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The US Shale Oil Miracle Disappears
Submitted by Chris Martenson via Peak Prosperity,
The US shale oil "miracle" has about as much believability left as Jimmy Swaggart. Just today, we learned that the EIA has placed a hefty downward revision on its estimate of the amount of recoverable oil in the #1 shale reserve in the US, the Monterey in California.
As recently as yesterday, the much-publicized Monterey formation accounted for nearly two-thirds of all technically-recoverable US shale oil resources.
But by this morning? The EIA now estimates these reserves to be 96% lower than it previously claimed.
Yes, you read that right: 96% lower. As in only 4% of the original estimate is now thought to be technically-recoverable at today's prices:
EIA Cuts Monterey Shale Estimates on Extraction Challenges
May 21, 2014
The Energy Information Administration slashed its estimate of recoverable reserves from California’s Monterey Shale by 96 percent, saying oil from the largest U.S. formation will be harder to extract than previously anticipated.
“Not all reserves are created equal,” EIA Administrator Adam Sieminski told reporters at the Financial Times and Energy Intelligence Oil & Gas Summit in New York today. “It just turned out it’s harder to frack that reserve and get it out of the ground.”
The Monterey Shale is now estimated to hold 600 million barrels of recoverable oil, down from a 2012 projection of 13.7 billion barrels, John Staub, a liquid fuels analyst for the EIA, said in a phone interview. A 2013 study by the University of Southern California’s Global Energy Network, funded in part by industry group Western States Petroleum Association, found that developing the state’s oil resources may add as many as 2.8 million jobs and as much as $24.6 billion in tax revenues.
(Source)
From 13.7 billion barrels down to 600 million. Using a little math, that means the hoped for 2.8 million jobs become 112k and the $24.6 billion in tax revenues shrink to $984 million.
The reasons why are no surprise to my readers, as over the years we've covered the reasons why the Monterey was likely to be a bust compared to other formations. Those reasons are mainly centered on the fact that underground geology is complex, that each shale formation has its own sets of surprises, and that the geologically-molested (from millennia of tectonic folding and grinding) Monterey formation was very unlikely to yield its treasures as willingly as, say, the Bakken or Eagle Ford.
But even I was surprised by the extent of the downgrade.
This takes the Monterey from one of the world's largest potential fields to a play that, if all 600 million barrels thought to be there were brought to the surface all at once, would supply the US' oil needs for a mere 33 days.
Yep. 33 days.
And along with that oil come tremendous water demands, environmental, infrastructure and air pollution damages.
So if you do go for it California, the rest of the country will be your best buddy for a little more than 4 weeks. But don't keep calling us afterwards, as we'll be off to the next oil party (if there are any other ones to be had). But know that, sure, we still respect you.
Of course I'm being sarcastic here. But if I lived over or near a shale formation, I would be putting up a hell of a fight to prevent the many long-term damages and airborne pollutants that inevitably accompany such short-lived fracking operations.
At this point, you might be wondering just how the EIA got its estimate so badly wrong. The answer is that the EIA relied on a private firm, one now scraping corporate relations and PR egg off its face:
U.S. officials cut estimate of recoverable Monterey Shale oil by 96%
May 20, 2014
Federal energy authorities have slashed by 96% the estimated amount of recoverable oil buried in California's vast Monterey Shale deposits, deflating its potential as a national "black gold mine" of petroleum.
Just 600 million barrels of oil can be extracted with existing technology, far below the 13.7 billion barrels once thought recoverable from the jumbled layers of subterranean rock spread across much of Central California, the U.S. Energy Information Administration said.
The new estimate, expected to be released publicly next month, is a blow to the nation's oil future and to projections that an oil boom would bring as many as 2.8 million new jobs to California and boost tax revenue by $24.6 billion annually.
The 2011 estimate was done by the Virginia engineering firm Intek Inc.
Christopher Dean, senior associate at Intek, said Tuesday that the firm's work "was very broad, giving the federal government its first shot at an estimate of recoverable oil in the Monterey Shale. They got more data over time and refined the estimate."
(Source)
Wait a minute. The 2011 California shale oil estimate that launched a flotilla of excited "shale miracle" headlines, led the EIA to publish an estimate of the Monterey at 13.7 billion recoverable barrels, and helped to form a national narrative around potential US "energy independence" was done by a Virginia engineering firm?
Okay, well who are they exactly?
Looking at their website, clearly put together using cheesy stock photos, early Internet font formats, and touting the fact that they've been a business "since 1998" doesn't quite project the hoped-for aura of gravitas and seasoned competency:
(Source)
Seriously? A clock in an arch? Typing fingers? A woman gesturing in a meeting and a guy on a phone?
I mean, does anyone other than me have a "no lame stock photos" requirement of the businesses they use to generate the data used to justify a major geopolitical energy realignment? It's the closest thing I have to a hard rule.
Okay, just kidding again....sort of.
At any rate, the bottom line here is that the EIA relied on this firm's back-of-the-envelope calculations which turned out to be -- surprise! -- unreliable. And now, Occidental Petroleum is scrambling to get its assets out of the Monterey and deployed somewhere more promising.
The lesson to be learned here is: don't believe every headline you read. Consider the source, and more importantly -- stock photos or not -- always question the data.
Price, It's Always About Price
However, I cannot completely write off the entire 96% as 'gone' because the media has left off the most important part, as they always do: the role of price.
Without having access (yet) to the latest well data to know exactly what sort of potential disaster we're dealing with, the correct way to write-down an oil resource is to say: at today's oil prices, this asset can yield (or is worth) $X.
At higher prices, it is certainly true that more of the resource will be 'worth' going after.
But as you and I know, the price mechanism is just a means of obscuring the most important variable: the net energy that will be returned from a given play. Generally speaking, the higher the price (which is often a function of the energy required to extract), then the less net energy will come from that play.
So anytime we hear that a given play is being 'written down', as the Monterey is in rather spectacular fashion, what's really being said is that the net energy from the play is a lot less than prior and/or existing plays, and will not be useful to us until higher oil prices come along. In the case of the Monterey, much higher prices.
Whether we have an intact, functioning and highly complex economy of the sort necessary to develop and deliver the technology required to prosecute such low-yielding plays is another matter entirely. My best guess as of today is, 'probably not.'
Conclusion
Today's write down of the Monterey shale asset is a huge blow to Occidental Petroleum specifically, to California's energy and employment dreams more broadly, and to the US's energy dreams at a national level.
This is not surprising at all to anybody following the shale story with a critical eye. We always knew that the best plays were being prosecuted first for obvious reasons; it's human nature to go after the easy stuff first. And this is especially true for the folks in the oil patch.
The best plays were tapped first, not by some accident of technology or lucky holes plunged into the ground, but because they were cheapest to prosecute. The remaining shale deposits are less rich, more costly to explore, and the profitable pockets much harder to find.
Your main take-away is this: the US has a lot less shale reserves on the books today than it did yesterday. Look for future downward revisions as the other remnant shale plays are poked and prodded and found to be wanting.
Investors need to be wary here too. The hype about shale prospects are wedded to a Wall Street cheap capital machine that is showing clear signs of over-heating:
Shale Drillers Feast on Junk Debt to Stay on Treadmill
Apr 30, 2014
Rice Energy Inc. (RICE), a natural gas producer with risky credit, raised $900 million in three days this month, $150 million more than it originally sought.
Not bad for the Canonsburg, Pennsylvania-based company’s first bond issue after going public in January. Especially since it has lost money three years in a row, has drilled fewer than 50 wells -- most named after superheroes and monster trucks -- and said it will spend $4.09 for every $1 it earns in 2014.
The U.S. drive for energy independence is backed by a surge in junk-rated borrowing that’s been as vital as the technological breakthroughs that enabled the drilling spree. While the high-yield debt market has doubled in size since the end of 2004, the amount issued by exploration and production companies has grown nine-fold, according to Barclays Plc. That’s what keeps the shale revolution going even as companies spend money faster than they make it.
“There’s a lot of Kool-Aid that’s being drunk now by investors,” Tim Gramatovich, who helps manage more than $800 million as chief investment officer of Santa Barbara, California-based Peritus Asset Management LLC. “People lose their discipline. They stop doing the math. They stop doing the accounting. They’re just dreaming the dream, and that’s what’s happening with the shale boom.”
(Source)
I guess there's a little less dreaming going on in the Monterey shale patch this morning.
Not to pick on RICE here, because they are more typical than not, but when you are spending $4 to earn $1, somebody ought to be asking some hard questions. Especially the investors.
More broadly, I have been clearly concerned by the recent reports indicating that the shale operators have been spending far more in CAPEX than they’ve been generating in operating earnings.
That's a larger subject that I've covered in more detail in recent reports, but the summary is this: over the past four years, free cash flow (FCF) has been negative for most of the major shale players.
Which leads us to the really big question: When will all these shale drilling efforts actually generate positive FCF?
In the case of the Monterey, and at today's prices, the answer looks to be 'Never.'
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"I think water will be the next big thing"
Wow, a true genius in our midst!
BTW - Ever hear of the true fundamentals that are: Food, Shelter and Water?
Curious to know how the obozo circus allowed this little story to get out? Seems kind of strange with all the other manipulations going on.
Official release is in June. Would not surprise me one bit if it gets air brushed before then. It's an election year.
That.
But notice, the best way to handle bad numbers is to first issue great numbers to broad public fan fair -- and then quietly revise them later in a way that is easy to either ignore or misunderstand.
Nobody is paying attention -- we're being tooled.
Um... Look! Squirrel!
Awe Come On!
Let Industry Shit in Our Water Table!
What goes down must come up!
Yeah, like what could possibly go wrong?
If I burn 1kg of petrol in the car engine, then I produce 42000 kcal., which I can convert into mechanical power.
if I need more, than 42000 kcal to produce this 1kg of petrol, then regardless the price, it does not give any sense to extract it from the earth.
the price is a secondary issue.
the energy gained is the primary issue.
petrol costs today here in Austria on average 1,4 Euro /liter this is 1,9 USD/liter, this is like 9 USD/ gallon.
Except you are only converting maybe 30% of that energy into mechanical power, while the machine that dug up that oil also was maybe 30% efficient. Tremendous room for improvement on both ends.
"Tremendous room for improvement on both ends."
Jevons Paradox.
We DID have abundant, cheap energy. And here we are today, more dependent on this condition and less able to provide for it.
But, none of the "improvements" are going to come about if end-consumers are still going to be in debt and continuing to face declining wages.
Jevon's Paradox can only occur if there is supply to enable it.
There needs to be a leg down in the economy, before we can start moving toward a new equilibrium. Some of the debt needs to be purged, wages need to fall, government needs to shrink and taxes and regulations need to go down. We'll see if Obama's Promise Zones or whatever he wants to call his SEZ provide the right environment.
Isn't EIA the guys who keep predicting a 25% increase in oil demand every year, who predict a 50% increase in oil prices every year, and who keep predciting a 40% drop in oil production every year? They are almost as bad at predictions as the Fed.
In fairness, trying to predict shit on such a huge scale and in the face of a highly distorted market is kind of like throwing darts at a dartboard that's moving, at the speed of light.
It's a finite planet and we're operating it as though it's not. The path is pretty clear as to how this is all going.
Isn't EIA the guys who keep predicting a 25% increase in oil demand every year, who predict a 50% increase in oil prices every year, and who keep predciting a 40% drop in oil production every year? They are almost as bad at predictions as the Fed.
Sounds more like the EIA is setting up $4.00 a gallon gasoline this summer for their big bank masters.
It's easier to think there is a brutal and cynical conspiracy going on to enrich the rulers of the universe, than to face the prospect that this game is over and you are truly and irrevocably fucked up the ass sideways.
Yep, it's ALWAYS the dealer's fault! (ask any junkie)
If fracking can cause earth molestations in Oklahoma, just imagine what kind of earth rape California would be in for.
Stopped reading after a few paragraphs. Resources are not reserves. There is a meaningful difference between the two. The words cannot be used interchangeably as is done here with credibility maintained. Those working in technical areas at resource extraction firms know this. Idiots at government agencies and most journalists apparently don’t.
Exactly so, and that begs the question, "what was the real point of this and (I've lost count of the number of "the oil and gas production in the US ain't real" stories) appearing on ZH? After that five year old phony "Where cars go to die" idiocy of last week I'm wondering, "why am I here?
"And I wonder what oil sustained at $150, plentiful as it might be, would do to everything else downstream on the economic value chain. What would food prices look like?"
I don't know. Cheap? Oil prices have exploded since the 1930s, but food is plentiful and cheap. It's so abundant that people talk about a GLOBAL obesity epidemic. The people starving to death are usually in war torn countries. In the 1930s, people really were going hungry, missing meals, losing weight.
Yeah but the way food is grown in many places has changed a lot since the 1930s. Agriculture the way we practise it today (read: to feed the number of people alive today) is heavily dependent on diesel and petrochemical products.
Oil prices haven't exploded since the 1930s (adjusted for inflation). They've exploded since the 1990s. There were some ups and downs in the 1930s to 1990s but for geopolitical reasons usually. The big step change came when we went from $15 or $20/bbl in the 90s to where we are today. I may be wrong but if memory serves I think we've seen a lot of food price inflation over the last 20 years too. When the stuff that you use to move the food, grow it, and fertilize it gets more expensive, then the food has to get more expensive too.
The increased yields from the 1930s is mostly offset by the population increase.
The other side is solar cycles; we get a dust bowl type prolonged multi-year drought in the American Midwest, and we'll see hungry people.
As for the obesity epidemic, anti-biotics make people and animals fat. fructose makes people fat. pollution and stress and who knows what else makes people fat. That doesn't mean they have too much nutrition.
http://www.ncbi.nlm.nih.gov/pubmed/17194277
Oil was at it's all time cheapest relative to just about everything else in 1998....
~$10 a barrel in 1998 dollars no less....
Right at the time the North Sea peaked....
"but food is plentiful and cheap. It's so abundant that people talk about a GLOBAL obesity epidemic."
You seem to be confused as to what food is, just as you are confused about tar sands being some replacement for oil.
"The people starving to death are usually in war torn countries. In the 1930s, people really were going hungry, missing meals, losing weight."
And those suffering from extreme weather conditions (droughts/floods etc). It's got to do with disruptions to distribution, and distribution relies heavily on energy.
"Oil prices have exploded since the 1930s"
What country are we talking about here? If it's the US then you're not in line with actual data:
http://www.energytrendsinsider.com/wp-content/uploads/2012/02/gas-prices...
http://inflationdata.com/inflation/inflation_rate/historical_oil_prices_...
http://gailtheactuary.files.wordpress.com/2013/11/average-us-wages-compa...
Note (for the US that is) the magic period of 1971/1972. It's when the USD totally disconnected from gold backing. It's also when US oil production peaked. And, it's when the US opened up trade realations with China. People need to pay more attention to this very key time.
Time to trade in the Hummer.
As much as I detest those status symbols, if they carry a full complement of people they get better People Miles Per Gallon than a lone driver in a Prius.
It's about tool usage.
And since I have a diesel-sucking 4x4 I'll have to defend it as being far more efficient at moving cargo than my cheap econo-car.
The shale formation extends into the Monterey Bay National Marine Sanctuary, but those pesky environmentalists would have a fit if they woke up one morning and saw an offshore drilling rig setting up near Big Sur. I would too.
http://montereybay.noaa.gov/visitor/slideshow/pages/1.html
There is probably shale oil under everything. But I don't propose we destroy everything just to prolong the undead existance of the oil majors for another couple quarters. After they are gone (and moved their happy asses to the islands) we don't get all that other shit back.
Call me a conspiracy nutter, but I swear the shale hype is just a US psyop to rattle Russia into a more submissive position when negotiating Europe energy deals.
I don't think that Russia is going to be rattled by US actions, as the US has no real ammo (other than try to drive a wedge between Russia and China).
The EIA reduces their guesstimate to 4% of what THEY said before. They must have learned this from watching analyst earnings estimates that keep being reduced so that a company gets a 'beat' headline. Of course, guesstimates that change this much totally destroys any credibility that the EIA has, since their numbers seem to come from a monkey throwing at a dartboard.
It's all predicated on "projected growth." Always been done this way. Problem is is that no longer can they "create" growth by forecasting it. And I'm pretty sure that much is stuck with these assumptions (just like it's assumed that growth WILL occur forever).
Given how politicized every agency is under Obama (especially the EPA) it wouldn't surprise me if this report was complete BS.
Yesterday this "news" was used as evidence we need to ban fracking here in California.
Keep an open mind, but be suspicious.
"Given how politicized every agency is under Obama (especially the EPA) it wouldn't surprise me if this report was complete BS."
Gee, with a name of "ObamaDepression" you don't have an agenda do ya?
Did you just fall of the haywagon? Fucking govt has ALWAYS been politicized! Govt is about serving business interests, and when one side of the "interests" is struggling to "get it's 'share'" it unleashes all sort of pawns/players. Ain't that right, Party Pussy?
So when is this expected to impact Oxy stock price?
At no point did I ever think shale oil was much of anything and I am proven right once again. Not bad for some dude living back in the woods.
Well, the remaining 96% is now available to the biggest bidder out there. And with the lower estimation, gas price goes up.. so will be the longs. And in a week or so, there will be a revised estimation, that will send the price of oil/gas to low... effectively killing anyone try to push gas/oil price up.
Dude we don't need no stinkin oil. They have plans to connect a rubber band to the moon and run a generator off of it.
I would suggest to place some strong magnets on Earth and Moon to create a stellar dynamo. That will fix all problems.
No, you do not understand shit about metal.
The "secret" is in Niobium.
99% of the reserves are in Brazil.
Is part of the BRICS.
You do not make stainless steel without niobium!
Just remember to "exceptional" USA, FUCK YEAH.
Now it is the turn of the BRICS.
hehe.
Hmm...
Used in pipeline steel.
That would be why IAMGOLD operates one of the worlds largest niobium mines in Quebec...
Talk to Buffet on how you’re going to ship Nat gas internationally via choo choo train.
Given the fact that the EIA is a government vehicle and that California is pretty much run by left wing nuts that would rather let oil seep into ocean than harvest it, I'm going to take the report with a grain of salt. (I think they still allow that in California kitchens - in limited quantities, to be sure.)
People extrapolate some claim by the government across every fracking field in the U.S. Bakken, Three Forks, etc. are profitable in 24 months and reserve numbers keep climbing. Most are being hooked up to nat gas lines now, further bolstering the bottom lines of the drillers. If people are going to hold a funeral for fracking sakes, wait until Exxon pulls out to do it.
And given that Wall Street... And that this is a finite planet.... Fucking never mind!
"The US Shale Oil Miracle Disappears"
Don't worry folks ...................it's been found in the UK (!!!).
Yesterday, it was revealed that several billion barrels of shale oil lie beneath some of England's most Tory of Tory parts of the country: Surrey, Hampshire & Sussex.
The Tory coalition is planning to change the Trespass Law which will allow fracking companies to drill and search/extract the oil from underneath peoples homes/land WITHOUT the owners permission. Currently, a company could be prosecuted for trespass absent getting the landowners permission.
http://www.telegraph.co.uk/earth/energy/fracking/10850529/Fracking-plann...
Just google "oil shale <insert whatever country name>" and out will pop the same basic cookie-cutter BS.
Fucking NUMHers (Not Under My Home-ers)! How dare they impede economic gain! </sarc>
Arrest Prince Charles for treason against the US.
This is an Epic fail! Now the real reason behind the geopolitical policies and increase in military is coming to the surface.