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Debt and Energy, Shale and the Arctic
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Debt and Energy, Shale and the Arctic

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Debt and Energy, Shale and the Arctic

I know I’ve talked about it more than once lately, but at least for now I don’t think it can be said enough. The world energy situation is much worse than you have been, and are being, led to believe. Even if you do understand the principle that underlies peak oil (by no means a given).

I’ve also repeatedly made the point that the real energy predicament is the real driver behind recent geopolitical events, notably Ukraine. Which is not to say that Libya, Iraq, Gaza or the South China Sea are not, just the Ukraine seems fresher and a more overt play for fossil resources. But let’s stay away from politics today – much as we can -.

The Daily Telegraph gives a podium to Tim Morgan, former global head of research at inter-dealer money broker Tullett Prebon, to present his view of the shale industry. Morgan draws the same conclusion that we at The Automatic Earth drew years ago – only now it’s news … -, and wrote about on numerous occasions.

See for instance Get ready for the North American gas shock , Fracking Our Future , Shale Gas Reality Begins to Dawn , Shale Is A Pipedream Sold To Greater Fools , The Darker Shades Of Shale . And that’s just a sample.

I may like to think that we have over time demolished shale as a viable energy industry so rigorously that nothing should need to be said it anymore. But no, it needs to be repeated by ever more well-placed individuals before it sinks in. So be it.

That conclusion is, shale is about money, not energy. And as such it is a huge money drain. It’s not an asset, it’s a sinkhole. As I cited only last week, the US shale industry lost over $110 billion per year over the past 5 years. That’s half a trillion dollars down the waste hole. In cheap credit. Who’s going to pick up that tab?

In essence, shale, and hence fracking, is nothing more, or less, than the purest form of land speculation. Location, location, location. The only thing that appears to make it stick out from other forms of land speculation is its utterly destructive character. It smells of desperation no matter what direction the wind comes from.

Money broker Morgan focuses on Britain and its ill-fated shale dreams:

Shale Gas: ‘The Dotcom Bubble Of Our Times’

[..] hardly anyone seems to have asked the one question which is surely fundamental: does shale development make economic sense? My conclusion is that it does not. That Britain needs new energy sources is surely beyond dispute. Between 2003 and 2013, domestic production of oil and gas slumped by 62% and 65% respectively, while coal output decreased by 55%. Despite sharp increases in the output of renewables, overall energy production has fallen by more than half. [..]

Those who claim that Britain faces an energy squeeze are right, then. But those who claim that the answer is using fracking to extract gas from shale formations are guilty of putting hope ahead of reality. The example held up by the pro-fracking lobby is, of course, the US, where fracking has produced so much gas that the market has been oversupplied, forcing gas prices sharply downwards.

The trouble with this parallel is that it is based on a fundamental misunderstanding of the US shale story. We now have more than enough data to know what has really happened in America. Shale has been hyped (“Saudi America”) and investors have poured hundreds of billions of dollars into the shale sector. If you invest this much, you get a lot of wells [..]. If a huge number of wells come on stream in a short time, you get a lot of initial production. This is exactly what has happened in the US.

The key word here, though, is “initial”[..] Compared with “normal” oil and gas wells, where output typically decreases by 7%-10% annually, rates of decline for shale wells are dramatically worse. It is by no means unusual for production from each well to fall by 60% or more in the first 12 months of operations.

All this is old fodder for our readership. If anything, that 60% decline in the first year of a typical well is greatly underestimated.

Faced with such rates of decline, the only way to keep production rates up (and to keep investors on side) is to drill yet more wells. This puts operators on a “drilling treadmill”, which should worry local residents just as much as investors. Net cash flow from US shale has been negative year after year, and some of the industry’s biggest names have already walked away. The seemingly inevitable outcome for the US shale industry is that, once investors wise up, and once the drilling sweet spots have been used, production will slump, probably peaking in 2017-18 and falling precipitously after that. The US is already littered with wells that have been abandoned, often without the site being cleaned up.

2017-18? I doubt the US shale industry’s will make it in one piece that long. My bet would be investors will run for cover before.

Meanwhile, recoverable reserves estimates for the Monterey shale – supposedly the biggest shale liquids play in the US – have been revised downwards by 96%. In Poland, drilling 30-40 wells has so far produced virtually no worthwhile production. In the future, shale will be recognised as this decade’s version of the dotcom bubble. In the shorter term, it’s a counsel of despair as an energy supply squeeze draws ever nearer. [..]

The dotcom bubble may be, or seem to be, a somewhat fitting metaphor for shale, but I’m thinking much more along the lines of Klondike, and any other kind of gold rush. Plus the ghost towns they all left behind.

And it’s by no means just shale where our fossil fuel supplies get squeezed. The problems Big Oil is drowning in are much broader. Take, for instance, the Arctic. It’s starting to look a lot like shale, only in a much harsher climate. That even the billions of Big Oil are no match for. Oilprice.com has this:

More Oil Companies Abandoning Arctic Plans, Letting Leases Expire

After years of mishaps and false starts, some oil companies are giving up on drilling in the Arctic. Many companies have allowed their leases on offshore Arctic acreage to expire, according to an analysis by Oceana that was reviewed by Fuel Fix. Since 2003, the oil industry has allowed the rights to an estimated 584,000 acres in the Beaufort Sea to lapse.

It wasn’t supposed to happen this way. The oil industry was once enormously optimistic about drilling for oil in the Beaufort and Chukchi Seas, off the north coast of Alaska. The U.S. Geological Survey estimated in a 2008 study that offshore Alaska holds almost 30 billion barrels of oil and 221 trillion cubic feet of natural gas.

In July 2012, Shell temporarily lost control of its Noble Discoverer rig, which almost ran aground. Shell’s oil spill response ship also failed inspections, which delayed drilling. Shell ultimately had to throw in the towel for the year as the summer season drew to a close. Finally, on December 31, Shell’s Kulluk ship ran aground as the company was towing it out of Alaskan waters. The events forced Shell to take a step back, and the company announced in February 2013 that it would suspend its drilling campaign for the year. It hasn’t returned.

[..] … earlier this year, a court issued a critical setback to the oil company, ruling that the Interior Dept. didn’t follow the law in an earlier Arctic auction. In response to the ruling, Shell’s new CEO Ben van Beurden cancelled drilling for yet another year. “This is a disappointing outcome, but the lack of a clear path forward means that I am not prepared to commit further resources for drilling in Alaska in 2014,” he said.

Van Beurden has also embarked upon a $15 billion two-year divestment program, with the intention of shedding higher cost assets around the world in an effort to improve Shell’s financial position, which had deteriorated in recent quarters due to high-cost “elephant projects.” That would suggest that the Arctic program could get the axe.

Big Oil, Shell, Exxon, Total, BP and others, are desperate for additional reserves. Exxon’s output fell 5.7% last year. If these companies let options expire that they paid millions for, something’s wrong. In simple terms: they can’t get to the resources at a price that’s economically viable.

The Oilprice article is based on this from FuelFix. And while we’re at it, let’s delve a bit deeper, so at the end of the day we understand what is happening as best we can.

Oil Companies Forfeit Arctic Drilling Rights

Oil companies that locked up more than 1.3 million acres of the Beaufort Sea for drilling in 2007 have since relinquished nearly half that territory. The industry’s appetite for tapping those Arctic waters may be waning even as the Obama administration plans to auction off more of the area. Oil companies have ceded rights to drill on roughly 584,000 acres[..]

… all but seven of the 141 still-active oil and gas leases in the Beaufort Sea along Alaska’s northeast coast are partly or completely held by a single firm, Shell [..] “Nearly half of the leases purchased in the 2003 to 2007 lease sales have been allowed to expire as company after company decides to forgo or delay activities in the U.S. Arctic Ocean …

Still on Tuesday, the Obama administration took the first formal steps to do precisely that, inviting oil companies, environmentalists, Alaska residents and other stakeholders to weigh in on what parts of the U.S. Beaufort Sea should be open for leasing during a 2017 auction. The Interior Department’s Bureau of Ocean Energy Management also has asked for public input on what coastal waters – from California and Alaska to the Gulf of Mexico – should be available for leasing from 2017 to 2022. [..]

Interior Department officials have stressed they want to balance any future oil development in the Arctic with preservation of the area’s unique ecosystem and subsistence fishing in the region. So far, the ocean energy bureau is continuing to work on the Chukchi Sea sale, even without a single specific industry nomination for territory that should be sold off. The agency was flooded with maps and other data suggesting areas that should be off limits from local communities and conservation groups.

Administration officials have suggested they are looking for ways to get more input from oil companies as they decide whether to hold the Chukchi Sea auction or cancel it. [..]

But oil companies have struggled to tap the potential lurking under those remote and icy waters — vividly illustrated by the series of mishaps that befell Shell as it drilled exploratory wells in the Chukchi and Beaufort seas two years ago. A specialized, first-of-its-kind oil spill containment system was not ready on time, engines discharged more air pollution than authorities had permitted to be released and the company’s Kulluk drilling unit ended up beached on a rocky Alaskan island’s shore on Dec. 31, 2012. [..]

Many of the forfeited Beaufort Sea oil leases documented by Oceana may have simply been allowed to expire — the likely fate for 39 blocks sold for $9 million in a 2003 auction. Others may have been relinquished early. Industry representatives say the decline in active Beaufort Sea oil leases represents a natural release of acreage based on individual company’s decisions about what they believe to be the most promising prospects.

Arctic oil exploration is also an expensive proposition that may be tough for even well-capitalized companies to justify amid an onshore drilling boom.

Shell has 100% ownership of 406,283 leased Beaufort Sea acres and 40% ownership in an additional 310,573 acres where leases are jointly held with ENI and Repsol. Outside of Shell and BP’s close-to-shore operations, ENI and Repsol are the only other companies holding active Beaufort Sea leases, about 23,861 acres’ worth. That’s a big contrast from 2007, when seven companies held active leases in the Beaufort Sea, including France’s Total, Canada’s EnCana Corp., Armstrong Oil and Gas, and Conoco.

While there seems to be a subtle way to blame the greens for the giant mishaps in there, the overall message is clear: it just can’t be done. It’s not viable at present prices. And before you dream away about the industry benefits of $200 oil, don’t forget that if prices were to go up substantially, a lot less people would be able to afford them. Catch 22.

Someone may still try at some point in the – increasingly desperate – future, but by then oil and gas won’t be anywhere near the industry it is today, and has been for 50-100 years. The money won’t be there, not on the supply side, and not on the demand side.

Obviously, the issue with that is fossil fuels give nations and societies, as well as corporations and individuals, power. Energy=power.

We presently, each of us in the west, have 200+ energy slaves at our disposal night and day, provided by coal, oil and gas. As a group, we maintain our domination over the rest of the world by applying the energy provided by oil fossil fuels to our defense against ‘others’, and to attacking them where we see fit.

If we stop doing that, if we run out, we risk being overrun. To prevent that from happening, we will attempt to grab, and hold on to, to as much as we can from what is left. But so do the ‘others’.

Arctic and shale are about the only ‘new’ sources of oil and gas we have, or had, and the Saudi’s won’t be able to make up for the difference. Not even close.

What is happening at this very moment in the shale industry and in the Arctic is like a big angry bull waving a bright red flag and waiting to have a go at the torero (that would be us).

The only possible way to go from here is to lower your energy demand, and your reliance on the energy demand of your society, as much as you can. 90% is a good and viable number to go for. If you don’t, you will be swept up in the biggest and deadliest battle ever.

The westworld will be hit hard and bloody by a financial collapse well before the energy war comes, and it’s therefore not much use right now to focus on energy, but in the end it’s really the same battle. It’s a very primitive fight for power. That’s what we do when push comes to shove. You too.

• Shale Gas: ‘The Dotcom Bubble Of Our Times’ (Telegraph)

Public opinion has been divided very starkly indeed by the government’s invitation to energy companies to apply for licences to develop shale gas across a broad swathe of the United Kingdom. On the one hand, many environmental and conservation groups are bitterly opposed to shale development. Ranged against them are those within and beyond the energy industry who believe that the exploitation of shale gas can prove not only vital but hugely positive for the British economy. Rather oddly, hardly anyone seems to have asked the one question which is surely fundamental: does shale development make economic sense? My conclusion is that it does not. That Britain needs new energy sources is surely beyond dispute. Between 2003 and 2013, domestic production of oil and gas slumped by 62pc and 65pc respectively, while coal output decreased by 55pc.

Despite sharp increases in the output of renewables, overall energy production has fallen by more than half. A net exporter of energy as recently as 2003, Britain now buys almost half of its energy from abroad, and this gap seems certain to widen. The policies of successive governments have worsened this situation. The “dash for gas” in the Nineties accelerated depletion of our gas reserves. Labour’s dithering over nuclear power put replacement of our ageing reactors at least a decade behind schedule, and a premature abandonment of coal has taken place alongside an inconsistent, scattergun approach to renewables. Those who claim that Britain faces an energy squeeze are right, then. But those who claim that the answer is using fracking to extract gas from shale formations are guilty of putting hope ahead of reality. The example held up by the pro-fracking lobby is, of course, the United States, where fracking has produced so much gas that the market has been oversupplied, forcing gas prices sharply downwards.

The trouble with this parallel is that it is based on a fundamental misunderstanding of the US shale story. We now have more than enough data to know what has really happened in America. Shale has been hyped (“Saudi America”) and investors have poured hundreds of billions of dollars into the shale sector. If you invest this much, you get a lot of wells, even though shale wells cost about twice as much as ordinary ones. If a huge number of wells come on stream in a short time, you get a lot of initial production. This is exactly what has happened in the US. The key word here, though, is “initial”. The big snag with shale wells is that output falls away very quickly indeed after production begins. Compared with “normal” oil and gas wells, where output typically decreases by 7pc-10pc annually, rates of decline for shale wells are dramatically worse. It is by no means unusual for production from each well to fall by 60pc or more in the first 12 months of operations alone.

• Oil Companies Abandoning Arctic Plans, Letting Leases Expire (OilPrice)

After years of mishaps and false starts, some oil companies are giving up on drilling in the Arctic. Many companies have allowed their leases on offshore Arctic acreage to expire, according to an analysis by Oceana that was reviewed by Fuel Fix. Since 2003, the oil industry has allowed the rights to an estimated 584,000 acres in the Beaufort Sea to lapse. It wasn’t supposed to happen this way. The oil industry was once enormously optimistic about drilling for oil in the Beaufort and Chukchi Seas, off the north coast of Alaska. The U.S. Geological Survey estimated in a 2008 study that offshore Alaska holds almost 30 billion barrels of oil and 221 trillion cubic feet of natural gas. Shell Oil has been the leader in the Arctic, venturing into territory where other oil companies were unwilling to go. It promised billions of dollars in revenue and enhanced energy security. But it ran into a seemingly endless series of accidents and setbacks.

In 2009, the Department of Interior approved Shell’s drilling plan. But the following summer, a court suspended Shell’s lease until the offshore regulators could conduct a more thorough scientific review. After providing more detail, Shell received another go-ahead, with high expectations for drilling in the summer of 2012. But that proved to be a fateful year for Shell’s Arctic campaign. In July 2012, Shell temporarily lost control of its Noble Discoverer rig, which almost ran aground. Shell’s oil spill response ship also failed inspections, which delayed drilling. Shell ultimately had to throw in the towel for the year as the summer season drew to a close. Finally, on December 31, Shell’s Kulluk ship ran aground as the company was towing it out of Alaskan waters. The events forced Shell to take a step back, and the company announced in February 2013 that it would suspend its drilling campaign for the year. It hasn’t returned.

Debt and Energy, Shale and the Arctic - The Automatic Earth

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