Sun Nov 28th, 2010 at 09:51:52 AM EST
There has been a lot of talk about the latest get-rich-quick (GRQ) scheme(s) called Marcellus Tight Shale Gas (MTSG) which is based on a Devonian Shale (350 million years ago) resource. It turns out that this is methane and other hydrocarbons (ethane, propane, benzene, for example) trapped in essentially non-porous rock that have the consistency of a brick. The hydrocarbons will not flow out of this rock unless the rock is fractured in a special way ("fracking"). Quite often, the formation is between 1 to 2 miles underground, and there is often saturated saltwater laden layers on either side of the approximately 100 foot layer (a former swamp/shallow ocean bottom) of shale. The hydrocarbons are not uniformly dispersed at the same concentration in the Marcellus shale formation, so there are regions of hydrocarbon rich shale and other regions without any significant organics (as in hydrocarbon chemicals) content.
These are not easy hydrocarbon reserves to extract, and they also are financially expensive to bring to market compared to "easy gas". But, since most of the easy pickings of natural gas have been developed and are being or have been drained of gas in North America, our hydrocarbon addiction has resulted in a "seeds and stems" situation, where we are getting down to the dregs. If we want to keep using and living large (energy wise), it's time to use up the bottom of the barrel stuff - beggars can't be too choosy, after all.
Frontpaged with minor edit - for your Sunday reading - Nomad
Anyway, we could spend many large fortunes to extract some of the Marcellus gas (followed by Utica Shale gas as the next hydrocarbon adventure) and in the process make some people really rich as well as a significant number who might be able to cling to a middle class lifestyle for a while. However, keep in mind the fate of mining towns; once the mine has been played out, what remains is a ghost town and quite often a big mess (toxic mine tailings). Once the "sweet spots" in the Marcellus regions have been tapped, then we need to move on to energy resources based on something else, such as something that won't deplete and also cause all kinds of pollution problems. Some say that maybe we should just skip this temporary patch and get on to a viable future. But if we do that, what of the fortunes to be made by the wannabe or already are but not sufficiently so Methane tycoons? Won't they be robbed of their potential methane/hydrocarbon riches based on our collective resource? Or what about the path not chosen - renewable energy - won't those riches go to someone/somewhere else while we tubed our money on Marcellus Pipe Dreams?
Anyway, therein lies the rub. So let's "drill down" and see what is really at stake here. It could be that people will have to overcome their phobia of wind turbines and highly skilled manufacturing industries (and with attendant large employment requirements/low unemployment rate resulting society), which lead to more wealth generation and a more equitable distribution of wealth, assuming they wish to have access to "electricity on demand". Well, is that so bad? However, maybe they could have a society where electricity is scarce and undependable (i.e. no renewable energy to speak of/fossil fuel dependent), more "3rd worldish", at least for the vast majority who don't have a lot of money.
As is the motto with thermodynamics "there is no such thing as a free lunch", overall, at least. Somebodies freebie cost someone else. And there is also no such thing as perpetual motion, and energy is not like magic...too.
America's society and economy runs on energy, among other things. Our rapid economic development, rise in our standard of living and rise in consumption of all sorts of things in the 19th and especially 20th century is based on plentiful quantities of cheap energy, notably coal, oil and natural gas. Our domestic oil production peaked in 1973 when the massive East Texas oil field (with 30 billion barrels extracted to date) had been sufficiently depleted, and for some time the difference between US consumption and US production has been made up by importing greater and greater quantities. We now pay over $1 billion/day to import about 12 million bbls/day (mbd) of crude and refined oil products, and this is a massive taxation on the American populace, for which no permanent improvement in our lives occurs. Oil is an especially compact and portable form of energy storage, and it is extremely useful for transporting goods and people in ways that coal and natural gas (Ngas) are not.
The US also had/still has major reserves of Ngas and coal, but depletion of these reserves have also resulted from decades of large scale consumption, and quite often, wasteful, profligate consumption. But since prices were cheap, who cared? However, starting in 2000 with the Enron crime wave and combination Ngas/electricity scams/frauds/grifting, Ngas prices have become more expensive, and even coal prices have been affected by these oil and/or Ngas instigated price spikes. At present, spot prices for oil on a thermal basis are 4 times that of Ngas, and about 10 times the price of coal (but that varies by region). Many of the prime U.S. Ngas fields have been drained, and so smaller fields that have less Ngas associated with them and thus higher extraction costs/required prices have to be used to maintain Ngas production. This is best seen in the number of wells being used (Ngas consumption has been relatively constant for the last decade). There are 137,000 new Ngas wells producing since 2000 - up by 40% in this time - (see http://www.eia.gov/dnav/ng/hist/na1170_nus_8a.htm), but Ngas production is still in the 22 trillion cubic feet year (tcfy) range (see http://www.eia.gov/dnav/ng/hist/n9050us2A.htm) or up by 10% in a decade. Thus, 40% more wells to give 10% more Ngas... And the trend is even worse than that decade long summary of events - much higher investment and energy consumption (of diesel oil no less; those fracking and drilling operations use a lot of diesel oil) required to get out a given quantity of methane.
Ngas and oil production are also related - especially from the deep well in the Gulf of Mexico (GOMEX) - the Macondo (BP) well was 50 wt% methane/50 wt% "oil""natural gas liquids". About 6 tcfy (see http://www.eia.gov/dnav/ng/hist/n9012us2A.htm) of methane (Ngas) comes co-produced with oil and "condensates", or about 1/4 of marketed Ngas. Lately, there has been a glut of Ngas relative to what is used, partly due to GOMEX oil production, partly a result of the Exploration and Production (E&P) efforts undertaken when Ngas prices were very high (2004 to 2008), and partly due to the collapse in demand when so many factories bit the big one/were off-shored. As a result, Ngas storage capacity no longer exists (it's been maxed out) - see http://ir.eia.gov/ngs/ngs.html. As another result, Ngas prices are quite depressed - wellhead prices are averaging 50% of the values from two years ago (peak of recent prices) - see http://www.eia.gov/dnav/ng/hist/n9190us3M.htm. Ngas prices are especially sensitive to the supply demand balance - drastic price changes result from subtle shifts in this balance.
Nowadays, prices for both Ngas and oil have severely diverged from the average cost to produce these materials. Worldwide cost to produce oil is around $20/bbl or less, but the marginal production costs (the cost needed to make that last bit (say 1 mbd out of a worldwide production of about 83 mbd oil/condensates) of oil) are much higher. The price for oil (now around $85/bbl) is explained by the high demand and limited supply. In fact, current oil production rates may have peaked due to depletion of so many long used "mega-fields" (more than 100,000 bbls/day production rate - these supply about half of the oil produced worldwide), and to the great surprise of many, the International Energy Agency (IEA), which has long denied the possibility of Peak Oil for at least two decades from now, now says that Peak Oil has essentially already happened (and in 2006, no less). Ooops!!! See http://www.eurotrib.com/story/2010/11/9/8402/91314 and http://www.energybulletin.net/stories/2010-11-11/iea-acknowledges-peak-oil. So, if you find oil, and even little pockets of it (the Macondo field had 2 billion bbls of oil in it (plus Ngas), and that oil is presently worth around $170 billion!), in effect, you've won the Lotto, and a big one, too. And the Peak Oil prediction - as supply exceeds demand, prices will skyrocket until they crash the economy in repeated cycles, but the average oil price will rise at a much higher rate than inflation.
But as for Ngas in the US, the opposite is true. The marginal production price for Ngas is now near $10/MBtu (needs a price of around $10/MBtu) and the marginal production cost is above $7/MBtu, but the spot price is near $4/MBtu. Either production rates have to decrease and/or consumption rates have to increase before long term viable prices for Ngas (as viewed from the E&P perspective, not the consumer perspective) are the usual rule again. These graphs shows the trend for the smaller Ngas field/higher cost to find this Ngas:
The data for these cost and price estimates were provided by Credit Suisse, a major global banking concern, and a major banker/adviser to US oil an gas drilling companies. E&P activities are capital intensive, and don't happen like a charity; they have been high yielding investments, on average, and those projects that will be money losers will get cut off from investment bankers and fellow finance sources in a New York nanosecond (which is one billionth of a second, FYI). From the second graph, the estimated price needed to meet equity investor expectations would have been about $9.31/MBtu in 2010 (this year), and the break-even cost needed for the wellhead (not delivered, and not Henry Hub price) would be $7.11/MBtu. And this industry does not run on the "break-even cost" model..... Also note that a 10% ROI (return on investment) is really considered to be sub-par, and a sign of failure. ROI's of 15% to 20% are the ones really expected...
Over time, the Ngas glut will go away, but that point in time could be 5 years from now, and even longer if high oil prices spark off another Great Recession (GR2). All Ngas wells are depleting as long as gas is being extracted from them, so eventually the high productivity and high profit wells/fields will draw down. The other ways to deal with the glut is to either restrict production from existing wells (the "Standard Oil Business Model"), which may be illegal under anti-trust laws (assuming they are still enforced), or else to increase the consumption rate of this Ngas. Three ways to increase the Ngas consumption are to make more electricity from Ngas, use the Ngas directly in transportation (ships, trains, trucks, cars) or to convert the Ngas into liquid fuels. For a variety of reasons, direct use of Ngas in cars, trucks and trains is unlikely to become a major Ngas consumption venue, so Ngas to electricity and Ngas conversion into liquid fuels are the major options for increased consumption rates.
Ngas usage rates to make electricity can be increased readily with no need to spend anymore money on new plants, as there is already a tremendous glut of Ngas based generating capacity available in this country. Most of it is rarely used, or used for "peaking". The capacity usage of Ngas plants in this country is near 50% or less. However, any new electricity made by the Ngas using facility would have to displace ultra-low priced electricity from fully depreciated coal burning or nuke facilities, and even at $4/MBtu (or about $6/MBtu as delivered to the facilities (see http://www.eia.gov/dnav/ng/hist/n3045us3m.htm)), Ngas users would need electricity prices higher than 5 c/kw-hr to justify Ngas usage. Unless either the coal burners or nukes (the low cost electricity producers) are shut down to use the higher priced electricity source fuel, increasing Ngas usage for electricity is unlikely to occur to the extent needed to cause Ngas prices to double. In fact, a trend of slightly increased Ngas usage is evident (see http://www.eia.gov/dnav/ng/hist/n3045us2A.htm), but nothing significant. And additionally, wind power is often directly competing with Ngas based electricity production; as more wind is installed, less Ngas will be used to make electricity. Adding more wind into pricing systems such as those that exist in NY State also LOWERS generated electricity prices (no matter what the cost to make that wind derived electricity happens to be - remember, electricity production cost and price for that electricity are not necessarily related in the NYISO marginal based pricing system), further depressing any trend to make more electricity from Ngas and putting price pressure on Ngas.
So, since the electricity route will only provide a slight demand increase, what about the use of CH4 (methane) for make molecules such as polymers of - "CH2" - (gasoline, diesel, kerosene, waxes). Mobil Oil installed a facility at Motuni rated at ~ 15,000 bbls/day in New Zealand (MTG process) over 20 years ago (New Zealand has natural gas but essentially no oil associated with that gas). Another version is Shell Oil's Bintalu facility in Malaysia (see http://www.theoildrum.com/node/7118), and the "world scale" Pearl GTL (Gas To Liquids) facility in Qatar, rated at 140,000 bbls/day (see http://www.shell.com/home/content/aboutshell/our_strategy/major_projects_2/pearl/overview/). About 1.4 billion cubic feet/day (bcfd) of methane will be used, equal to about 2.3% of present U.S. production; this facility cost about $19 billion in Qatar, and easily over $25 billion in the US. It takes about 10 MBtu of Ngas to make a barrel of oil products (refined, not crude), so roughly $50 of raw material would be made into $125 of products.
In the U.S., a GTL facility could get made, providing companies were willing to fork over a $25 billion investment to make ~ 140,000 bbls/day (the US imports 12 mbd to make about 10.5 mbd of products). However, at least a $250 billion investment would be needed just to make about 10% of US gasoline, diesel and oil. The limiting factor may well be just the available investment money... And a 20 year supply per facility would need 10 TRILLION standard cubic feet just to keep it supplied with raw material. Furthermore, if that money was invested in renewable electricity (that could be made with wind turbines) and in electric transportation as well as more efficient liquid fuels consuming cars, the need for a GTL unit would more or less vanish. Looks like more oops. Bankers and other investors would ONLY make such investments if they had guaranteed customers for the products of these GTL facilities.... and at guaranteed prices for the GTL products as well as the Ngas raw material....
While people tend to be focused on Marcellus shale gas/fracking (see http://www.energybulletin.net/stories/2010-11-17/sixty-lame-minutes for a great article on that), it is puzzling that:
- Ngas prices are now too low to justify shale gas E&P and are likely to be that way for some time, too.
- Ngas usage is likely to remain quite dormant for some time - no new markets to speak of.
- If Ngas prices were high enough to justify Marcellus Shale gas fracking, it would be less expensive or similar in cost to make onshore wind turbine derived electricity instead of Ngas derived electricity. So why bother with fracking to make unmarketable Ngas?
- Increased fuel efficiency could drastically lower oil demand in the US, which would trash any need for a GTL facility. For example, doubling average gasoline mileage at constant miles driven would mean that only half of the gasoline usage rate would result. Dropping the vehicle-miles traveled per year by liquid fuel consuming vehicles by half would also drop fuel usage by half. Combining these results in transportation fuel usage of only 25% of today's levels. Given the huge demand for capital, and also potential competition from even MORE expensive to build coal based sin-fuel facilities (which at least used to have stable prices for the raw material - coal, pet coke), and also the potential for drops in the demand for fuel to move people and stuff around.. maybe GTL sin-fuel facilities are too risky to build.
So why the rush to do this? Maybe, as is suggested in this article - http://www.energybulletin.net/stories/2010-11-17/shale-gas-shell-game
- the Nags drilling is really an ASSET PLAY. That is, small and medium sized E&P companies stake out territory, drill some wells in order to get bought up by extremely cash bloated major oil companies. The goal is not to produce a lot of Ngas (but the more pricey "condensates" are another matter, and very much sought after), or to provide energy security to the U.S., or even to slow down the rate of CO2 pollution by substituting Ngas for coal in electricity production. The oil majors need to obtain hydrocarbon reserves in order to boost their stock prices (all that cash does not do this), and these E&P units are losing money at prodigious rates (a high "burn rate", as in burning through capital), so this is a match made in financial heaven. Recent examples include the purchase of XTO by Exxon-Mobil for $30 billion in cash, and Atlas by Chevron for a mere $3.1 billion, cash. So the idea that this will provide a "gas boom" of employment and business/economic development seems to have no basis. Of course, before the minor E&P's can sell themselves off, they have to find and deliver SOME gas, which means some fracking and related activity. Including air and water pollution, done by companies operating in a cut-throat, precarious environment, and a race against time to avoid bankruptcy. They need to get bought out before they go bankrupt, and that means cutting corners (safety and pollution rules be damned...), and hey, "ya gotta do what ya gotta do...."
Of course, eventually the oil majors will need to produce this Ngas, but that won't be for a while - not until prices are high enough for a long enough time to justify the rapidly increasing cost to do this Ngas development. And then that will run into the wind turbine wall; its less expensive and price/cost-wise, much more dependable to make electricity via wind than to rely on roller coaster pricing for Ngas, coupled with roller coaster electricity pricing. Who knows, proper environmental enforcement and proper waste water disposal (for all the spent fracking fluids, and hydrocarbon-contaminated produced water brines, alias "produced water") might be enforced.
Thus, a business model for Marcellus and Utica shale gas exploitation would include the removal/minimization/obliteration of the only viable competition for electricity production in the northeast part of the US (wind turbines, pumped hydroelectric energy storage, biomass and biogas) - those need to be "taken of the table". Taken out, prevented and thwarted by hook or by crook. So the use of astroturf "environmental organizations", lobbying, public relations, purchased/rented media, and the denial of media access to pro-renewable energy advocates is essential. After all, rural NY is pretty much all Republican, and the oil industry pretty much OWNS the GOP (Grand Oil Party). In this endeavor, truth is an immediate casualty, and time gets to be on the side with billions in cash (oil companies, and related bankster/investment entities organizations) just sitting by idly, looking for a use.
This is a big way that wind turbines enter the fray with respect to the fracking controversy. Wind turbines directly compete with Ngas to provide electricity, and they also tend to depress the price for electricity via the Merit Order Effect, thus destroying the profitability. You can choose no electricity (and thus a peasant farming based society, hurtling towards third world and then fourth world status), renewable wind, renewable biomass (and wind plus biomass plus pumped hydro is also a nifty combination), polluting coal, polluting nukes or air and water polluting fracked methane. But, it is a choice, one way or another. The one that creates the most jobs for a given investment with essentially no pollution is the renewable one. But for some, using the most money to create the least jobs is just fine as long as it results in a situation where the rich get significantly enriched, and all others get the wrong end of the process.