What the Frack? Popping the Gas Bubble

Richard Heinberg

For the past three or four years media sources in the
U.S. trumpeted the “game-changing” new stream of natural
gas coming from tight shale deposits produced with the
technologies of horizontal drilling and hydrofracturing.
So much gas surged from wells in Texas, Oklahoma,
Louisiana, Arkansas, and Pennsylvania that the U.S.
Department of Energy, presidential candidates, and the
companies working in these plays all agreed: America can
look forward to a hundred years of cheap, abundant gas!
Some environmental organizations declared this means
utilities can now stop using polluting coal-and indeed
coal consumption has plummeted as power plants switch to
cheaper gas. Energy pundits even promised that Americans
will soon be running their cars and trucks on natural
gas, and the U.S. will be exporting the fuel to Europe
via LNG tankers.

Early on in the fracking boom, oil and gas geologist Art
Berman began sounding an alarm (1) . Soon
geologist David Hughes joined him, authoring an
extensive critical report for Post Carbon Institute (2) whose Foreword I was happy to contribute.

Here, one more time, is the contrarian story Berman and
Hughes have been telling: The glut of recent gas
production was initially driven not by new technologies
or discoveries, but by high prices. In the years from
2005 through 2008, as conventional gas supplies dried up
due to depletion, prices for natural gas soared to $13
per million BTU (prices had been in $2 range during the
1990s). It was these high prices that provided an
incentive for using expensive technology to drill
problematic reservoirs. Companies flocked to the
Haynesville shale formation in Texas, bought up mineral
rights, and drilled thousands of wells in short order.
High per-well decline rates and high production costs
were hidden behind a torrent of production-and hype.
With new supplies coming on line quickly, gas prices
fell below $3 MBTU, less than the actual cost of
production in most cases. From this point on, gas
producers had to attract ever more investment capital in
order to maintain their cash flow. It was, in effect, a
Ponzi scheme.

In those early days almost no one wanted to hear about
problems with the shale gas boom-the need for enormous
amounts of water for fracking, the high climate impacts
from fugitive methane, the threats to groundwater from
bad well casings or leaking containment ponds, as well
as the unrealistic supply and price forecasts being
issued by the industry. I recall attempting to describe
the situation at the 2010 Aspen Environment Forum, in a
session on the future of natural gas. I might as well
have been claiming that Martians speak to me via my
tooth fillings. After all, the Authorities were all in
agreement: The game has changed! Natural gas will be
cheap and abundant from now on! Gas is better than coal!
End of story!

These truisms were echoed in numberless press articles-
none more emblematic than Clifford Krauss’s New York
Times piece, “There Will Be Fuel,” (3) published November 16, 2010.

Now Krauss and the Times are singing a somewhat
different tune. “After the Boom in Natural Gas,” co-
authored with Eric Lipton and published October 21 (4),
notes that “. . . the gas rush has . . . been a money
loser so far for many of the gas exploration companies
and their tens of thousands of investors.” Krauss and
Lipton go on to quote Rex Tillerson, CEO of ExxonMobil:
“We are all losing our shirts today. . . . We’re making
no money. It’s all in the red.” It seems gas producers
drilled too many wells too quickly, causing gas prices
to fall below the actual cost of production. Sound
familiar?

The obvious implication is that one way or another the
market will balance itself out. Drilling and production
will decline (drilling rates have already started doing
so) and prices will rise until production is once again
profitable. So we will have less gas than we currently
do, and gas will be more expensive. Gosh, whoda thunk?

The current Times article doesn’t drill very far into
the data that make Berman and Hughes pessimistic about
future unconventional gas production prospects-the high
per-well decline rates, and the tendency of the drillers
to go after “sweet spots” first so that future
production will come from ever-lower quality sites. For
recent analysis that does look beyond the cash flow
problems of Chesapeake and the other frackers, see “Gas
Boom Goes Bust”  (5) by Jonathan Callahan, and Gail
Tverberg’s latest essay, “Why Natural Gas isn’t Likely
to be the World’s Energy Savior” (6).

David Hughes is working on a follow-up report, due to be
published in January 2013, which looks at unconventional
oil and gas of all types in North America. As part of
this effort, he has undertaken an exhaustive analysis of
30 different shale gas plays and 21 shale/tight oil
plays-over 65,000 wells altogether. It appears that the
pattern of rapid declines and the over-stated ability of
shale to radically grow production is true across the
U.S., for both gas and oil. In the effort to maintain
and grow oil and gas supply, Americans will effectively
be chained to drilling rigs to offset production
declines and meet demand growth, and will have to endure
collateral environmental impacts of escalating drilling
and fracking.

No, shale gas won’t entirely go away anytime soon. But
expectations of continuing low prices (which drive
business plans in the power generation industry and
climate strategies in mainstream environmental
organizations) are about to be dashed. And notions that
the U.S. will become a major gas exporter, or that we
will convert millions of cars and trucks to run on gas,
now ring hollow.

One matter remains unclear: what’s the energy return on
the energy invested (EROEI) in producing “fracked” shale
gas? There’s still no reliable study. If the figure
turns out to be anything like that of tight “fracked”
oil from the North Dakota Bakken (6:1 or less, according
to one estimate), then shale gas production will
continue only as long as it can be subsidized by higher-
EROEI conventional gas and oil.

In any case, it’s already plain that the “resource
pessimists” have once again gotten the big picture just
about right. And once again we suffer the curse of
Cassandra-though we’re correct, no one listens. I keep
hoping that if we’re right often enough the curse will
lift. We’ll see.

(1) http://www.theoildrum.com/node/6785

(2) http://www.postcarbon.org/report/331901-report-will-natural-gas-fuel-america

(3) http://www.nytimes.com/2010/11/17/business/energy-environment/17FUEL.html

(4) http://www.nytimes.com/2012/10/21/business/energy-environment/in-a-natural-gas-glut-big-winners-and-losers.html

(5) http://www.theoildrum.com/node/8900

(6) http://ourfiniteworld.com/2012/10/17/why-natural-gas-isnt-likely-to-be-the-worlds-energy-savior/

SOURCE: Republished with permission from PORTSIDE (See Links) distributing “Gas Bubble Leaking, About to Burst” by Richard Heinberg, Post Carbon Institute, October 22, 2012
http://www.postcarbon.org/blog-post/1262435-gas-bubble-leaking-about-to-burst

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One response to “What the Frack? Popping the Gas Bubble

  1. The fad’s that the energy industry goes through is much more dramatic and impacting than any other industry. At least when a bad fashion fad happens it doesnt ruin millions of peoples lives.

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