for many sources of unconventional energy.

As discussed in this article “At $2.53 per million Btu at the Henry Hub, the price of natural gas is up 33% from the April low of $1.90 per million Btu—a number not seen in a decade. But even if it doubled, it would still be below the cost of production. And if it tripled, it might still be below the cost of production for most producers. That’s how mispriced the commodity has become”. For sake of comparison, a detailed study of the likely lifetime costs of Shale gas suggests a price window centred on around $8 per million Btu (give or take). Arthur Berman (a well known “insider” within the industry) suggest a price of around $7 million Btu in his presentation to ASPO 2012 (around 4 minutes in). Now I’m no businessman, but I suspect trying to sell something for $7-8 when the market price is closer to $2.5 sounds like a loosing strategy!

 This puts the investors behind shale gas (or shale oil or tar sands prospects) in the unenviable position of either shouldering losses (article here from Forbes about the huge potential losses Chesapeake might be shouldering) in the hope that things eventually pick up (and if they don’t pick up they know they risk bankruptcy) or cutting their losses and running. This will inevitably lead to a decline in Shale Gas “plays” and with conventional gas production falling it difficult to see how a flat lining shale gas business can offset these declines.

 The Energy business cycle

Historical US oil price (in 2010 dollars) [Credit: WTRG Economics]

 And these problems with Shale Gas are nothing new for the US energy industry, which has a nasty habit of going from a massive Boom’s to sharp Bust’s. Throughout its history (see graph above), the US energy industries have seen periods of high prices and shortages, sometimes artificially created by greedy corporations trying to maximise profits or milk political concessions out of congress (good examples being the Rockefeller era leading up to Standard Oil’s break up by the Federal government, or the ENRON induced California energy “crisis”). The energy companies then go on a drilling boom, buoyed on by high prices, lax regulation and lots of cheap credit. Inevitably supplies improve, output rises, prices crash, and you get a glut with prices sent tumbling and many investors losing their shirts. As the joke from the last glut in the 90’s goes “how do you address a petroleum geologist in Wyoming?” “Waiter!”

 So in some respects, this looming crisis for Shale gas is nothing new. The cat will get out of the bag soon or later and everyone will go running for cover. There will be a number of large bankruptcies, as there have been before in the fossil fuel business. Some investors will lose their shirts, and no doubt a whole generation of them will get burned by the whole affair. Politicians and journalists who’ve been singing the praises of Shale Gas will be made to look like fools, and will no doubt develop a healthy cynicism in future of other “miracle” energy solutions (such as Shale oil).

However, the shale gas industry will likely continue to make a modest contribution to energy supplies. Shale gas has now probably delayed the inevitable onset of “peak gas” in North America by a decade or so. It will probably help “take the edge” of off declines in gas production in Western Europe too. But that is all that can hope for, and at a substantial environmental cost. As I’ve mentioned before, exploitation of shale gas is simply not compatible with a policy of averting dangerous climate change.

 No Fracking Panacea!

 But there will be one ultimate casualty from this whole affair and it will be the myth of Shale gas as the silver bullet solution to all our problems. It will become all too obvious in the next few years that shale gas is, as I’ve previously described, great news for investors in the business (those who are lucky enough to pick a winner!) or lawyers who specialise in environmental pollution cases, but not much else.

The only way the US could ever become energy independent using its shale gas, shale oil, tar sands, coal and nuclear resources is via the imposition of drastic communist style price controls, a ban on imports and via a massively expensive (and environmentally apocalyptic) centrally planned (and state funded) series of “mega projects”, coupled with rationing. It is, to say the least odd, that so many right-wing (or Libertarian) supporters of these industry’s can be in favour of something that is clearly incompatible with either democracy or capitalist.

Too many people have clung to the shale gas myth, or similar “sliver bullet” solutions, such as Fusion, Thorium fuelled LFTR‘s or Fast Reactors, or have fallen for various delusions as regards climate change denial. Because ultimately they are in denial and cannot accept the fact that our civilisation is sleep walking into a major crisis.

It is unfortunately human nature for some people to buy into comforting myths over cold harsh truths. It’s the entire basis behind organised religion, telemarketing scams and lotteries. One of the tragedies as regards the Titanic wasn’t that the ship has only lifeboats for half the people on board, but that so many of those lifeboats went away partially full, largely because so many people on the ship were reluctant to trade the apparent safety of the iron deck beneath their feet (of an “unsinkable ship”) for a seemingly small flimsy little lifeboat. Such is the power of myth.

While yes indeed unconventional sources of fossil fuel energy are going to make an important contribution to future energy supplies. And, as recently discussed by George Monbiot, there’s more than enough of the stuff left “to fry us”. But as far as averting the impending energy crisis, they will only buy us time (and we’re talking a few years or maybe a decade or two if we’re lucky) nothing more, and at a tremendous cost.