Friday
May232014
by 
Bishop Hill
Bishop Hill Newsnight on shale
May 23, 2014 Energy: gas Ahead of today's announcement on shale oil prospects in southern England's Weald basin, Newsnight took a look at the differences between the shale industry in the US and the sclerotic developments here. Featuring Iain Stewart, it was a pretty balanced piece. The one thing I felt it missed was a view of a production well head.
See it here from 10 mins.
Update on May 23, 2014 by
Bishop Hill
Bishop Hill
The BGS report is available here. Apparently the amount of oil in place is put at 4.4 billion barrels (with the likely range set at 2.2 to 8.6 bbl).
Wow.
Reader Comments (76)
Pray tell us what are these 'alternatives' you are thinking we should be investing in because I've been involved in power engineering for 30 years and I must have missed it.
Really? I think that you are quite aware of coal and nuclear power generation of electricity. That is far better than wind or solar. As for liquid fuels I would let the free market come up with solutions as it usually does when individuals looking to get rich by soling some problem are allowed to compete. I think that there is some kid out there who will figure out how to take advantage of methane hydrate deposits of figure out how to produce shale gas and oil economically. There is probably some other kid who is going to figure out a biological solution to the fuel problem that makes sense economically and environmentally. Who will do what and when someone will come up with a solution is beyond my scope of knowledge. It is also clearly beyond yours so I suggest that playing central planner by either of us is not only unproductive but harmful.
I used to argue for windmills, wave energy and solar panels when everyone else poo poohed the idea and when the current faux-greens were buying Chelsea tractors. I've since seen the economic realities of those. Sure solar power is now ok if you live in Spain - or it was until they started to tax it.
But it wasn't OK. It was depreciated using an inappropriate schedule just like many shale wells. If you wrote off the costs over the actual life of the panels, which is far shorter than the stated life, solar is not economic even in areas that get a great deal of sunshine. Spain destroyed jobs and harmed its economy by pursuing solar so if that is your idea of success I would hate to see what disappoints you.
And anyway Uranium is likely scarcer than coal.
Coal is not scarce and neither is uranium.
Offshore wind has more uptime than onshore but is hugely more expensive. Nuclear fusion will arrive maybe in 2070.
All wind is uneconomic except for a few niche applications. Fusion is far from reality and will probably not arrive for centuries.
What else is there and how much will it cost?
Coal and nuclear still make a lot of sense. They are cheap and reliable unless governments get in the game and make them very expensive as governments like to do.
As it stands gas extraction costs the taxpayer nothing: Tax breaks being just a reduction in money in rather than increased money out. So what does your economic sense tell you? Negawatts perhaps? Biogas? Geothermal from Iceland? What have we missed?
What you have been missing is the negative return. Producing gas at a loss does not make sense even if it provides temporary relief for consumers who get to pay a bit less for a while. The problem comes when the investment has to be written down and the distortions have to be dealt with. It is better not to have any distortions in the first place.
Vangel
Thank you for your valuable informed contribution to this debate. I have been a voice of one for the last year in trying to establish that shale exploitation is not as straightforward as its been painted. I won't repeat but will remind - numerous wells, huge areas, fast depletions, gathering systems, above ground processing etc.
You endorse the point that by definition shale = tight formation = stimulation (fracking) = low delivery rates and rapid depletion. Typical depletions referenced for Marcellus shale are less than two years to fall by 70%.
Vernon E
Vangel: thank you for your latest post. It quite clearly demonstrates that you avoid reading the comments of others, or, if you do, you are clearly misunderstanding what they are trying to say (whether deliberately or not, who’s to say?): you fisk JamesG’s comment, utterly oblivious to the fact that you are actually arguing the same points that he is. The “alternatives” to which JamesG refers are not coal and nuclear – they are generally considered the norm; while he used to champion the cause of wind and solar (the “alternatives”), he now sees their limitations, and accepts that they have very limited commercial viability; he never said that either coal or uranium are rare; he iterates the total pointlessness of off-shore and fusion (but does not discount continuing research); finally, he points out that the risks are to private money, aided by not having too much filched off them by government, thus they will reap any rewards or suffer any losses, so the tax-payer will not be milked as avidly as they are with “alternatives”. However, what he does fail to say is that this does not preclude that, to cover the cost of production, the cost of the end product might rise.
You write as if against the case presented by JamesG, yet use argument that is actually for his case; I am sure there must be a term for this bizarre form of argument, but I have no idea what it would be
@ Vangel V
I'm not playing, and you're not that stupid.
Shale gas is of course a product of the free market as was the closure of our coal mines and our nuclear program. The free market quite clearly prefers natural gas and foreign coal. How we might manage to have a nuclear program without central planning escapes me. Based on current evidence we either set up our own nuclear program or submit to extortion by a foreign cartel in order to obtain it in dribs and drabs.
Radical Rodent wrote:
The “alternatives” to which JamesG refers are not coal and nuclear – they are generally considered the norm; while he used to champion the cause of wind and solar (the “alternatives”), he now sees their limitations, and accepts that they have very limited commercial viability; he never said that either coal or uranium are rare; he iterates the total pointlessness of off-shore and fusion (but does not discount continuing research); finally, he points out that the risks are to private money, aided by not having too much filched off them by government, thus they will reap any rewards or suffer any losses, so the tax-payer will not be milked as avidly as they are with “alternatives”. However, what he does fail to say is that this does not preclude that, to cover the cost of production, the cost of the end product might rise.
I agree that the alternatives that are being pushed are useless. I agree that coal and uranium are the best solution for now and that the markets will come up with something else. What I have made clear though is that using the current technology shale gas and oil are not going to be a solution because they are only viable in core areas of some formations. The shale optimists point to American production but not to profits by the American producers. And I do not discourage anyone from choosing to take a flier on shale because I have little trouble with investors choosing to 'do good' subsidizing consumers. My issue is with the distortions that is created in the shale sector by the central banks' attempt to save the financial system.
Shale gas is of course a product of the free market as was the closure of our coal mines and our nuclear program. The free market quite clearly prefers natural gas and foreign coal. How we might manage to have a nuclear program without central planning escapes me. Based on current evidence we either set up our own nuclear program or submit to extortion by a foreign cartel in order to obtain it in dribs and drabs.
That is like saying that the housing bubble was the product of the free market. It wasn't.
Thanks again Vangel for hanging in here -maybe an Americanism. Is it possible for someone to buy into say an eighth of a well in the UK as it is in the US - Limited Partnership? You're right about the housing bubble. I apologize for the effect of our greed and stupidity on all of you. When you understand the details of what was done,. it is amazing that no-one made more of a fuss.
I still cannot understand why no-one is going to jail over the misrepresentation of the dubious-solidity of the underlying mortgages. I cannot believe that many of the people marketing these things in the US didn't know full well that they were junk. And they weren't marketed as junk.
Thanks again for your informative comments.
John
Vangel, I'd seen reports that the the shale operations in the US were losing money, and didn't understand what was happening. Your explanations make sense. Thank you!
There's something you said that I do not fully understand: "the distortions that is created in the shale sector by the central banks' attempt to save the financial system". What have the central banks been doing in the shale sector?
Thanks again Vangel for hanging in here -maybe an Americanism. Is it possible for someone to buy into say an eighth of a well in the UK as it is in the US - Limited Partnership? You're right about the housing bubble. I apologize for the effect of our greed and stupidity on all of you. When you understand the details of what was done,. it is amazing that no-one made more of a fuss.
What bothers me is that we could see the problem coming, understood the mechanism, had reports from the S&L crisis that explained everything yet the media and academics kept silent until the bus went over the cliff. What gets me more is how the EU banking sector decided to play in the game even though the low quality loans ensured that there would be a massive loss. This just shows how intellectually and morally bankrupt the system is.
I still cannot understand why no-one is going to jail over the misrepresentation of the dubious-solidity of the underlying mortgages. I cannot believe that many of the people marketing these things in the US didn't know full well that they were junk. And they weren't marketed as junk.
It is called regulatory capture. Why would you try to put into jail the people who will give you a $3 million a year job in two years when you retire at 55 with a full pension from the government? And suppose you do prosecute and expose the entire scam. That will bring down the entire financial system and will lead to people attacking, not praising you. Once we look at the incentives it is easy to see why things have worked out as they should and why we need to hedge by buying assets that will survive the inevitable collapse of purchasing power for the fiat currencies.
There's something you said that I do not fully understand: "the distortions that is created in the shale sector by the central banks' attempt to save the financial system". What have the central banks been doing in the shale sector?
Sorry for not being more clear. When the central banks inflate the supply of money and credit they cannot control where all of the excess purchasing power goes. In the 1990s the money injections went into tech stocks. In the 2000s housing was the big beneficiary. All along the way the CBs were making sure that sovereign debt held up by buying more and more of it. But some of the money has gone into other sectors. A lot went into commercial real estate. Stocks regained some of their lost lustre and moved to record highs. Some of the money went into the shale sector. Note the 'positive effects of increased shale production even if the production is uneconomic. There is a new narrative of energy independence and energy riches that acts to prop up the US dollar and to permit the Fed to monetize a great deal of government debt without setting off the alarm bells. Financial companies run by old S&L hands know the trick to personal riches. You make loans that are unlikely to be paid back by financing them with nearly free borrowing. You reduce the provisions for bad loans to nearly zero and book high profits. The bonuses flow in and the options are cashed in at a very nice profit. When the whole bubble bursts you point to the USGS estimates, the SEC approved accounting methods that use estimated recoveries rather than actual recoveries, and the booking of proved undeveloped reserves (PUDs), and are pretty certain that there is no way to be prosecuted. It is hard to argue that these people should have known because the people who point out the problems are ignored and ridiculed by the media, the industry analysts, and even on sites like this one.
Here is my problem with sites like this one. Most people here are supposedly skeptics and question all of the data that comes from the government agencies that are pushing the AGW hypothesis and call for polices that would deal with the 'problem.' But these people tend to take faith based positions on other issues. They object to alternatives so much (as I think they should) that they seize on any new fossil fuel production method and hype it without checking the facts. They call people like me naive, foolish, ignorant, etc., etc., etc., yet refrain from doing the one thing that would prove us wrong. Like the IPCC they cannot point to empirical evidence that would support their claims. If you think that I am full of crap all you need to do is to look at the five to ten top primary shale producers and show me that they can self finance their shale operations. Note that I expect the new small players to be cash flow negative even if they have the type of wells that I love and would invest in if given the chance. My concern is that the original players, who have been around for a long time, are still having a hard time generating positive cash flows even though shale wells give up most of their bounty in the first two to three years. As far as I am concerned the math just does not work but I do not understand why the optimists on this site don't bother looking at it so that they can draw their own conclusion.
JerryM writes:
I'm not playing, and you're not that stupid.
Thanks for the complement but how do you know? This is a site on which uncertainty tends to be an important topic yet too many people tend to be far too certain once the topic wanders away from the issue of climate. I think that most of us need to look into a mirror and take a close look. Perhaps we are not as smart as we think and some of the things that we think we know are simply not true.
Vangel
Please list the companies which have the business model of only fracking shale and which have been around for "a long time" and which are not cash flow positive. Market caps would be useful, too.
Thanks.
sam:
Off the top of my head Chesapeake Energy is apparently the poster child for such companies. But I'm not an expert and have only a casual interest.
Please list the companies which have the business model of only fracking shale and which have been around for "a long time" and which are not cash flow positive. Market caps would be useful, too.
Thanks.
I could not find a single company that has been around for a while and is generating positive cash flows from a diverse portfolio of wells. Given the fact that I have been sniffing around the sector for quite some time, that is problematic. I just did some searching and located an article that I had seen a while ago. Christopher Joye wrote a fabulous article on just this subject about two years ago where he used Continental, the darling of shale promoters, as his example. The last two paragraphs read as follows:
“In 2012, Continental’s free cash flow was negative $1861 million, a vastly different result to the $739 million reported net profit,” Heddle says. Depreciation expenses are the difference – and Heddle believes they should be far higher in the early years. “When the divergence between net income and free cash flow is large and growing, it is time to ask questions about what the true state of earnings is. A key issue for shale oil and gas companies is what total lifetime well production assumptions they make.
“Continental says their average Bakken well will yield 600,000 barrels of oil. Yet the US Geological Survey says lifetime production of a Bakken well is between 64,000 and 241,000 barrels. That’s the difference between a revolution and a scam.”
The full story is available at the link below.
http://www.afr.com/f/free/blogs/christopher_joye/the_real_oil_on_us_shale_may_be_w07tCAT80ChWN4RYUjcgpM
Vangel
I see what you mean now but I still think it is too early to be defeatist; perhaps just cautious. The dot com bubble burst but then recovered. The housing market will recover too but this time it will be more controlled. All that is required for shale gas to prosper is a small increase in gas prices. I admit to being optimistic on this but it gets boring being pessimistic all the time :). The fact is that the gas is actually there and it is being produced - it is not a talked-up mirage like dotcom valuations, sliced and diced subprime mortgages, extra-long-life batteries, etc. Maybe it won't last forever but it would be nice to get 20-40 years of it while we work on other options.
That is the thing with the Vangel's of the world: They refuse to see that on balance we do thrive and prosper. We adapt and over come. That is the failure of vision shared by the climate obsessed, the Ehrlich's, and sadly too many of our current politicos. His swan song is really the siren's song, calling us to the rocks.
Real Estate bubbles have come and gone more than a few times in history. The dot-com bubble did not destroy the internet.
As to Chesapeake problems- they grew faster than they could safely manage- it happens in every industry.
To claim this means we should not do fracking is just bizarre and unreal.
Vangel,
Your so-called test of the viability of fracking is bunk.
The question is whether or not fracking is well established technologically?
Yes, it is.
Is gas being produced at market prices by viable companies using fracking?
Yes, it is.
Is the production of this gas helping economically?
Yes, it is.
The rest is your obsessive and long winded refusal to accept the reality of gas.
That is the thing with the Vangel's of the world: They refuse to see that on balance we do thrive and prosper. We adapt and over come. That is the failure of vision shared by the climate obsessed, the Ehrlich's, and sadly too many of our current politicos. His swan song is really the siren's song, calling us to the rocks.
I think that you have it all wrong. I am very optimistic about the ability of human beings to adapt and solve problems. The problem is that we have governments that are getting in the way of the markets doing their job. Between the central banks' creation of money and credit and the governments' intrusive regulations there is too much money being diverted into uneconomic ventures like wind, solar and shale. What we need is a lot more investment in coal and nuclear and venture capital moving towards technologies that might make sense.
Real Estate bubbles have come and gone more than a few times in history. The dot-com bubble did not destroy the internet.
But they were both a part of the same methodology that has created the biggest bubble in the history of this planet; sovereign bonds. The shale bubble is another unintended consequence as is the second real estate bubble.
As to Chesapeake problems- they grew faster than they could safely manage- it happens in every industry.
No. They had to drill and produce gas at a loss because of the terms of their leases. Continental has similar problems but it has managed to keep its accounting a bit more ambiguous. So what we have are two of the oldest and biggest players unable to generate positive cash flows from operations because the depletion rates are much steeper than the assumptions on which the accounting is based. The parallel is Nortel, a company that did not depreciate its investments quickly enough to account for obsolescence and wound up having to write off much of its balance sheet as the shares dropped from over $100 to less than $1.
To claim this means we should not do fracking is just bizarre and unreal.
Vangel,
Your ignorance of the oil and gas industry is not a reason to dismiss fracking. Chesapeake over bought drilling rights and is suffering accordingly. Companies in all industries have done this. Lumping f oil and gas in with wind and solar is bizarre and raises questions about your sincerity in this.
Preaching for nuclear energy and coal when governments in the West are largely abandoning both means we are stuck with trying to end the madness of wind and solar. Since gas actually produces something of value without government direct subsidy, your position is non-sensical.
Your ability to ignore the fact that fracking has led to success where it has been honestly tried and conflating it with companies that over spent puts you in a place not well connected to reality.
Your man Vangel might have answered this and I might have scrolled over it.
But it used to be said that shale would only be profitable with oil at >$85bbl. The early tight shale drillers started before that price point was reached in the hope that costs would come down and/or oil would go up, both of which have happened..
I believe that with the development of technology and techniques and having reached and passed the point of the critical mass of equipment and expertise, that figure is tending more toward the $70/bbl level or lower.
Gas is a lot more dependent on local infrastructure and politics so I imagine the break even point would vary a lot.
Vangel's interest in sovereign bonds is interesting.
Will we now find out about his interest in the Illuminati, how a cabal of Jewish bankers run the world, and how 911 was an inside conspiracy?
The US has used full faith and credit to back its bonds since the Washington Administration.
So far they have done pretty well.
Vangel's interest in sovereign bonds is interesting.
What is far more interesting is your inability to prove me wrong by showing examples of primary producers of shale gas and oil that have shale production that is self financing. I guess that you had as hard a time finding positive cash flows as I did.
Vangel,
What is more interesting is that you think your straw man argument is valid.
Every energy company goes to capital markets to raise money for exploration.
You are an interesting troll:
Show up, write long winded yet empty posts, set phony standards and tests and then continue to ignore reality.
So do tell us about the 911 conspiracy. I will bet good money you *know* what really happened on 911.
Hunter wrote:
What is more interesting is that you think your straw man argument is valid.
It is not a straw man argument. To be a success a company has to get revenues for its products that are greater than the cash that the production of those products consumes. You would think that after years of production you would be able to come up with one such producer to support your argument. The fact that you can't speaks volumes.
Every energy company goes to capital markets to raise money for exploration.
Actually, shale companies have no exploration risk. They go to the market because they cannot generate positive cash flows from production. They need cash to fill their funding gaps and do so by issuing shares, borrowing, or selling off assets when the first two methods are no longer workable.
Show up, write long winded yet empty posts, set phony standards and tests and then continue to ignore reality.
No. The reality that matters is that the shale producer projects are not self financing. As I said, pick the top companies and look at the increase of debt on the balance sheets as well as the cash flow statements. The shale books look a lot like those of Nortel and Lucent in the 1990s. A few specially creative companies have reached Enron levels.
So do tell us about the 911 conspiracy. I will bet good money you *know* what really happened on 911.
Of course I do. I watched it all on TV and saw the plane hit the second tower. The buildings collapsed as would be expected. The attacks showed the incompetence by the Department of Transport, the FAA, FBI, CIA, and other government agencies. And, as usual, those that failed got rewarded with a bigger budget.
One last thing. I was just sent a link to a story that fits perfectly with my assessment. (http://tinyurl.com/mgqdj4e)
As time passes I expect to see more and more of these kinds of postings. While that is inevitable as the accountants can no longer ignore the production data and must write down assets regardless of what the SEC rules permit them to do my interest is in the effect of this news on the US Dollar and the US markets. Keep in mind that the myth of independence from OPEC has allowed the US economy to maintain the illusion of strength and has given the Fed the ability to monetize deficits without risking the status of the USD as the reserve currency of the world. What happens when foreign lenders realize that the US will have the same energy problems as the rest of the developed world and that one of the huge sources of energy to the EU, Russia, has been diverted towards China and SE Asia?
All the optimists out there can prove me wrong by doing a simple exercise. Go out and comb through the 10K filings of shale producers and find the players that are cash flow positive and are not plugging funding gaps by growing debt, issuing more stock, or selling off assets at a loss.