Seen elsewhere
Twitter
Support

 

Buy

Click images for more details

Recent posts
Recent comments
Currently discussing
Links

A few sites I've stumbled across recently....

Powered by Squarespace
« The word spreads | Main | Fracking in Sussex »
Monday
May132013

Efficiency gains in the Marcellus

From an article about the continued growth of shale gas in the US comes this interesting snippet:

"Despite losing 53 rigs, gas production is still up an estimated 3.1 Bcf/d this gas year (November to November)," Adkins said.

"Wait a minute! Weren't low prices and high shale gas decline rates supposed to force U.S. gas supply sharply lower? Not for the Marcellus," Adkins said, noting that drillers can make money at $3.00/Mcf in the Marcellus.

My understanding had always been that you couldn't really make money from shale gas at less than $6/Mcf, hence the losses being accrued by many producers in the USA. Given that UK shale beds are much, much thicker than those in the Marcellus, this bodes well for the possibility of a financial bonanza and/or cheap gas.

PrintView Printer Friendly Version

Reader Comments (39)

shh...don't mention it to DECC....

May 13, 2013 at 2:40 PM | Unregistered Commenterconfused

Good news - but will it filter through to our politicians, Mr Lilley excepted. I hope his shoulders are broad as there seems to be an awful riding on them.

May 13, 2013 at 2:44 PM | Unregistered CommenterG.Watkins

My understanding had always been that you couldn't really make money from shale gas at less than $6/Mcf, hence the losses being accrued by many producers in the USA.

That is correct. Look at the 10-K filings by the companies and you see a lot of debt being added to the balance sheets and no evidence that production revenues can finance the drilling. The reporting of profit is easy to deal with by assuming EURs that are much higher than the actual ultimate recoveries. That allows you to report unrealistically low depreciation costs and report any profit or loss that you want.

May 13, 2013 at 2:57 PM | Unregistered CommenterVangel

My understanding is that company filings of this sort are carefully scrutinised by regulators, since mis-representation of this kind is a simple way to fraudulently increase your share price.

Doesn't mean that it doesn't happen, of course. But I would be surprised if the practice was endemic across multiple companies, and went unreported by the regulators. Especially in the post-ENRON climate...

May 13, 2013 at 3:11 PM | Unregistered CommenterDodgy Geezer

[...]"noting that drillers can make money at $3.00/Mcf in the Marcellus."

Cripes, even so $3 - it is hard to believe - no wonder the US economy is growing - mind you Paul Krugman would put it down to Obarmy economics and funny money [QE].

May 13, 2013 at 3:12 PM | Unregistered CommenterAthelstan.

Assuming of course companies aren't just shifting debt around to minimise their tax exposure.

Secondly, as shake drilling is propped up by private investment funds instead of hundreds if billions of dollars of tax payer funds I couldn't care less if there is no money in shale. The fact companies ARE drilling rather destroys the notion there is no money there simply because they wouldn't be drilling if there was nothing in it (unlike, say, windmills where we KNOW there is no money in it yet thanks to state subsidies they still go up!).

Mailman

May 13, 2013 at 3:13 PM | Unregistered CommenterMailman

Over to our resident Troll :-)

May 13, 2013 at 3:39 PM | Unregistered CommenterDon Keiller

Presumably shale gas producers sell this stuff forward in the form of futures so don't have to pay too much attention to the prompt price.

That's what the ancient Egyptians invented commodity futures markets for, after all.

May 13, 2013 at 4:04 PM | Unregistered CommenterJustice4Rinka

One reason that money can be made in the Marcellus with a lower price is that it is close to the Northeastern US market, and thus has lower pipeline transmission costs. It one quarterly investor's conference call I listened to, one of the Marcellus drillers pointed out to the investment community that they were competing with gas from Oklahoma, Texas, and Louisiana and thus would always have a price advantage. The price of gas is hovering around $4.00 today, but there are many shut-in wells simply waiting for demand to catch up with supply or the price would plummet again.
An additional headwind to higher gas prices is that the price of oil remains high. That seems illogical, but oil wells produce natural gas as a secondary product. So oil producers have gas to sell at virtually any price, as long as the oil price remains high. The push to reduce fugitive emissions (leaks, intentional venting or flaring) of this gas means that the gas is available for sale regardless of any profit potential. It's hard for the gas drillers to compete with "free" gas.

May 13, 2013 at 4:12 PM | Unregistered CommenterGerald Quindry

Don't forget natural gas liquids which are worth almost as much as crude oil and/or can be substituted for oil.

" In 2012, production of NGLs hit 2.4 million barrels per day, according to the US Energy Information Administration – a rise of 34% compared with 2008"

http://www.risk.net/energy-risk/feature/2255165/ngl-hedging-takes-off-amid-shale-gas-boom

May 13, 2013 at 4:36 PM | Unregistered CommenterBruce

Drilling has shifted in the Marcellus Shale play from the eastern end, Pennsylvania, where the natural gas is “dry” to the west in Ohio where the natural gas is “wet”. The “wet” contains liquid hydrocarbons, including ethane, propane and butane, that can be processed and sold separately. Those additional products make the $3 gas profitable but also keeps natural gas price lower than the profitable drilling rate for “dry” gas areas. My impression is that when and if the “wet” gas plays out the natural gas price will go up and then the dry gas will be profitable again and keep the price under $5.

Does anyone know about the gas in the shale in the UK?

May 13, 2013 at 5:30 PM | Unregistered CommenterRoger Caiazza

The market should be levelled for all forms of energy production and let the fittest survive. The only potential drawback would be that some parts of our beautiful land would be polluted with the rotting hulks of abandoned windmills.

May 13, 2013 at 5:48 PM | Unregistered CommenterSteve Jones

Gerald,

It's funny that we hear this issue about transmission costs and how prohibitive they are for shale yet somehow those exact same issues don't exist when it comes to wind?

Mailman

May 13, 2013 at 6:07 PM | Unregistered CommenterMailman

Does anyone know about the gas in the shale in the UK?

May 13, 2013 at 5:30 PM | Roger Caiazza

Tamboran describe the gas in the Bundoran Shale and the Dowra sandstone as "dry". This is an area in Northwest Ireland.

I have not found any information regarding whether UK reserves are wet, dry or variable from one play to another.

May 13, 2013 at 6:15 PM | Unregistered CommenterEntropic Man

Gas production is not so much a function of bed thickness, i.e. gross pay, as permeability and pressure. Although the equations show a linear response to changing perms and pressures, the nature of both means that you have to take local conditions into account. A lot of fine fractures, for examples, do not produce the same rate as fewer large fractures. Liquids in the fracture system as well as gas also change the relative productivity rate.

Gross pay is all about "molecules in the ground", not molecules in the pipeline. In any reservoir, there is a "sweet spot" where productivity is best, with an expanding halo of either poor productivity or non-productivity. Non-productivity, or "tight" rock, may still be gas-charged, but the rate at which the gas leaks into a wellbore is insufficient. In a regional sense, of course, the tight section does supply the good section, but if the ratio of high rate to low rate rock is too low, the reservoir ceases to produce long before the reservoir is actually empty.

High quality reservoirs can have a recovery factor, the percentage of gas or oil that is physically recoverable, of 85%, though that is very high. Low quality reservoirs, like shales, may be down in the 3% RF level - so even when your thickness if great, you can have a LOWER RF.

Look to your pressures, not your thickness. A lower pressure will have a lower RF, but again it is not linear.

And look to associated light hydrocarbons, the ethanes and butanes. Brit shale gas is dry, CH4 only.

Moreover, the total recoverable you are told is a 40-year or more number. The actual production is not yet proved in any of the shale fields, so when you hear "$3/mcf" minimum costs, you must understand if they are running minimum costs over this faux-40 year number, which is speculative, or over the reasonable, economic requirement of about 6 years (perhaps 10 years if you are content to get your money back at a 10% per annun recovery rate, using a zero inflation, zero debt cost and big government subsidies).

Cuadrilla and the UK government are feeding you lines when they don't talk of recoverable gas per well and the full-costs per well IN THE FIRST 6 YEARS.

The future is not dark but it is expensive.

May 13, 2013 at 6:28 PM | Unregistered CommenterDoug Proctor

Various writers are referencing facts about the Marcellus that I have been mentioning here for quite some time.

1. Marcellus has wet gas, so the added-in cost for the gas may be $3/mcf to make sense, but this does not reflect dry gas-only economics,
2. Infrastructure, facilities etc. already exist in the Marcellus, which need to be added in for the Brit situation,
3. Debt financing is ongoing, so Marcellus (like North Dakota Bakken) does not in whole show a profitability yet, which means that minimum costs are extrapolations to some future final volume and time and escalation ($3/mcf is TODAY, not the future).

The above writers do not address pressure, production rate/well, drilling density or costs. The reading I have done has costs per well for DRILLING ONLY to be about $US10million, but NOWHERE do I find full-cycle costs per "pod" with a recoverable gas and recovery time per pod.

Continental Oil in the North Dakota Bakken and Cuadrilla Resources in the UK Gas Shales both practice good shareholder and political showboating. Everyone loves a good story. But facts, not factoids, deliver results you can heat your wintery house with.

The UK shale story needs facts, not headlines.

May 13, 2013 at 6:40 PM | Unregistered CommenterDoug Proctor

Doug,

The future with shale in it appears much cheaper than a future with windmills in it (thanks to the North American experience where shale HAS lowered prices).

Let private companies invest their own money in extracting shale (AND let them profit from it). As no public money is required it seems criminal in my opinion that we are instead heading down a dark path towards renewables (and bankruptcy) that we all know cannot possibly meet the demands when it's most needed, ie when it's cold and dark.

Some may be right, shake could very well be a bust however we will never know as long as people like Ed Davy and others have a disproportionate say in how power is generated in this country.

In fact if it was up to me the one and only goal of the Department of Energy would be energy security as only this will protect our economy, our people and, surprisingly, the environment.

Mailman

May 13, 2013 at 6:58 PM | Unregistered CommenterMailman

Doug,

Lets stop talking and worrying about what might be. Lets get on with drilling and fracking to see what will come out. Lets leave the negatives behind until we have some idea what is possible. I just cannot understand all this negativity when we haven't even started.

May 13, 2013 at 7:32 PM | Unregistered CommenterDavid Porter

@Dodgy Geezer

My understanding is that company filings of this sort are carefully scrutinised by regulators, since mis-representation of this kind is a simple way to fraudulently increase your share price.

There is no fraud. The companies disclose that they have to keep increasing the amount of money that they borrow and that their operations are not self financing. They clearly show their ESTIMATED ultimate returns as they are permitted to do by the SEC rules and use these as the basis of their reported earnings. After a few years pass they will have to adjust their statements to reflect what the actual production data is showing but that will be long into the future. On the conference calls CEOs clearly talk about funding gaps and the need to borrow more money so that they could fund their expansion plans. The reality is all there for us to see if we care to see it. Most people prefer a nice story by the analysts to a straightforward review of what the data is telling us.

Bill Powers is writing a book that should cover the subject. It should be out some time in June of this year. The book is titled, Cold, Hungry and in the Dark: Exploding the Natural Gas Supply Myth</I>. When it comes out you might want to look at the argument that it will provide.

Doesn't mean that it doesn't happen, of course. But I would be surprised if the practice was endemic across multiple companies, and went unreported by the regulators. Especially in the post-ENRON climate...

Who said that it is unreported? Exxon admitted that it was losing its shirt. BHP was writing down assets. So is Encana. Chesapeake has been selling off assets for less than a third of what they are shown on its balance sheet. Shale gas company CEOs are talking about funding gaps and have made clear that they need costs above $6 per MMcf to break even. If you look into the detail many of the $2.50-$4.00 break-even quotes you get do not include leasing costs, royalties, overheads, etc. They only include the drilling and direct operations costs and tend to be based on very optimistic EURs.

May 13, 2013 at 8:11 PM | Unregistered CommenterVangel

@Mailman

Secondly, as shake drilling is propped up by private investment funds instead of hundreds if billions of dollars of tax payer funds I couldn't care less if there is no money in shale. The fact companies ARE drilling rather destroys the notion there is no money there simply because they wouldn't be drilling if there was nothing in it (unlike, say, windmills where we KNOW there is no money in it yet thanks to state subsidies they still go up!).

Companies invested money in operations that sold pet food and groceries over the internet. They bought land in the desert that was going to be developed into exurban housing. They invested in low grade open pit copper mines that needed sub $70 oil to have a hope of a profit. Yet, profits did not materialize except for those selling the equity and being paid to run the money losing operations.

May 13, 2013 at 8:14 PM | Unregistered CommenterVangel

@Justice4Rinka

Presumably shale gas producers sell this stuff forward in the form of futures so don't have to pay too much attention to the prompt price.

If you look at the futures you do not see prices that will guarantee profits anywhere in the next few years.

@Doug Proctor

And look to associated light hydrocarbons, the ethanes and butanes. Brit shale gas is dry, CH4 only.

Sadly, the shale liquids turned out to be a big bust too. Between the lack of infrastructure and the glut in production prices fell sharply and the 'we are moving to shale liquids' story was turned into, 'we will try to produce shale oil and sell our shale gas assets to a bigger fool.'

May 13, 2013 at 8:19 PM | Unregistered CommenterVangel

Vangel,

Companies also invested "some" money (not a lot)in windmills because they know the government will pay out BILLIONS in subsidies to encourage then to generate expensive, rare native bird killing energy.

Again, our future is looking pretty damned dark and expensive thanks to the desire to commit national suicide! Beh mind, at least the Chinese will respect out soft power...while they walk past the bones of the poor who died because they couldn't afford to keep the heat and lights on.

Mailman

May 13, 2013 at 9:25 PM | Unregistered CommenterMailman

Btw Vangel,

How many BILLIONS of dollars of tax payer subsidies were involved?

Mailman

May 13, 2013 at 9:29 PM | Unregistered CommenterMailman

@Mailman

How many BILLIONS of dollars of tax payer subsidies were involved?

None. The fact that there are no subsidies involved in some process does not mean that it is going to be economic. But while we are at it let us know that the shale industry gave money to the Sierra Club and other environmental groups so that they would put pressure on Congress and the Obama Administration to use regulations to limit coal use and production.

@Doug Proctor

Continental Oil in the North Dakota Bakken and Cuadrilla Resources in the UK Gas Shales both practice good shareholder and political showboating. Everyone loves a good story. But facts, not factoids, deliver results you can heat your wintery house with.

Continental's cash flow and balance sheets don't look very promising. Eventually that will matter and investors will not get fooled much by the showboating. It might help heat your home but only because shareholders will subsidize production.

May 13, 2013 at 9:56 PM | Unregistered CommenterVangel

@Mailman

Companies also invested "some" money (not a lot)in windmills because they know the government will pay out BILLIONS in subsidies to encourage then to generate expensive, rare native bird killing energy.

Correct. That is why government needs to stay out of the economy. I hope that you do not confuse me with one of those alternative energy idiots. My concern is only on getting positive returns on investment and on economic and social liberty.

Again, our future is looking pretty damned dark and expensive thanks to the desire to commit national suicide! Beh mind, at least the Chinese will respect out soft power...while they walk past the bones of the poor who died because they couldn't afford to keep the heat and lights on.

Yes, you keep electing idiots who argue about which side should be in charge of the central planners and ignore the people who promise to cut down the size of government and let the markets come up with solutions. Everyone is a socialist nowadays and few care about individual liberty and justice. But do not worry. National bankruptcy has a way of doing away with windmill subsidies and solar panel mandates. If you actually choose small government there may be a way out of the mess that you seem to have gotten yourself in.

May 13, 2013 at 10:52 PM | Unregistered CommenterVangel

Vangel,

That's right, not a single dollar of tax payers money is needed to extract shale gas...which strangely enough has had the benefit of driving the cost if energy down in the States to a fraction of what it is here AND driving immissions down at the same time!

On the other hand tens or hundreds of billions if tax payer dollars has been p1ssed away on windmills, mirrors and ground unicorn horn energy production where the direct impact is the rampant abd out of control energy prices we here in the mother country are now experiencing.

But never mind...lets leave the gas in the ground because it might not generate any money??? Personally...if we are going to p1ss hundreds of billions if tax payers money on energy production Krys throw it at a form we can guarantee will generate electricity from shake gas).

Mailman

May 13, 2013 at 11:51 PM | Unregistered CommenterMailman

That's right, not a single dollar of tax payers money is needed to extract shale gas...which strangely enough has had the benefit of driving the cost if energy down in the States to a fraction of what it is here AND driving immissions down at the same time!

The tax part is true. But that does not mean that the government is not complicit in the shale gas bubble that has led to so much capital destruction and losses in the sector. First of all, the SEC rules allow the companies to distort reality in ways that EU accounting standards do not. As long as American companies are exactly compliant to the regulations companies are free to distort as they wish. I believe that would be much harder to get away with in the UK or most of the EU. Second, we have a central bank that keeps printing and allows access to very cheap money. Without this central bank activity the shale bubble would never have been blown up to the current levels.

Let me note here that even the 'optimists' have figured out that American shale gas production has been a massive loser for investors. Even Exxon's Rex Tillerson is finally abandoning the previous story and is finally admitting that company is losing its shirt on shale gas production. For the record, this does not mean that Exxon's purchase of XTO was a bad idea because the SEC's rules permit Exxon to hide its reserve problems by using a 6:1 boe conversion factor that is based on energy content rather than the 20:1 price ratio that should be used to reflect the financial reality. By keeping its share prices artificially high Exxon should be able to use them as currency to pick up cheap conventional (or even heavy oil) assets on the markets rather than risk exploration failures or overspending on the development of difficult projects.

On the other hand tens or hundreds of billions if tax payer dollars has been p1ssed away on windmills, mirrors and ground unicorn horn energy production where the direct impact is the rampant abd out of control energy prices we here in the mother country are now experiencing.

That is true. Voters elect idiots who tell tall tales and pretend that they know much more than they do. Eventually that will do a great deal of harm to the general economy.

But never mind...lets leave the gas in the ground because it might not generate any money??? Personally...if we are going to p1ss hundreds of billions if tax payers money on energy production Krys throw it at a form we can guarantee will generate electricity from shake gas).

You should be free to spend your money to try to extract gas from shale. I have no problem with that position. All I am telling you is that shale gas production has not been economic in the United States.

May 14, 2013 at 3:05 AM | Unregistered CommenterVangel

"UK shale beds are much, much thicker than those in the Marcellus"

Unfortunately, UK politicians seem to be much, much thicker than those in the US as well.

May 14, 2013 at 5:54 AM | Unregistered CommenterAlex Heyworth

It's good that Vangel agrees with me that we should be drilling for shale gas.

Alex,

There appears to be a direct cirri lagoon between the potential thickness of a shake deposit and the amount of obstruction being run by politicians with a vested interest in green energy.

Perhaps the trick is to get them addicted to the profits shake gas could deliver in to their dirty, greedy, slimy little hands eh?

Regards

Mailman

May 14, 2013 at 8:15 AM | Unregistered CommenterMailman

It's good that Vangel agrees with me that we should be drilling for shale gas.

I have never been anti-drilling. I am simply pointing out that shale gas has been a capital destroyer in the US and cannot generate a positive energy return outside of small core areas. It is the high hanging fruit and often it is better left hanging until a more effective way of picking it is developed. For now fracking does not make the grade. And note that some of the best stories and highest successes in the US have come in dolomite formations in shale areas.

May 14, 2013 at 4:17 PM | Unregistered CommenterVangel

You just keep believing you aren't against shale Vangel...at the best you have one person who believes you (counting yourself).

Regards

Mailman

May 14, 2013 at 8:26 PM | Unregistered CommenterMailman

vangel, as a gas CONSUMER, my interest in whether the gas producer makes no, low or high profits is close to sweet F.A. Some of the companies involved will go bust, sure. There are many car marques that are history, too. But in the meantime, loads of men are gainfully employed, loads of consumers have access to cheaper gas.
You are sharing a cautionary tale, which is fine, but the vehemence is surprising. I can't believe the prices that 60 inch tvs sell for these days. Should I worry about retailer and manufacturer margins? Perhaps, if I put my pension savings hat on. But the consumer in me says "yeah, baby, yeah".

Nothing ventured, nothing gained.

Jun 12, 2013 at 7:04 AM | Unregistered CommenterClunking Fist

vangel, as a gas CONSUMER, my interest in whether the gas producer makes no, low or high profits is close to sweet F.A.

But it does because if gas producers cannot earn sufficient returns on their investments you will not have any gas to consume when they go bankrupt and will have to pay much higher prices to secure new sources.

Some of the companies involved will go bust, sure. There are many car marques that are history, too. But in the meantime, loads of men are gainfully employed, loads of consumers have access to cheaper gas.

Let me be clear here. I HAVE NOT FOUND ANY COMPANIES IN THE SHALE SECTOR THAT ARE SELF FINANCING. The only wells that are decent are in the small core areas but those cannot justify the huge investment in infrastructure that would be needed gas to consumers. That means that the UK will wind up destroying capital and be poorer for it.

You are sharing a cautionary tale, which is fine, but the vehemence is surprising. I can't believe the prices that 60 inch tvs sell for these days. Should I worry about retailer and manufacturer margins? Perhaps, if I put my pension savings hat on. But the consumer in me says "yeah, baby, yeah".

Margins are positive for the industry as a whole so no, you do not have to worry. But that is not the case for shale gas and oil production. If you depreciate wells at the rate suggested by the production data the industry as a whole is destroying scarce capital that could be used elsewhere. That makes shale a bad bet.

Nothing ventured, nothing gained.

Truisms do not help us escape the consequences of reality. What we need are sustainable models that do not require subsidies or mandates. We do not have those in alternative energy such as wind and solar or in unconventional fossil fuel production such as shale. Eventually that will matter.

Jun 12, 2013 at 12:20 PM | Unregistered CommenterVangel

"you will not have any gas to consume when they go bankrupt "
Except that companies will not go bankrupt in unison. I can't think of a competitive industry where bankruptcies have had that severe effect to halt all supply.
In common law countries, the usual deal is for liquidators or receivers to obtain top dollar for a failed company'e assets by selling as a going concern, so there may well be close to zero effect on supply.
Capital is represented by the production assets, which will persist in spite of the shareholders of the failed company receiving nothing from the realisation. This happens in most industries all the time, especially highly competitive industries characterised by many small producers. Perhaps it's time for this industry to see some consolidation: fewer, larger, producers could see some increase in price and/or reduction in costs.
Capitalism has got us this far from the caves and the naked flames, don't lose faith in it just yet. :^)

Jun 12, 2013 at 8:52 PM | Unregistered CommenterClunking Fist

Except that companies will not go bankrupt in unison. I can't think of a competitive industry where bankruptcies have had that severe effect to halt all supply.

There are no retained earnings. Shareholder equity is going down. And not all supply will stop. We will still have the production from a few good wells in the core shale areas and the conventional fields. The problem is that will not be enough. And the low prices in the US has caused a lot of utilities to move from cheap coal to natural gas. That makes demand far less flexible than it would be in a true competitive environment and will do a huge amount of damage to consumers as price increases will be needed to ration demand.

In common law countries, the usual deal is for liquidators or receivers to obtain top dollar for a failed company'e assets by selling as a going concern, so there may well be close to zero effect on supply.Capital is represented by the production assets, which will persist in spite of the shareholders of the failed company receiving nothing from the realisation. This happens in most industries all the time, especially highly competitive industries characterised by many small producers. Perhaps it's time for this industry to see some consolidation: fewer, larger, producers could see some increase in price and/or reduction in costs.

As I wrote, capital was destroyed. Once the wells are a year or two old they no longer have economic value.

Capitalism has got us this far from the caves and the naked flames, don't lose faith in it just yet. :^)

Central banking has nothing to do with free market capitalism. You might want to consider that point.

Jun 16, 2013 at 5:22 AM | Unregistered CommenterVangel

"low prices in the US has caused a lot of utilities to move from cheap coal to natural gas"
And all the coal planets were.. bulldozed... or simply mothballed?
If a supply problem does indeed materialise, prices will do what? That's right: move upwards. What do higher prices do? That's right: stimulate production.

"As I wrote, capital was destroyed. Once the wells are a year or two old they no longer have economic value. "
So fracking is dead, now is the USA...? No, I didn't think so.

"Central banking has nothing to do with free market capitalism. You might want to consider that point."
I would... if we were talking about banking. Or debt financing. But we talking about gas and shareholders' equity.
Tell me, is the food supply at risk if there are too many farmers..?

Jun 16, 2013 at 6:44 AM | Unregistered CommenterClunking Fist

And all the coal planets were.. bulldozed... or simply mothballed?

Most of the plants could not be converted to comply with the new EPA standards so they are not capable of being brought back into service. A lot of the equipment in them has already been removed and sold to foreign buyers or scrapped outright.

If a supply problem does indeed materialise, prices will do what? That's right: move upwards. What do higher prices do? That's right: stimulate production.

That is nice in theory but we have historical examples that tell us otherwise. A few days ago New Society Publishers released Bill Powers' book, Cold, Hungry and in the Dark: Exploding the Natural Gas Supply Myth. In the book Powers goes over the supply problems in the 1970s. I suggest that you take a look at it.

And the main point is still being missed. Production increases have to be economic. Investors have to be rewarded for brining to the market a greater supply of a product. That has not been the case for American shale gas, which has been a balance sheet disaster for producers. While the SEC rule changes have managed to save many of the players from bankruptcy so far the SEC cannot change geological reality so we are getting closer and closer to the day of reckoning that will force huge write-downs in the industry as well as within its customer base. People have to stop using cliches and thinking that wishing and hoping will fix everything.

So fracking is dead, now is the USA...? No, I didn't think so.

The USD has been propped up by the myth if a game changing technology and magical geology. Once that myth is exposed you will see the market for treasuries collapse and will see a major contraction in the real economy. The billions lent out to drill wells, build pipelines to carry shale production to market, and new facilities to use that cheap production will have to be written down. Prices will explode but production outside of the core areas will remain uneconomic. The supposed proven reserves of 100 years will fall to less than a decade. Sadly, that will be a game changer. And will show that all of the capital spent on shale and alternatives will have been wasted.

I would... if we were talking about banking. Or debt financing. But we talking about gas and shareholders' equity.

We are talking about shale. The shale bubble was enabled by central bank liquidity injections that allowed the financial system to take out zero interest loans and finance money losing shale operations that generated billions in fees and trading gains. That is not free market capitalism. In a free market capital destroying industries like shale gas do not get access to financing. And banks do not make stupid loans because they will be allowed to fail.

You are confusing the system that you see in the UK and US as free market capitalism. It isn't.

Tell me, is the food supply at risk if there are too many farmers..?

No. But it is at risk when the farmers overproduce and sell for a loss year after year. Eventually they will have to spend within their means or risk losing their farms. Or they will panic and overwork the soil to squeeze out as much cash flow as they can. You cannot escape the consequences of reality. The shale gas producers have managed to extract much of the best gas out of the core areas without generating any positive cash flows and are looking at wells that have little economic value after two or three years. That is not a path to success and general prosperity. It is just another bubble that so many supposedly smart people managed to miss yet again because they get emotional and forget to think critically.

Jun 16, 2013 at 2:03 PM | Unregistered CommenterVangel

“Most of the plants could not be converted to comply with the new EPA standards so they are not capable of being brought back into service.”
Okay, so we’re committed to gas, then, which means there’s a level of demand. If gas prices go up, so will power prices. But if gas prices go up, supply is stimulated and eventually equilibrium is found. All remaining coal-fired power producers will be happy.

“A few days ago New Society Publishers released Bill Powers' book, Cold, Hungry and in the Dark: Exploding the Natural Gas Supply Myth.”
I’ll read that when I’ve finished reading the book about Peak Oil and another one about Africanised Killer Bees Taking Over America. From the description “Suggests numerous ways to mitigate the upcoming natural gas price spike” I guess one would be, buy forward?

“The USD has been propped up by the myth if a game changing technology and magical geology.”
Let me guess, YOU are Bill Powers. Your book gets a favourable review from… Kurt Cobb, who wrote a novel about Peak Oil…
The USD is propped up by the myth that it cannot fail. But exploding govt debt and ultra-loose money supplies, inflating equity markets, are far more of a worry than the gas supply. I’ve not heard anyone claim that the US is improving on the back of shale. But I do hear many people point out that reductions in energy costs are the opposite of a hindrance. Me thinks that Bill Powers is trying to be the next Peter Schiff.

“We are talking about shale. The shale bubble was enabled by central bank liquidity injections that allowed the financial system to take out zero interest loans and finance money losing shale operations that generated billions in fees and trading gains.”
So you are saying that the banks are taking a hammering on loans to Shale miners? Can you link some evidence?

“No. But it is at risk when the farmers overproduce and sell for a loss year after year. Eventually they will have to spend within their means or risk losing their farms.”
Incorrect, the FODD SUPPLY is not at risk, but certainly the farmers are. Mate, I am a New Zealander, primary produce is our main game. We know a bit about losing the farm. The bank forecloses and sells to someone else. That is part of creative destruction. It’s been going on for centuries. Wells, too, will be sold.
Producers with no or low debt will survive longer than producers with high debt, there will be no sudden flame-out of producers.

I can't spare the energy to keep this up, so you'll have the last word. Make it a good one, cheers!

Jun 17, 2013 at 7:25 AM | Unregistered CommenterClunking Fist

Okay, so we’re committed to gas, then, which means there’s a level of demand.

Yes, there is demand that creates inelasticity. When the price of gas goes up in North America, and it will go up sharply, the utilities will have to keep on buying. As the price of electricity goes up industry will have trouble passing on its rising costs to consumers. The economy will break and many companies will go under just as they did when something similar happened in the 1970s.

If gas prices go up, so will power prices. But if gas prices go up, supply is stimulated and eventually equilibrium is found. All remaining coal-fired power producers will be happy.

Yes they will. But consumers will not be. And real wages will go down because of all the malinvestments and the lack of capital formation.

I’ll read that when I’ve finished reading the book about Peak Oil and another one about Africanised Killer Bees Taking Over America. From the description “Suggests numerous ways to mitigate the upcoming natural gas price spike” I guess one would be, buy forward?

Powers is more interested in a solution to the problem that is facing us. He argues that the EUI has to improve its 914 reports and suggests ways to mitigate the deliverability problem. But the value of the book is the historical lesson that exposes the shale myths that are being sold to a trusting public.

Let me guess, YOU are Bill Powers. Your book gets a favourable review from… Kurt Cobb, who wrote a novel about Peak Oil…

I am not Bill Powers. I am Vangel Vesovski and have been making this argument for the past half decade because the production data told us a very different story than the hype. Shale gas and oil make sense in the better parts of the core areas in certain shale formations. While there are plays that can make a lot of sense as a whole shale is a capital destroyer, which is why the gas industry does not accumulate retained earnings and needs to keep borrowing to maintain production levels.

Note that the people who argued against Peak Oil were predicting a massive increase in global production by now. But the more than trillion in new investment has barely moved the needle past the 2005-2007 level. The predicted increases are not materializing because the Peak Oil thesis is right.

The USD is propped up by the myth that it cannot fail.

The myth of a new era of energy independence is also propping up the USD. The government could not be running such a massive deficit without the support the myth gives to the dollar.

But exploding govt debt and ultra-loose money supplies, inflating equity markets, are far more of a worry than the gas supply.

I agree that they are a huge worry and do not claim that they are not very important. All I am saying is that the energy supply is critical to the health of the economy and that right now energy policy is based on mythology. Between the greens and the promoters the US has been dealt a huge blow from which it will be very difficult to recover.

I’ve not heard anyone claim that the US is improving on the back of shale. But I do hear many people point out that reductions in energy costs are the opposite of a hindrance. Me thinks that Bill Powers is trying to be the next Peter Schiff.

Peter Schiff was right. So is Powers. And Powers is not alone in this. Arthur Berman was fired for pointing out that companies like Chesapeake were destroying shareholder equity by drilling in areas that were not productive. Years and billions of dollars in losses later he was shown to be totally right just as Schiff was shown to be right. Yet we have people like you still choosing to believe the story told by developers even when the actual data shows that they are blowing smoke up your skirt.

I do not argue against price declines because like everyone else outside of the green movement I look favourably on productivity increases that allow us to produce something at a lower cost. But that is not what we have here. The cost of production is much higher than the revenue from sales. That makes shale production unsustainable at price levels that are below the cost of production but that is exactly what the utilities, fertilizer, and chemical companies are counting on. The capital used to build facilities dependent on cheap gas will be wasted and much of the value of those facilities will have to be written down. When combined with the failure of the shale sector companies the write downs will pull down some of the banks and depositors and taxpayers will be on the hook again.

So you are saying that the banks are taking a hammering on loans to Shale miners? Can you link some evidence?

What I am saying is that the 10-K filings show a massive increase in debt that will not be paid back. The banks will not write down those loans until the companies begin to go under. Since loans are extended that will not happen for a while. But that was the point that Peter Schiff, who you brought up, also kept making. The housing crash was inevitable. That did not mean that it was immediate.

The real oil on US shale may be elusive

Incorrect, the FODD SUPPLY is not at risk, but certainly the farmers are.

If there are no farmers to plant enough crops the food supply is at risk during the following year. Once the bankruptcies start taking place there will be no money for new drilling activity. Since gas wells lose most of their production in the first year of operation supply will fall off a cliff. And consumers will have to pay much more. Fields of wheat do not plant and harvest themselves; shale wells do not drill themselves.

Mate, I am a New Zealander, primary produce is our main game. We know a bit about losing the farm. The bank forecloses and sells to someone else. That is part of creative destruction. It’s been going on for centuries. Wells, too, will be sold.

We are talking about two different things. NZ farmers were protected and subsidized. As such they had to go bankrupt. But some of the land was still useful and went to someone else. In the case of shale gas the leases are not useful because they require more money to be spent in producing the gas than can be earned by sales of gas. There will be nobody stepping up to drill until prices of gas go up high enough and production costs fall low enough to make sense. Fallow land has substantial useful value at a certain price for agricultural commodities because you can plant immediately. A typical shale lease does not have a lot of value at todays prices because drilling does not make sense at these levels. Production will have to fall and will fall even if gas prices in the US double.

Producers with no or low debt will survive longer than producers with high debt, there will be no sudden flame-out of producers.

That would be the shale producers who have unicorns in their stables. Which producers have low or no debt? I suggest that you look to the biggest producers in the shale space and look at their balance sheets. There are no primary shale producers who have low debt.

I can't spare the energy to keep this up, so you'll have the last word. Make it a good one, cheers!

This debate will be settled by market events, just as the one between Schiff and the promoters was settled by the market.

Jun 17, 2013 at 2:01 PM | Unregistered CommenterVangel

PostPost a New Comment

Enter your information below to add a new comment.

My response is on my own website »
Author Email (optional):
Author URL (optional):
Post:
 
Some HTML allowed: <a href="" title=""> <abbr title=""> <acronym title=""> <b> <blockquote cite=""> <code> <em> <i> <strike> <strong>