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/

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ShrNfr's picture

I thought his decline rates to be high, but on further investigation find that they are within reason. Some stuff that may be relatively easy in ND will be a real pain in more populated areas over shale. I suppose we will find out.

ComeAndTakeIt's picture

I'm concerned Obama will go after oil and gas as aggresivley as he's gone after coal. There's really nothing out of the realm of possibilty with these psychopath's in DC...At the very least, I could see them trying to nationalize all oil and gas production eventually...It would appear to be nearly impossible to do that in this country, but if they attempted it, I wouldn't be shocked.

Yen Cross's picture

 The premise of my original question, was based on the profitability of "shale oil extraction" via high pressure "sideways extrusion".

  There is a floor/cost on this type of energy extraction. I'm sure it was known 30 years ago, and cost effective.That form of extraction, has created an energy policy base of  $85-90bbl.

   That should imply a cost of 40-50 dollars a barrel of crude. Either consumption is going up, or the the United States will be a net exporter of your " SOVEREIGN WEALTH"! Based on demand in the United States...

A Humble Man's picture

Long time lurker, first time poster.  I would just like to add my 2 cents worth.  What Berman says seems to be true but it needs to be taken in a different context.  Drilling/fracking for nat gas is profitable if there is enough nat gas liquids.  Profits come from the liquids, the gas is just a by-product that is sort of given away. 

Bicycle Repairman's picture

There is big money on all sides of the energy issue.  Lots of money, lots of BS and lots of war being spread around.  Especially BS.

MrPalladium's picture

Where is the supporting data? Is this just a shill for shorts like Chanos?

TheBigTree's picture

This author is hilarious. Does he really think that thousands upon thousands of shale wells have been drilled because they are subeconomic? Every single oil company on the planet takes into account the decline in production from the time they are drilled. My company drilled three utica shale wells this year. The first well paid back the cost to drill it in 65 days. The second well did the same. The third well is being tied into a pipeline but the initial test is extremely positive. At current oil and nat gas prices I will drill these all day long. These wells still have a positive npv down to $23/bbl. AND THAT ACCOUNTS FOR AN 80%first year decline. The decline is actually hyperbolic, so 5 years out the well will only decline 4%/year for perpetuity. The operating cost is almost nothing, so these wells will conceivably be producing 50 years from now.

Uneconomic? Hardly.

Bubble? Maybe in the money the publics are able to pull out of the national oil companies from around the world that are flush with petrodollars and nowhere to go with them.

Oil goes to $50 tomorrow...I'm still drilling like a house of fire.

And for all the people that claim there is no frack chemicals list out there, check out http://fracfocus.org/. There is information on thousands of wells and what chemicals are involved.

Hate the oil industry all you want. But nobody hates the farmer when he plants corn and the corn is sold at all time high prices. Maybe we should hit farmers with a windfall profits tax when zirp runs food inflation through the roof. America should cheer the oil industry because every barrel of oil I make brings the price down incrementally for everyone else. And I'm producing it here in America. So not only does that make America richer by not exporting that wealth through additional trade deficit, but it also gives us additional national security by not having to bring our lifeblood across an ocean. And that money doesn't go to a country that supports terrorism.

As long as oil prices stay where they are we will be energy independent in North America. In just the USA, it's doubtful unless there is a strong push for nat gas as a transportation fuel.

CunnyFunt's picture

MSDSs are readily available for the non-proprietary chemicals. Proprietary chemicals are subject to gag orders, even by physicians.

http://www.theatlantic.com/health/archive/2012/03/for-pennsylvanias-doct...

I don't hate the industry. I just don't want my 20 GPM well contaminated with drilling byproducts or methane, especially not when eminent domain is being used against lease hold-outs to sieze their mineral rights.

Matt's picture

The article seems to be mainly talking about natural gas, not oil; If nat gas went down to $0.50 per million Btu, will you still be drilling it? Or is your company drilling mainly oil?

Take a look at the finances of Chesepeake, one of the big players in nat gas. The story seems to be that they are using borrowed money to drill, and keep borrowing more and more.

TheBigTree's picture

Dry gas shale wells need anywhere from $4-$6 nat gas to be viable depending on the well. Chk's problem is they are 90% nat gas, over leveraged on a bet to buy a ton of leases, and they sold their nat gas hedges because they thought gas would go back up. It was obviously a bad bet.

We drill for both gas and oil. Oil is less likely to slowdown because it is a global commodity and gas is land locked in North America so to speak. The reason nat gas is low even though demand is up is because shale gas drilling has been too effective. If this author was correct they would decline so fast the market would be back to the old equilibrium very quickly and chk would be golden again. Obviously...that has not happened.

Kayman's picture

"Only one abbreviation EIOER:"

This is entirely meaningless until costs and revenues are attached.  One of the fundamentals to Oilsands ROI is that natgas is so cheap for heating bitumen at the source. 

TheBigTree's picture

That law may exist, but the frack focus website has the full list and explanation of what they are. A lot of people in New York where fracking has been banned currently have methane in their well water. Underground coal seams are less permeable to water than the soil above, so people tend to put water wells there because the water filters down and gets stuck above the coal seam. Coal generates coal bed methane.

A mistake the oil industry made is that in Pennsylvania we did not initially do baseline samples of water wells to be able to prove water quality has not changed . I assure you in other states where shale drilling is beginning (Ohio) those base line samples are being taken.

As far as contamination goes, it's much much more likely that a truck flips on an icy road carrying oil or flowback water. Obviously, there are inherent dangers, but we try to mitigate those as much as possible. The other option is horse and buggy.

Underground contamination is highly unlikely for myriad reasons that I'm not going to go into here, but I would be much more concerned about surface spills than a water well being contaminated from underground.

In many of these areas where we drill, the coal companies already came in and turned the countryside upside down to get the coal out and then allow acid mine drainage to leach into the water supply, but the media has the general public up in arms over something far far less ecologically damaging.

CunnyFunt's picture

New York has NOT banned fracking. There is a drilling moratorium until the DEC completes its regulations (due Nov. 29). Cuomo has ambitions and he doesn't want to upset the wrong people.

I'm familiar with fracfocus. It is an amalgam of regulatory and industry interests. The rules vary from state to state. In Ohio, Michigan and Texas, proprietary chemical information is not provided to regulators or the public. In Pennsylvania, Arkansas, Colorado and Wyoming, the information is disclosed to regulators but not to the public. These chemicals are not disclosed in fracfocus, either.

Regarding contamination of water, I would urge readers to research what happened in Dimock, PA, and in Pavillion, WY.

What disturbs me most about the fracking is the hand-in-glove relationship between the executives, regulators and courts. They work out sweet deals among themselves and subvert existing laws and craft new provisions for their mutual benefit. If my water gets contaminated while there is drilling beneath my land (all made possible through eminent domain), then too fucking bad. Right?

overmedicatedundersexed's picture

just a comment on ground water contamination..why do we have purification of drinking water in many areas where there is no drilling at all?? could one have a company based on taking methane out of potable water??

why that might create jobs, the by product could be useful as well NO?

water contamination is/has been an exciting area to solve and profitable.

Yellowhoard's picture

Can't wait for Matt Damon's fuck fracking movie paid for by the United Arab Imirites.

Lloyd_Xmas's picture

I going long the hot air coming out of Washington

Yen Cross's picture

 I like " yellow hard" . He gets it!

Kina's picture

you can frack with a propane gel nowadays, recover and reuse most of it.

tongue.stan's picture

Decline rates are high everywhere for every well, and yes they will have to drill 1000's of wells to keep prod rates flat. So what? Thats the way it has always worked. When the price goes up, its economical to drill. <and when a well declines it is economical to refrac if prices are high enough.>

One of the bigger dangers to fracking, at least in the west, is when the fractures connect to faults, thus providing an easy path for hydrocarbons to contaminate.

Still, this post is another valuable contribution from ZH.

jonjon831983's picture

"There Is A Shale Oil Field Under Santa Barbara Four-Times Bigger Than The Bakken"

 

http://www.businessinsider.com/shale-oil-field-santa-barbara-bigger-than...

 

What is the accessibility and decline rate dunno...

R_J's picture

-The U.S consume 15 million B, per day? (and the Military?)
-Because one reactor was incredibly stupidly planned (At least 200 are stupidly planned...)
-For Germany to abandon nuclear… that decision is truly delusional because they haven't had any problems...(Only One Problem is needed and Europa is Gone)

----As long as the Side-Product is Elecricity...no one will abandon nuclear...

CEOoftheSOFA's picture

I've already been through a bursted shale bubble (Devonian) in the '70's and '80's.  There are just enough good wells to keep you going for a while.  But the price softens and after while you realize you haven't been making much money.  The next thing you know the bottom falls out.  It happened before, it will happen again.  I stil think the best economics for shale wells was in the early 1900's.  Back then the Devonian Shale wells were completed with an open hole completion and stimulated by dropping a torpedo in the hole.   

slackrabbit's picture

Like I said - take a look at this graph. From over a $3 high down to 13 cents

http://www.google.com/finance?chdnp=1&chdd=1&chds=1&chdv=1&chvs=Linear&c...

 

There is no way producers can make money at these prices.

Some producers will go bankrupt and prices must rise.

 

Short the producers and go long NGAS.

And if more and more trucks and car go over to natural gas then the only way is up! http://youtu.be/UtKADQnjQmc

 

 

klapper's picture

I don't quite agree with Mr Berman's take on Germany. Germany is building new coal-fired power plants which cost 1/4 the capital on a $/kWe basis of a nuclear plant and can be throttled up or down 50% in 15 minutes to smooth the irregular power production of renewables. Obviously these plants are facing serious headwinds from the public. However, they do have the effect of reducing reliance on Russian NG.

entropy93's picture

The article completely ignores the revolutionary advances in solar panel efficiency and price. Its going to be far cheaper for Germany and Japan to switch to solar than to build a new generation of nuclear plants. 

Of course people will trot out the same lame old excuses:

"The sun doesn't shine all the time"

The answer was actually invented for the nuclear industry, reactors run all the time and are hard to throttle. They needed a way to store energy produced at night. 

http://en.wikipedia.org/wiki/Grid_energy_storage

As far as energy output capacity, Germany has already demonstrated that solar can deliver gigawatts of power. We are no longer talking a percent or less. Combined with utility scale storage, Germany's cheapest and safest road forward is solar. This in a country far less suited for solar than the US or Japan.

klapper's picture

You sound like a salesman. However, give us some numbers we can check and run.

AU5K's picture

This article is way off base.  I live in san antonio next to the eagle ford.  It is a complete boom.  EOG even has some mega wells, 5000 barrels/day run rate.  There's between 10 and 25 BILLION barrels here.

 

And guess what - there is another layer below eagle ford - much deeper but companies are going there to in the wells already drilled.

 

I'd ignore this Berman guy.

Kayman's picture

As I stated above, without attaching costs and revenues to EIOER, the formula is meaningless.

cgagw's picture

The bike purred between his legs and his pants succumbed to the whips of fresh wind,The ministries in good north face denali clearance warm enough pink and white went by, then a series of stores on Central street with brilliant shop windows.