Guest Post: Shale Gas Will Be The Next Bubble To Pop

Tyler Durden's picture

Submitted by James Stafford of OilPrice.com,

The “shale revolution” has been grabbing a great deal of headlines for some time now. A favourite topic of investors, sector commentators and analysts – many of whom claim we are about to enter a new energy era with cheap and abundant shale gas leading the charge. But on closer examination the incredible claims and figures behind many of the plays just don’t add up. To help us to look past the hype and take a critical look at whether shale really is the golden goose many believe it to be or just another over-hyped bubble that is about to pop, we were fortunate to speak with energy expert Arthur Berman.

Arthur is a geological consultant with thirty-four years of experience in petroleum exploration and production. He is currently consulting for several E&P companies and capital groups in the energy sector. He frequently gives keynote addresses for investment conferences and is interviewed about energy topics on television, radio, and national print and web publications including CNBC, CNN, Platt’s Energy Week, BNN, Bloomberg, Platt’s, Financial Times, and New York Times. You can find out more about Arthur by visiting his website: http://petroleumtruthreport.blogspot.com

In the interview Arthur talks about:

•         Why shale gas will be the next bubble to pop
•         Why Japan can’t afford to abandon nuclear power
•         Why the United States shouldn’t turn its back on Canada’s tar sands
•         Why renewables won’t make a meaningful impact for many years
•         Why the shale boom will not have a big impact on foreign policy
•         Why Romney and Obama know next to nothing about fossil fuel energy

Interview conducted by James Stafford of Oilprice.com

Oilprice.com: How do you see the shale boom impacting U.S. foreign policy?

Arthur Berman: Well, not very much is my simple answer.

A lot of investors from other parts of the world, particularly the oil-rich parts have been making somewhat high-risk investments in the United States for many years and, for a long time, those investments were in real estate.

Now these people have shifted their focus and are putting cash into shale. There are two important things going on here, one is that the capital isn't going to last forever, especially since shale gas is a commercial failure. Shale gas has lost hundreds of billions of dollars and investors will not keep on pumping money into something that doesn’t generate a return.

The second thing that nobody thinks very much about is the decline rates shale reservoirs experience. Well, I've looked at this. The decline rates are incredibly high. In the Eagleford shale, which is supposed to be the mother of all shale oil plays, the annual decline rate is higher than 42%.

They're going to have to drill hundreds, almost 1000 wells in the Eagleford shale, every year, to keep production flat. Just for one play, we're talking about $10 or $12 billion a year just to replace supply. I add all these things up and it starts to approach the amount of money needed to bail out the banking industry. Where is that money going to come from? Do you see what I'm saying?

Oilprice.com: You've been noted suggesting that shale gas will be the next bubble to collapse. How do you think this will occur and what will the effects be?

Arthur Berman: Well, it depends, as with all collapses, on how quickly the collapse occurs. I guess the worst-case scenario would be that several large companies find themselves in financial distress.

Chesapeake Energy recently had a very close call. They had to sell, I don't know how many, billions of dollars worth of assets just to maintain paying their obligations, and that's the kind of scenario I'm talking about. You may have a couple of big bankruptcies or takeovers and everybody pulls back, all the money evaporates, all the capital goes away. That's the worst-case scenario.

Oilprice.com: Energy became a big part of the election race, but what did you make of the energy policies and promises that were being made by both candidates?

Arthur Berman: Mitt Romney, particularly, talked about how the United States would be able to achieve energy independence in five years. Well, that's garbage.

Anybody who knows anything about oil, gas and coal, knows that that's absurd. We were producing a little over 6 million barrels a day thanks to an all-out effort in the shale oil play. We consume 15 million barrels of oil a day and that leaves the gap of 9 million barrels per day. At the peak of U.S. production, in 1970, the U.S. produced 10.6 million barrels per day. Like I said, either the guy doesn't know what he's talking about, or is making a big joke of it.

Obama didn’t talk so much . . . He's a hugely green agenda kind of president and I'm not opposed to that, but he's certainly not for the oil and gas business. It wasn't until he got serious about thinking about his re-election that he decided to take credit for what really happened.

Oilprice.com: Japan recently announced that they are going to be phasing out nuclear power. What are your views on nuclear? Are we in a position to abandon this energy source?

Arthur Berman: No. Japan is a special case. The disaster at Fukushima, the nuclear reactor, was right on top of a major fault. So, that was a dumb place to put it.

To wholesale abandon nuclear power because one reactor was incredibly stupidly planned, to me seems like a bit of a . . . well, I can't tell people how they should react, but if I were a Japanese citizen, and the truth was that we have no oil, we have no coal, we have no natural gas, the next question is, "Well, if we get rid of nuclear, what are we going to do?"

It's a really good question to ask. If you don't have anything of your own, how are you going to get what you need? The answer is that they have to import LNG and that's very expensive.

Right now, natural gas is selling in Japan for $17 per million BTUs. You can buy the same BTUs in Europe for $9 today, or in the US for $3.25

Oilprice.com: What about Germany’s decision to also phase out nuclear power?

Arthur Berman: For Germany to abandon nuclear… that decision is truly delusional because they haven't had any problems over there. Nor is Germany particularly earthquake prone or tsunami prone. They have forced themselves into a love relationship with Russia.

Oilprice.com: What are your views on Canada's tar sands? Are they a rich source of oil that the U.S. needs to exploit? Or do you think they're a carbon bomb, which could do irreparable damage to the climate?

Arthur Berman: Well, that's a very good question. I suppose they're both, as are virtually all things that burn. Right? They're a very rich source of oil. And they're dirty. It requires a lot of natural gas heating to convert them into some usable form, a lot of processing, but here's the thing, if the United States doesn't buy that oil from Canada, do you think Canada's just going to say, "Oh. Okay. Nevermind. We'll forget about all this."

No. They're going to sell it somewhere else. They'll probably sell it to Asia. So, the issue of the carbon bomb doesn't get resolved by the United States not taking the oil.

So, to me, that's off the table. Yes. I think it's an incredibly sensible play to get your oil from a neighbour, and a neighbour who you trust, and it doesn't require overseas transport and probably getting involved in periodic revolutions and civil uprisings.

Oilprice.com: Is there any technology, any development you see coming in the future that can help us get where we need to be? Is conservation really the only answer or do you have any hopes for some of the alternative energy technologies, such as solar or, even, some of these more advanced technologies such as Andrea Rossi’s E-cat machine?

Arthur Berman: Oh. I have all the enthusiasm for technology that you could ask for. I'm a scientist and I love technology but I heard a very good presentation several years ago on your exact question and the man who gave a talk said, "I'm going to give you a rule to live by. If it's not on the shelf today, then a solution is no sooner than ten years in the future." So, when you talk about E-cat and you talk about algae and all this kind of stuff, it's not on the shelf today. So, that means it's in some sort of pilot stage of testing.

Work harder guys. Work harder and faster because you've got a lot of work to do. So, yes, I'm enthusiastic. I think there are some great ideas out there but I don't see any of them helping us in the coming five to ten-year period.

Oilprice.com: Environmentalists talk about the evil of fossil fuels, but have they really done their research to see how vital it is to pretty much everything that we base our modern lives upon?

Arthur Berman: Well, that's exactly right. My oldest son and his family until recently lived in California, and in California people think electricity comes from the wall. They don't have any idea that most of their electricity comes from horrible coal-fired power plants in New Mexico and Arizona. As long as they don't have to see it, they don't have a problem.

But, in this world, and in this life, we're all connected and if you see something you don't like, there's a good possibility that whatever they're doing there has something to do with something you're using. So, this is an issue.

Oilprice.com: Arthur, thank you for taking the time to speak with us. For those readers who may be interested in contacting Arthur please take a moment to visit his website: http://petroleumtruthreport.blogspot.com/

Comment viewing options

Select your preferred way to display the comments and click "Save settings" to activate your changes.
AGuy's picture

"With current administration, more and more coal fired power plants are going to go off line or converted to nat gas."

Yup. All this will lead to a major electricity shortage in the future. Perhaps permanent rolling black outs

1. Power companies take on debt to build new gas fire plants and assume that the cost of Ngas remains below $4 mmbu.

2. Shale gas play collapses. Price of Ngas rises to $12-18 mmbtu with in 6 months of the Shale gas collapse.

3. Power companies first experience margin collapse, and press regulators for rate hikes

4. Power Companies only get a partial rate hike, not enough to offset higher Ngas prices. They shutdown there Ngas because they can't afford to operate them.

5. With Coal Plants shutdown and may Ngas plants offline because of Ngas Prices, Rolling blackouts occur. Espeically during the summer months.

 

 

TheGreenManalishi's picture

Bubbles are the next Bubble

Yen Cross's picture

 Is it true that "sideways drilling" isn't profitable under $85bbl?  If that's the case, then we are screwed sideways...

literarybeer's picture

sideways drilling...lol. if you dont know what the hell you are talking about then please dont bother. thanks!

CrockettAlmanac.com's picture

That's what I use for sideways drilling.

Yen Cross's picture

 Ok, no need to create a 'blow out'...

Yen Cross's picture

 Easy there TEX. I might have to frack your wisdom teeth. Lay off those " Lone Stars", it was just a question.

CrazyCooter's picture

I think break even in the Bakken (liquids fracking) is lower than that. So are tar sands.

The problem with gas is that is it much cheaper on the market than oil/liquids, which are cheap and easy to transport.

But, all that aside, we are screwed regardless. Just a process of time. So, the real haggling is on now, soon, a little later, later, etc.

And the answer to that depends on your disposable income and income security.

Regards,

Cooter

The Gooch's picture

Long, potable water.

Jack Burton's picture

Water is indeed a large concern. I am not up on all that goes into the fracking process, but fracking is seen as the great American energy play, and I understand fracking is very water intensive. I heard reports this summer that the big drought in the US midsection actually caused a slow down in fracking well drilling. Water in some places was hard to come by for the fracking process. Could we see more of this?

Also, I think the slow collapse of the Middle East into war is going to make US energy sources highly profitable no matter production costs. When the bombers head for Iran, and they WILL, then US energy will be as good as solid gold. The gas bubble ain't going to pop when the Middle East is in flames and NATO attacks Syria, Israel bombs Iran and destroys Gaza, Hoezbolla opens a missle campaign against Israel. Iraq fragments into Sunnis versus Shia versus Kurds. Other Mid East oil nations like Saudi Arabia and Qatar are sitting on social time bombs.

Any energy that is USA based is going to have a bright future when the Middle East is one vast war zone, it is half way there already!

Major Major Major's picture

On the first part… Hydraulic fracturing can use a lot of water, which then has to be disposed of / stored.  However, you can also “frack” with hydrogen, which uses practically no water.  I doubt a drought would have an impact on fracking, at this time.  Slowdown more likely due to low nat gas prices given there would be limited demand due to the economics of drilling.

falak pema's picture

Oh hydrogen is not at all "combustible" right? Why not use Nitrogen.

Matt's picture

What exactly do you think happens during a frack? What do you think "frack" is short for?

From what I've seen, it sounds like propane may be the way to go, but I'm sure whatever is most economical is what will be used, eventually.

Ginsengbull's picture

Liquid carbon dioxide is only 0 degrees farenheit at 300 psi, and that stuff gasses off with explosive force when the pressure drops below 60 psi.

CO2 is a dirty word to the greenies, but most industrial CO2 comes from natural gas wells anyway, so you can easily reclaim it and sell it to beverage producers, fire extinguisher manufacturers, and processed food freezers.

CrazyCooter's picture

Um, please provide a reliable technical citation where any one in actual industry uses anything OTHER than H2O for fracking before hijacking the thread.

Regards,

Cooter

Matt's picture

Wow, bit sensitive there? I would hardly call discussing non-hydrualic fracking to be an off-topic thread-jack on a thread about shale gas. You should spend a few hundred hours posting your complaints on all the other threads about all the far-more off topic posts.

Here's the company that claims to be using propane gel for fracking; patents pending so GL on finding technical informaiton on it:

http://www.chimeraenergyusa.com/investors.html

CrazyCooter's picture

LMAO!

Ok, so millions of gallons of H2O, PER FRAC, can be replaced with ... something as cheap as water per volume (and a gas, not a liquid).

By all means sir, buy it! Oh, right, you are selling. Perhaps I should buy 2!

Regards,

Cooter

Matt's picture

Here's a fun, educational video from the ad firm:

http://www.zerowaterfracking.com/

EDIT: and holy crap, if chesapeake's numbers of 65,000 to 600,000 for a shale gas well, and 4.5 million gallons for a horizontal frac, and this ad's numbers of 800,000 existing wells is accurate, we're talking trillions of gallons of water.

Ginsengbull's picture

I used to work for the Liquid Carbonic Acid Manufacturing Corporation.

 

That reliable and technical enough for you?

SoCalBusted's picture

CO2 may be a may be a dirty word to the greenies, but google "carbon sequestration" - most of these processes in fact pump it underground at high pressure.

falak pema's picture

its high pressure liquid pumped into horizontal pipes @ 9000 lbs used to crack shale layers, its not in-situ HC burning. 

falak pema's picture

Look how the energy lobby now howls about frack potential all over USA : First they say LA Santa Barbara is bigger than Bakken now this from San Antonio : Forget North Dakota — There's A New Shale Oil Boom State In Town - Business Insider

If the depletion rate is the same in side ways gaseous nirvana all over, we will have an investment bubble as they drill completion to depletion so fast they will have more wells in San Antnio than cactuses in the desert. 

With a 3-4 $/MMBTU price in USA its means no ROI on investment. Bubble trouble bigtime apart from frack pollution hell.

correction : south texas may only be liquids production. This is not clear if the ratio to gas is significant, although many wells show hi gas/oil ratio. 

 

CunnyFunt's picture

It's not only the volume of water withdrawals, but contamination of water wells with nat gas and chemicals used to facilitate extraction. The public doesn't know what these chemicals are since they are "proprietary" information. It's a farce.

Ginsengbull's picture

Invest in activated carbon filtration.

CunnyFunt's picture

Will I get an ObamaFilter when my water is contaminated on account of a convoluted reading of eminent domain?

DaveyJones's picture

that and the fact that we are drawing down our water tables faster than relpenishment all over the world makes this a great combo

Caviar Emptor's picture

I'll have Spam with that combo

falak pema's picture

Jack learn to count, without ME the whole world is fukked. For the 21 st century.

So you don't play games around it for silly Israel. 

There is only one meme allowing Pax Americana and its NWO to exist : ME OIL MUST FLOW TO ALL ITS CLIENTS AS THEY ARE PART OF THE GLOBAL OLIGARCHY. That is non negotiable to US supremacy hawks. As, if it loses ME oil the world economy and USD hegemony die.

This thing is about global Oligarchy power and it is NOT US centric. Not today, not for another 30 years. The US oligarchs jointly OWN that oil with Saud and surrogates who have ALL their assets in west. Its totally incestuous.

Caviar Emptor's picture

I'm as much of an oligarch as the next guy.

And I agree ME oil must flow. US Nat Gas : still got to store, distribute and retail it on a mass scale which current infrastructure does not support. To get to where we are currently with ease of liquid hydrocarbon use would take years for gas to catch up

archon's picture

I agree... the demise of oil shale is greatly exaggerated, especially in an energy-starved world.  Besides, once the Arabs and Israelis are done killing each other, they'll be more than willing to sell as much oil as they have so they can pay for the clean-up.

CrazyCooter's picture

Disagree.

Population has already outstripped supply. To clarify, infants today are adults tomorrow, with energy needs by modern standards.

You drive your car by looking through the windshield. I suggest you comment on ZH by not seeing the world through your rear view mirror.

Regards,

Cooter

falak pema's picture

to think the Oil lobby is proposing this sidesways drilling in France like every where else...sideways reasoning at its best?

Yes one point is very clear : the German nuclear option plus its all-in into renewables makes it very dependent in future to :

a) Gazprom

b) French nuclear electricity at peak loads. 

This will be an option that makes German Ost politik a vital necessity and it takes the whole of Euro group eastwards, and club med southwards, with Algeria/Libya/West Africa in coming years for its energy needs, leaving ME for Far East.

magpie's picture

Mind the solar panels in Morocco lol

falak pema's picture

they use it to green house hashish. Big business.

magpie's picture

Free electricity from the Sahara, to power hash plantation s by infrared in downtown Amsterdam ! Better watch out, if France ever has to apply for a bailout, Mutti Merkel might order those fast breeders shut down in exchange.

gould's fisker's picture

If you smoke enough hash none of this matters.

Tsar Pointless's picture

There are two big lies that the big energy companies have tried to sell (and have been somewhat successful in so doing) where I live, in Western Pennsylvania:

1) There is such a thing as "clean" coal; and,

2) Marcellus Shale=The Golden Grail.

http://www.post-gazette.com/stories/local/marcellusshale/derry-well-site...

I lived in Derry for more years than I care to claim. There is a lot of stupid in Derry - prime for the picking by smooth-talking shysters spouting promises of stacks and stacks of money.

Now, that area is replete with half-completed wells and decimated land. Stupid is, as stupid does, I s'pose.

Vint Slugs's picture

He frequently gives keynote addresses for investment conferences and is interviewed about energy topics -- almost stopped there because that says it all about Mr. Berman but decided to read further.  This interview is long of one man's opinions and short of actual facts.

CrashisOptimistic's picture

Berman knows his stuff.  He has to dumb it down in interviews.

The most important part is early in the interview.  EVERYONE needs to understand that the media only covers "new discoveries".  They do not cover decline rates.  You probably have never heard of an oil well being "P&Aed", which is Plugged and Abandoned.  

But it happens hundreds of times every day globally.  

You never hear about it, but you really do need to understand that DECLINE RATE defines everything.  Not new discovery or new production.

It's a diabolical reality.  Oil is not measured in barrels.  It's measured in barrels per day.  The day you start a new well producing, it's all downhill from there.  The production rate will fall.  Every new well you drill ADDS to the decline rate that you must overcome with new drilling.

It becomes frantic.  It becomes desperate.  And it eventually fails -- just like the young kid running up a down escalator.

Tsar Pointless's picture

You mean sorta kinda like this?

http://www.youtube.com/watch?v=qLFTUIcJHNU

I agree with everything you say, BTW.

CrazyCooter's picture

Visit www.TheOilDrum.com and in that light vet Berman versus the others.

He is widely recognized as not having his head up his ass or being a shill.

Thus, you should at least consider his ideas/opinions and vet them against facts/reality you know to be true/reliable.

Regards,

Cooter

Augustus's picture

First nonsense error was in stating that Romney promised "US energy independence."  The comment was actually referring to North American energy independence, including the Canadian surpluses that will be marketed somewhere.

Then he carries on to infer that the shale gas is somehow not there to be produced.  Of course it is there, just not at $3 prices.  Note that price in Japan is $17 and that Gazprom is glad to supply Europe at $9.  If US NG price is $6, it can displace Gazprom in Europe and make a very large profit selling to Asian markets.  US consumer would still be getting energy at a discount to world prices as $6 NG = oil at somewhere in the range of $50 to $60 a bbl.  Obummer has delayed the integration of the Canadian market and the construction of the LNG facilities that would lead to NG production increases.  Note also that at $6 NG price coal is very price competitive for electric generation.

This incompetent has created more bums than any other President in the history of the country.

Mr Lennon Hendrix's picture

Good interview from the illustrious Lauren Lyster with the Chief Energy Investment Strategist at Casey Research:

http://rt.com/programs/capital-account/outlook-energy-oil-gas/

CrazyCooter's picture

Good stuff, just watched it (first half).

Thanks for sharing.

Regards,

Cooter

Tsar Pointless's picture

“Money is pouring in” from investors even though shale gas is “inherently unprofitable,” an analyst from PNC Wealth Management, an investment company wrote to a contractor in a February 2009 email. “Reminds you of dot-coms.”

http://www.nytimes.com/2011/06/26/us/26gas.html?pagewanted=all&_r=0

Dot-coms, you say? Well, then, what could possibly go wrong?

ShrNfr's picture

Actually quite an interesting read. Many thanks. Looking at the source documents is an interesting exercise. Aubrey just sold a pile of his shale plays. CHK may not be as dumb as folks make them out to be.