Sound Familiar?Kurt Cobb
October 22nd, 2009
Compare these statements concerning oil and natural gas made a decade apart:
Oil in 1998-99:
[I]f you're still operating under the assumption that the earth's petroleum--or at least the cheap stuff--is about to run out, you're not going to thrive in the new oil era. Technology is making it possible to find, produce, and refine oil so efficiently that its supply, at least for practical purposes, is basically unlimited.
--BusinessWeek, December 14, 1998
oil prices projected to stay low, companies are dismissing employees
and cutting the spending that is crucial to finding the oil they will
sell in the future.
as oil prices languish at the lowest levels in more than a decade,
contractors like Diamond, the R & B Falcon Corporation, the Noble
Drilling Corporation and the Rowan Companies are taking rigs out of
service as rents slide.
situation looks so gloomy that Crown Prince Abdullah of Saudi Arabia
warned starkly in December, ''The boom days are over, and they will not
Hughes Inc., the third largest United States oilfield services company,
said the number of rigs drilling for oil and natural gas in the United
States had fallen to the lowest level since 1947.
Yet here is a thought: $10 [a barrel] might actually be too optimistic. We may be heading for $5.
Natural Gas in 2008-09:
natural gas reserves are far more plentiful than previously estimated,
says an industry study being released today - a discovery that heralds
a potential remedy to the energy crisis. The report says the U.S. has
up to 50% more natural gas reserves than earlier projections because of
higher-than-expected yields from 22 shale formations in 20 states.
the current gas supply/demand situation, [John Walker, the chief
executive officer of EV Energy Partners] sees gas prices falling into
the $3-$4 per Mcf range that will create serious economic challenges in
the gas and energy industries. He thinks gas storage will be full by
September 1st and that could lead to $1 per Mcf gas as gas-on-gas price
number of rigs drilling for natural gas in the United States fell 15 to
685 this week, the first time below the 700 benchmark since late
November 2002, according to a report on Friday by oil services firm
Baker Hughes in Houston.
of worry about supply shortages because of the maturing of conventional
supplies have been replaced by worries there aren't enough customers
for the 1,200 trillion cubic feet of natural gas in shale deposits --
enough to last a century -- found in the past three years, plus
liquefied natural gas coming from offshore that is "needed like a hole
in the head," Mr. [Steve] Letwin [vice-president, gas transportation
and international, at Canadian pipeline giant Enbridge Inc.] said in an
amount of natural gas available for production in the United States has
soared 58% in the past four years, driven by a drilling boom and the
discovery of huge new gas fields in Texas, Louisiana and Pennsylvania,
a new study says. The report, due to be released Thursday by the
nonprofit Potential Gas Committee, concludes the U.S. has more than
2,000 trillion cubic feet of natural gas still in the ground, or nearly
a century's worth of production at current rates.
Plc, Europe's second-largest oil company, forecasts that [world] gas
resources may rise 60 percent to 100 years of global use at current
rates, helped by unconventional sources that are undeveloped or
new technique that tapped previously inaccessible supplies of natural
gas in the United States is spreading to the rest of the world, raising
hopes of a huge expansion in global reserves of the cleanest fossil
players in the LNG market like Repsol YPF, Total and Qatargas, which
oversees some of Qatar's huge LNG industry, predicted this week spot
gas prices will remain mired near current low levels until well into
the next decade.
At turning points most market observers and participants are of the same mind. That doesn't mean the bear market in natural gas can't continue, perhaps for quite a while yet. But the idea that gas will remain cheap and plentiful for decades because of technological breakthroughs sounds too good to be true, and it probably is. Dave Cohen offers a corrective to this vision in his piece, "A Shale Gas Boom?"
Of the many problems not apparent in the above quotations concerning natural gas, two loom large. The shale gas resource is undoubtedly vast. But the key question is at what rate can we produce this shale gas. I've used the following analogy many times before, but it bears repeating: If you inherit a million dollars with the stipulation that you can only withdraw $500 a month, you may be a millionaire, but you will never live like one. We may all be natural gas moguls, but will we ever live like natural gas moguls?
The second big question is how much energy will be required to get the shale gas. The financial costs of getting it are one indication. A key industry insider who heads the country's largest independent shale gas driller said last year that a sustained natural gas price above $6 per mcf is required to grow gas supplies. In truth, a price above $10 per mcf might be needed to get the massive quantities of shale gas touted by the industry. The industry is now drilling the sweet spots in the various shale formations. As they explore further, it will become harder to extract the remaining gas. That means more energy will be required per unit of gas. At some point, shale gas will cease to be worth extracting meaning much of the resource will remain in the ground.
Perhaps the technology will improve. But will it improve quickly enough to offset the increasing difficulty of extracting the shale gas resource as the more easily exploited areas deplete?
There are myriad other issues as well with both conventional and unconventional natural gas:
We heard the same kind of optimism about supplies (and pessimism about prices) just before oil began its historic ascent from $10 a barrel to $147. Given what we know about consensus predictions for fossil fuel prices and supplies, would it be wise to accept the current consensus on natural gas?
October 22nd, 2009
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