Shale Energy Bubble Threatens Second Economic Collapse

There has been more than a little celebration as the result of the huge shale gas deposits discovered in Pennsylvania and elsewhere. The discovery has led to a sense among many that our energy problems are not terribly urgent. Even President Obama referred to a 100 year supply of natural gas in his second State of the Union address. The U.S. is now predicted to become the world’s top oil and gas producer in the year 2017. What those predictions don’t tell is how long the U.S. is expected to remain in that position.

According to one expert, that status could be very short-lived indeed. In fact, according to David Hughes, a scientist who spent 32 years with the Geological Survey of Canada, the exceedingly optimistic estimates could be setting us up for a fall, the likes of which we have not seen since the real estate collapse of 2008. Hughes is currently a fellow with the Post Carbon Institute.

Shale gas has grown explosively to the point that it now supplies some 40 percent of U.S. natural gas. But the question is, how long can that explosion last?

Hughes has noted in his report, Drill Baby Drill that it’s not the amount of gas in situ, but the achievable rate of supply that really matters. It turns out, there are significant constraints to achieving the needed rates for both shale gas and oil. After studying production data for some 65,000 shale gas wells, using the industry standard DI Desktop /HPDI database, Hughes found that the vast majority of these wells are depleted within five years.

So although, there is a huge amount of gas and oil sitting there, it will become increasingly difficult, risky and expensive to retrieve those resources as time goes on. The very high rates of decline of these wells will require thousands of new wells to be dug at a cost that could well exceed the value of the energy extracted. In the case of shale gas, Hughes estimates a cost of $42 billion per year as compared to $32.5 billion worth of gas that was produced in 2012.

A similar scenario exists with the shale (tight) oil, The two main plays in North Dakota (Bakken/yellow) and Texas (Eagle Ford/brown) are declining rapidly and will require over 1500 new wells annually at a cost of $14 billion, just to offset the declines. Production of this oil is expected to peak in 2017 (the year the US briefly becomes top producer) dropping back within two years to 2012 levels and essentially petering out by 2025. In other words, this whole shale oil bonanza will be a bubble of about ten years’ duration (see graph).

Tar sands oil, the raison d’être for the much-opposed Keystone XL pipeline, is likewise troubled. It contains relatively low energy while requiring lots of energy, in the form of steam, to produce. Some estimates claim a cost of as much as $100 per barrel.

It is not just Hughes saying this. The Energy Information Administration (EIA) sees U.S. domestic crude oil production including shale oil peaking at 7.5 million barrels per day (mbd) in 2019 (well below the all-time U.S. peak of 9.6 mbd in 1970), and by 2040 the share of domestically produced crude oil is projected to be lower than it is today.

At the same time as Hughes’ report came out, Deborah Rogers of the Energy Policy Forum also issued her report, Shale and Wall Street: Was the Decline in Natural Gas Prices Orchestrated?. Rogers is a former investment banker, now the founder of the Energy Policy Forum. According to her report, shale mergers and acquisitions became one of the most profitable areas for Wall St. investment banks, accounting for some $46.5 billion worth of deals. Her report provides evidence that Wall Street promoted the natural gas drilling frenzy (much as it did the housing bubble), by, among other things, conspiring with energy companies to overstate the size of reserves by as much as 4-500% , as well as understating the steep decline rates and highly inefficient nature of these operations. Furthermore, they drove production to unsustainable levels in an effort to drive prices down to encourage investment and manipulate government policy in a direction most favorable to domestic oil and gas production. Because of the debt resulting from these highly leveraged operations, stated reserves may have broken SEC rules in an effort to avoid collateral default.

So, it seems what we have here is a conspiracy of misinformation, on the part of energy companies and their Wall Street backers, intended, in the name of short term profit, to lure our economy out onto a branch of the energy tree that is not strong enough to hold its weight.

When that branch collapses, prices will suddenly go through the roof, and the result will be much the same as the financial collapse of 2008, only this time the government will be asked to bail out the oil companies.

I think it would be appropriate, given this information, to immediately terminate the Keystone XL pipeline and to initiate criminal prosecution of all those involved, for their attempt to defraud the American public, and to, once again put the entire world economy at risk.

And, it's time for this game to get some rules, so this doesn't keep happening.

[Image courtesy of Post Carbon Institute]

 

RP Siegel, PE, is an inventor, consultant and author. He co-wrote the eco-thriller Vapor Trails, the first in a series covering the human side of various sustainability issues including energy, food, and water in an exciting and entertaining format. Now available on Kindle.

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