Snake Oil: How Fracking's False Promise of Plenty Imperils Our Future (8 page)

Official agencies began revising their oil reserves numbers and production forecasts. The EIA, in its “Annual Energy Outlook 2013,” noted that US oil import dependency had fallen from 60% of total oil consumed in 2005 to 45% in 2011; assuming further growth in tight oil output, the agency projected oil imports to fall to only 37% of consumption in 2035. The United States would not achieve oil independence, but it would make substantial progress in that direction.

The IEA likewise adopted a more optimistic attitude about future petroleum supplies. The organization’s chief economist, Fatih Birol, even called the surge in US oil and gas production “the biggest change in the energy world since World War II.”
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As with shale gas, Daniel Yergin played a key role in pumping up expectations about the potential of tight oil. “[T]echnology has opened doors people didn’t know were there or didn’t think could be opened,” he told the
Wall Street Journal.
“We expect to see tight-oil production grow dramatically over the rest of this decade.”
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* * *

Altogether, these were amazing developments. Prior to the fracking boom, the United States had been assumed to be a fully mature oil and gas province. Since the start of the hydrocarbon era, more oil wells had been drilled in the continental US than in all other countries combined. The nation’s peaks in oil and gas production were apparently four decades in the rearview mirror. Yet, led by technology and enabled by the treatment of mineral rights under US property law, a host of small oil and gas companies had unleashed a genie of new production potential.

Nevertheless, there was another way of framing the situation. Soaring fuel prices, resulting from the depletion of giant conventional fields, had led drilling companies to go after some of the last, least inviting oil and gas plays in North America. These operators had invented superior barrel-scrapers, but they were still in essence scraping the bottom of the barrel by producing oil and gas from source rocks.

Figure 18. Oil and Gas Resource Volume Versus Resource Quality.
This graphic illustrates the relationship of in situ resource volumes to the distribution of conventional and unconventional accumulations, and the generally declining net energy and increasing difficulty of extraction as volumes increase lower in the pyramid.

Source: J. David Hughes, “Drill, Baby, Drill,” Figure 37.

Every geologist understands the principle of the
resource pyramid
: the entire pyramid represents the total mineral resource in place. The top portion of the pyramid consists of the concentrated, easy-to-produce portion of that resource base, while lower levels correspond to more abundant but lower-quality resources that have higher production costs and whose extraction implies higher environmental risks. This mental model holds true for copper and iron mines, oil and gas fields, and even commercial fisheries. Shale gas and tight oil plays were far from the top of America’s gas and oil resource pyramids. In addition, each shale gas or tight oil play could be thought of as its own smaller resource pyramid: the best resources within each play would inevitably be targeted for production first, and, as time went on and as producers made their way down the stair steps of the pyramid, well productivity would decline and per-well decline rates would rise. Operating costs would soar. Production potentials that were forecast on the basis of extrapolating the best results from the first wells drilled into “sweet spots” in each play would inevitably prove highly misleading.

But not many analysts wanted to adopt this more realistic view. There was no money in it.

Leonardo Maugeri’s statement that “the shale/tight oil boom in the United States is not a temporary bubble” carries a whiff of resemblance to Nixon’s “I am not a crook” or Clinton’s “I did not have sexual relations with that woman”: the gentleman doth protest too much, methinks. But where lies the truth? Are shale gas and tight oil booms the “new normal” for American energy? Or do they more closely resemble a short-term Ponzi scheme?

Let’s take a closer look.

SNAKE BITES

1. THE US ENERGY INFORMATION ADMINISTRATION (EIA) SAYS:

Enough new shale gas wells will be drilled every year until 2030 to ensure steady production growth.

THE REALITY IS:

Production from shale gas wells typically declines 80 to 95 percent in the first 36 months of operation. Just to maintain the current rate of supply will take massively increased rates of drilling.

2. THE EIA SAYS:

Proved and unproved technically recoverable shale gas reserves will provide a 24-year supply of natural gas at current US consumption rates.

THE REALITY IS:

Given steep shale gas well decline rates and low recovery efficiency, the United States
may actually have fewer than 10
years
of shale gas supply at the current rate of consumption.

Eventually, horizontal drilling is suspended because operators reach a point where they are
just burning cash
.

— Robert Smith, operations geologist, International Western Oil

Chapter Three

A Treadmill to Hell

T
he tiny ghost town of Desdemona is situated in Eastland County, Texas, about halfway between Fort Worth and Abilene. It was founded in the mid-19th century as a fort to protect settlers from Indians, its early economy revolving mostly around peanut farming. In 1918, Tom Dees of Hog Creek Oil Company discovered an oil field nearby, and within weeks 16,000 speculators and rig workers crowded Desdemona’s dusty streets. Fortunes were quickly made—less often on actual oil production than on the trading of stock shares, which appreciated dramatically in value during the first couple of years of the boom. (Some shares that originally sold for one hundred dollars soon fetched over ten thousand.) Fortunes were just as suddenly lost in gambling or robberies. By 1920, rampant lawlessness had drawn the attention of the Texas Rangers, who at the time operated as a paramilitary organization employing tactics like targeted killing and enhanced interrogation. The Rangers effectively ran Desdemona—but they didn’t stay long. Between 1919 and 1921, oil production rates dropped by two-thirds. The value of oil stocks collapsed. By 1936, Desdemona’s city government had dissolved itself; the town’s lone school closed its doors in 1969, and as of 2013 only two businesses remain.

Booms go bust: it is a story as old as civilization. Historically, most booms have been associated with resource extraction—gold, silver, oil, gas, or coal. Often, financial speculation based on an extravagant (and sometimes deliberate) overestimation of resource potential drives the peak of the boom higher than would otherwise be the case, thus making the bust all the more devastating. Though the pattern is consistent, on each occasion the participants assure themselves and one another that “this time it’s different.”

The current fracking frenzy in the oil and gas fields of Texas, North Dakota, Oklahoma, Louisiana, Arkansas, Colorado, and Pennsylvania shows all the signs of being a boom in the classic sense. How do we know it’s
not
different this time, that it
won’t
end in a colossal bust? And if it
is
yet another instance of the same old story, how soon will the bust come?

These are questions best answered by data—by realistic resource estimates, per-well production and decline rates, and reliable calculations of the number of possible drilling sites. Compiling these kinds of data is hard work and often requires access to expensive proprietary information. And the rewards are few: investors want good news.

In the previous chapter we surveyed the claims made by the industry regarding reserves and future production of shale gas and tight oil. This chapter tells the story of the data—how they have evolved, and what they tell us now.

The Boom That Fizzled

The first indication that the emerging shale gas bonanza might not have a happy ending came in 2007 when Arthur E. Berman, a petroleum geologist and consultant to the oil and gas industry in Sugar Land, Texas, started crunching numbers from the Barnett shale gas play. The results were anything but encouraging. Berman used his regular column (“What’s New in Exploration”) in
World Oil
magazine to report on his analysis of decline rates and profitability for hydrofractured, horizontally drilled Barnett wells and concluded: “This analysis shows that, while many wells are profitable and some operators are significantly more successful than others, most Barnett shale wells will lose money. . . . The overall resource size for the play is great, but economic reserves are relatively small.”

Berman continued accumulating data from shale plays and publishing his analyses; the following paragraph, from his March 6, 2009,
World Oil
column titled “Shale Plays, Risk Analysis and Other Perils of Conventional Thinking: Haynesville Shale Sizzle Turns to Fizzle,” is typical of his coverage:

An early analysis of 20 horizontally drilled wells in the Haynesville Shale play in Louisiana and parts of adjacent East Texas suggests a disappointing outcome because of extremely high decline rates. Average monthly decline rates are 24%, with 75% of wells declining 20–35% per month. The impressive initial production rates (IP) for these wells do not, therefore, necessarily translate into high reserves (actual daily production rates from the maximum 30-day period were, in fact, about 20% lower than reported IPs).

Representatives of the shale gas industry hotly denied Berman’s assertions, accusing him of “inconsistent data gathering” and of having “poorly supported opinions.” After all, total production in the shale gas plays was rising, companies were flush with investment capital, and jobs were being created. How could this be anything less than a game-changing economic miracle?

In October 2009, Berman wrote yet another column questioning shale gas prospects; this time
World Oil
refused to run it. Berman recounted the events this way when I e-mailed him:

Perry Fischer, the editor of
World Oil
, called to tell me that my column in press would be pulled because of objections from Petrohawk Energy and Seneca Resources. I later had a conversation with John Royall, President and CEO of Gulf Publishing that owns
World Oil,
who objected to my comments to the press that he had been pressured by industry not to publish my articles on shale. My relationship was based on freedom to choose content. Since the magazine rejected content, I chose to end the relationship.

The incident was reported in the
Houston Chronicle
(Nov. 3), which noted:

John Royall . . . said he didn’t receive any pressure from gas companies.
World Oil
serves a global audience, and gas shale is largely a domestic issue. Berman had written on the topic for a year, and Royall decided that was enough. “Art had an interesting take on shale gas,” he said. “It was interesting, provocative stuff, but it was time to move on.”
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Berman continued gathering data, doing the numbers, and writing his conclusions in articles published at TheOilDrum.com and on his own his own blog, PetroleumTruthReport.blogspot.com. He also gave public presentations, including one at the 2009 ASPO-USA conference in Denver, where I first heard him speak.

By 2011, Berman had been joined by other critics of the shale gas boom. Bill Powers, editor of
Powers Energy Investor
and previously the editor of the
Canadian Energy Viewpoint
and
US Energy Investor
, began telling his readers about high decline rates and other problems repeatedly and in detail, relying mostly on Berman’s analysis. “The importance of shale gas has been grossly overstated,” Powers told TheEnergyReport.com. “The US has nowhere
close
to a 100-year supply. This myth has been perpetuated by self-interested industry, media and politicians.”
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Soon Powers began working on a book,
Cold, Hungry and in the Dark: Exploding the Natural Gas Supply Myth,
published earlier this year. Art Berman contributed the book’s foreword.

Berman’s work also served as initial inspiration for a major new analytic survey, the most comprehensive to date, authored by David Hughes and published by the Post Carbon Institute (at which I am senior fellow) in February 2013.
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Hughes, a geoscientist who studied the energy resources of Canada for nearly four decades, including 32 years with the Geological Survey of Canada as a scientist and research manager, examined proprietary data on 63,000 US shale gas and tight oil wells, calculating production decline rates in each active play. The data were licensed from DI Desktop. (DI stands for DrillingInfo, a petroleum industry data company headquartered in Austin, Texas.) Hughes’s report fills over 160 pages, including many tables and graphs, and also addresses prospects for expanded production of tar sands and other unconventional fuels. For anyone wanting to understand current and future production from fracking and horizontal drilling, “Drill, Baby, Drill” is the Holy Grail of information and analysis. Here’s the report’s abstract:

It is now assumed that recent advances in fossil fuel production—particularly for shale gas and shale oil—herald a new age of energy abundance, even “energy independence,” for the United States. Nevertheless, the most thorough public analysis to date of the production history and the economic, environmental, and geological constraints of these resources in North America shows that they will inevitably fall short of such expectations, for two main reasons: First, shale gas and shale oil wells have proven to deplete quickly, the best fields have already been tapped, and no major new field discoveries are expected; thus with average per-well productivity declining and ever-more wells (and fields) required simply to maintain production, an “exploration treadmill” limits the long-term potential of shale resources. Second, although tar sands, deepwater oil, oil shales, coalbed methane, and other non-conventional fossil fuel resources exist in vast deposits, their exploitation continues to require such enormous expenditures of resources and logistical effort that rapid scaling up of production to market-transforming levels is all but impossible; the big “tanks” of these resources are inherently constrained by small “taps.”
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From the work of Berman, Hughes, and other analysts, a more realistic picture of the actual potential of shale gas and tight oil plays is emerging. Briefly: The wells in
core areas
(usually just a few counties) in each of these plays do tend to be productive and profitable, yielding oil or gas in significant amounts for many years. These are not comparable to the conventional oil and gas finds of the mid-20th century, but they do nevertheless provide an important new source of supply for the industry and for the nation. However, these compact core areas tend to be drilled out fairly quickly. Meanwhile, outside these regions, per-well production rates tend to fall quickly and dramatically, and wells are uneconomic. Overall, taking into account decline rates, potential drilling locations, and the variability of regions within resource plays,
the industry’s claims for how much oil and gas can be extracted, at what rate, and how profitably, are wildly overblown.

Throughout much of the rest of this chapter, as we explore the energy reality of fracking in more detail, we will be relying primarily on data and analysis in “Drill, Baby, Drill.”

Shale Gas: the Evidence Is In

When discussing US shale gas production, it is always necessary to begin by acknowledging the industry’s accomplishments—as we have already done on more than one occasion in this book. Natural gas production in the United States is now higher than at any point in history, and shale gas currently makes up 40% of America’s total natural gas production. Considering how quickly the new technology has been deployed, this is an impressive achievement.

Nevertheless, it turns out that high productivity shale gas plays are few and far between: just six plays account for 88% of total production. And, as noted at the end of Chapter 2, each play is in effect its own “resource pyramid,” characterized by a few small “sweet spots” surrounded by larger areas capable of only marginal productivity. Drillers invariably concentrate their efforts on the zones of highest productivity first. So, as time goes on and as drillers must stray ever further from sweet spots, the initial productivity of each
new
well drilled in the play tends to be lower than that of previous wells. The number of available drilling sites is always limited, and, once the play is saturated with wells, per-well decline rates will determine the play’s longevity.

Hughes notes that individual shale gas well decline rates range from 80–95% after 36 months, in the top five US plays. The industry’s claim that America has 100 years of gas is based on the assumption that individual wells will continue to produce for 40 years, but given such steep decline rates, the data do not support this assumption.

Figure 19. Type Decline Curve for Barnett Shale Gas Wells.
Based on data from the most recent five years of this play’s production.

Source: J. David Hughes, “Drill, Baby, Drill,” Figure 48. Data from DI Desktop/HPDI current through May 2012.

One result of high decline rates is that a large proportion of overall field output must be replaced by additional drilling in order to keep the total production rate growing or even flat. Hughes calculates that, for the nation as a whole, between 30 and 50% of shale gas production must be replaced
every year
with more drilling—amounting to roughly 7,200 new wells a year. Remember: that’s simply to maintain the current production rate. This is the “treadmill to hell” referred to in the title of this chapter. Oil analyst Rune Likvern uses a different metaphor; he calls it the “Red Queen” syndrome, after a character in Lewis Carroll’s
Through the Looking-Glass.
In that colorful story, the fictional Red Queen jogs along at top speed but never gets anywhere; as she tells Alice, “It takes all the running you can do, to keep in the same place.” Similarly, with such steep decline rates, it takes all the drilling that the industry can do just to keep production steady.
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