Off the keyboard of Steve from Virginia
Published on Economic Undertow on February 19, 2012
You Know You’re In Trouble When ..
… the President lies on TV about energy:
Discuss this article at the Epicurean Delights Smorgasbord inside the Diner
According to the president, the country has 100 years’ supply of natural gas … everyone knows this, even the president who is a square, the last to know everything. Right?
When a president mentions energy in any speech is a big red flag. The word energy from the president always has ‘problem’ lurking somewhere in the background: remember Jimmy Carter. The president suggests our problem is a matter of perception: this must be ‘the audacity of something-or-other’ that the ‘frantic urgency of nothing in particlar’ that have become part of the national conversation as a consequence of Mr. Obama’s presidency.
Frantic urgency to waste: keep in mind at all times that every single word and phrase of the president’s State of the Union Address is scrutinized and measured by flotillas of lawyers and professionals … and algorithms. The president does not write the speech, highly paid national security specialists … and algorithms … write the speech. Every word in the speech is there for a specific purpose. The president just didn’t blurt out by accident that the country has 100 years supply of natural gas: this misstatement was calibrated … by an algorithm.
The algorithm conveniently overlooked proven reserves or the rate of consumption, whether that rate would increase or decrease. For example, if we use no gas we have hundreds of thousands of years of supply. If the US had the same proven reserves as Saudi Arabia — or a bit better – we would have 13 years at the current rates of consumption.
Wiki — and the US EIA — gives the US about 9 trillion cubic meters of proven reserves.
At the current US rate of consumption, Russia, with six-times US reserves, would give us 80 years supply. Perhaps the president’s statement signals the upcoming invasion of Russia! The only way the US would get 100 years out of Russia’s massive reserves would be with stringent conservation! It would also mean no gas at all for Europe, the Baltic states, Belarus or Ukraine … or Russia itself.
Notice the map @ the right. Surprisingly out of focus on the high-definition TV, the map is overlapped with suggestive continent-sized giant, gassy bubbles. The map itself is made up of pink blobs giving the impression that America is bulging with natural gas … that a pin pricking the ground anywhere will cause the gas to flow. There are only a few areas in the country that are gas deposit free: the Eastern Seaboard, Minnesota, Nevada and the Pacific Northwest.
Notice the gas- and oil bearing formations. The map is misleading because there are only a few high-output hot spots within each mauvey-pink play. Other areas are not productive or deplete very rapidly. Once production is underway, the hoped-for vast resources generally turn out to be overstated. Gas or oil that cannot be retrieved may as well not exist.
The productivity of gas or oil wells follows a curve: for every hot spot a larger number of wells must be drilled that produce an average amount then rapidly deplete. There are also large numbers of dry holes. The technology that everyone raves about doesn’t make individual wells more productive but rather cuts the number of (costly) dry holes … technology such as ’3D seismic’ (reflection seismology).
The president never mentions cost: gaining gas from shale formations requires companies to drill far more wells than were required to extract from conventional hydrocarbon-bearing formations. He never mentions the customers ability to pay for the wells, nor does he mention the effects of drilling and hydrofracking everywhere in the country on the nation’s drinking water supply. He never mentions whether the water we have is enough … to extract the promised oil and gas.
It is the fact of the lie that is more important than the content or nature of the lie. It insists that within this government, nothing is true until it is officially denied.
You know you are in trouble when the president is not lying when he is lying.
The US actually is bubbling with natural gas, the president is right! The problem is the gas is dispersed and flows are intermittent and irretrievable. Methane gas leaks out of landfills, from marshes, from undersea clathrates, from melting permafrost, leaking around fracked wells and coal mines, it emerges from animal waste, from peat bogs … none of these are useful ‘reserves’ for the natural gas industry or its customers. Instead, the gas circles the globe in the atmosphere, contributing to climate change. Millions of cubic feet of gas are simply flared:
(TRC Solutions) Flaring natural gas from Bakken oil well. Funds are always available to lavish on waste, proper husbandry of capital and gaining the maximum return is unaffordable. Here is the perverse waste-based US energy policy made manifest: citizens and firms are given every incentive to burn through non-renewable natural resources as fast as possible. Flaring suggests that the world will come to an end if the associated oil is kept in the ground for a few more months until gas transmission infrastructure can be installed.
It also suggests there isn’t enough oil or gas to worry about, not enough to pay the bills.
You know you’re in trouble when corruption and influence peddling becomes so commonplace as to be invisible, the background noise behind ordinary business-as-usual.
Comes now another billionaire … to take his rightful place in the leadership cadre, as potential boss of the Department of Energy, (Washington Post):
Billionaire has unique role in official Washington: climate change radical
When Thomas Steyer — a San Francisco billionaire and major Democratic donor — discusses climate change, he feels as if one of two things is true: What he’s saying is blindingly obvious, or insane.
“I feel like the guy in the movie who goes into the diner and says, ‘There are zombies in the woods and they’re eating our children,’ ” Steyer said during a recent breakfast at the Georgetown Four Seasons, his first appointment in a day that included meetings with a senator, a White House confidant and other D.C. luminaries.
It’s a somewhat shocking statement for someone who’s in the running to succeed the cerebral Steven Chu as energy secretary. Granted, he’s a long shot — the leading contender is MIT professor Ernest Moniz, who served as the department’s undersecretary during the Clinton administration …
Unsurprising that leading nominee Moniz is a Clinton retread and nuclear industry whore. Recycled insiders from previous regimes has been a characteristic of the Obama administration … bet the rent on Moniz (Reuters).
Moniz, who was undersecretary at the Energy Department during the Clinton administration, is a familiar figure on Capitol Hill, where he has often talked to lawmakers about how abundant supplies of U.S. natural gas will gradually replace coal as a source of electricity. Moniz is director of MIT’s Energy Initiative, a research group that gets funding from industry heavyweights including BP, Chevron, and Saudi Aramco for academic work on projects aimed at reducing climate-changing greenhouse gases. (Reporting by Roberta Rampton and Jeff Mason; Editing by Paul Simao)
While Moniz is a tycoon enabler, Steyer is an actual tycoon. He offers more upside to Obama than the technocrat Moniz. With Steyer’s connections, Obama could wind up being somebody after he’s finished with his probationary period as president … Steyer might even capitalize an Obama hedge fund!
Steyer is taking on a more prominent public role. On Sunday, he spoke to a crowd that organizers estimated at 35,000, gathered on the Mall to call for a stronger national climate policy.“I’m not the first person you’d expect to be here today. I’m not a college professor and I don’t run an environmental organization,” he said. “For the last 30 years I’ve been a professional investor and I’ve been looking at billion-dollar investments for decades and I’m here to tell you one thing: The Keystone pipeline is not a good investment.” The move stems from an uncomfortable conclusion Steyer has reached: The incremental political victories he and others have been celebrating fall well short of what’s needed to avert catastrophic global warming. “If we can win every single battle and lose the war, then we’re doing something wrong,” he said, moments after consuming two mochas on the table before him.The simultaneous mocha-drinking is understandable: Steyer had arrived just hours before on the red-eye, which he chooses over a private jet to reduce his carbon footprint. He may have built one of the nation’s most successful hedge funds — Farallon Capital Management, named after the waters off San Francisco Bay teeming with great white sharks — but he’s not flashy.
It’s good to know billionaires are ordinary folks just like you and me … while at the same time inhabitants of the rarefied precincts of sacred money. As a consequence, star-struck Eilperin avoids shining any light into the dark corners of Steyer’s fund, (Wikipedia):
Tom Steyer founded Farallon in January 1986 with $15 million in seed capital. Previously, Steyer worked for San Francisco-based private equity firm Hellman & Friedman, as a risk arbitrage trader, under Robert Rubin, at Goldman Sachs and in Morgan Stanley’s corporate mergers and acquisitions department.
Rubin … Goldman-Sachs … take it back: Steyer is certainly equally qualified- if not more so than ‘Brand X’ candidate Moniz. In Washington, DC, where money talks, Steyer carries his own lobbyist around in his wallet.
Steyer knows coal because Farallon once owned the 2d largest coal-fired power plant in Indonesia! The following is from a report criticizing Steyer’s handling of university endowment funds (Amanda Ciafone, Working Group on Globalization and Culture, Yale University):
(Un)Fa(i)rallon in the Endowment:
Tracking Yale’s Global Capitalism In 2002, when Farallon purchased a 51% stake of Indonesia’s Bank Central Asia for $520 million dollars the fund could not avoid the high visibility of mainstream media attention. Bank Central Asia was the “crown jewel” of Indonesia’s banking sector with approximately $10 billion in assets and eight million customer accounts. In 1998, when the Asian financial crisis brought on by foreign investment and currency speculation brought Indonesia’s banks “to the brink of ruin,” the Indonesian government nationalized the bank, bailing it out and taking on its debtors by replacing unpaid loans with government bonds.In line with demands from the IMF, the sale of Bank Central Asia was seen as crucial to the overall success of the government’s privatization program: “international lenders and the IMF placed great emphasis on BCA’s divestment as a yardstick of economic reform, threatening to withhold financial aid if it was not completed.” Private investors could now buy an Asian bank on the cheap. Although it offered 25 rupiah a share less and has never run a bank, Farallon was chosen over other bidders. In fact, Farallon had won a huge asset for Yale and its other investors; for the $520 million it paid, it bought a bank predicted to earn $650 million in government interest payments a year for the next few years. In actuality, the Indonesian government was paying Farallon interest on its own bonds originally issued to save the bank that Farallon now owns.
Ciafone questions how non-Indonesian Farallon could buy the bank with both the lower bid and zero-experience in running a financial institution? It emerged that Farallon was well connected in Indonesia and could leverage its friends in high places (IMF) better than the other financiers.
Some of Farallon’s (Yale’s) money was invested in Paiton I, Indonesia’s first private power venture and “one of the most expensive power deals of the decade.” As the first private power project in the country the huge Paiton I coal burning power plant set the tone for subsequent private power ventures which “cut overpriced, politically influenced deals that undermined the Indonesian economy.” Although little is known about Farallon’s connection to the Paiton project, the financial press revealed that Farallon held a “controlling position in the $180 million [bond] issue” of Indonesia’s Paiton I plant. But much is known about the nature of the Paiton I project; three Wall Street Journal investigative articles detail the crony capitalism, price gauging, and environmental risks surrounding the plant in Indonesia.
It’s hard to say who would be worse as DOE Boss: captive insider Moniz or finance criminal Steyer. Both are creatures of the money-establishment: the end result is more of the current status-quo: lies and continuing incentives to waste, more theft from the citizens by tycoons. Regardless who whomever becomes DOE Boss, don’t expect any real change as to do so might adversely effect tycoons’ two-fisted lifestyles.
Meanwhile, you know you are in trouble when the Federal Reserve is lending $85 billion dollars to the Federal Government and the mortgage business every month.
It is both worrisome and suggestive that the central bank is such a large lender to the government. Are there no other lenders? This is a tremendous red flag: this sort of direct monetization suggests the government is a credit risk.
Is is also worrisome and suggestive when the Fed is lending billions every day to the mortgage industry. If the industry was solvent it would not need a continuing $40 billion-per-month bailout! At the same time, it is worrisome that the Fed is guaranteeing bank deposits. When the Fed accepts securities as collateral during open market operations such as ongoing Quantitative Easing (QE) it credits the banks with ‘excess’ reserves. These reserves are never deployed (into circulation) unless the banks’ balance sheets are collapsing … as when there are runs on the banks.
Does the Fed know something about the banks we should worry about?
You know you are in trouble when the inflation/deflation argument is still with us.
Deflation tends to be described as a change in prices for goods, a fall in the general price level or a contraction of credit and available money. Rather, deflation is where the cost of repayment of any debt is greater in real terms than the worth of the debt.
Current deflation is meaningless out of context of debt and energy. The world is running out of energy and has taken on $640 trillion$ in debt in order to run out of energy.
There is debt deflation when the cost of repaying a debt increases as the debt is repaid, because the act of repayment extinguishes currency. The scarcity premium of currency increases faster than the rate at which the debt(s) can be retired. In fact, debt repayments by 3d parties has the effect of rendering all debts unaffordably costly to repay. Read Irving Fisher’s paper on ‘Debt Deflation’ (1933).
Energy deflation occurs when energy becomes scarce and more expensive in real terms, there is a scarcity premium added to fuel that the customers cannot afford … fuel becomes too valuable to waste by driving tens of millions of useless cars in circles from gas station(s) to gas station(s).
Fuel is hoarded or unaffordable, so is money used to buy fuel. If currency is more useful to gain fuel than credit, there is no credit. The cycle is broken only when there is no fuel or no demand for it.
Economists are blind to the distinction between ledger loans (amounts noted on spreadsheets as due and payable) and circulating money.
Central banks offer ledger loans as do private sector lenders. The latter offer unsecured loans to customers. Ledger loans are credits made to borrowers’ accounts, funds thereto are simply ‘invented’. As the name implies, circulating money is loans that have changed hands to 3d (or more) parties in the marketplace where their worth is determined.
Banks’ offering unsecured loans is called ‘inflation’, demanding circulating money as repayment for unsecured loans is called ‘deflation’. Since most repayment is made by taking out greater loans, inflation tends to be a background condition. Unsecured loans represent economic ‘growth’ as their tally makes up the components of GDP.
Private sector lenders demand repayment in circulating money which is always in limited/finite supply. Borrowers cannot offer ledger repayments! They must earn, borrow or steal the funds demanded for repayment from others who then do not have the funds. Repayment reduces the amount of money in circulation which reduces GDP. When repayment demands exceed the amount of new loans there is a recession.
Clearly, offering more ledger credit — which costs very little — and gaining circulating money in return — which costs everything — is good business for lenders. Everyone is robbed whether they borrow or not because of the increased scarcity and cost of needed circulating money!
Central banks cannot make unsecured loans (loans in excess of collateral) therefor there is no such thing as central bank ‘money printing’. Because reserve banks have no capital structure — they are reserve banks after all — they cannot extend unsecured credit. Any central bank that offers unsecured loans is instantly and permanently insolvent!
This is not an Economic Undertow supposition but a condition like gravity. If ordinary commercial or depository banks are rendered insolvent by excess leverage and bad loans, a central bank which leverages itself while taking on the bad loans of its clients is ruined just the same as the other banks, for the same reason!
Under such circumstances, there is no effective lender of last resort, the only real collateral for all loans is currency on deposit. There are bank runs to redeem as much as possible … (as are underway in Europe and commencing in Japan).
The outcome of the discussion is delay in implementing reforms. Meanwhile, there is ongoing energy- and resource waste.
You know you are in trouble when your world burns 88.8 million barrels of petroleum per day … and is fantastically in debt by trillions of dollars!
That petroleum is gone forever. Another 88.8 million barrels will flush down the toilet tomorrow and another 88.8 million the day after … day after day after day!
and the day after that. What do we get in return for 88.8 million barrels per day? People laugh at the Medievals but they left behind some nice towns and useful buildings. What do we have to show … for the million barrels … burned up for nothing every single day for decades?
We have some used cars, some potholed ‘infrastructure’, millions of ugly buildings … we’re bankrupt.
In order to burn the 88.8 million barrels we’ve had to borrow billions of dollars from bankers and finance every day, as well, The total amount we owe to the financiers is $640 TRILLION dollars (Bank for International Settlements, PDF warning)!
Don’t listen to the soothing bromides of the analysts. Each swap noted on BIS ledgers cost someone real money, they hedge something real, the total system credit including that derived by way of foreign exchange.
We burn instead of holding onto our oil until someone can figure out something better to do with it. We rush to burn as much as possible as fast as possible. We want to burn it faster so that we can change some ‘indicators’ and allow tycoons, ‘entrepreneurs’ and ‘innovators’ to borrow some more.
We are like a family that has inherited a palace: we have burned all the furniture in order to keep warm now the furniture is gone we must burn the house. Well-dressed salesmen knock on the door offering efficient saws and furnaces to cut the house apart and burn it.
Madness … whatever is happening to us we deserve it.
Off the keyboard of Monsta666
Discuss this article at the Energy Table inside the Diner
Much of the mainstream media in the US bills shale gas as the next revolution that will push the country towards energy independence but the facts do not support these claims. Furthermore due to the high costs of extracting shale gas it is not economical to produce at current market prices. The effect of these low prices are already being felt from producers as drilling activity has decreased significantly throughout 2012 which has resulted in production levels plateauing.
It is likely that the US will peak in total natural gas production in the coming two years as peak production of conventional gas has already been reached and the high decline rates of shale gas make it very difficult to sustain even existing levels of production for a prolonged period of time due to the high levels of investment required to maintain exponential growth of drilling.
While the European region may have more reserves than the US and ultimately the problems will not be as acute the region is heavily dependent on Russia for its gas and will become increasingly dependent due to increasing consumption and reduced production in the EU region. As a result Europe will need to make some difficult decisions on how it procures its gas either from Russia or the Middle East which is rich in natural gas. Gaining access to the Middle East gas may prove to be difficult however due to the need for large investments in pipelines or LNG terminals. In addition to these financial (and possibly political) barriers there is likely to be strong competition from Asia and most particularly China for these natural gas resources as those economies grow faster than European countries.
Natural gas can come in various forms and this list should offer you a glance of the grades of natural gas available in the market:
|Conventional Gas – Consists primarily of methane but also contains other gases such as ethane, propane, other hydrocarbons, hydrogen sulphide, carbon dioxide and nitrogen.Although natural gas emits less C02 than other fossil fuels when burned it should be noted that methane itself is 72 times more potent than C02 as a greenhouse gas so any natural gas leakages in pipelines/LNG terminals will mean its advertised environmental advantages will be significantly reduced.|
|Condensate – Gases often found in oil wells and some gas wells. The gas found in these “wet” wells contain heavier hydrocarbons (such as pentane) which are found as a gas upon extraction but then condense to form liquids when reaching room temperature hence the term condensate.|
|Coal-bed Methane – Natural gas extracted from coal beds. This form of natural gas lacks hydrogen sulphide and is often called “sweet gas” because of this property. Coal-bed methane also contains less ethane and propane and none of the heavier condensate hydrocarbons.|
|Shale Gas – Natural gas found in shale rock. This form of natural gas has a slightly different composition to standard natural gas which can result in higher processing costs.  |
The importance of a global peak production of natural gas is somewhat less relevant than its peak coal or peak oil counterparts. This is because unlike coal or oil natural gas is not exported in large quantities. This is particularly true for the North American market as the costs of exporting natural gas over the Atlanta and Pacific oceans are excessively high. This makes the market for gas far less open and the closed nature of these markets is reflected in the huge differences in spot prices:
Natural gas prices obtained from BP Statistical Review of World Energy June 2012.
As a result of these closed markets it becomes more relevant to examine the time when natural gas will peak in each region. If we divide the world’s natural gas production into its respective continents we find the top three largest markets are the Europe, America and Asia Pacific.
|North America||Europe + Russia||Asia Pacific||Middle East||South America|
|2011 Total Consumption||863.8 billion cubic metres||1101.1 billion cubic metres||590.6 billion cubic metres||403.1 billion cubic metres||154.5 billion cubic metres|
|2011 Total reserves||10.8 trillion cubic metres||78.7 trillion cubic metres||16.8 trillion cubic metres||80.0 trillion cubic metres||7.6 trillion cubic metres|
|2011 % of world reserves||5.2%||37.8%||8.0%||38.4%||3.6%|
|2011 Production||864.2 billion cubic metres||1036.4 billion cubic metres||479.1 billion cubic metres||526.1 billion cubic metres||167.7 billion cubic metres|
|Year reserves are depleted||2023||2086||2046||2163||2056|
Data obtained from BP Statistical Review of World Energy June 2012.
|PROVEN RESERVES (1P) = Reserves that have a 90% or greater probability of being present, the term is often shortened to 1P.
PROBABLE RESERVES (2P) = Reserves that have a 50% chance of being present. 2P represents proven + probable reserves.
POSSIBLE RESERVES (3P) = Reserves that have only a 10% chance of being present. 3P represents proven + probable + possible reserves.
This figure of an 8% depletion rate equating to a 12.5 year supply is certainly a contentious and alarming point to make. It should be noted that other reputable sources such as the EIA arrive at similar figures claiming the US has a 13.7 year supply if taken on a R/P basis (R/P = Reserves/Production rate). In the case of the EIA it does stress however that discoveries currently exceed production rates. Still, this is quite different to the picture painted out by the media and even Obama who claimed that the US has enough natural gas to meet current needs for 100 years. This discrepancy over how long these reserves will last mainly stem from the fact that Obama included proven, probable, possible, speculative AND coal-bed methane reserves when applying the R/P ratio. It should also be noted that even adding all those reserves the total still only accounts for 95 years (it would appear the papers simply rounded of for the final five years). In the case of BP and EIA the supply time was calculated only using proven reserves.
In any case it is best to breakdown natural gas into its different grades to gain a greater understanding of the overall situation of natural gas production:
Natural Gas Production data obtained from EIA.
Note: Since January 2012 the EIA has only published aggregate totals for natural gas production.
From this graph we see that while natural gas production has risen slowly but steadily peak production of conventional natural gas was reached in December 2006 when 1.56 trillion cubic feet of gas was extracted that month. Since then production of conventional natural gas has declined by 35.5% for the period of December 2006 to December 2011. These declines in conventional gas have been masked by steep increases in shale gas production; in fact these large gains in shale gas have been the main reason why total natural gas extraction has risen in recent years. This large increase in shale gas is reflected in that fact that until 2007 there was negligible amounts of shale gas being produced but as of December 2011 shale gas makes up 33% of total natural gas production.
With conventional gas already reaching a peak it would seem that the US’s future in gas production lies firmly in shale gas production. Unfortunately the cost of producing shale gas is higher than conventional gas as it requires the use of more expensive horizontal drilling not to mention hydraulic fracturing (informally known as fracking) which on average the fracturing operation alone cost $6-7 million per well. This $6-7 million cost may not even cover the entire expenses imposed on society as hydraulic fracturing is a very water intensive activity with each operation requiring the use of 1.2-3.5 million gallons of water. Each well (of which there are currently thousands in operation) requires hydraulic fracturing and in some cases multiple fracturing operations are performed on the same well. Furthermore there is on-going controversy over the fact that the chemicals used in fracturing can result in water contamination on a chemical and even possibly radioactive level. It is also speculated that these drilling activities can result in minor earthquakes.
(10 minute extended trailer it is recommend you watch the entire movie for more information)
Other issues with shale gas come from its composition as shale gas is slightly different to conventional natural gas as it contains higher concentrations of ethane, propane, hexane and even diluents such as C02 and nitrogen;  this view is also supported by Dmitry Orlov. This means that the processing costs as well as drilling costs will be higher than conventional natural gas. To cover such costs it often stated that shale oil has to be priced at least $4 per thousand cubic feet but the figure is more likely to be $6 or even higher. Considering current natural gas prices are $3.19 per thousand cubic feet at the time of writing it means the vast majority of shale gas is being produced at a loss. As a result it should be expected that the number of rigs that drill for gas will be declining and upon inspection of drilling rigs that does appear to be the case:
US Active rigs engaged in oil/gas drilling, according to Baker Hughes.
The period between December 29th 2011 and December 28th 2012 saw the rig count for natural gas decline from 809 to 431 rigs a 46.7% decline in just one year! It is this decline in drilling that has resulted in total production for most of 2012 to stagnate. To make matters even worse is the fact that shale gas plays have high decline rates of around 65%-85%. As a result of these two factors it seems only a matter of time before shale gas and by extension total natural gas production in the US to decline. Indeed many shale gas producing regions such as the Barnett Shale, Haynesville Shale and Fayetteville have seen production rates plateau while The Eagle Ford and Woodford Shale have already began to experience declines. The only shale gas region that still appears to exhibit exponential growth in rates of production is the Marcellus Shale. However even with strong growth in this region it seems highly likely that production will hit a peak within the next two years due to the fact that annual decline rates for the US now totals 32% or 22 billion cubic feet per day and these decline rates will continue to increase even further as a larger percentage of gas wells are devoted to shale gas production.
Europe + Eurasia
While on the surface the European situation may not seem as acute as that of the US it should be noted that European natural gas production is dominated by Russian production with the country producing 58.6% of the gas in the entire region. Furthermore the United Kingdom; which was the third largest producer in the region as recently as 2008, is now experiencing major declines with the latest decline figures for 2011 being 20.8%. This on-going decline means as time goes on the Western European nations can no longer depend on Britain for exports and will become increasingly dependent on exports from further regions, the most obvious being Russian exports but this will also include other former Soviet countries such as Turkmenistan or Azerbaijan.
Natural gas production data obtained from BP Statistical Review of World Energy June 2012.
These issues of dependence will be further compounded if Germany follows through with its plan to phase out nuclear energy as natural gas will be the favoured fossil fuel to replace nuclear energy due to its lower C02 emissions. Indeed this move towards natural gas is a pattern repeated by many European nations as many strive to meet the EU quotas of reducing 20% of their 1990 C02 emissions by 2020. If we look at the energy mix of Europe we find that the amount of energy obtained from natural gas has consistently been increasing in the last 20 years:
Natural gas production data obtained from BP Statistical Review of World Energy June 2012.
It is this increased demand that means Europe will have to look elsewhere for gas to meet internal demand. Another candidate apart from the former Soviet states is the Middle-East most notably Qatar but also possibly Algeria. Qatar has the third largest reserves in the world and has trebled its exporting capacity since 2006 through the installation of numerous Liquefied Natural Gas (LNG) terminals. However such terminals are expensive and to be economically viable require the use of long-term contracts. Moreover Europe will face strong competition from Asia countries who are not only long-term customers to this exported gas but their economies are expected to grow faster than Europe.
Another avenue being pursued is that of shale gas however it is still early days to make any educated judgement on what will transpire here as most EU nations have opted to take a cautious stance to shale gas and wish to seek a rigorous regulatory framework being formed before pursuing this issue further. However the United Kingdom and Poland have been more aggressive in their pursuit of shale gas with both nations giving the green light to drilling. 
Regardless of what happens with shale gas in Europe the situation will not massively change. The simple fact of the matter is if we exclude Russia and other former Soviet nations the main EU block has already peaked in 2004 with a production of 327.5 billion cubic metres and since then production has declined by 15%. Seeing as the current trend is for natural gas consumption to increase then it means Europe must build extra infrastructure to accommodate more natural gas imports from either Russia or the Middle East but each option has its own set of problems. If Europe relies heavily on Russia they will have a monopoly and will gain an increasingly strong foothold on the energy market and the chances of a large scale disruption such as the disputes in 2006 and 2009 in Ukraine is likely to become more common place. This is a particular issue because 80% of all European gas imports from Russia flow via Ukraine pipelines. The probability of such disruptions occurring will only increase if numerous European countries experience recessions and struggle to pay their debt obligations as this was the chief cause for Russia shutting its pipelines to Ukraine.
If on the other hand Europe decides trade with the Middle East then it must invest heavily in either pipelines or LNG terminals to gain access to Middle Eastern gas but even then Europe will likely face the prospect of stiff competition from Asia for this resource and likely higher prices which will harm economic growth.
As we go forward it seems quite likely that supplies of natural gas will become increasingly strained. This will be particularly true in the west as production in Europe has already passed its peak and the growth of Asian economies will mean most of the excess supply from the Middle East and former Soviet bloc will largely be diverted to them. Moreover it is likely that the Asian economies will be able to tolerate higher prices natural gas prices (as is the case with oil) which will stand them in good stead in the future when it is reasonable to assume natural gas prices will rise (this will happen because of demand rising faster than supply).
The reason the Asian economies will be able to tolerate higher gas prices better is because of a concept known as energy leveraging. That is, when an economy faces high prices it will leverage these high energy costs against cheaper energy sources. In the case of Asia they have cheaper sources such as coal and even cheaper labour (which is less the case in Europe). This means any expensive energy sources can be diverted into economic activities that are more productive for example an Asian country will use this natural gas to provide electricity for a corporation which is a more economically productive use of this energy than if it were used to heat a domestic home in a European country. To learn more about energy leveraging please refer to this article. This dynamic will become even more prominent should there be a shortage of coal as suggested in my previous article.
These issues of constrained natural gas supply will be further compounded if the US reaches its own peak in the near future. While we cannot be certain this will be the case I believe this will peak will occur soon because of the high decline rates of shale gas. These high decline rates mean a high level of investment (which must increase on an exponential basis) needs to be sustained for production to continue rising or even to maintain a plateau. However since current market prices are below production costs these investments cannot be supported and as a result drilling activity will decline (this has already happened).
This sudden reduction in investment by itself would not necessarily result in production peaking even with high decline rates. For example if prices were to rise quickly then investments would return to normal levels fairly quickly. However I do not believe this will be the case. This is because due to the on-going recession in the US and the milder winters demand for natural gas has not kept up with supply. As a result the amount of gas held in storage has increased over the last few years:
As we see from the diagram storage capacity is near five year highs, indeed storage capacity has been close to the point of overcapacity. As a result it will take a considerable length time of time before storage levels get low enough for the price of natural gas to rise sufficiently to induce large scale investments. What is more if prices of natural gas rise above $4 per thousand cubic feet then that will mean it will become more economical to mine coal reducing demand for gas even further.
If this period of low gas prices carries on for a considerable length of time then producers will lose even more money and this is likely to make investors more cautious in reinvesting in the future after the shale gas bubble bursts. In the after mass of such an event it is likely any investors still interested in investing will scrutinise the economics more deeply and according to analysis from Arthur E. Berman and Lynn F. Pittinger (warning their detailed analysis is not for the faint of heart!) the shale gas plays are only marginally profitable even under the best of circumstances. This view is further supported by Richard Heinberg who suggests that the EROEI of shale gas can be as low as 6:1. With a ratio this low it is likely that these plays can only be supported if subsidised with higher EROEI energy sources. Therefore as time goes on and there are less cheap energy resources available it is very possible that shale gas production will largely cease as it would no longer prove economical from a financial and energetic basis to drill.
 = BP Statistical Review of World Energy June 2012 (BP as .pdf file)
 = U.S. Crude Oil, Natural Gas, and NG Liquids Proved Reserves (EIA)
 = The Math Behind the 100-Year, Natural-Gas Supply Debate (CNBC)
 = What the Frack? (Slate)
 = Natural Gas Gross Withdrawals and Production (EIA)
 = Landscape with well (The Economist)
 = Unconventional Gas Shales: Development, Technology, and Policy Issues (Congressional Research Service as .pdf file see pg. 11)
 = Shale Gas Measurement And Associated Issues (Pipeline & Gas Journal)
 = Shale Gas: The View from Russia (ClubOrlov)
 = Economics of Shale Gas (energybiz)
 = The murky future of U.S. shale gas (smartplanet – Chris Nelder)
 = Rotary Rig Count (Baker Hughes)
 = U.S. marketed natural gas production levels off in the first half of 2012 (EIA)
 = Barnett Report (Pickering Energy Inc. as doc file see pg. 19)
 = Chesapeake Energy – Haynesville Shale Decline Curve (Haynesville Shale)
 = After The Gold Rush: A Perspective on Future U.S. Natural Gas Supply and Price (The Oil Drum)
 = What is the EU doing about climate change? (European Commission)
 = The Cold Facts About a Hot Commodity: LNG (The Oil Drum)
 = Fracking for shale gas gets green light in UK (the guardian)
 = Poland Moves Ahead With Shale Gas Production (Arkansas Business)
 = Fourth Assessment Report (IPCC as .pdf file see pg. 212)
 = Natural gas storage capacity up 3.3 pct: EIA (REUTERS)
 = Headwinds for Rally in Natural Gas (Wall Street Journal)
= Gas Bubble Leaking, About to Burst (Energy Bulletin)
Off the keyboard of Monsta666
Discuss this article at the Energy Table inside the Diner
Energy despite its utmost importance is a topic that doesn’t receive much attention and is a subject that is poorly understood particularly in the mainstream media or even economics. It is curious to think that this is the case especially if we consider that without energy nothing would literally happen. Taken in this context it is easy to see why energy could be regarded as the most critical resource for without it there would be no life on planet Earth.
It seems that one of the major reasons we forget about the importance of energy and take it for granted is the fact energy is ubiquitous in modern day society. If one cares to look outside their window it is likely they will see numerous cars whizzing around at high speeds (they are high if we compared their speeds to humans and animals which was the historic norm before the industrial age). If one thinks about this last point it can be quite an enlightening process; how much energy does it take to cart an object that weighs in excess of 1000kg at around 30MPH? Then think all this energy can be found in a single gallon of gasoline/diesel. And as startling as this thought maybe we can say we consume even more energy in total in our homes and workplaces and that is despite the fact there are over one billion cars – which nearly all run on oil – running across our planet. Quite a thought isn’t it? 
So in short we can say we are addicted to using energy. However this should not come as any surprise because man has always needed SOME energy to ensure his survival. The amount needed for basic survival is relatively modest however since the only real energy source man needed at first was direct consumption through food to stay alive. However through time man found other external inputs of energy that made life easier for him. The heat from fire allowed man to keep warm not to mention allowed him to cook and provide a source of light in the dark. Domesticated animals also reduced the burden of labour in the fields and allowed great productivity not just in hunting but also in managing the fields when man shifted to agriculture.
These external inputs of energy not only allowed man to extend his natural range of environments he could live on but it also spurred growth in population and prosperity as external energy meant more of the burden of labour could be shifted away from man. As time went on the number the external sources of energy increased and so did the amount of energy used by man. It was not until man began harnessing fossil fuels in earnest however that his energy use suddenly exploded. The graph below can clearly attest to this fact.
While this final fact is widely known it is still quite difficult to fully grasp and appreciate how much of a boon these fossil fuels were to mankind. To illustrate just how much energy we can obtain from these fossil fuels I feel it is best to apply a little maths. To make comparisons between different energy sources it is necessary to know what a BTU is. For people unfamiliar with the term a BTU stands for British Thermal Unit and one BTU represents the energy required to heat one pound (454g) of water by one degree Fahrenheit which comes to approximately 1055 joules.  Now if we consider the most expensive fossil fuel, which is oil, then we will find that burning one barrel of oil (42 US gallons or 159 litres) releases 5.8 million BTUs or 6.1 gigajoules of energy.  These large numbers may seem rather abstract and arcane but if we covert this total energy content into man hours then the facts can be more easily absorbed. The energy delivered from 6.1 gigajoules would equate to a man spending 1.45 million kilocalories. If we assume a man consumes somewhere between 100-200 kilocalories an hour then that would mean a barrel of oil produces the equivalent amount of energy as 7,290-14,597 hours of labour depending on how hard the man works. Assuming there are 48 forty hour weeks a year that equates to 3.8-7.6 years of human labour. Armed with this information it makes you wonder how we can ever consider a barrel of oil is overpriced at $90 dollars a barrel when one barrel delivers the equivalent of 3.8-7.6 years labour!
To put this into an even greater context if we decided to pay the man a decent wage of $10 an hour then we would need to pay him anywhere between $73,000-$146,000 to deliver the same amount of work as a barrel of oil. With this perspective it becomes clear what a boon fossil fuels have been proven to be as effectively we have been using these fuels as “energy slaves” due to the fact they produce so much energy at such a low cost. With energy being so cheap it becomes obvious just how profitable the exercise of replacing man and animal labour with capital powered by cheap fossil fuels has been as the price differential between the two markets is simply enormous. And let us not forget in all this that oil is the most expensive fossil fuel in today’s market and its price is abnormally high when compared to historical prices so it was even more economical in the past than it is today.
Saying all that we do need to recognise the flaws in making such comparisons or more generally, using BTUs in general. That is not all work achieved with a certain resource can be easily substituted with another resource for example no amount of men dragging a car would make it travel at 30MPH as could be achieved if the car was powered by oil. Therefore the figures above can only deal with the total energy expenditure and allow comparisons on that end but they say nothing about the quality of the work achieved nor can they describe how easily the work can be substituted with another resource. This is an important concept to grasp as quite often it is stated that we can substitute oil consumption with renewable, nuclear or even coal and gas energy which while such statements are true to a certain extent, not all uses can be substituted for. Coal, renewables and nuclear energy cannot be easily made into a liquid fuel as these energy inputs are primarily used for electrical generation or home heating. It is this lack of fungiblity which results in people often making the distinction between a liquid fuel crisis and an energy crisis as these are two distinct phenomenon as each crisis poses a different set of problems and will therefore require a different set of solutions (assuming solutions even exist) to solve or manage if there are no viable solutions.
Despite these limitations or perhaps because of them we can reach certain conclusions. The increase in the availability and affordability of energy has done more than reduce the cost and amount of work that can be achieved. It has also played a big part in increasing productivity. This increase in productivity comes because, as described in the previous paragraph, there are certain forms of work that can only be utilised with fossil fuels and these activities cannot be done regardless of the amount of men employed in particular tasks. Jobs that are energy intensive such mining, steel production or heavy vehicle transport all require intense and constant inputs of energy. Since they require intense AND constant energy inputs these tasks cannot easily be substituted into labour nor is renewable energy a suitable candidate for substitution due to its intermittent nature. However it cannot be denied all these economic activities contribute to increased productivity as less labour will be needed to be deployed to accomplish these tasks (assuming these tasks could be completed at all without fossil fuels).
Many mining operations such as the tar sands mining operation in Canada would be much harder if not outright impossible without cheap abundant energy inputs provided by fossil fuels.
A more troubling fact does emerge from this however and that is it becomes apparent that our modern industrial society is heavily dependent on not just abundant energy but cheap energy to remain viable. Even today with oil priced at $90 a barrel which is still an excellent deal when taken in the context described above this price is sufficiently high that many developed economies struggle to grow quickly due to the “high” energy costs as we are repeatedly reminded by the media. In fact these high energy costs have resulted in much demand destruction in the major OECD countries for oil that are most sensitive to price changes as demonstrated in graph below.
This demand destruction primarily manifests itself through higher unemployment and reduced oil consumption from remaining employed workers due to a decline in real wages. This high price of oil has not curbed demand in all countries as the developing economies, which are less sensitive to price increases, continue to demand more of the product. This demand increase of the non-OECD countries is roughly equal to the decreased demand in the OCED countries so overall global oil demand has remained constant at around 30 billion barrels per annum.
The more significant trend has not been with changing patterns in oil consumption but with the changing energy mix in which the global economy utilises. Since oil is priced at $90 it is the most expensive fossil fuel in the market. In the US the next most expensive fossil fuel is coal which is priced at $68.15 per short ton. Seeing as one short ton on average releases 19.6 million BTUs of energy which is roughly three times that of a barrel of oil we see that coal is just over 4 times cheaper than oil on BTU basis. In light of this fact it would be natural to think and expect coal consumption to rise rapidly during this period however coal consumption has actually declined in recent years (for the US at least) because the cheapest fuel in recent years has been natural gas which reached levels as low as $1.90 per million BTUs earlier this year. Seeing as coal has been priced generally been priced at around $3 per million BTUs for the last three years it is easy to see how natural gas consumption has surged.
It should be noted however that at this present moment natural gas is currently priced at $3.48 per million BTUs (accurate at time of writing) and seems to be rising in the past few months. If natural gas price rise much further then coal will become the cheapest fossil fuel in the US and demand for this fuel should increase provided the trend of rising natural gas prices continues. If we talk about fuels on a global basis the story is quite different as globally coal is by far the cheapest commodity and it is these cheap prices that have caused global coal demand to surge in recent years. The high price of oil and the fact that main users of coal (Eastern Asia) have seen rapid economic growth in recent years have been other contributing factors in the increase in the amount of coal demanded.
If this trend of growing coal consumption continues it will not be long before coal becomes the top source of energy in the world and this is a fact that is likely to catch many people by surprise. Saying that, one should throw some caution to this current trend of surging coal demand as it is quite likely that growth in the global economy will slow down and may even decline. If that is the case then the rate of increase in demand will decline or demand may even decline entirely should the world enter a global recession.
Another important consideration and one that is almost universally overlooked in the mainstream is the concept of Energy Return on Energy Invested (ERoEI). In the second part of this topic I will discuss this concept in more detail and also explore the laws of thermodynamics that is largely neglected in the media and economics in general. Do not worry; it will not be a boring physics session with lots of large scary numbers. In any case I wish all diners a merry Christmas and a happy new year.
 = World Vehicle Population Tops 1 Billion Units (WARDSAUTO)
 = British thermal unit (Btu) (Business Dictionary)
 = Barrel of oil equivalent (Wikipedia)
 = Coal News and Markets (EIA)
 = What is the average heat (Btu) content of U.S. coal? (EIA)
 = Coal News and Markets Archive (EIA)
 = Commodity Prices (CNN Money)
Off the keyboard of Gail Tverberg
Published on Our Finite World on October 17, 2012
Discuss this article at the Epicurean Delights Smorgasbord inside the Diner
We keep hearing about the many benefits of natural gas–how burning it releases less CO2 than oil or coal, and how it burns with few impurities, so does not have the pollution problems of coal. We also hear about the possibilities of releasing huge amounts of new natural gas supplies, through the fracking of shale gas. Reported reserves for natural gas also seem to be quite high, especially in the Middle East and the Former Soviet Union.
But I think that people who are counting on natural gas to solve the world’s energy problems are “counting their chickens before they are hatched”. Natural gas is a fuel that requires a lot of infrastructure in order for anything to “happen”. As a result, it needs a lot of up-front investment, and several years time delay. It also needs changes on the consumption side (requiring further investment) that will allow this natural gas to be used. If the cost is higher than competing fuels, this becomes a problem as well.
In many ways, natural gas consumption is captive to other things that are happening in the economy: an economy that is industrializing rapidly will easily be able to consume more natural gas, but an economy in decline will find it hard to scrape together funds for new ways of doing what was done previously, now with natural gas. Increased use of renewables seems to call for additional use of natural gas for balancing, but even this is not certain, because in many parts of the world, natural gas is a high-priced imported fuel. Political instability, often linked to high oil and food prices, creates a poor atmosphere for new Liquefied Natural Gas (LNG) facilities, no matter how attractive the pricing may seem to be.
In the US, we have already “hit the wall” on how much natural gas can be absorbed into the system or used to offset imports. US natural gas production has been flat since November 2011, based on EIA data (Figure 1, below).
Even with this level of production, and a large shift in electricity production from coal to natural gas, natural gas is still on the edge of “maxing out” its storage system before winter hits (Figure 2, below).
Figure 2. US natural gas in storage, compared to five-year average. Figure prepared by US Energy Information Administration, Weekly Natural Gas Storage Report as of October 5, 2012.
World Natural Gas Production
The past isn’t the future, but it does give a little bit of understanding regarding what the underlying trends are.
World natural gas production/consumption (Figure 3) has been increasing, recently averaging about 2.7% a year. If we compare natural gas to other energy sources, it has been second to coal in terms of the amount by which it has contributed to the total increase in world energy supplies in the last five years (Figure 4). This comparison is made by converting all amounts to “barrels of oil equivalent”, and computing the increase between 2006 and 2011.
Figure 4. Increase in energy supplied for the year 2011, compared to the year 2006, for various fuels, based on BP’s 2012 Statistical Review of World Energy data.
In order for natural gas to be an energy savior for the world, natural gas consumption would need to increase far more than 2.7% per year, and outdistance the increase in coal consumption each year. While a modest increase from past patterns is quite possible, I don’t expect a miracle from natural gas.
Natural Gas: What Has Changed?
The basic thing that has changed is that fracking now permits extraction of shale gas (in addition to other types of gas), if other conditions are met as well:
- Selling price is high enough (probably higher than for other types of natural gas produced)
- Water is available for fracking
- Governments permit fracking
- Infrastructure is available to handle the fracked gas
Even before the discovery of shale gas, reported world natural gas reserves were quite high relative to natural gas production (63.6 times 2011 production, according to BP). Reserves might theoretically be even higher, with additional shale gas discoveries.
In addition, the use of Liquified Natural Gas (LNG) for export is also increasing, making it possible to ship previously “stranded” natural gas, such as that in Alaska. This further increases the amount of natural gas available to world markets.
What Stands in the Way of Greater Natural Gas Usage?
1. Price competition from coal. One major use for natural gas is making electricity. If locally produced coal is available, it likely will produce electricity more cheaply than natural gas. The reason shale gas recently could be sold for electricity production in the United States is because the selling price for natural gas dropped below the equivalent price for coal. The “catch” was that shale gas producers were losing money at this price (and have since dropped back their production). If the natural gas price increases enough for shale gas to be profitable, electricity production will again move back toward coal.
Many other parts of the world also have coal available, acting as a cap on the amount of fracked natural gas likely to be produced. A carbon tax might change this within an individual country, but those without such a tax will continue to prefer the lower-price product.
2. Growing internal natural gas use cuts into exports. This is basically the Exportland model issue, raised by Jeffrey Brown with respect to oil, but for natural gas. If we look at Africa’s natural gas production, consumption, and exports, this is what we see:
Figure 5. Africa natural gas production, consumption, and exports, based on BP’s 2012 Statistical Review of World Energy.
In Africa, (mostly northern Africa, which exports to Europe and Israel), consumption has been rising fast enough that exports have leveled off and show signs of declining.
3. Political instability. Often, countries with large natural gas resources are ones with large oil resources as well. If oil production starts to drop off, and as a result oil export revenue drops off, a country is likely to experience political instability. A good example of this is Egypt.
Figure 6. Egypt’s oil production and consumption, based on BP’s 2012 Statistical Review of World Energy.
No matter how much natural gas Egypt may have, it would not make sense for a company to put in an LNG train or more pipeline export capability, because the political situation is not stable enough. Egypt needs oil exports to fund its social programs. The smaller funding amount available from natural gas exports is not enough to make up that gap, so it is hard to see natural gas making up the gap, even if it were available in significant quantity.
Iran is a country with large natural gas reserves. It is reportedly looking into extracting natural gas for export. Again, we have a political stability issue. Here we have an international sanctions issue as well.
4. “Need the natural gas for myself later” view. A country (such as Egypt or the United States or Britain) that has been “burned” by declining oil production may think twice about exporting natural gas. Even if the country doesn’t need it now, there is a possibility that vehicles using natural gas could be implemented later, in their own country, thus helping to alleviate the oil shortage. Also, there are risks and costs involved with fracking, that they may not choose to incur, if the benefit is to go to exporters.
5. Cost of investment for additional natural gas consumption. In order to use more natural gas, considerable investment is needed. New pipelines likely need to be added. Homeowners and businesses may need to purchase gas-fired furnaces to raise demand. If it is decided to use natural gas vehicles, there is a need for the new vehicles themselves, plus service stations and people trained to fix the new vehicles. Additional natural gas storage may be needed as well. Additional industrial production is difficult to add, unless wages are low enough that the product being sold will be competitive on the world market.
Existing “pushes” toward better insulation have the effect of reducing the amount of natural gas used for heating homes and businesses, so work in the opposite direction. So do new techniques for making nitrogen-based fertilizer using coal, rather than using natural gas.
6. Touchy balance between supply and consumption. If additional production is added, but additional uses are not, we have already seen what happens in the United States. Storage facilities get overly full, the price of natural gas drops to unacceptably low levels, and operators scramble to cut back production.
The required balance between production and consumption is very “touchy”. It can be thrown off by only a few percent change in production or consumption. Thus an unusually warm winter, as the United States experienced last year, played a role in the overly full storage problem. A ramp up of production of only a few percent can also cause an out of balance situation. Unless a developer has multiple buyers for its gas, or a “take or pay” long-term contract, it risks the possibility that the gas that is has developed will not be wanted at an adequate price.
7. Huge upfront investment requirements. There are multiple requirements for investing in new shale gas developments. Each individual well costs literally millions of dollars to drill and frack. The cost will not be paid back for several years (or perhaps ever, if the selling price is not high enough), so debt financing is generally needed. If fracking is done, a good supply of water is needed. This is likely to be a problem in dry countries such as China. There is a need for trained personnel, drilling rigs of the right type, and adequate pipelines to put the new gas into. While these things are available in the United States, it likely will take years to develop adequate supplies of them elsewhere. All of the legislation that regulates drilling and enables pipeline building, needs to be in place as well. Laws need to be friendly to fracking, as well.
Growth in Exports to Date
Exports grew as a percentage of natural gas use through about 2007 or 2008.
Figure 7. World natural gas exports as percentage of total natural gas produced, by year, based on EIA data (older years) and BP’s 2102 Statistical Review of World Energy for 2010 and 2011.
In recent years, natural gas exports have fallen slightly as a percentage of total gas extracted. Thus, if world natural gas supplies have risen by an average of 2.7% per year for the past five years, exports available for import have risen a little less rapidly than the 2.7% per year increase. A major ramp-up in export capability would be needed to change this trend.
While we hear a lot about the rise in exports using LNG, its use does not seem to be adding to the overall percentage of natural gas exported. Instead, there has been a shift in the type of export capacity being added. There are still a few pipelines being added (such as the Nord Stream pipline, from Russia to Germany), but these are increasingly the exception.
The Shale Gas Pricing Debate
Exactly what price is needed for shale gas to be profitable is subject to debate. Shale gas requires the payment of huge up-front costs. Once they are drilled and “fracked,” they will produce for a long period. Company models assume that they will last as long as 40 years, but geologist Arthur Berman of The Oil Drum claims substantial numbers are closed down in as few as six years, because they are not producing enough natural gas to justify their ongoing costs. There is also a question as to whether the best locations are drilled first.
Logically a person would expect shale-gas to be quite a bit more expensive to produce than other natural gas because it is trapped in much smaller pores, and much more force is required to extracted it. In terms of the resource triangle that I sometimes show (Figure 8, below), it epitomizes the low quality, hard to extract resource near the bottom of the triangle that is available in abundance. We usually start at the top of the resource triangle, and extract the easiest and cheapest to extract first.
Berman claims that prices $8.68 or higher per million Btu are needed for profitability of Haynesville Shale, and nearly as high prices are needed to justify drilling other US shale plays. The current US price is about $3.50 per million Btu, so to be profitable, the price would need to be more than double the current US price. Prices for natural gas in Europe are much higher, averaging $11.08 per million Btu in September 2012, but shale gas extraction costs may be higher there as well.
The US Energy Information Administration admits it doesn’t know how the economics will work out, and gives a range of projected prices. It is clear from the actions of the natural gas industry that current prices are a problem. According to Baker Hughes, the number of drilling rigs engaged in natural gas drilling has dropped from 936 one year ago to 422, for the week ended October 12, 2012.
Backup for Renewables
One area where natural gas excels is as a back up for intermittent renewable energy, since it can ramp up and down quickly. So this is one area where a person might expect growth. Such a possibility is not certain, though:
1. How much will intermittent renewables continue to ramp up? Governments are getting poorer, and have less funds available to subsidize them. They do not compete well on when they go head to head with fossil fuels, nuclear, and hydroelectric.
2. When intermittent renewables are subsidized with feed in tariffs, and requirements that wind power be given priority over fossil fuels, it can provide such an unlevel playing field that it is difficult for natural gas to be profitable. This is especially the case in locations where natural gas is already higher-priced than coal.
The Societal “Recipe” Problem
Our economy is built of many interdependent parts. Each business is added, taking into account what businesses already are in place, and what laws are in effect. Because of the way the economy currently operates, it uses a certain proportion of oil, a certain proportion of natural gas, and more or less fixed proportions of other types of energy. The number of people employed tends to vary, too, with the size of the economy, with a larger economy demanding more employees.
Proportions of businesses and energy use can of course change over time. In fact, there is some flexibility built in. In particular, in the US, we have a surplus of natural gas electricity generating units, installed in the hope that they would be used more than they really are, and the energy traded long distance. But there is less flexibility elsewhere. The cars most people drive use gasoline, and the only way to cut back is to drive less. Our furnaces use a particular fuel, and apart from adjusting the temperature setting, or adding insulation, it is hard to make a change in this. We only make major changes when it comes time to sell a car, replace a furnace, or add a new factory.
In my view, the major issue the world has been dealing with in recent years is an inadequate supply of cheap oil. High priced oil tends to constrict the economy, because it causes consumers to cut back on discretionary spending. People in discretionary industries are laid off, and they tend to also spend less, and sometimes default on their loans. Governments find themselves in financial difficulty when they collect fewer taxes and need to pay out more in benefits. While this issue is still a problem in the US, the government has been able to cover up this effect up in several ways (ultra low interest rates, a huge amount of deficit spending, and “quantitive easing”). The effect is still there, and pushing us toward the “fiscal cliff.”
The one sure way to ramp up natural gas usage is for the economy as a whole to grow. If this happens, natural gas usage will grow for two reasons: (1) The larger economy will use more gas, and (2) the growth in the economy will add more opportunities for new businesses, and these new businesses will have the opportunity to utilize more natural gas, if the price is competitive.
I have compared the situation with respect to limited oil supply as being similar to that of a baker, who is trying to bake a batch of cookies that calls for two cups of flour, but who has only one cup of flour. The baker is able to make only half a batch. Half of the other ingredients will go unused as well, because the batch is small.
To me, discovering that we have more natural gas than we had before, is analogous to the baker discovering that instead of having a dozen eggs in his refrigerator, there are actually two dozen in his refrigerator. In fact, he finds he can even go and buy more eggs, if he is willing to pay double the price he is accustomed to paying. But the eggs really do not fix the missing cup of flour problem, unless someone can find a way to change eggs into flour very cheaply.
Basic Energy Types
To me, the most basic forms of energy resources are (1) coal and (2) oil. Both can be transported easily, if it is possible to extract them. Natural gas is very much harder to transport and store, so it is in many ways less useful. It can be made work in combination with oil and coal, because the use of coal and oil make it possible to build pipelines and make devices to provide compression to the gas. With coal and oil, it is also possible to make and maintain electric transmission lines to transport electricity made with natural gas.
I sometimes talk about renewable energy being a “fossil fuel extender,” because they hopefully make fossil fuels “go farther”. In some ways, I think natural gas is an extender for oil and coal. It is hard to imagine a society powered only by natural gas, because of the difficulties in using it, and the major changes required to use it exclusively.
In the earliest days, natural gas was simply a “waste product” of oil extraction. It was “flared” to get rid of it. In many parts of the world, natural gas is still flared, because the effort it takes to collect it, transport it, and make it into a useful product is still too high.
The hope that natural gas will be the world’s energy savior depends on our ability to make this former waste product into a product that will replace oil and coal. But unless we can put together an economy that needs and uses it, most of it probably will be left in the ground. The supposedly very high reserves will do us no good.