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'The Shale Gale Is a Retirement Party'

So concludes an expert analyst of the natural gas boom. Brace for bust.

Andrew Nikiforuk 27 Mar

Award-winning journalist Andrew Nikiforuk has been writing about the energy industry for two decades and is a contributing editor to The Tyee. Find his previous Tyee articles here.

This special Tyee series was produced in collaboration with Tides Canada Initiatives Society (TCI). Funding was provided by Fossil Fuel Development Mitigation Fund of Tides Canada Foundation. All funders sign releases guaranteeing The Tyee full editorial autonomy. Tyee funders and TCI neither influence nor endorse the particular content of Tyee reporting.

Every day a government agency or industry group in North America still hails natural gas mined from deep shale rock formations as "the bridging fuel" that will power a brighter if not cleaner energy tomorrow. Cheap natural gas, goes the mantra, will solve our energy woes and build a new energy foundation.

The government of British Columbia, for example, dutifully salutes the ancient hydrocarbon as "a transition fuel to a low carbon global economy" that will fill government coffers.

And the Massachusetts Institute of Technology (MIT) calculates that the continent's growing gas supply can retire the majority of the continent's aging coal-fired plants. Others claim that natural gas will make the continent energy independent altogether.

Big Oil such as Exxon Mobil and Shell have invested so much money in shale resources that they now want to export U.S. and Canadian natural gas to Asia. Exuberant corporate leaders also predict that natural gas will surpass coal as the second-largest energy source on the planet, after oil, by 2040.

Eager to cash in on the shale gale, pipeline companies can't wait to build another 450,000 miles of new pipelines to ship gas from heavily fracked rural landscapes to urban markets over the next two decades.

But that's not Arthur Berman's take. The oil patch consultant sees the shale gas frenzy as "magical thinking" as well as a full-blown commercial failure. In fact, the 62-year-old Houston-based petroleum geologist doesn't view natural gas as "a bridge to anywhere."

What others call the "shale gas revolution," he rudely describes as an "industry retirement party."

Industry supporter, skeptical eye

Now don't get Berman wrong. With more than 30 years of technical experience in the oil and gas industry, the consultant recognizes the intensive mining of shale gas and shale oil across the continent as significant events.

He clearly supports the industry. But he's the kind of thoughtful and critical guy that quotes Samuel Johnson or Tao Te Ching in his presentations. As such, he has persistently challenged corporate gold rush economics that crushed natural gas prices as well as persistent government ignorance about the resource's longevity, volume and cost.

His blunt refusal to cheerlead for the industry has also earned him some grief. The magazine World Oil cancelled his long-running column in 2009 after Berman repeatedly questioned the accuracy of inflated shale gas reserves in the absence of real production data. The editor got sacked too.

In the last couple of years, a Devon Energy spokesperson dubbed Berman a "dinosaur" for questioning industry hubris. Former Chesapeake CEO Aubrey McClendon, now under investigation by the U.S. Securities Exchange Commission, also dished the prominent analyst as "third tier geologist."

But Berman's no-nonsense technical assessments have been damningly accurate. In many quarters the prescient Berman is now hailed as an energy fox.

Compulsive drilling

It all began six years ago when the savvy geologist started to question the economics of shale gas drilling in Texas as well as a manufacturing model that promised endless energy. After checking real geology and real production numbers he warned that industry had overhyped the potential of many fields while ignoring falling prices, rising costs and sharp depletion rates.

Nevertheless, the shale boom became a verifiable mania in the mid-2000s. With heavy promotional hoopla and flush with easy credit from Wall Street, companies such as Chesapeake and Encana individually acquired land bases as large as the State of West Virginia.

Then they compulsively drilled them with repeated fracture treatments. Not surprisingly, industry flooded the market and drove down the price of natural gas from a historic high of $14 a million metric BTU in 2008 to lows of $2.

Yet cracking rock miles underground remains a high cost and high-risk business. In 2010 Berman predicted the shale gas manufacturing model "was unsustainable" and that overproduction would create killing debt loads and force companies to divest their assets.

Most shale gas companies need a price between $6 and $8 a mm BTU to be economic. Yet the market price for gas remains around $3. Hence the sell-offs, mergers and acquisitions and corporate resignations in the natural gas industry now making media headlines.

Two of the loudest shale gas promoters, Chesapeake and Encana, have suffered major train wrecks due to the shale gas glut. Their CEOS have resigned. They've not only reduced drilling but have tried to sell off a billion dollars worth of assets to cover their unsustainable debt loads.

They are not alone. BP has written off nearly $2 billion in assets. In addition Quicksilver has temporarily suspended drilling in the Horn River shale play due to low natural gas prices. Even Rex Tillerson, the bombastic CEO of Exxon Mobil, admitted last year that the company was "losing our shirts" on shale gas investments.

Or as Berman duly warned in one article: "Improbable stories that great profits can be made at increasingly lower prices have intersected with reality."

Berman was also one of the first to question the abundance of the resource too. Formations blasted open by water, sand and chemicals often yield great gushers of gas for six months but then drop off as dramatically as a Wall Street market crash. In many shale gas plays, production declines average more than 40 per cent a year, says Berman. (In contrast conventional plays deplete by an average of 20 per cent.)

Nevertheless, industry and industry-funded academics often boasted that the so-called shale gale could spew enough methane to meet North America's energy needs for 100 years. But real-time depletion rates and problematic geology (not all shale resources are equal) have totally rewritten those optimistic claims.

The Marcellus shale formation in Pennsylvania and New York, for example, was supposed to hold 410 trillion cubic feet of gas or nearly 20 years worth of natural gas. (The U.S. burns about 22 TCF a year).

But in 2011 the U.S. Geological Survey slashed that estimate by 80 per cent to 84 trillion cubic feet, or a four-year supply. Other studies "show that commercially recoverable per-well shale gas reserves may be considerably smaller than some believe."

Two decades to transition

Given such downgrades in shale fields from Haynesville to Woodford, Berman believes that the unconventional gas may represent only between 20 and 25 years worth of supply. That's not a bridge given dramatic declines in conventional gas, says Berman. In short, most shale gas deposits are too deep, too marginal or too inaccessible to be economically viable.

A 2013 comprehensive report based on the study of 60,000 oil and shale wells in the United States confirmed Berman's own analysis and research.

The Post-Carbon Institute study reported that 80 per cent of all shale gas production comes from just five of 20 developed fields. Moreover, the majority of these fields had peaked after five years of production and were now in decline. "In the Haynesville play (a major shale gas field in north Louisiana and east Texas), an average well delivered almost one-third less gas in 2012 than in 2010," reported Hughes.

David Hughes, a retired Canadian geologist and author of the report, estimated that it would cost $42 billion to maintain current production (that's 40 per cent of US gas supply) with 7,000 more wells even though the 2012 market value of shale gas production was but $32.5 billion.

Rapid decline rates have taken the wind out of the shale gale. Industry once advertised shale wells as assets that could be milked for up to 40 years. Now it appears that some wells might not be economic after fives years of production. As a consequence, an increasing number of high cost wells must be drilled (a veritable treadmill) in order to maintain supply. "We are spending more and more to get less and less," explains Berman.

Given such poor thermodynamics, shale gas is a temporary phenomenon and another sign of peaking supply in hydrocarbons explains the consultant. "But it is not sustainable. By 2020 or 2025 it will be pretty much played out. And what comes after that?"

Now that the gold rush is over, Berman thinks the future for natural gas could be equally dramatic.

582px version of Natural Gas North American prices

Conventional gas production, which supplies 60 per cent of the market, is steadily declining. In 2001 the decline rate was 23 per cent; today its 33 per cent.

That means 12 billion cubic feet of new gas was needed every year to offset consumption rates of 54 billion cubic feet. Today industry needs to replace 22 billion cubic feet a year to sustain the consumption of 64 billion cubic feet of gas. Calgary-based Arc Financial estimates that major gas producers must spend $22 billion per quarter to replace what's being burned. But most firms are only spending half of that.

It's unlikely that shale gas will be able to make up the difference.

'Retirement' looms

This reality coupled with increasing demand for natural gas to replace coal-fired power based on illusions of cheapness, will soon increase prices as well as the volume of shale drilling. But even hundreds of thousands of newly fracked shale gas wells won't be able to keep up the depletion rates, making natural gas an ugly treadmill industry.

"Shale plays are not a renaissance or a revolution. This is a retirement party."

As a consequence Berman doesn't think industry, now in a panic mode over low prices, should rush to build high-risk LNG terminals to export shale gas to Asian markets. "Just because we have a temporary supply of abundant natural gas, why should we race to use it up as fast as we can?"

Nor does he believe that government should subsidize the fossil fuel industry. "We'll never develop effective or alternative technologies as long as government gains profit from fossil fuels."

B.C.'s shale gas industry, for example, is entirely subsidized by low royalties, free water and tax-payer funded roads and other infrastructure. All horizontal drilling in Alberta gets a hefty royalty break, too, in addition to free water.

Nor should the illusion of temporary cheap gas dissuade governments from investing in public transportation, energy conservation or encouraging green renewables such as solar and wind power, adds the consultant. "I think our energy future is quite bleak and we are going to need everything we can get."

"The transition we're in now is one from energy abundance to scarcity. I know it doesn't play well. But right now we don't have a bridge to anything. We have a bridge to nowhere and we don't know where the future is."

"Shale gas is a retirement party because we now have to live on what we have left," he explains.

"We have reached the bottom of the resource pyramid. All the good resources are gone. So, like a reluctant retiree, we try to convince ourselves that the best is in front of us but we know it is really not. We will have a nice retirement party -- these are usually awkward events -- and in coming days will resign ourselves to the hard truth."

Berman adds that he's an optimist. "I think we are an adaptable species."  [Tyee]

Read more: Energy, Environment

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