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PeakTrader said...

VangelV believes shale gas is a "huge loser."

Here's what a skeptic says (New York Times):

Shale Gas

"The Barnett in Texas, the Haynesville in East Texas and Louisiana and the Fayetteville, across Arkansas — less than 20 percent of the area heralded by companies as productive is emerging as likely to be profitable under current market conditions, according to the data and industry analysts.

Gas is currently going for $4.38/MCF (thousand cubic feet, or MMBTU). Most shale gas wells are losers, or only break-even at that price. However, if gas were to rise into the $6-$8 range, the profitability picture changes considerably."

My comment: Gas hit $14 a few years ago.

Lower production costs, e.g. through technology, and higher prices will make shale gas more profitable.

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VangelV said...

My comment: Gas hit $14 a few years ago.

Let us keep things simple.

Your reference agrees that gas is a loser at current prices.

Your argument is that if gas goes way up in price the shale gas industry can be profitable.

But here is my counter argument.

The current production is taking place in the best spots of the shale formations.

The production curves are showing that well depletion is running at 75-90% per year.

To keep production growing you need to do enough drilling to offset the depletion and to create new supply that is coming from less productive areas.

But the huge demand for more drilling will increase the drill costs due to a number of factors.

Future contracts will demand more money as the supply of rigs and drill crews trails demand. To keep production going up the drilling costs will have to go up by enough to finance the building of new drill rigs and the training of new drill crews.

But the cost of drilling also includes the energy needed to make the materials that go into making the rigs, the energy needed to assemble the rigs, and the energy needed to transport the rigs. In a rising energy cost environment such as the one that is being predicted the non-labour costs of manufacturing and operating drills will go up. As will the transport costs of the product.

The big issues that the optimists are missing are depletion, the energy return on the energy invested, and the variation of formation quality within shale producing areas.

Let us begin with depletion. If you look at the production data you see that the stated EURs are about twice the actual ultimate recoveries. That means that the depreciation cost is underestimated and that the breakeven figures being thrown around are too low.

If we move on to the EROEI, we find that for marginal shale producing areas the total energy invested in drilling the wells, extracting the natural gas, and pressurizing and transporting it comes out to less than the total energy extracted from that natural gas.

The last issue that I want to look at before I end this comment is the lack of uniformity in shale formations. If you look at the data you see a few very nice formations that can be profitable while most are marginal at best. As pointed out above, the problem for the optimists is that much of the production in the core areas is taking place when prices are low and the supply from those core areas is helping to keep the prices below the cost of production. A price increase will take place when most of the core areas have seen their best days behind them. The best candidates in the next tier areas need higher break even prices but the marginal production will still generate a loss.

The process will continue until investors figure out that this is just a replay of previous shale booms and that the low energy density of shale means that profitability is still a long way away.

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PeakTrader said...

VangelV says: "Your reference agrees that gas is a loser at current prices."

A loser for who?

Consumers may gain now.

Producers may gain later.

Investors may eventually gain the most.

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PeakTrader said...

Blue Skies, High Anxiety
The American
The American Enterprise Institute
May/June 2007 Issue

Americans are driving more miles, using more energy, and producing more goods and services than ever. But at the same time, the air quality in America’s cities is better than it has been in more than a century—despite the fact that the U.S. population has almost quadrupled and real GDP has risen by a factor of nearly thirty.

Much of what Americans think they know about air pollution is false. Through exaggeration and sometimes even outright fabrication, the main purveyors of the story—journalists, government regulators, environmentalists, and even health scientists—have created public fear out of all proportion to the actual risks.

Between 1980 and 2005, average levels of air pollution fell between 20 percent and 96 percent, depending on the pollutant.

For example, sulfur dioxide, which results mainly from the burning of coal and the smelting of some metals, is down 63 percent, while carbon monoxide, the vast majority of which comes from automobiles, is down 74 percent. At the same time, coal usage increased more than 60 percent and miles of driving nearly doubled.

Virtually the entire nation now meets federal standards for sulfur dioxide, carbon monoxide, nitrogen dioxide, and lead.

The country is also near full compliance for the U.S. Environmental Protection Agency’s older standards for ozone (the “one-hour” standard) and particulate matter (the “PM10” standard for airborne particulate matter less than ten micrometers in diameter).

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