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« Wicked Wikipedia | Main | A difference of opinion »
Monday
May212012

Cuadrilla were not at No 10 seminar

As we saw yesterday, some details of those of those invited to the Downing Street seminar on prospects for shale gas in the UK have now been revealed. The involvement of only the oil and gas majors, whose investments in conventional gas are threatened by shale developments made the seminar look decidedly dodgy.

No Hot Air blog has now obtained a comment from Cuadrilla Resources, the company that is at the forefront of efforts to develop a shale gas industry in the UK.

No, we were not invited. Nor were we consulted about potential shale gas production in the future. I was surprised to see negative statements from people who have never seen our core data or open hole log data. They may consider getting their facts in line next time since this is such an important issue to the country.

This makes the the seminar look like a sham. I wonder which civil servants were responsible for issuing the invitations?

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Reader Comments (51)

It illustrates neatly the complete falsehood of watermelons' assertions that Big Oil is opposed to greenism. Big Oil is out for Big Oil and its shareholders and has no ideological view either way, which is as it should be; they are commercial entities, and that's all.

May 21, 2012 at 5:52 PM | Unregistered CommenterJustice4Rinka

Bish
I remember seeing an Ernst and Young whiney report about shale gas.

Does it ring any bells?

http://www.ey.com/Publication/vwLUAssets/Oil_and_Gas:_Sale_Gas_in_Europe/$FILE/European%20Shale%20Gas%20brochure%20FINAL.pdf

May 21, 2012 at 6:03 PM | Unregistered CommenterShub

The words "..... run a bath" come to mind. If Ca'Moron gave up making "eye-catching initiatives" a la Blair, and got on with governing the country, we MIGHT start going somewhere. This is the biggest opportunity we've had for years, handed on a plate, and if this pathetic government has its way, we're going to throw it all away.

May 21, 2012 at 6:29 PM | Unregistered CommenterHuhneToTheSlammer

The note about the major o and g companies having their conventional gas supplies "threatened" by shale gas is odd. I'm a 33 year oil and gas geologist. I can assure you that conventional gas is cheaper to produce btu vs btu than shale gas, but the volumes you get conventionally are lower in the conventional than in shale gas. So why are prices for gas so low right now? Shale gas is driving down prices only because the volumes right now are greater than demand. Conventional gas has lower profits, but much shale gas has NO profits, but only costs.

Shale gas will NOT reduce energy costs. Once demand equals production capability, sales prices will rise to equal cost plus profit. Gas prices will quadruple. And that means that the conventional gas profits will skyrocket. So, once going forward, shale gas helps conventional, not threatens it.

Shale gas is very expensive. You need deep pockets, as they say. The only ones capable of drilling up a shale gas field are the major producers.

Shale gas has a dense drilling pattern with a high decline rate, which means that you have to keep drilling. A 200 well field will cost $300 to $600 million (or more!), with perhaps a constant 100 wells per year to maintain production levels - a cashflow stream of $150 to $300 million per year. Since it takes 5 years (say) to actually pay off a well, this investment each year is in excess of what is produced. You need money from elsewhere to keep going. Why do it at all? Because the profit, though really coming once you stop drilling and simply produce and cut yourself cheques, is huge because of the volume aspect.

Shale gas makes sense in a $7 - $10 range (US dollars/mcf). Current prices in North America are under $2. Conventional gas may break even in places under $2, but, again, acceptance of such sales prices is because of oversupply. What hurts conventional gas producers kills shale gas producers: low prices.

Only the big boys can do shale gas. Only with high gas prices WILL the big boys do shale gas. Cheasapeke, Devon and others have shut-in wells and stopped unnecessary drilling because of non-economic pricing. So why the meeting? Prices.

The meeting will be focused on minimum pricing to go ahead, not on rules and reserves. Ain't nothing gonna happen unless there is a buck to be made. The companies need to get assurance that the pricing they require, as well as the ability to drill the numbers of wells they require each year, will happen. The government needs to know what energy costs will be and how agressive they will have to be to step on the surface stakeholders to get a security of supply. Meanwhile the public, British, American or German, are making a mistake thinking that shale gas will give them a happy future. Soon they will be paying a lot more than they do now.

May 21, 2012 at 6:32 PM | Unregistered CommenterDoug Proctor

It's just pathetic! Why bother to even have a seminar at all if you take advice from just one side? Ed Davey can't argue that he has all the facts, and he will get found out. I do take the point that some civil servant will have drawn up the list.
It's pathetic, but shale will happen anyway.

May 21, 2012 at 6:44 PM | Unregistered CommenterCurfew

Invites were probably sent via chris hulme and Andy Coulston

May 21, 2012 at 6:44 PM | Unregistered Commenterjason f

The moment the wider general public see clear linkage between energy shortages and energy policy there will be hell to pay.
I'm amazed that creeping bills haven't caused more of an outcry so far really.

May 21, 2012 at 6:44 PM | Unregistered CommenterCurfew

@doug proctor


'Shale gas will NOT reduce energy costs'

The experience in the USA seems to contradict this idea and there is good evidence that reduced costs due to shale gas exploitation has helped the recent relative economic progress there.

What is so entirely different about USA that makes it a bad example for the UK?

May 21, 2012 at 6:59 PM | Unregistered CommenterLatimer Alder

@Doug Proctor.

Why are Caudrilla champing at the bit and the Yanks drilling like crazy if what you say is true? I do not know anything about either the ins and out of shale drilling or the economics but what you say seems to fly in the face of what is actually happening. Could you explain further?
I appreciate that exploiting the UK shale gas may not bring us cheaper fuel bills....that would be too much to hope...but are you suggesting it would be better left in the ground? Are you including the additional economic benefits of an UK gas boom?

May 21, 2012 at 7:13 PM | Unregistered CommenterJack Savage

Doug

$7 seems quite a bit cheaper than $12. Presumably as the technology moves on the breakeven point gets lower still?

May 21, 2012 at 7:18 PM | Registered CommenterBishop Hill

@Doug Proctor
The questions re shale gas also include how it will compare with on shore or off shore wind farms (the politicians favourites), the costs of connecting to existing grids, and what it offers in terms of energy security. Do you have data for this and for the cost of imported LNG?

May 21, 2012 at 7:22 PM | Unregistered Commenteroldtimer

Surely the cost of gas drilled locally is going to be cheaper than importing gas drilled abroad and then transported here?
Especially if it's the same company doing the drilling.
There will obviously be a difference in scale, I wouldn't expect a 200 well field in the UK but I would still expect production to be cheaper than production plus import, or am I missing something?

May 21, 2012 at 7:29 PM | Registered CommenterLord Beaverbrook

of course a major power supplier would like to talk down the prospects of shale gas in order to buy out Cuadrilla at a below-par price. That is why we are supposed to have regulators for this field! It seems that the Reguylators have been captured.

May 21, 2012 at 7:42 PM | Unregistered Commenterdiogenes

'Parliament Talks...Energy’ is a series of free events and promotional activities highlighting Parliament's role in debating and challenging Government policy on energy.

Aberdeenshire - Thursday 24 May

Where: Banchory West Parish Church of Scotland, High Street, Banchory, AB31 5TB
Time: 18:00 to 20:00
Chaired by: Sir Robert Smith MP

Last event of three, others held in Southampton and Suffolk

May 21, 2012 at 7:47 PM | Registered CommenterLord Beaverbrook

To my mind there is another big advantage to producing highly labour and equipment intensive shale gas and that is that aside from all the local jobs and improved balance of payments it also provides a huge boost to indigenous engineering industry. The extra capacity and economies of scale that that boost provides helps to make a lot of other engineering and manufacturing industries more viable.

May 21, 2012 at 7:52 PM | Unregistered CommenterRobL

While this is definitely not 'hubbert's peak' consider the effect on price when demand cannot be met by supply. And consider the purpose of statements suggesting extraction may be uneconomic. It seems to me certain oil companies and the regulator are almost colluding and 'engineering' the situation to extract as much wealth as they can from consumers. Just a passing thought.

May 21, 2012 at 7:56 PM | Unregistered CommenterRobin

From Memorandum submitted by Professor Paul Stevens, Chatham House (SG 16) to The Energy and Climate Change Committee 29 March 2011


2. The "Shale Gas Revolution" has had a huge impact in the USA. Gas prices have collapsed although this has also been driven by lower gas demand as a result of the economic recession. Thus based on data from the US Energy Information Agency the average well-head gas price in 2005 was $7.33 per thousand cubic feet (mcf) while the average for 2010 to October was $4.25 per mcf. Furthermore, LNG imports to the USA have collapsed and in 2009 capacity utilization on regasification plants was less than 10 percent. To put it crudely, a great many investors in LNG in the USA have lost their proverbial shirts.


Putting it simply, the infrastructure in Europe does not currently exist to mount enough unconventional gas projects to make a difference. Of course this can change if the projects appear profitable, but it will take time. However, a further problem is that the service industry in Europe is an oligopoly dominated by a few (largely American) companies. This is not conducive to the rapid development of a service industry capability.

There are a number of actions that could be taken by the UK government to encourage the development of shale gas both here and in Western Europe more generally, - see link above

May 21, 2012 at 8:13 PM | Registered CommenterLord Beaverbrook

@Doug Proctor

As a very rough guesstimate, based on what you've read so far about Cuadrilla's Bowland exploration and the record of similar fields elsewhere, what proportion of the 200+ tcf of Gas Initially In Place in Bowland would you expect to be economical to recover at a) $5 b) $7, or c) $9 per thousand cubic feet?

May 21, 2012 at 8:21 PM | Unregistered Commenteranonym

OK, Shale gas may not be all that cheap.

How does it compare in price with BigWind (+ Gas stations on spinning reserve + other power stations forced to run at low efficiencies + rebuilding the National Grid)?

Just a tad cheaper, maybe?

Which is most likely to leave you sitting shivering in the dark?

Hmmm. A tough one. Not.

Drill, baby, Drill!

May 21, 2012 at 8:24 PM | Unregistered CommenterMartin Brumby

@Doug Proctor

One more question: the most optimistic estimate of shale gas costs I've seen yet was actually in the Deutsche Bank report on European shale which was linked from here recently. While it suggested that UK shale would cost about $8/mcf after tax, it seemed to show most US fields as profitable below $5, some at far below that. Am I interpreting that correctly? If so, is Deutsche simply wrong? Is it clearly out of line with the consensus among oil/gas industry people?

May 21, 2012 at 8:39 PM | Unregistered Commenteranonym

It seems that Doug, albeit a climate change skeptic, is employed by Big Oil. Could it be that his views on shale gas economics are slightly biased?

http://tallbloke.wordpress.com/2012/03/07/doug-proctor-a-geologist-on-sea-level-and-dust/

May 21, 2012 at 9:07 PM | Unregistered CommenterChris M

May 21, 2012 at 6:32 PM | Doug Proctor

I remember reading a history of the early oil industry in the USA. JD Rockefeller made his money by constantly driving costs down. Henry Ford did it in motor cars. It has also happened in PCs, mobile phones (many generations), coal mining, textile manufacturing and so on. In fact every major area of mining and manufacturing that I can think of. So why should shale gas be any different.
If a select number of interested parties were brought together by an interventionist government then Adam Smith's observation is likely to hold true:-

People of the same trade seldom meet together, even for merriment and diversion, but the conversation ends in a conspiracy against the public, or in some contrivance to raise prices.

May 21, 2012 at 9:12 PM | Unregistered CommenterManicBeancounter

Manic

I wonder what involvement ministers had with putting together the guest list. How much of the fix - assuming our supposition is correct - was down to civil servants?

May 21, 2012 at 9:14 PM | Registered CommenterBishop Hill

Also Doug, why would you need to travel to the Middle East when you can happily drill at home? Surely an advantage for you as well, unless you equate geology with "a life of adventure"? Plus the flow-on domestic industrial and employment benefits, as pointed out by RobL above.

May 21, 2012 at 9:20 PM | Unregistered CommenterChris M

Argument for a shale subsidy as a premium to secure gas supply security? Who pays that? The end-user or the Government maybe through lower taxes on locally sourced energy as opposed to imported?

Also comparing mature energy sources where production techniques are well-established with costs driven down over time versus a new process where initial efficiencies will be poor but which will presumably improve over time. What might the relative production costs look like in 5-10 years time?

May 21, 2012 at 9:48 PM | Unregistered CommenterArgusfreak

I have just sent an eMail to Graham Stringer (the only MP with a science degree - Chemistry - snap - although he is Labour).

For those who don't know:

stringerg@parliament.uk

I have referred him to:

http://www.nohotair.co.uk/gas-guru-blog/shale-gas-2012/2523-cuadrilla-not-invited-to-downing-street-briefing

I should diffidently suggest that a mass follow-up (be polite, please) is appropriate.

May 21, 2012 at 10:11 PM | Unregistered CommenterJan v J

I don't think Graham Stringer is the only MP with a science degree. Does not Peter Lilley have a degree in Physics? Steve Baker, High Wycombe MP, has an engineering degree from Southampton. Does anybody have the stats on how many MPs do have scientific qualifications?

May 21, 2012 at 10:49 PM | Unregistered CommenterMike Post

Mike,
I believe that Margaret Beckett has a degree in Metallurgy, although in my communications with her she is in the "it may be already too late" camp.

May 21, 2012 at 11:11 PM | Unregistered CommenterSandyS

The civil servants who organised the meeting knew what advice ministers wanted. They certainly didn't want to be told that gas could get cheaper soon, as that would threaten their expensive renewables intermittents agenda. So guess what? Ministers got "independent, expert" advice which suited their policies.

Oiks with facts not wanted.

May 21, 2012 at 11:18 PM | Unregistered CommenterJohn Page

Manicbeancounter...and it might even happen in some forms of "renewables" if governments took away the taxpayer-funded disincentives to efficiency.

May 21, 2012 at 11:30 PM | Unregistered CommenterDavid S

@Bishop Hill

$7 seems quite a bit cheaper than $12.

And in fact, if shale offers the UK a moderate amount of $7-ish gas, and not a cornucopia of sub-$5 gas, then these statements

"The reserves aren't absolutely huge compared with the likes of America, Ukraine and North Africa," said a senior government source. "And we are relatively densely populated. It is a question of how much we can get out, and at what cost. There is a not-insignificant amount of domestic supply, but not a game-changing amount."

Mark Hanafin, managing director of the energy production division of Centrica, played down the UK's potential to cash in on the technology. "UK shale production... I think it's important and we should develop it, but I don't think it's going to be a game changer," Mr Hanafin said in Paris earlier this month, according to Dow Jones.

seem to reflect that pretty fairly, no? In that case the advice given to ministers by the oil-industry companies - as distinct from the spin afterwards put on it by Greenpeace and Davey - seems likely to have been roughly fair and accurate. (Again, if Doug Proctor and the other people who put the price of shale gas in the $6-to-$7-something/mcf range are actually wrong - if shale offers the UK copious amounts of sub-$5 gas in the foreseeable future - then that's another story.)

May 21, 2012 at 11:32 PM | Unregistered Commenteranonym

I'll grant y'all Lilley - although it was joint with Economics - I could quibble. Baker - Engineering is not Science (although in some fields, preferable). The MSc(Computation) from Oxford helps, but both have operated more in Economics.

Anyroad, just a throwaway comment based on 'something I read'. Somewhere.

The point is, the HoC is hardly a hotbed of Science & Technology. Let's hear the chorus. Rebut it if you can. Out of 650.

A home for failed lawyers.

May 21, 2012 at 11:37 PM | Unregistered CommenterJan v J

For Heaven's sake, let the market decide. One has had enough of Tsars (Czars?) and Ministers picking winners. Solyndra, anyone? And a dozen others!

Let them compete! $5, $7, $12 - let somebody go bust. And if somebody risks all, & makes a fortune - so what? Good for the country - and for fuel-poor pensioners.

May 21, 2012 at 11:51 PM | Unregistered CommenterJan v J

I doubt I am the only person to do this, but after seeing the original story on BH I submitted a FOI request about the seminar. Details below...

http://www.whatdotheyknow.com/request/no10_seminar_and_discussion_abou

Let's see what comes back.

May 22, 2012 at 12:18 AM | Unregistered CommenterAutonomous Mind

Of course, the likely cost of shale gas, as it can be extracted from the ground, is one thing.

The price of it - by the time the regulators have gold plated absolutely everything - is something entirely different.

The ecoloons have made their position crystal clear and the likes of Chris Smith (EA) and Davey will have had their instructions which they will follow with enthusiasm.

Hence the reference by Smith (and others) to Carbon Capture & Storage.

That will kill it graveyard dead. Exactly what the whole crackpot CCS idea was floated for.

May 22, 2012 at 6:54 AM | Unregistered CommenterMartin Brumby

Davey was on R4 this morning, refusing to answer a simple question about what constituted a subsidy. Sadly, Humphrys failed to ask about shale gas or anything else searching - I assume the Beeb have a spike in his chair that they can raise when necessary...

May 22, 2012 at 9:21 AM | Unregistered CommenterJames P

My comment at No Hot Air, bears repeating here then :

Yes and we can see why, when among those participating included Centrica, who have just announced today on their website that thier "Norwegian" operations have signed a supply deal for GAS with the United Kingdom.....
http://www.centrica.com/index.asp?pageid=1041&newsid=2462

Come on then Mr. Davey, are you corrupt or merely an ignoramus?
When Andrew Neil put you on the spot, you looked shifty, and gave
vacillating answers. You blamed "the coalition" yet are not in favour
of using "coal" [pun]. You rubbished the shale gas, and now we know
why. You signed some agreement to allow Centrica to sell the UK gas
from Norway. Mr. Davey you are naught but a Traitor to the UK who
should resign immediately. Let a real man like Peter Lilley take over
before the UK is bankrupted by your incompetence.

Andrew Neil puts Ed Davey on the Spot about GAS
http://www.bbc.co.uk/news/uk-politics-18145313

May 22, 2012 at 12:25 PM | Unregistered CommenterAxel

"The meeting will be focused on minimum pricing ..."

What's the difference between 'minimum price' fixing and price-fixing?

May 22, 2012 at 12:34 PM | Unregistered CommenterBarbara

British Fraud Act 2006

4 Fraud by abuse of position
(1) A person is in breach of this section if he—
(a) occupies a position in which he is expected to safeguard, or not to act
against, the financial interests of another person,
(b) dishonestly abuses that position, and
(c) intends, by means of the abuse of that position—
(i) to make a gain for himself or another, or
(ii) to cause loss to another or to expose another to a risk of loss.
(2) A person may be regarded as having abused his position even though his
conduct consisted of an omission rather than an act.
5 “Gain” and “loss”
(1) The references to gain and loss in section ... 4 ... to be read
in accordance with this section.
(2) “Gain” and “loss”—
(a) extend only to gain or loss in money or other property;
(b) include any such gain or loss whether temporary or permanent;
and “property” means any property whether real or personal (including things
in action and other intangible property).
(3) “Gain” includes a gain by keeping what one has, as well as a gain by getting
what one does not have.

Ed Davey is culpable then, is he not?

May 22, 2012 at 1:44 PM | Unregistered CommenterKung Fu

Mr. Axel - Centrica's "Norwegian" operation is nothing, when compared with their Cygnus Gas Field, which has been on the "backburner" for some years, however Centrica and partners expect to bring the TWO TRILLION cuft of gas online via the Murdoch pipeling in 2013. More vested intests in the advice that Mr. Hanafin of centrica gave then....

"The Cygnus gas field is situated over UK Continental Shelf blocks 44/12a and 44/11a. The field is operated by GDF Suez, which also owns a 38.75% stake. Centrica has a 48.75% interest"
"One of the largest discoveries in the North Sea" "The field development plan for the first phase of Cygnus was sanctioned by the UK's Department of Energy and Climate Change (DECC) in August 2009. Phase I is targeted at developing the eastern part of the field, which comprises 16 production wells tied back to six platforms. Production is expected to start in 2013."
http://www.offshore-technology.com/projects/cygnusgasfield/

May 22, 2012 at 2:00 PM | Unregistered CommenterKung Fu

Excellent responses. I'm not a shill. I'll answer in detail shortly.

May 22, 2012 at 4:58 PM | Unregistered CommenterDoug Proctor

Certain in/famous tomes have been cited as only meant in fiction, not as a manual.
I don't think this author in his wildest dreams might have imagined he would be proven a seer:
http://www.planetclaire.org/quotes/hitchhikers/

May 22, 2012 at 5:34 PM | Unregistered CommenterJunkkMale

Doug Proctor

I'm a geo twice your age and agree with most of your assessment.

You might be interested in a precis'ed bio from a North Sea geo like me, his career life story. In fact I met him several times. Note the bit (first para) where the Chief Geologist of BP, Sir Peter Kent, said he'd drink all the oil that was found in the North Sea (did it entitle him to subsequent knighthood and perpetual honour by the annual Geol Soc Lecture, one might ask?) .

http://calms.abdn.ac.uk/DServe/dserve.exe?dsqIni=Dserve.ini&dsqApp=Archive&dsqDb=Catalog&dsqCmd=show.tcl&dsqSearch=(RefNo==%22MS%203769/1/144%22)

We are being hung drawn and quartered by green zealots bent on killing anything to do with fossil fuel, while shale gas, not a panacea, no equal to conventional gas, needs every encouragement it can get to add to our future national heritage resource, gets killed by the ridiculous carbon capture millstone like our equally vilified coal resource, the birth of all industry

May 22, 2012 at 9:59 PM | Registered CommenterPharos

Go to Arthur Berman formerly a writer for World Oil, Shale Gas if you want some good info. He was terminated from World Oil for publicly saying what all of us in the industry knew: with shale gas, what you hear is not what is or will be. (Unless the stars align, to give gas companies an out.)

Other than that ....


I've had a look at the responses to my comments, and they are dead on - if you look at shale gas the way companies and our governments want us to. Fact is, unless you peer very closely at the words, what you think you are reading, isn't quite what you are reading.

Fundamentally, the difference between what I'm saying and what you are hearing is that I refer to the overall project, the overall cost and the overall results of a shale gas project. The words you read - like Mr. Axel's reference to "Two trillion cuft of gas online" (Kung Fu, 22-05-2012 @ 2:00 pm)and Caudrilla's Bowland 200+ BCF Gas Initially In Place (anonym, 21-05-2012 @ 8:21 PM), is about gas volumes in the ground, not the gas that is available to go down the pipelines to your homes. See below for the Recovery Factor comments. Elsewhere, gas prices that collapsed (Lord Beaverbrook, 21-05-2012 @ 8:13 PM) are referring to the prices paid by consumers for the gas they use, not the COST of the gas to the producers: you'd think they would be similar, but in an oversupply situation, they are not, not by a longshot. Also see below. High costs that involve local labour and equipment (first, it's mostly large corporations anyway, so the profit leaves your town except for field maintenance) (RobL 21-05-2112 @ 7:52 PM, you still pay the high prices though your neighbour is employed, and that dollar from you pocket is still the dollar that your butcher doesn't get. Finally (Latimer Alder 21-05-2012 @ 6:59 PM), the US is not different from Britain except that taxes are less in the States, access is easier and reserve volumes are greater.

See below for details. But note I make no specific comments about any particular company or field. My comments are general and generally true. There is the press and there is the profit. Not the same. The overall theme is this: what we have now is more expensive and more difficult to get than what came before, and those costs will be, must be, passed on to the consumer. The oil and gas companies are not going to be hurt individually, though as a group they can be pushed away: the field that is unavailable to everyone hurts none of them. Selective discrimination is a problem, not a collective one. You can't tax a company into not producing a resource if the company can increase its price to the consumers: only regulation or a price freeze will keep a marketable product from being produced. Whatever you might hear about shale gas being a green boom is overrated, and will, has to, cannot be otherwise than, requiring more money out of your pocket, regardless of carbon based taxes.

Below I have some background for y'all. I've loaded this on my own website, a rarely used thing, as blogging with technical details is a full job in itself which my career in the oil and gas business has NOT enabled me to do, any more than someone running a corner store.
1. Economics of Shale Gas

You read numbers a lot. Economic thresholds for shale gas plays to go forward. Before you can really understand them, though, you have to know what they are talking about, for there are various types of economic assessments. Essentially all are time-related, but within that time-frame come, necessarily, costs as well as revenues.

1. Long-term. This might be called “full-cycle”. In a “play”, as the general project is called in the oil and gas industry, you have mineral right acquisition costs, surface access costs, drilling, completion and equipping costs, facilities and pipeline costs, operating costs, remedial surface repair and abandonment costs. You also have land taxes. To offset these costs you have production sales. Production is highest in the beginning and then falls either exponentially or, if you are lucky, hyperbolically, in which declines almost level out after a few years. Conventional and unconventional productions decline similarly at first, but the resource plays such as shale gas, are supposed to decline hyperbolically. Hyperbolic declines give you long-term production. Shale gas and coal-bed methane are both supposed to have reserve lives in the 40 year range.

Full-cycle economics is what it all is really about. You put a buck in and when it is all over, interim costs considered, how much did you get out? Full-cycle has the full revenue and the full costs, but there are a couple of big assumptions. First and foremost is the production decline: will it really last 40 years? Second is the price forecast, and this is where an individual company can make or break the apparent worthiness of the project: is the commodity price going to 6 bucks in two years or will it stay at 2? And 10 years out, what will it be? The discount factor (DCF) for the project is important, too: while the dollar may rise, what about the purchasing price of the dollar, so you are comparing apples to apples?

Shale gas (like CBM) is generally presented as the volume you get over 40 years, with a 40 year price forecast. Costs are recovered first, profits last. So the real profits are at the second half of production life. If there isn’t any production, or if the prices are low, your economics are either low or negative, regardless of what the project was “supposed” to be like. The money is made in the future.

2. Short-term. This is how you and I generally think about the economics of a project when we ask, does it make money.

a. Short-cycle. Generally less than 6 years. The idea is that you want to get your money back within 6 years. Because of the DCF, money spent today must have a certain rate of growth to be have the same purchasing power later. And that is before profit. And because of the rapid decline of these new resource plays, getting twice as much for the product later doesn’t do you much good if the production rate is one-quarter of its original. If you don’t at least get your money back (value neutral) in 6 years, you might have been better to put your effort into a toothpaste factory.

Shale gas doesn’t do well on the short-cycle because the upfront costs and decline rates are very high. You need good commodity prices to get a positive short-term economic forecast. This is why resource plays, like shale gas, typically give the 40-year picture. There is more wiggle room.

3. Finding and Development. Known as F & D. This is the upfront costs to getting the well or field on production. $/mcfd, or dollar per volume of gas produced per day. Long-term costs are not considered. Peak production is the rate you use. As you can imagine, a very high rate, which shale gas has, gives a positive number relative to a conventional source, but the number doesn’t necessarily represent the profitability or even the total profit you might get.

4. Drilling, Completion and Equipping. D,C & E. This number gives you the project cost but doesn’t include facilities, pipelines, land, etc. It gives you the costs to production once you have the legal right to go after it. This number lets you determine if you can afford the discovery and/or the development of the project. Shale gas drilling and completing is a multi-million dollar operation. It is a scale enterprise: decline rates demand a lot of locations and a lot of replacement locations as the field declines rapidly.

5. Operating. This is the net-back view. All the money is spent, water (cash) under the bridge. You have operating costs, not including future abandonment and reclamation costs or equipment sales, and you have production revenue. Each day you make a buck and you spend less than a buck, if you are going forward, and the reverse, if you are going in the whole.

The economic assessment you read about, which is relevant to how much gas has to be sold for to be worthwhile, is one of the above five types. Corporate discussions always give you the numbers that sound the best or are perceived as representing the best scenario for the company. If the gas prices are in the toilet, then short-term is not what you will hear. F & D is helpful for knowing how much muscle you need to bring to get the thing going. Operating is good once the thing is established and maintenance is all you need to worry about for a few years. If you want to sell a project on its future merits, then full-cycle is what you use. It is in the differences between these economic assessment types that the devil lives.

What is the true economic costs of shale gas? Now we have to be even more specific. There is the core area, and there are fringe areas. The core area is the high productivity, high reserve portion. Like everything in life, there is the best part and the not-so-best part and finally the poor part. All rolled in you may think that you have a field that requires $5/mcf to make money, but what you really have is a core that requires $2, a surround that requires $4 and a fringe that requires $7. Why would you drill the fringe, then, when prices are, say $4/mcf? Well, companies need volume to maintain image and production in-place to take advantage of positive price spikes.

I’ve seen this personally. Areas that clearly do not make money are brought developed because, rolled into other areas that make more money, the whole enterprise makes a ton of money. Plus, if prices spike, then suddenly the no-profit areas become profitable. Finally, money to large corporations, not just oil and gas, is like water in a river. There is more coming tomorrow, and all that money today doesn’t really have a place to go (not all the time). You could dividend, but, no. So you plow it into things that tomorrow may be good, even though today they are not good. Regardless, in a year or two the moneybags are full again. (Obviously if you do this too many times you go bankrupt – witness Detroit. But if you only do it a few times, the future wins at least make up for the current losses. At least that is the strategy.)

So what is the cost level for shale gas to make sense? The core-non-core ratio is the key. When corporations speak of the threshold, they speak to the better parts. The truth is generally worse because the best parts have to support the lesser parts. As for shale-gas vs conventional gas: a shale gas well is a closely spaced, horizontally drilled well with a large frac required. If a conventional well to that depth costs $1, a horizontal shale gas well can be $4 to $6 (or more). The production rate may be 4 – 10X in a shale gas well, but the volume received may be more of the 3X ratio. All these numbers mean that short-term, you get much more from a horizontal shale gas well, perhaps 10X, but long-term you get only 1.5X the volume, and at 2X the cost. The ratio is off: more gas, more expensive. And since the decline rates of shale gas wells are higher than for conventional wells, more expensive more often.

That’s the rub.

Breman noted this difference when he got into trouble at World Oil. The long-term could use a PRESENT low price because the price forecast increases and best-efforts volume forecast made up for the short-term deficiencies. These were assumptions which are not necessarily valid. But you have to realize that a corporation thinks far longer ahead than an individual, and so can do that. The average Joe and smaller company knows that the short-term, like for breathing, is where you live and die.

A price basis of $4 to more than $7/mcf is not unreasonable for what you need as a go-ahead business. At $10/mcf a great deal is worthwhile producing. Current prices in NAmerica are less than $2/mcf. (Before you consider what Europe and Britain are paying, you have to make sure that the taxes are similar. Which they are not.)

Operating profits don’t count when it comes to the overall scheme. And current sales prices don’t tell you anything, either, about the costs of exploration, development and production.

There is a supply glut of gas right now. If it weren’t for the recession, that would not be the case. And you don’t just shut-in a well. Most companies borrow the money they use, so have a need for constant cashflow. Even though the well you produce is getting little for its gas, you need the money to pay bills. You also don’t shut-in fields if you can help it, because often they cannot be turned back on, especially if there is co-production of water. Which a lot of shale gas wells do. But where does it go? It goes back into the ground in specially built salt-dissolved caverns, or in abandoned oil/gas fields. You produce out over here and dump it in, over there. Now you have a large supply ready to produce at a moment’s notice … whenever that is. Also an “asset” that costs money to be saved, and an asset that is not generating any revenue. So you drop your price to get as much as YOU can into the market without giving away the farm.

Notice this has nothing to do with the cost of production. The price of gas is now determined by how desperate you are to get cash in the front door.

Shale gas has driven market prices down while driving the cost of gas production up. In the short-term, producers are “losing money”, meaning that if the low prices continue until the field is depleted, there will have been more money spent on getting the gas to market than the market paid for the gas. In the short-term, consumers are happy with “cheap” gas. But once the gas “bubble” as they call it, is gone, prices will reflect the cost plus profit of what is being produced. That is why gas prices must go up if shale gas is to become a major part of our energy needs.

So, wwhat do I think of shale gas and its potential?

Shale gas is a “resource” play that is going to save our butts. It is everywhere. All you have to do is get permission to drill and your company’s and nation’s energy problems are solved.

Yeah, right. First, if it were that easy, it would already have been done. We’ve actually known about these reservoirs for decades – we drilled through them and had big problems with gas coming into the drilling fluids, reducing its weight, creating a danger at surface. (This is true of methane in coals, by the way.) We didn’t have the good technology to get the gas out of these shales before, however, and we didn’t have the prices for gas to justify the effort, either. Now we can get it out … but shale gas reservoirs are like conventional reservoirs: they have core good bits, lesser bits, bad bits and areas of no bits. The companies/countries may boast of their gas-in-place numbers, but what counts is their economically producible gas-in-the-pipeline volumes (and rates). This is often called the recoverable gas, with a recovery factor (RF) showing the percentage of gas you can get out. Not just at A price, but ANY price.

What is the RF for shale gas? Obviously it is different for different places. 65%? In the core? 20%? over the field? Right now we don't know. The fields are all still in their initial years, but some already don't look like they were initially hoped/hyped to be (standard practice: optimism first, realism later).

What I can say, though, is that resource plays - actually any oil and gas idea these days - always appears more promising than it turns out to be. That is because it is not easy to find or easy to produce or easy to transport - those ones have already been exploited. One resource play was large coalbed methane fields in the States and Canada. The in-place “resource” is huge. The RF in the core might be 26%, but much of it is actually <9%. Overall, the RF might be 3%. This in-place vs producible situation is the same with shale gas said to be under half of Britain. Yes, the gas molecules are everywhere. No, you can’t get them out. (In theory, of course, you can. Gimme $200/mcf and I can deliver a great deal, not all, but more. And see what this does for energy costs?)

Shale gas is an excellent reserve of natural gas for the world. It is cleaner than oil, though not as useful and not as energy dense. It will add to our future, but not remove all our concerns. For individual companies or countries, check to see what practical reserves are being discussed, not how many molecules are in the ground. And don’t think it is cheaper than what you got before.

Your energy costs MUST rise if shale gas is an important component of your energy sources as it is harder to get out and goes away faster than our previous gas reservoirs. And the fringes cost more to get less than the core, just like with everything else. Shale gas will also – once supply gets in line with demand – raise the overall price for gas, to the benefit of the conventional producers, as gas at market has the same value regardless of its source. And since all the places where gas could substitute for oil have already been taken care of, gas prices will do nothing for oil prices, up or down.

2. I’m a shill for Big Oil. How weird is that?

Yeah, I’m a skeptic about CAGW, but I’ll tell you as I’ve told others: oil and gas businesses will flourish under carbon taxes because the costs will be pushed onto the consumer – you. The only way that the oil and gas companies will really be hurt is if the governments put a PRICE freeze on the commodities. To-the-consumer price reflects cost plus profit. And, for the government, which likes percentage taxes, the higher the cost, the more gross revenue it gets. Even if you were to put a tariff on foreign oil, this would hurt the consumer, but not the oil and gas companies. In fact, a tariff would increase the value of the internally produced oil.

The oil and gas companies do not stand to lose from carbon dioxide capture rules because they can pass on the costs. The consumer cannot. If the consumer cuts back on demand, AND production remains high, then prices will fall. So jobs will be lost while the oil and gas companies contract to preserve profitability, energy costs to the consumer will fall … and demand will go back up. If production is curtailed, so there is a shortage nation-wide, then prices will go back up, the oil and gas companies will make a lot of money again, and the consumer will still be paying through the nose, except this time it won’t end.

I’m a professional geologist. I’m not rich and never will be. But CAGW doesn’t really affect me as an o and g guy. It sure affects me as a person, though, and my non oil and gas friends. Every dollar that I have to pay for energy is one less dollar I can pay to my favourite bartender or musician or magazine writer. Personally, I’d like to keep paying them rather than the government (in taxes) or Chevron (because someone forced them to develop expensive oil and gas fields).

Summing up:

Shale gas is expensive to produce. The economic downturn globally has reduced demand below supply, but gas fields cannot just be shut down. Gas goes into storage underground, but the buyer now can chiesel away at the price as there is always someone with lower profit demands or more urgency to sell. So prices drop below cost, while producing companies try to hang on until demand exceeds supply. And then prices will rocket.

Production costs you hear refer to the better parts of the field. Improvements in costs come from shared infrastructure and improved results, not reduced costs. That never goes down except in very bad recessions when it is a dog-eat-dog business and things like rig maintenance become next year's business.

Gas-in-place is not gas in your stove burner. The Recovery Factors for shale gas are still to be determined. If 65% is said to be that of a field, that will be the core and that will require a lot of infill drilling. More gas = more cost. If 1/4 of all the areas I have seen reported as the total resource were produced, I'd be shocked. GIP is only meaningful in comparison to someone else's GIP. If Recoverable Gas were so impressive, that would be the number you hear.

May 23, 2012 at 5:40 AM | Unregistered CommenterDoug Proctor

I watched the energy item on the BBC ten o’clock news. The thing that made me most angry and frustrated was the total acceptance of the fact the CO2 emitted by burning fossil was causing Global Warming and the implication that CO2 was a dangerous pollutant. There was no reference to the current science and empirical evidence to the contrary which is now strong enough to warrant at least a mention in the interest of balance. (“There is a strong body of empirical evidence produced by well qualified and respected climate scientist which suggest that Natural causes have produced the rise in global temperatures since he end of the LIA and that the role of CO2 concentrations in atmosphere play no measurable part”) There was no mention of the fact that the UK emissions of CO2 were a very small proportion of world emissions ( about 3% if believe) and as such would have absolutely no detectable effect on global temperature even if the consensus science was true. As such the very costly wind turbines and solar panels, the subsidies for which are passed on to the consumers via energy bills, are a huge waste of money when we are struggling to get our economy moving. The item was nothing but propaganda.

May 23, 2012 at 8:20 AM | Unregistered CommenterRoss Lea

I've started a thread in Discussion in reply to what Doug Proctor posted above.

May 24, 2012 at 1:44 PM | Unregistered CommenterNial

@Doug Proctor

Caudrilla's Bowland 200+ BCF Gas Initially In Place (anonym, 21-05-2012 @ 8:21 PM), is about gas volumes in the ground, not the gas that is available to go down the pipelines to your homes

Yes, I'm well aware of this, which is why I asked you the question. It's Nick Grealy at No Hot Air who quotes GIIP figures in a way that seems to assume that all or a large proportion of the GIIP will be economically producible.

May 24, 2012 at 4:14 PM | Unregistered Commenteranonym

@Latimer Adler, @Jack Savage

Why are Caudrilla champing at the bit and the Yanks drilling like crazy if what you say is true? I do not know anything about either the ins and out of shale drilling or the economics but what you say seems to fly in the face of what is actually happening. Could you explain further?

This blog post gives the explanation:

Even if the model is off a bit, it shows that the industry has been fracking at a steep loss for years. But due to the way gas drillers account for their wells by front-loading profits, the pain has mostly shown up in their ballooning debt and their current negative operating cash flows. Hence, Chesapeake's dire situation. Drillers have shifted whenever possible from drilling for natural gas to drilling for oil, which is still highly profitable. And so, the rig count for gas wells has been heading south, from over 900 last fall to 600 last week (Baker Hughes).

Turns out, the shale gas revolution is an uneconomic activity even at much higher prices and is sustainable only for a limited time and only by blowing through loads of borrowed money. Now debt has piled up, cash flow is negative, and solvency risks are gathering on the horizon.

In other words, it's another bubble like the Internet and real-estate bubbles of recent memory. Now I'm not promising you that this explanation is true. But at the least it's a prima facie plausible explanation of how it's not impossible for shale gas exploration to both be unprofitable and attract large amounts of investment.

May 24, 2012 at 5:02 PM | Unregistered Commenteranonym

For "shale gas exploration" above read "shale gas production".

May 24, 2012 at 5:03 PM | Unregistered Commenteranonym

Anonym, that might be the situation in the States where supply has outstripped demand because _everyone_ is suddenly fracking with little demand.

If the resource is tapped more slowly here in the UK, where prices and demand are higher, it looks like a contribution to our energy supply that could help keep our prices down and allow profits to be realised.

As I said in the discussion thread we spend a lot of money importing gas from abroad, this would be much better spent on-shore.

May 24, 2012 at 9:32 PM | Unregistered CommenterNial

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