Whatever happened to shale gas?

In certain circumstances, no news is good news. Sometimes, though, it tells its own story, especially when it we are experiencing something akin to a news blackout on an issue which should be constantly in the public eye.

That issue is shale gas, the great white hope of the energy market which, supposedly, was going to rescue our economy with the promise of massive volumes of cheap energy. By now, we should be getting some idea of the scale of the bonanza in the UK, but there have been no public reports following early test drilling.

The most recent media report, however, might give some clue as to why we are hearing so little. This is from the South China Morning Post which tells of China’s shale gas ambition facing a “reality check”. Commercialisation of the mainland’s rich shale gas resources, the paper says, is proving difficult. Challenging geology, shortage of water near the drilling sites and high population densities are all conspiring to make drilling more expensive and less certain than predicted.

Last April, the BBC had already pre-empted the language of the South China Morning Post, proclaiming that the “shale industry faces global reality check”.

It told us that Poland was seen as the poster boy for European shale gas but, according to Stuart Elliott, managing editor at the industry information provider Platts, “the Polish experiment has been a failure to date”. Enticed by seemingly abundant reserves and a government keen to kick-start production, US energy majors moved in, hoping to replicate their domestic success on foreign shores.

Thirty to 40 wells were planned for 2013. To date, there is just one well producing enough gas to be economically viable. Earlier, we had news of companies deserting Poland. Exxon Mobil, Talisman and Marathon have all pulled out, while Chevron, Conoco Phillips and San Leon are persevering.

In the UK, alarm bells have been sounding for some time, and for some of the same reasons. Chatham House in December 2013 was telling us that knowledge of the geology of shale plays in the United Kingdom was in its infancy.

Not only are shale plays notoriously different, so too are wells on the same play, it said. Costs also change as the shale gas operations move along the learning curve. This uncertainty is compounded by the uncertainty over the externalities of environmental damage that may be associated with shale gas operations.

In March of this year, the Financial Times was also sounding less than enthusiastic, starting off by setting up John McGoldrick, chief executive of unconventional gas company Dart Energy, to say: “The shale gas potential is enormous here, even if we just get one percent of the in-place estimates”.

But just because gas is recoverable, it doesn’t mean it makes economic sense to do so, the paper said. Explorers must drill wells to discover natural gas flow rates. Cuadrilla was the only company to have fracked in the UK and no wells had been fracked since an 18-month moratorium had been lifted more than a year preciously.

Exploration is expensive and it is easy to spend more on drilling a well than the value of gas that comes out of the ground. Drilling costs are significantly higher in the UK than the US. The nascent supply chain and long licensing process were largely to blame.

“At the minute, the economic equation is negative”, said Alex Grant at investment bank Jefferies. “It’s costing [UK explorers] well over $10m to drill a well – compared to say $4m in the US – and the gas they can get out is worth a lot less than that. If this is the best they can do then the equation doesn’t work on a per well basis and it doesn’t matter that they have huge amounts of gas”, he said.

And seriously expensive it was turning out to be, with a report in April telling is that the investment needed to bring 4,000 wells into action would cost £33 billion. By then, though, Bill Powers in Forbes was “popping the shale gas bubble”. America’s shale gas resources and reserves have been grossly exaggerated and today’s level of shale gas production is unsustainable, he was saying.

In fact, he said, due the distortions of zero interest rates and other factors, an enormous shale gas bubble has developed. Like all bubbles, this one will pop sooner than expected and when it does, the aftermath will be very unpleasant.

From a standing start a dozen years ago, shale gas production had grown to account for nearly 50 percent of America’s gas production. However, the shale gas boom was rapidly maturing and it was quickly approaching a point where shale gas production was heading into decline. In fact, the majority of shale gas basins in America were already exhibiting declining production.

This had long been picked up by industry sources, and even Bloomberg had been warning of it earlier in the year. Freshly fracked wells had sent US oil production soaring 39 percent since 2011, it said. That had been the steepest climb in history, and if production had continued apace, the US had been set to become the world’s biggest source of oil by 2015. The problem, though, was that the production was declining faster than expected.

The average flow from a shale well drops by about 50 percent to 75 percent in the first year, and up to 78 percent for oil, we were told by Pete Stark, senior research director at IHS Inc. “The decline rate is a potential show stopper after a while,” said Stark. “You just can’t keep up with it”.

The industry has so far been able to live with the decline curve problem because operators have been able to scratch out better initial production in wells, Stark said. “If you don’t have that improvement, then you get stuck after a while and have to drill more and more wells just to stay even”, Stark said. As depletion rates increased, an FT correspondent described the problems as “crippling”.

Exactly the same problems are being found with gas production and the New York Times has been on the case for years – with caveats.

By May this year, though, the House of Lords select committee on economic affairs was saying that exploration and appraisal was urgently needed to establish the economic potential of the UK’s shale gas and oil resource. And there lies as neutral an assessment as you can get. There are currently no official reserve estimates. The UK reserves could be anywhere from zero to substantial. And without those estimates, the commercial scale of shale gas extraction cannot be forecast.

Still the questions on the US scenario abound. “The staying power of the American shale boom is limited by natural, macroeconomic, and microeconomic factors, none of which will disappear on the strength of unconstrained enthusiasm”, said Dajahi Wiley of Oilprice in June. And in September, the situation was once again being called this decade’s version of the dotcom bubble.

Already in July, the Telegraph had been warning that the British shale industry had a very long way to go, making any investment extremely high-risk. It may be impossible to get the shale gas out of the ground economically and there had been no well tests that had proven the resources was commercially viable, this paper said. Yet, in Poland, it is estimated that about 150-300 drills will be needed to produce enough data to estimate the size of shale gas deposits.

However, even if UK shale gas reserves are zero, or the industry fails to be economically viable, it may not matter. Another potential source is coming up fast – methane hydrate, which potentially exists in such quantities that it can keep the world supplied for 1,500 years.

For sure, it would be preferable to have indigenous supplies of gas, but the prospect of the world running out of gas any time soon is looking increasingly remote. What we cannot do, though – at this stage, at least – is rely on UK-produced shale gas as a policy option. The UK shale revolution may happen, but it may not.

Source: http://eureferendum.com/