Monday
Jun102013
by 
Bishop Hill
Bishop Hill More shale numbers
Jun 10, 2013 Energy: gas Nick Grealy has come up with some news on the long-withheld report from the British Geological Survey:
The BGS Assessment of the Bowland Shale will be published, allegedly, by the end of the current Parliamentary session, July 18. A study for DECC on the price impact of shale gas, undertaken by Navigant will be released simultaneously I’m told.
He also says that a representative of the UK Onshore Operators has put UK reserves at 200Tcf, or nearly a century's worth of supply. This is similar to numbers that have been bandied about in the past, but much more than official estimates.
Reader Comments (62)
but==>put [Thanks. BH]
Yes, the RGS report will be published soon but only after the energy bill has received its third reading. Can't have reality getting in the way of fantasy.
Shale gas has the potential to create wealth. Renewables destroy wealth. I know which I would choose.
The release of the report will unleash a frenzy in the green lobby world. I'm 97% certain there will be an upsurge in forecasts of thermageddon.
"..........UK reserves at 200Tcf, or nearly a century's worth of supply. This is similar to numbers that have been bandied about in the past, but much more than official estimates."
'Reserves', and 'viable reserves' that are profitable to extract at current/i> market prices may account for the discrepancy.
200000000000000000000 cubic feet. Sheet!
it may be a good one , but it will still be just a estimate and then you need to think about if its economical to extract it.
But yes as its fright to the Greens much wanted energy crisis , they will not be at all happy and expect lots more scaremongering from them.
"UK reserves at 200Tcf, or nearly a century's worth of supply"
Bish it is more than that.....that figure is just the reseves in the Borders area of England and Scotland.
Back in 1997 (pre devolution) I had a viewing of the un-politicised map produced by the British Geological Survey for Nirex
@KNR
'and then you need to think about if its economical to extract it'
Sure. Set the benchmark against the alternative - offshore wind - and I think you'll find it very economical.
@KNR
'and then you need to think about if its economical to extract it'
Sure. Set the benchmark against the alternative - offshore wind - and I think you'll find it very economical.
Jun 10, 2013 at 7:15 PM | Latimer Alder
Well, don't forget to factor in the Carbon Tax - and, of course the 'greens' will doubtless use the shift to local powers to resist developments!
This is the opportunity we should grasp and progress with all endeavour and courage. Acquiring ten to twenty years of independence from the gas sources in Europe and Russia and Qatar will give UK an opportunity to develop nuclear to take over major generation supply at the time that fracked gas may be at peak or dwindling.
Those who are affected by minor seismic events, the intrusion of fracked gas facilities or other minor disturbances should receive suitably attractive compensation paid without rancour from the public purse. The large benefit to UK as a whole should allow this new advantage to be developed without hindrance from contrived obstructions and exaggerated dangers.
North Sea oil was exploited reasonably well but we should look to the Norwegians to see an example of how to do it better. We cannot afford to fudge it again.
I do hope that the politicos can see beyond the next two years and support its development; I hold little real expectation.
QUESTION
carbon capture and storage
Fracking.........in stead of fracking with high pressure water why not use high pressure liquid carbon dioxide?
200000000000000000000 cubic feet. Sheet!
Jun 10, 2013 at 6:46 PM Martyn
That looks a bit big. Got a calculator handy?
Whoops, must wear my glasses more often.
Yeoing, yeoing, gone.
Shale gas in the US has been a total disaster and a destroyer of capital. Shale oil does not seem much better because there is no evidence that wells outside of small core areas are economic. While the UK might want to ignore the environmental nonsense and develop such resources shale is not a solution to any long term problem. At best the core areas would start to deplete after a year or two of production and UK consumers will be scrambling for cheap energy sources again. It is much better if instead of just relying on the false promise of shale more energy was spent on getting the government to approve more coal and nuclear facilities instead.
vangel....yawn
Vangel, just to expand
you frequently come here and tell us of the economic disaster that is shale gas in the USA. Since this appears to contradict the mass media view of the shale gas miracle, we ask you for evidence, You tell us to consult the SEC filings of companies that you fail to list, thereby supplying no evidence whatsoever. In the UK, we do not know the names of the companies drilling for shale gas in the USA.
Unless you supply evidence, I for one will continue to heap ridicule on your posts.
Nick' story is upbeat, but he is asking the right questions - it is "when not if" we exploit shale gas and if we decide to leave it in the ground, what is the replacement?
Delaying the report until after the energy bill is debated is appalling politics and should be pointed out widely. This is a bigger scandal than Yeo and Gummer since this is coming from the government itself.
I'd like to think that we will extract a large part of that 200Tcf but I'm not optimistic. The public have to be convinced that it is a good thing and that seems a difficult sell. We'll need to do better than Peter Lilley on Radio 4's Politics Weekly - he was telling us that shale fracking is an old technology (60 years I think he said) and that the UK would need less 'pods' (meant 'pads' I suppose) than the US because of different resource ownership rules. Neither point sounded likely to convince. He came over to me as someone who doesn't know anything about the subject.
you frequently come here and tell us of the economic disaster that is shale gas in the USA.
It is a disaster. There are no shale projects that are cash flow positive from operations. The production increases have come out of debt financed drilling to meet lease commitments.
Since this appears to contradict the mass media view of the shale gas miracle, we ask you for evidence,
I do not see the mass media view of shale profitability being positive. The media has moved away from shale gas and is now hyping shale oil. Frankly I don't see how you could have missed the losses. It is not as if they were not mentioned in the press.
http://www.mining.com/five-billion-loss-expected-at-bhp-billiton-after-shale-gas-misplays/
http://www.1derrick.com/us-companies-write-off-billions-of-on-shale-gas-assets/1868/
http://www.examiner.com/article/big-oil-and-gas-industry-writing-down-billions-u-s-shale-gas-assets
http://www.marketwatch.com/story/exxon-ceolosing-our-shirts-on-natural-gas-price-2012-06-27
http://www.aei-ideas.org/wp-content/uploads/2012/12/bakken1.jpg
You tell us to consult the SEC filings of companies that you fail to list, thereby supplying no evidence whatsoever. In the UK, we do not know the names of the companies drilling for shale gas in the USA.
Look at Continental, a shale favourite. It is exploding its balance sheet as it keeps adding debt to finance production but if you look at the depreciation costs after three years you find that the company is writing down 25% of the cost even though 50% of the oil has already been extracted. None of this is a secret. You can find it in the SEC reports, conference calls, and all over the place. The same is true of Chesapeake, Range, and all the rest of the larger players that have more than a handful of wells.
Unless you supply evidence, I for one will continue to heap ridicule on your posts.
I have provided evidence. Show me one 10-K that shows that shale is self financing and you might have something to back your views. Until you do there is nothing there.
"...North Sea oil was exploited reasonably well but we should look to the Norwegians to see an example of how to do it better. We cannot afford to fudge it again...."
Jun 10, 2013 at 7:32 PM | CPSJ
//////////////////////////////////////
I doubt that we could employ the same model as the Norwegians since we have the huge problem of unfundded public sector pensions. These are really going to come home and bite within the next 20 years, especially given the expansion in public sector jobs under the Bliar/Brown government. it may have taken some people off the dole but at huge future cost since those persons will not receive just the state pension but rather the state pension and a public sector pension. We are talking of several million who were employed in needless jobs and the future liabilities in connection with that needs to be met from somewhere and revenue from shale looks like the only possible candidate.
Vangel
You have a strange idea of how capitalism works.
One off it's biggest advantages is that it's "fail safe" for the majority.
Rich people invest in a new idea to enrich themselves even more. Sometimes they fail to make a profit - but everyone shares the benefit of the progress.
Somebody once calculated that the entire US railroad system was built in about 50 years without any taxpayers money - or anybody making a profit.
If a bunch of international gas companies lose their shareholders millions by supplying us ridiculously cheap energy - should we worry or celebrate?
Infinitely better than confiscating our taxes to bribe the "renewables" pirates to make a guaranteed profit by selling us energy at twice the price (or more).
Vangel might be right. Remember the adage: if it looks to good to be true then it probably is.
And shale gas does look to be a bit too good to be true... (A century or so of
cheapinexpensive fuel.)But it is certainly worth investigating, as if it is true, then it will be a boon for the country.
You have a strange idea of how capitalism works.
No, I am perfectly aware of how capitalism works. But I do not think that many appreciate how the move away from free market capitalism has made malinvestments like drilling shale gas wells more likely.
One off it's biggest advantages is that it's "fail safe" for the majority.
Rich people invest in a new idea to enrich themselves even more. Sometimes they fail to make a profit - but everyone shares the benefit of the progress.
I would argue that much of the money being used to drill wells is borrowed from a banking system that is eager to lend money it gets at very low rates without regard for risk because there is always the taxpayer and depositor to bail out the risky strategy when that fails. Until the party continues the players will make a lot of money. When it ends they will get bailed out by the central banks who argue that it is for our own good.
Somebody once calculated that the entire US railroad system was built in about 50 years without any taxpayers money - or anybody making a profit.
That is true. But railroads are still useful and have value after five years. Shale wells aren't.
If a bunch of international gas companies lose their shareholders millions by supplying us ridiculously cheap energy - should we worry or celebrate?
Whenever capital is destroyed you should worry because it is capital formation that increases our real standard of living.
Infinitely better than confiscating our taxes to bribe the "renewables" pirates to make a guaranteed profit by selling us energy at twice the price (or more).
Who do you think will cover the shale loan losses when the bubble bursts? And isn't it time that we learned the lesson that there is no such thing as a free lunch?
Vangel's examples are companies failing to make money from shale gas in the US.
The operating environment there is more favourable to shale gas operaters. The EPA provides exemptions from the rules governing injection of fluids below ground. Local landowners benefit directly from the minerals extracted from below their land, making it much easier to pass the planning process.
In the UK the operating environment is less favourable. The Environment Agency is less willing to relax its rules. The locals gain no benefit from gas extraction because they have no financial stake in the gas deposits. They therefore no incentive to tolerate the intrusion. . This makes it harder to persuade them, in a planning system which already takes years to process exploration, let alone production.
This has all the makings of a gas bubble.
Incidentally, Diogenes, you are very keen on evidence. Vangel has documented his case. I look forward to your evidence that shale gas is viable in the UK
Not really true though.
The "destroyed capital" has gone in improving the standard of living of poor people by providing them with cheap energy.
Basically, if your worst case is true and all the shale companies lose money - there has simply been a transfer of wealth from their shareholders to the gas consumers.
In the case of renewables - the suppliers' guaranteed price subsidies guarantee a wealth transfer in the opposite direction.
I'm a capitalist ah heart myself - but I know which process I prefer.
Vangel,
Is there any truth then to the, much publicised, statement that "the US shale gas has seen a dramatic fall in domestic gas prices"?
If the above quote is so then; who is paying for the reduction in price to the consumer if the wells are being drilled with debt-financed-money that is costing the operators their profits?
I don't understand where you are coming from Vandel. If the companies are selling at below cost why don't they cap the wells to control the market supply ( or can't the wells be capped ? I'm not an engineer). Also if it is so bad why are they still exploribng new areas for gas and oil ? Google -"Cline shale , Texas "
No comments yet at Grealy’s excellent article. Nobody here with the expertise to say something perceptive there, where it counts?
I would have thought that planning in the UK would be easier from the POV that .gov basically owns everything that it's drilling into. One well for example could drill horizontally for hundreds/thousands of metres without having to 'pay-up' to land-owners who's mineral rights are being disturbed.
Is there any truth then to the, much publicised, statement that "the US shale gas has seen a dramatic fall in domestic gas prices"?
Of course there is.
If the above quote is so then; who is paying for the reduction in price to the consumer if the wells are being drilled with debt-financed-money that is costing the operators their profits?
Ultimately it will be investors in shale companies, depositors in financial institutions that made loans to those companies, the taxpayers that will bail out the institutions and holders of USDs when the purchasing power of a currency that has been elevated because of the promise of shale riches falls to its intrinsic value. It will also be investors in companies that made bets on a money losing activity being sustained, people who bought assets in shale producing areas with the expectations that the boom can continue, etc. Bubbles have many victims.
If the companies are selling at below cost why don't they cap the wells to control the market supply ( or can't the wells be capped ?
They can't because there are terms in the leases that demand that they keep drilling. This is why Chesapeake kept drilling more and more as it was losing more and more.
I'm not an engineer). Also if it is so bad why are they still exploribng new areas for gas and oil ? Google -"Cline shale , Texas "
The answer is simple. There is a lot of money to be made in shale if you are working in the industry or selling shares to an unsuspecting public. There is also the 'value' of gas reserves to majors who have problems with declining reserves. At a 6:1 conversion ratio, which the SEC allows when doing boe calculations money losing shale gas has a great deal of value to conventional players who need to hide reserve problems. By using the claims of high reserves they can keep share prices high and use their overvalued shares to buy up conventional reserves in the stock market. This is probably why Exxon does not regret its shale gas purchases even though the company admitted to losing its shirt in shale operations.
Vangel,
So, the U.S. .gov is keeping local gas-prices down by taking money directly out of the operators/investors pockets? I guess that must be a Political decision then and why would the investors keep on drilling the wells?
Are Vangel and EM two cheeks of the same Troll?
It really does beggar belief that they think shale gas has been a disaster in the U>S.
I suppose that is why gas prices are about 1/3 what they are over here.
Ah silly me. That is the problem . Shale gas makes windmills/moonbeams/biofuel/hamster wheels redundant.
Does anyone remember the Elswick Gas Field on the Fylde?
From the Planning Application Supporting Statement to The Lancashire County Council by Eukan Energy, February 1994
Document Source: Eukan Energy 1994 Submission Fylde Borough Council No. 5-94-0130
So, the U.S. .gov is keeping local gas-prices down by taking money directly out of the operators/investors pockets?
Where did you get that from? I am simply pointing out that when you have free money sloshing in the system it will find itself flowing into areas that will turn into bubbles. This time around that is shale production as companies that have not been able to generate positive cash flow for a decade are still getting access to loans even though the Henry Hub price for the July contract is $3.795 as I write this and the producers need $7.50 or so to break even. Without the QE-forever policy such loans would not be possible. Of course, without such policies the government could not spend as much it does.
I guess that must be a Political decision then and why would the investors keep on drilling the wells?
If they stop they have to write down the asset side of the balance sheet and go into receivership. That means that there are no pension payouts, no bonuses, and no high salaries for the management. We saw this with the home builders and the internet companies during the tech bubble. At that time I was asked why companies kept borrowing even though many of us were claiming that there was no way to make a profit from more eyeballs and that selling pet food and groceries on-line was a guaranteed loser.
Unknownknowns
Drillers have to buy/rent/lease the ground for the exploration drill pads and the subsequent production pads.
Given present technology a shale gas field needs a 3.5 acre pad for each square kilometre, equivalent to two football pitches. In the North of England landowners would get about £17,500 if they sold the land or about £1750/year in rent per pad. Their neighbours would get the noise, traffic and other problems but no benefit.
Each pad would need separate planning permission. The local politicians whose planning departments approved such applications would have an interesting time come the elections.
If this wasn't the Bishop's site I would tend to swear while responding to that nonsense! (and having read subsequent response, those too). Goodbye!
Apologies if double-posted.
If this wasn't the Bishop's site I would tend to swear while responding to that nonsense!
Reference
The Elswick Gas Field is a single well drilled into porous sandstone. It produces enough gas to drive a small generator. The electricity is then fed into the local grid by a low voltage overhead line. Its current footprint is 1 acre, with a couple of sheds and a surrounding berm.
http://www.warwickenergy.com/oandg/OAGelswick.htm
Cuadrilla bought it recently.
For 'each square kilometre' of what exactly?
Let those that read this thread come to their own conclussions. Goodbye.
Vangel/EM, you just don't get it. US operations are unprofitable because there was an uncontrolled stampede to develop shale and the resulting glut caused prices to tank. That is where the problems come from - if prices had remained at their previous levels shale operations would be looking great.
Gas companies know that as well as anyone and will make sure the same doesn't happen in the UK - the last thing they want is to affect the market price. The regulatory environment here also ensures that there will be no gold-rush. Nobody expects there to be a price crash here to mirror that in the US. But there will still be export earnings or savings from displaced imports either of which is good news for our sickly economy.
Firstly Vangel , I apologise for misspelling your nom de plume in my earlier comment.
But I don't buy the fact that these companies enter into lease agreements that require them to continually drill even if they are not getting the gas they may have expected. Even if they did have something as stupid as that , with interest rates as low as they are in the US it must be cheaper to borrow and buy their way out of the lease, than sell the gas at a lose.
It really does beggar belief that they think shale gas has been a disaster in the U>S.
I suppose that is why gas prices are about 1/3 what they are over here.
The producers need around $7.50 to have a chance of breaking even drilling in the core areas of the better shale formations. Prices are half that. Eventually the depreciation costs will have to be restated and when they are the investors will be wiped out and creditors will with up as owners of worthless assets and in need of another handout from the government.
Ah silly me. That is the problem . Shale gas makes windmills/moonbeams/biofuel/hamster wheels redundant.
They are all capital destroyers and all make us poorer in real terms. Having the Fed bail out reckless lenders is no better than having government use mandates and subsidies to push wind or other useless energy 'solutions.'
Shale gas would not be a 'disaster', to use your word, if shale producers could show that they are able to self finance their operations and service their debts. What do you think happens to production when rates rise and loans are harder to get? And what happens to the billions in investment that was counting on cheap ongoing production far into the future?
I would have thought that the housing bubble scam would have thought the Europeans a few lessons about the corruption of the American financial system. It was EU banks that bought worthless CDO and MBS paper that created many of the problems that were the catalyst for the major problems in the EU banking system. Why would you fall for a similar bubble yet again?
Vangel/EM, you just don't get it. US operations are unprofitable because there was an uncontrolled stampede to develop shale and the resulting glut caused prices to tank. That is where the problems come from - if prices had remained at their previous levels shale operations would be looking great.
At $11 Henry Hub prices gas production in the core areas was profitable for the drillers. The trouble is that the production is easy to ramp up if you throw enough money at it. That means that it is easy to create a glut that drives prices lower and makes a true profit impossible. Fortunately for management, the American accounting rules permit companies to make guesses about the ultimate recoveries and use their stated EURs as the basis for their depreciation costs. The actual production data does not matter and will not matter for a while, which is why a company like Continental can write off only 25% of a well even though the well has already yielded 50% of its production.
Gas companies know that as well as anyone and will make sure the same doesn't happen in the UK - the last thing they want is to affect the market price.
That is easier said than done. First, the energy services companies are likely to be far cheaper in the US than in the UK, where most activity is geared towards the North Sea fields. Second, the markets will reward the companies that go all in quickly and get their production to a high level as quickly as possible. To get investment in new distribution systems you will need to promise high production in a reasonable period of time. All this will stimulate activities that will drive costs to much higher levels than in the US at a time when new supply will drive prices lower. I am also quite sure that your accounting will demand that costs are written down at a more realistic rate. That means that the EURs cannot be pulled out of thin air to come up with numbers that are far from reality. And if that happens the total amount of gas that can be produced is too small to be meaningful.
That said, I have no trouble with UK companies using risk their own capital, or money borrowed from UK banks, to try to produce as much gas or oil as they can. All I know is that if I were looking at long term investments I would avoid the sector. Frankly, I would think that over the very long run coal and uranium should do better.
Firstly Vangel , I apologise for misspelling your nom de plume in my earlier comment.
No problem. I am used to people getting my name wrong for most of my life.
But I don't buy the fact that these companies enter into lease agreements that require them to continually drill even if they are not getting the gas they may have expected.
First of all, take a look at the following links:
Facing a cash crunch and mounting pressure from activist shareholders to trim spending, Chesapeake is seeking contract changes that would allow it to drill fewer wells while keeping the leases. It is generally required to drill at least one well on a specified group of properties known as a unit; it is trying to bundle leases into much bigger units, which will allow it to drill fewer wells but retain rights to more acreage.
And...
How lease agreements work
The basic lease agreement involves an initial bonus payment for signing the lease, royalty percentages to be paid if natural gas minerals are found and extracted from the property and a time frame within which the operator must begin operations. If natural gas production does occur, the lease is in effect for the life of the well, which could be 20 years or more.
It is self-explanatory.
Even if they did have something as stupid as that , with interest rates as low as they are in the US it must be cheaper to borrow and buy their way out of the lease, than sell the gas at a lose.
They can't do that because if you write down the leases you are looking at bankruptcy even if you do not count all of the lawsuits for breach of contract by the people who own the land. They had options to sell to other companies that were bidding but chose the believe that the company that signed the lease would live up to its commitments. Note that the land owners get paid even if the production is not economic because they get the bonus payments up front and a percentage of any production no matter how uneconomic it might be.
EM
Do you think that drilling is as blind as your rhetoric ? My information from drillers on the ground here in Oz is that they know fairly well where to drill ... you might like to refer to this http://www.westsidecorporation.com/LinkClick.aspx?fileticket=JdAzENZcqTM%3D&tabid=40
Entropic Man
Porous? Yes. Permeable? No. They had to frac the Collyhurst sandstone to get the gas out. Remember the howls of protest in June 1993?
Free markets normally sort prices out on their own, problems begin when politicians get involved. When prices fall too low some producers go out of business. When prices go high new suppliers enter the market. Summed up by an old farmer:-
"You never get 3 consecutive years of high/low prices for potatoes"
This may not have the right time frame for shale gas but without limits imposed by politicians and pressure groups then the price of anything should fluctuate round a gradually increasing average value. Unfortunately politicians and pressure groups know what is best for us.