Bishop Hill The Wright stuff
Jan 14, 2014 Climate: Parliament Energy: gas The House of Lords Economic Affairs Committee had another in its long running series of hearings on shale gas today. The first witness, it is fair to say, will have been an eye opener. Chris Wright is the boss of an American shale gas company, someone who has actually done fracking, made it work and made it pay - in other words someone who could, rather than discussing hypothetical opportunities and hypothetical problems, explain the realities on the ground. He exudes all-American get up and go and is therefore a rather different kettle of fish to most of the world-weary Brits who appear to before the committee. Some of the peers seemed to eye him rather suspiciously at first, as if he might suddenly leap up and achieve something tangible without asking first, but they seemed to warm to him as the hearing went on and there were some moments of communal good humour and bonhomie.
I was struck by the fact that several of their lordships didn't seem to have grasped that the impact of shale wells is essentially a squad of drilling rigs moving around the country, leaving behind them lots of wellheads of trivial visual impact. So it was good that Wright was able to correct their misconceptions and they will have got a lot from his appearance, for example his thoughts on the idea that population density might be a barrier to shale gas development in the UK:
I've driven across Northern England...it looks like North Dakota after it has rained...The Barnett shale, where the shale gas revolution began, was under Fort Worth...my company has worked on frack treatments in Beverley Hills and Los Angeles.
On the idea that shale development will not cause gas prices to fall in the UK
I read those [suggestions] and I've been quite puzzled to read it. Obviously the United States is connected by pipeline to Canada and Mexico and our gas market is much larger than the European market, so if it caused a big decline in the US I have trouble imagining why it wouldn't in Europe. If you increase the supply of a commodity it's going to have an impact...The price of gas [in the US] is quite different all across the country. In fact there are places in the country where the price of gas is less than $2.
If you ran 35 drilling rigs in England and you produced the entire UK production from British gas wells, there's no question about it, you'd have a significant drop in British gas prices; probably a dramatic drop
And lastly his certainty that the UK regulatory regime is not currently fit for purpose and, repeatedly, the need for a regulatory regime that will allow operators to try different things without having to get new permissions each time.
Not right now. I'm in favour of strict regulation myself and if you had rigorous but crisp and clear environmental regulations and you had a way to align the community and you had a way to move quickly...I'd do it in a heartbeat, but that's not there today...the shale gas was discovered years ago and none's come to the surface yet...
Every rock is different, every rock you've got to innovate, this didn't work you've got to target the rock in a different place or we need a different frack recipe...you have to be able to move quickly to figure out the right formula to make it work.
To make it work with British rocks...You've got a different stress regime, you've got different microfracturing in the rocks. You don't understand these yet and to make it work is going to require innovation. The first well is going to produce some gas and it's going to have some shortcomings and some problems and you say well, "we should have done this". And the second well...There's going to be a learning curve. And if it takes a year to permit each one of those wells noone is going to be around for the learning curve and it won't happen...if you have some certainty and can move quickly it will happen in the UK. If it is slow and cumbersome, I don't know if it will happen.
Which brings us neatly on to witness two, the Deputy Director General of Environment at EU Commission, whose very appearance led one to a morbid certainty that a slick regulatory regime is nowhere on the horizon.
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Reader Comments (85)
Yesterday’s evening news here on the main French public broadcasting channnel had an item on Total’s decision to invest in fracking in Britain. No French political party to my knowledge has come out in favour of lifting the ban on fracking in France, so this was already quite daring. The accompanying visuals showed bits of machinery pumping out stuff, apparently rather less visually offensive than your average wind turbine. The message seemed to be: “What’s a French company doing helping the Brits to become self-sufficient in energy, when they’re banned from doing the same thing in France?”
The House of Lords Economic Affairs Committee would be well advised to call someone from Total to give evidence. They might discover that the desire to do well by doing good is not a uniquely American trait.
Hmmm... the Total UK enhanced gas move obviously isn't quite the same as Willie Walsh launching all available BA jets at Heathrow during the volcano dust farce showing that the CAA were naked, moronic buffoons but it's up there...
I think the French term is un pied de nez?
Did Mr Wright explain how he made money selling shale gas at a loss?
Imagine an alliance between Max Bialystok and Milo Minderbender. That would give a hint as to how you make money selling at a loss.
(If you haven't heard of either or both of those fictional characters look them up.)
EM,
He makes money. And you make yourself look incredibly, predictably, and reliably, stupid.
It would certainly come over as cleverer if EM discussed the points made in the hearing about break even points.
Entropic Man:
In North America, most of the money is made from the liquids produced with the gas. The gas is simply gravy. The liquids generally pay for the well in a year or less.
In areas where there are no assoiciated liquids, the drilling has slowed considerably. Except by energy generating and industrial companies who like the long, steady production of shale gas to supply their industrial processes. There are examples of vertical wells in the shales, that have produced for over 60 years. Energy intensive companies love this type of certainity.
Bishop Hill
According to Bloomberg and others the break-even price for shale gas in the US varies between $4.80 and $8.00 depending on local conditions.
The shale gas market price in the US varies around $3.80.
If the lords are being given different figures I would be concerned.
My question still stands. How is Mr Wright making money in this market when the cost of production exceeds the sale price?
Jan 14, 2014 at 10:20 PM | Unregistered CommenterLes Johnson
I applaud your efforts but EM won't be interested in the facts of the matter. Trotting out all the easily refuted anti-fracking myths is all he is interested in. He and his ilk have amazing foresight and can predict the future with 100% accuracy; that is how they have convinced themselves that fracking will not benefit the UK and why it must be stopped now.
Rhoda,
I'm imagining Hitler enjoying chocolate-covered cotton.
"Some of the peers seemed to eye him rather suspiciously at first, as if he might suddenly leap up and achieve something tangible without asking first..."
Wicked.
Les Johnson
If much of the US gas on sale is an incidental extra to oil production it explains the low gas price, and why drilling for gas alone has slowed.
Unfortunately it means that gas drilling in the UK is only likely to be economic when the gas price is high.
Even some normal gas production is uneconomic. Centric a has an offshore gas field in the Irish Sea. It is mothballed because the gas price is too low for extraction to be worthwhile.
Steve Jones
You probably posted before seeing the figures I gave.
I look forward to your easy refutation.
Entropic man,
"How is Mr Wright making money in this market when the cost of production exceeds the sale price?"
Hmmmm. So, either your figures are wrong, or a vast industry in the US is pretending to be viable in some sort of enormous conspiracy.
Paging Mr Lewandowsky.
"Either your figures are wrong, or a vast industry in the US is pretending to be viable in some sort of enormous conspiracy."
Jan 14, 2014 at 10:44 PM | Unregistered CommenterJames Evans
There is a school of thought on Wall Street that companies are doing exactly that.
They do the exploratory drilling, sell production rights and leave. The production companies then drill and are trapped, selling gas at a loss to pay interest on loans they can never profitably pay off.
After the South Sea bubble, the Tulip bubble and the dotcom bubble; I give you the gas bubble. ;-)
It really doesn't matter whether fracking in the UK will be profitable or not. If we have such a rush and oversupply in the UK that the price of gas falls below the cost of production, that will benefit the consumer whether industrial or private - only foolish capitalists will lose money.
If the anti-frackers really believed there was no money to be made fracking in the UK, they wouldn't be trying so hard to get it banned, would they?
"There is a school of thought on Wall Street that companies are doing exactly that."
OMG! How awful! I guess Wall Street have stopped investing in these blackguards then.
We should put a stop to this now. I hate these rackets that lower energy prices and CO2 emissions.
EM
No need to, "THE gas bubble", the CO2 gas bubble! Is following the South Sea bubble, the Tulip bubble and the dotcom bubble as sure as night follows day!
"I was struck by the fact that several of their lordships didn't seem to have grasped that the impact of shale wells is essentially a squad of drilling rigs moving around the country, leaving behind them lots of wellheads of trivial visual impact."
Maybe this is what they had in mind ...
http://www.americanhistoryusa.com/wp-content/uploads/2012/04/titusville-oil-fields.jpg
If the anti-frackers really believed there was no money to be made fracking in the UK, they wouldn't be trying so hard to get it banned, would they?
Jan 14, 2014 at 11:04 PM | Unregistered CommenterShotover
I doubt that the protesters are thinking that rationally.
My own strategy is to allow drilliing and let the dubious economics become apparent.
Note that the only money made from UK shale gas so far is by Cuadrilla. They have spent a few tens of millions on test drilling and made a few hundred millions selling production rights.
The real test will come when Centrica and Total try to make money producing gas.
Entropic man,
The experts say that the "frackers" are losing billions of dollars selling gas to businesses and consumers. Yet they continue to fall over themselves investing in new projects - allegedly destroying any chance of ever making a profit. If that is true, I would welcome them over here, as their foolishness has transferred investors wealth to the customers, benefiting ordinary people both directly (lower energy bills) and indirectly (more jobs in manufacturing, with greater resultant economic activity). Oh, and if you believe in that sort of thing is of value, lower CO2 emissions have resulted as well. Suddenly anti-capitalist Greens seem extremely concerned to save the rich from their folly.
One of the ways to be successful in business is to know how costs per unit of output change. The "experts" only have their models and past data to work from. Pro-actively and continually reducing costs per unit of output is the way to make profit where none apparently exists. For instance, having an efficient drilling and fracking processes means the expensive drilling equipment can be utilised in as many places as possible within a given period. Learning quickly, in refining the drilling and fracking process to suit local conditions, is also essential.
Manicbeancouter
One of the great weaknesses of economics is the delusion that investors are rational.
The herd behaviour you describe is usually the reality, hence the successful investment strategy of getting in early and getting out early. Fortunately, or unfortunately depending on youroint of view, the braking effect of UK planning law will probably prevent the investment overshoot seen in the US.
What has been conspicuously absent from this debate has been a proper business case for tracking in the UK. Lots of political hype, but nothing that would convince a bank manager.
Never thought I'd say this but I don't think Entropic Man is necessarily incorrect in regard to shale profitability in the US. Having ridden the dot com wave myself in the US, and nabbed my very own sub-prime mortgage deal in the process, my experience certainly is that wealth generation in the US is much more about the illusion of futures than of actual wealth generation itself.
Another thing to bear in mind, though, is the crucial distinction between the US and the UK on market prices. In the US, the "stack 'em high, sell 'em cheap" philosophy ensures low costs to consumers when supply is abundant. However, the UK absolutely does not, by design or by convention, function this way and we can be sure that shale gas here will go for "whatever the market will bear", i.e. the maximum the consumer can be shafted for, regardless of profit margin. Whatever slim gap might open up between fat profits and consumers' ability to pay, Westminster will surely plug with a tax. It's how it is, how it always was, and always will be. (Vive La Révolution!)
EM:
in the meantime the consumers (private and industry) have benefitted from the low gas prices for many years. Isn't that wonderful after all these years of Wall Street looting? Your concern for the financial markets is touching, or is it just an excuse?
The DECC, uses bogus calculations [it is ever thus] to project future European spot prices of natural gas. DECC apparat's, believing that the price [of gas] will ever escalate and hence making justification to loading ever more burdensome costs via the transport of the green agenda and onto the British consumer. Monies levied, to be used to carpet the land and seas around Britain with patently useless 'green technology' [an oxymoron if ever I heard one], those bird mincers and solar arrays - all as some sort of palliative to cure a non existent man made 'disease'.
Notwithstanding, the howling at the moon stupidity of the green agenda and its piling into green boondoggles. If UK shale gas exploitation, produces anything like the amounts it has in the USA - evidently all of the DECC's daft calculations are immediately made to look futile; highlighting the idiot prognostications of jejune civil servants beholden to the devils of a political elite who blatantly couldn't care less about the hard pressed UK consumer.
Mr. Chris Wright, is a man who should be listened to - his thoughts, eminent common sense and cool reasoning should be broadcast loud molto fortissimo to this nation and on a loop.
EM.
I'm sitting in my house in Ontario right now, enjoying a nice 23C (gas heated) temperature - even when the outside temperature went down to -25C over the last couple of weeks.
Last Summer I invested in a (gas heated) heater for my swimming pool, which keeps it nice and comfortable from May to September.
My gas bill? It has literally halved over the last 5 years, while my consumption increased.
Bless you Marcellus shale.
If this is down to economic illiteracy then long may it continue.
On the flipside my electricity bill has doubled in the same timeframe as the green energy act has taken hold, and we are now held ransom by foreign owned wind and solar developers.
Our gas turbines could easily cover the provinces demand (with gorgeous Marcellus shale of course), but they are forced to run at one third of capacity to allow for the multi-decade wind and solar guaranteed contracts.
Oh - and the gas providers are paid for capacity (not actual production) as they are needed for renewable backup.
Remind me who the economic illiterates are again?
Hoi polloi, Jud
Time will tell. Jud has invested in gas appliances on the assumption that gas prices will remain low and supplies abundant.
My future concern is for the consumers who find their supply diminishing and gas prices rising as producers start to go bankrupt.
"My future concern is for the consumers who find their supply diminishing and gas prices rising as producers start to go bankrupt."
And what would the consumer's price be if the investors had never invested in fracking?
No need to, "THE gas bubble", the CO2 gas bubble! Is following the South Sea bubble, the Tulip bubble and the dotcom bubble as sure as night follows day!
Jan 14, 2014 at 11:14 PM | Registered CommenterGreen Sand
Interesting that you should link the two topics.
I see the same irrational and emotional responses in protesters reacting to the prospect of fracking and the sceptics reacting to the prospect of climate change.
And what would the consumer's price be if the investors had never invested in fracking?
Jan 15, 2014 at 12:35 AM | Unregistered CommenterJohn M
In the short term higher; in the long term lower. The capital lost in tracking will not be available for investment elsewhere.
Goodnight.
"In the short term higher; in the long term lower."
Based on gas prices, I guess Europe is permanently stuck in the short term.
I don't normally engage with people such as EM. It's akin to hitting your thumb repeatedly with a hammer ... it only feels better when you stop
However, he is engaging in a common Deep Green ploy here. This ploy insults my hard-won professional knowledge over 3+ decades so a reply is warranted
The ploy is to question the economic results of geological risk exploration before it has been done. The purpose of the ploy is to prevent, if possible, such exploration from taking place at all - because the results may not be palatable to the Greens
In Aus, this has been taken to ridiculous lengths. A very large famous National Park has been proscribed from exploration by even the totally non-invasive use of airborne geophysics. Obviously, any interesting results that may be obtained from such non-invasive exploration are considered too dangerous to be known
It is the modern equivalent of medieval book-burning
In the case of UK shale gas, Chris Wright is perfectly correct in stating that exploration results are cumulative. Learning takes place progressively. If the end results indicate poor economics for extraction, the risk capital spent on exploration is lost. If the data is offered as onsold after exploration, potential purchasers examine the details minutely and professionally before signing cheques - this is called risk assessment and is very commonly done worldwide. Sometimes errors are made in such assessments, but so what ?
Green tape, deliberately made as pervasive as possible, is designed to slow these processes down to the point where it is uneconomic to even try. Chris Wright makes that point clearly, as well as recommending crisp regulatory control over potential messy cowboys
EM doesn't want what Wright suggests - the results are unpredictable and may supply information and data conducive to economic wells. Factors such as the geological and geotechnical characteristics of the host strata, the level of methane concentrations, permeability/porosity/permissivity factors and so on need to be measured before economic decisions can be made
So the Deep Greens try to prevent such data from being collected in the first place. So EM questions the economics before the data is collected
Book burning
So is it the government's role in the UK to determine whether a business venture is going to make a profit? I'm American so I'm ignorant about British politics, but it seems odd...
Hi from Oz! Bish, re your concern that US gas was selling below cost of production, you (and others) seem to have failed to hear Les Johnson's statement that the liquids are where the profits are! The gas component helps with cash flow, but I know that for example BHP is making squill ions from its gas wells in the US, again mainly from the liquids.
EM:
"My future concern is for the consumers who find their supply diminishing and gas prices rising as producers start to go bankrupt."
Your concern is only for yourself and your deep green religion.
The sooner consumers escape the massively damaging results of your 'concern' the better.
I'm lucky I have gas. Right now people stuck with electrical heating appliances (typically those least able to retrofit with gas) are going to bed early in their winter coats because they can't afford to turn their heat on.
All thanks to the active 'concern' of the likes of you.
EM has successfully detoured a thread by lying and sticking to his lie.
EM makes me laugh. All of sudden he is a market economics expert when all greens like him are trying to get a central 5-10-15 year plan implemented. A worldwide central plan.
Lecturing on free market prices, and market share, when their own schemes rely on skewing the market through state intervention. And states have shown how really good they are that over the last 100 years.
EM is frightened. He says he wants it to proceed. And yet he makes the same mistakes as he always does. A lack of understanding of the dynamic and interconnected state of systems.
It is free market. No one can predict what will happen. But it WILL DESTABILISE the market. The "price" may not even go down in numerical terms, but it will make the Russians think, the EU about pipelines, all sorts of countries about import/exports, about starting their own fracking. Companies may decide to palace factory near a well head.
The market will change, and supply will increase. Whatever the result do not say that in a FAIR market the RELATIVE price will not go down (relative to no shale gas.)
But that is the point, Greenies do not want a fair market. They want market intervention.
They lecture on their economic mastery, trying to justify covering the country wide with solar panels or windmills. Economic howling at the moon.
Greens and economics? Where their socialist leanings are ever more present. And socialist economics have been shown to be a great success for advancing mankind. Oh but I forgot, that was the point.
"Throw down your chains! Well actually have a new set, but these ones you are stuck with for life. They are poor quality, heavier that your old ones and are not fit for purpose. You can't complain either. Oh and do not worry me, I have some too. Bit lighter and smaller, more of a bracelet really, but I share your pain. Really I do. Have some caviar."
Greenie economics.
Dave Bob wins the the thread.
From a public policy perspective the economics of England's shale gas are immaterial unless the state is paying for the exploration or subsidizing production. EM might was to turn his economic skills to the analysis of wind farms.
Rhoda,
Producer gas?
Jiminy Cricket:
He sees to morph into an expert on whatever he needs to fit his preset agenda. Suddenly he's more knowledgeable than people who've been working in the field of gas exploration for over 20 years.
That's simply an amazing ability. Or maybe just an amazingly boring ability.
We can't have fracking in the UK! Why, they might find so much gas that gas prices will drop 75% and end up below drilling costs. Better not to do anything rather than suffer that tragedy!
I thought the comment was in jest...is this a real position????
Hahahahahaha at Entrocospiratropy man!
School of thought bla bla Wall Street bla bla bla...gas bubble bladieblahblahhh
And Lew and the crew acuse the skeptics of conspiracy thinking....
All these questions are a smokescreen created by Greenpeace and Friends of the Earth. The unique reason that environmental campaigners are against gas is because it will assuredly mean fewer windmills being built.
Nobody need care if the gas price is high or low as long as no government money is lost. All the other questions just reflect the fact that the noble lords did not bother to read anything about the thing they are debating prior to the debate. Yet another reason why the Lords should be abolished, as if the absurdity of them wasn't enough.
Entropic Man is a typical lefty, opposing all innovations not under the direct control of his imaginary collective.
I suggest he emigrate to N Korea to prove his ideas can work to improve the lot of the people, then if he survives the starvation rations and absence of power, come back to tell the rest of us how to do it.
Entropic, I caution you about believing everything that comes out of Bloomberg. Michael Bloomberg, the founder and majority shareholder, has bought into the anti-carbon global warming thing big time.
Re: EM
Perhaps you should try looking at the companies accounts.
Cuadrilla has been around for 4 years and has never made a profit. The 2012 accounts show an operating loss of £29 million which is fairly typical. So far, Cuadrilla hasn't borrowed a penny from a bank or received any government grants or subsidies. Its entire operating capital of £65 million has been raised from its shareholders. It will receive £40 million from the license deal with Centrica which will be used for exploration. The "hundreds of millions" you claim is a fantasy.
You can purchase the companies accounts from here.
C'mom EM tell us all about how windmills produce electricity and heat (apart from when they catch fire) more cheaply than shalegas and how "renewables" are going to whisk us to a bright, new low-carbon future.
Use your planet-sized brain to predict future energy prices under these two scenarios;
1) Shalegas the predomitant primary energy source
2) Windmills, solar and biomass.
EM:
I'm glad that most of the modern world is the result of entrepeneurs who, in view of the advance and prosperity, are not afraid to invest into the future instead of sitting on their @rse. If it was for people like you we would still be living in the woods with an expected lifetime of 35 years.
Shale gas exploration will work or not, but when you don't start you will never know it. Acid p!ssing is not how the world developped into what is now.
Let's face it EM the only reason you're trying to argue that shalegas is not economic (despite all the evidence to show that it is), is that you realise that fracking is not an "environmental" hazard and that with that demon demolished there are no logical reasons to plaster the country and the surrounding seas with windmills.
In other words your green pipedream is going down the pan.