In all the (eight plus) years I’ve been writing here, alternately banging the drum and my head upon the desk for global shale gas, a consistent theme has been fracanomics, the idea that shale gas economics don’t actually work.
It’s one of several riffs in the same tune, the lyrics being composed in a key from the 2008 financial collapse. In the UK especially, we don’t do new, exciting or interesting and least of all “unconventional”. After all, it’s hard for “conventional wisdom ” to understand how shale natural gas production techniques were only first discovered as recently as 1998, when slick water hydraulic fracturing first emerged as a result of using less chemicals, not more as this from NPR recently revealed:
For years and years, the giants of the oil industry ignored oil and gas that was trapped in hard shale rock all around the United States. It was just too expensive to extract the petroleum from shale. So much so, that the headquarters of Exxon sits right on top of a huge deposit, but the company still looked offshore and overseas instead of trying to tame the underground shale right in their backyard.
On today’s episode, we meet the mild-mannered oil engineer who unlocked the secret to making fracking work like it does today, little by little, and largely by accident. We ask him how he feels about changing the world, what he regrets, what makes him proud, how it feels to change the world.
That was fracking 1.0. Shale 2.0 combined it with horizontal drilling and Shale 3.0 takes place every day in the US. The next stage of shale will inevitably be international. Shale 3.5
None of this was meant to work in a “conventional” oil and gas, or climate world, but we now have enough data to prove any distinction between “conventional” and “unconventional”production is irrelevant. That then leads to clear proof that the economics of shale long has has jumped to reality, not the “hype” opponents propose. Shale is in fact far more successful in both production and economics than anyone dared believe as recently as two or three years ago.
Resources for the Future provides, from a study of 60,000 Texas wells this century, the most complete picture of this century’s events:
The shale revolution has fundamentally changed how gas and oil are produced in the United States. In the words of one industry expert,conventional oil andgas investments resemble high-risk/high-reward, “big game trophy hunting,” which involves drilling many dry holes in search of a few highly productive ones. This stands in stark contrast to modern unconventional extraction from shale, which is commonly said to resemble a “manufacturing process” in that operators have much more flexible and certain control over their production levels.
In short, shale gas is becoming boring. Three things especially stand out. First the impact of shale on prices means the end of volatility.
..unconventional gas is more price responsive, the shale boom has likely “flattened out” the U.S. natural gas supply curve, thereby reducing price volatility. Indeed, following the boom in shale gas, prices have been significantly less volatile compared to the early 2000s. To the extent that unconventional gas is responsible for this diminished volatility, continuation would help reduce uncertainty for policymakers and businesses considering investments that are highly sensitive to gas prices.
Second is how counter to narrative, unconventional decline rates aren’t the issue those heavily invested in conventional like to make out.:
On average, we do not observe a substantial difference in decline rates between unconventional and conventional gas wells—somewhat contrary to conventional wisdom. Decline rates measure the rate of change in production levels for a given well beginning with the peak period, typically but not always the first full calendar month of production. Unconventional gas wells extract more natural gas in earlier periods because they are much larger on average.
Well decline is often cited by shale opponents in the UK and also, for different reasons, by ‘conventional’ industry and it’s cheerleaders who saw the writing on the wall for the North Sea and other high cost provinces and wanted desperately not to believe. John Dizard of the FT was the standard bearer for this, and his theories were grasped upon by shale opponents. This was Dizard in 2010:
If the hyperbolics are right, then shale gas wells in Louisiana or, prospectively, Poland will produce gas at a reasonably high rate and low cost over a long period of time.
That is what has been sold to Wall Street and is being used as a negotiating position with Russian gas officials. Up to now, the hyperbolic argument has worked with Wall Street. Unfortunately for Europe, the Russians think the production and unit cost numbers are an empty bluff.
I have seen very smart exploration and production people using the best available science and data make large losing bets on the size and location of hydrocarbon deposits. Unlike Wall Street or political people, they eventually face the facts, admit when they’re wrong, and use the information from the failures to do better next time.
Of course, many investors are happy to commit based on some dealer’s PowerPoint with little cartoon gas rigs. So shale gas now takes well over half of the US industry’s capital expenditure budget. That is only the ante on a very large gamble on our energy future.
Dizard continued to push this theory for years. In the grand tradition of UK energy experts failing sideways, he’s still at the FT every week, giving expert investment advice to fund managers. Track records aren’t required for financial journalists who can depend on a steady churn of city traders. City traders don’t hang around long for two reasons. If they’re no good, they are quickly culled. If they are good, they make enough money to retire or start their own business. The pages of the FT How To Spend It magazine are full of archetypal former investment bankers who open organic goat farms or fancy boutique hotels. Each new generation then comes in, reads the Dizards of the world and makes the not entirely unreasonable assumption that longevity equals expertise. In his case it obviously didn’t, but traders have learnt the lesson too late by that point and either lucked out or been chucked out.
But the Peak Oil narrative, built on declining production making any number of energy projects from Hinkley Point through CCS on one side to Russian oil linked gas on the others, lives on in an institutional memory. Only now, after several years of facts clobbering the “shale is hype” narrative into submission, can we see the new world, the new normal of shale emerging.
The third takeaway from the RFF, page 16 proves how today it’s not shale that died, it was “unconventional”
Following the massive increase in unconventional drilling and collapse in gas prices, conventional gas wells have all but disappeared.
Ed Crooks at the FT has had an occasional unhealthy over- skepticism re shale economics, but he recently wrote 2016’s version of reality:
Ever since the shale boom started, there have been critics arguing that it was all too good to be true. Sceptical analysts warned that the industry would collapse like a house of cards if oil and gas prices fell.
This summer has brought the strongest evidence yet that they were wrong. Since prices began to fall two years ago, some shale producers have wilted, and dozens have folded. Many others, however, have been tempered by adversity. The second-quarter earnings statements from US exploration and production companies earlier this month showed some remarkable cost reduction numbers — not aspirations, but achieved results. Pioneer Natural Resources said it had reduced its production cost per barrel by 26 per cent since last year. Devon Energy said costs were down 40 per cent from their peak.
Scott Sheffield of Pioneer has been saying for several years that the Permian will be a permanent addition to oil supply. He’s being doing it, and often in London, in a soft-spoken non hype manner that doesn’t get reported enough. It”s not controversial enough perhaps. Just last week however, he went to tell the news to people who didn’t want to believe it for years either,the ONS Norwegian Off Shore Conference in Stavanger. Platts were there:
Under pressure from low oil prices and their rising debt levels, top oil executives at the ONS 2016 conference this week might well have found the blunt message of shale driller Scott Douglas Sheffield unsettling.
The chief executive of Pioneer Natural Resources seemed to enjoy the role of spoiler-in-chief, harrying Big Oil with some uncomfortable assertions.
The bad news, for those in the industry who missed out on shale and expected it to fade in the face of low prices, is that the Permian basin should be able to increase its output from 2 million b/d to 5 million b/d in the next 10 years, assuming prices reach $56/b in 2025, Sheffield said. Pioneer itself is growing its output by 27-30% annually.
“It’s in that [price] strip that I see the Permian adding 300,000 b/d per year in US supply,” he told the Offshore Norwegian Seas conference, held Aug. 29 through Sept. 1 in Stavanger.
If that came over to the hosts as fragrantly as a dish of pickled puffin, worse was yet to come:
Ramming home his contrarian stance, he said he was skeptical of some of the higher forecasts of long-term oil demand growth due to global warming, alternative energy and electric vehicles, while boasting of the company’s use of renewables in its own operations and the solar panels on his home.
On one hand the conventional oil industry wants to believe, because their survival depends on it, the story that shale is unsustainable and prices will rise and multi million projects will no longer be stranded. As, of course, so do offshore wind, nuclear, CCS, gas and electricity inter-connectors, tidal and every other big ticket energy project going. On this they are egged on by a Green Claque of relentless boosters who celebrate multiple projects, no matter how tenuous, expensive or inconsequential as breakthroughs providing confirmation of impending doom for the oil and gas industry. Tidal power provides only one recent example.
But on the other hand, Greens want to be virtuous and see the end of oil, but not just yet. Celebrating EV’s, renewables and the role of global warming is their job: Not Scott Sheffield’s, or mine or anyone in the oil and gas industry. We’re meant to provide the caricatures that Harold Hamm or Rex Tillerson sometimes do. Oil and gas people are meant to silently play a role of distorted grotesques, and certainly never appear as people who share the planet and have their own children. In the world of binary choices of yes/no, good/bad, Green Life/Black Death, nuanced views disrupt the meme as much as the resources themselves.
This is because they still cling to a the unconventional era in hope that they can still scare people off the cost, either in financial terms, or in alleged physical dangers, of shale. In brief, it’s because they have no idea of what the solution is, but are making good money spinning out the problem.
Returning to the RFF report, from Texas today, a portent of the future, of Shale 3.5 or 4.0:
Further, large quantities of shale resources are located beneath more densely populated regions of the country, and these resources can now be accessed through horizontal drilling techniques, with laterals extending from the vertical well forthousands of feet in any horizontal direction. Combined with advancements in seismic and surveying technologies, these extraction methods increase the accessibility to otherwise inaccessible natural gas and oil
Natural gas and oil from what were once considered unconventional resources, is widely distributed on a global basis. The nuanced, or what some would call the Greenwasher version, is that gas can provide a bridge to the future will inevitably come to pass. We see that in the resources being discovered in Argentina and China today. (By the way, that mild-mannered engineer, Nick Steinsberger is now working for Ineos Shale in the UK ). Onshore natural gas in Europe, may or may not be accessible. But it will be economic, it can be remarkably low impact and it can be just as game changing.
First the UK, and then inevitably the rest of Europe’s onshore gas, is running out of excuses to not to at least look. The UK is inexorably following a process where by next year we’ll have finally put shot to every possible delay, review, hand wringing and pettifoggery. I’ll still be occasionally banging my head on the desk at the increasingly desperate tactics of the Green Claque, but I no longer feel I’m banging my head against the wall either.