Sunday, July 15, 2012

Shale Gas Gives Big Boost to America’s Economy

Here's where America's 100-year supply of natural gas will come from: 
From The Economist:

"Natural gas has wrought some remarkable changes. Over the past five years America has recorded a decline in greenhouse-gas emissions of 450m tonnes, the biggest anywhere in the world. Ironically, given its far greater effort to tackle climate change, the European Union has seen its emissions rise, partly because its higher gas prices (linked to oil) have led to an increase in coal-fired power generation.

Cheap gas is also helping other parts of America’s economy. The country’s industry uses around a third of its gas output. The biggest winner might be the petrochemicals industry. It gobbles up gas as feedstock to make chemicals such as methanol and ammonia, a vital ingredient of fertilizer. Switching feedstock from naphtha, derived from oil, to ethane, derived from gas, has kept petrochemicals cheap even as oil prices have peaked. These chemicals in turn provide cheaper raw materials for carmakers, agriculture, household goods and builders, or go for export at prices to compete with the world’s lowest-cost producers, the state-owned petrochemicals firms in the Middle East.

Dow Chemical and others have announced a raft of new investments in America to take advantage of low gas prices. Methanex, the world’s biggest methanol producer, is considering dismantling a huge ethylene cracker in Chile and rebuilding it on America’s Gulf coast. The United States might export fewer cheap raw materials to countries with low labour costs to be made into goods to export back to America. The country could do the job itself, shortening the supply chain and returning manufacturing jobs to America in industries where petrochemicals are a large part of the cost base. PricewaterhouseCoopers, a large accountancy firm, reckons that lower feedstock and energy costs could result in 1m more American factory jobs by 2025.

There are non-industrial benefits too. According to MIT, residential and commercial buildings account for over 40% of America’s total energy consumption, in the form of electricity or gas, making up over half the country’s demand for gas. Low gas prices have meant that the cost of heating schools and other government buildings, often itemised on local tax bills, is falling.

The fossil-fuel industry is only a small slice of America’s economy, but the relative drop in gas prices is so dramatic that it could boost a manufacturing renaissance. That might add 0.5% a year to GDP over the next five years, says UBS, a Swiss bank. Meanwhile low gas prices are already fattening American wallets. According to IHS Global Insight, a research outfit, they are saving the average American household $926 a year.

Not everyone will win. Some coalminers, for instance, will have to find new work. But Mr Obama says that fracking might support 600,000 jobs by the end of this decade. Not bad for a business that barely existed ten years ago."

27 Comments:

At 7/15/2012 7:40 PM, Blogger PeakTrader said...

Some fracking good news
The Economist
May 25th 2012

"America’s carbon-dioxide emissions from generating energy have fallen by 450m tonnes, more than in any other country over the past five years...a shift away from dirty coal towards cleaner gas.

The economics of energy in Europe have moved in coal’s favour.

In France and Germany, for instance, the “clean spark spread”—the theoretical gross margins from selling electricity after buying the gas required to produce it and the right to emit the carbon dioxide—is negative, meaning that the gas needed to fuel a power plant costs more than the electricity produced.

It is “ironic to see that the current outcome for Europe seems to be increasing emissions due to higher coal-fired power generation as gas prices are so high.”"

 
At 7/15/2012 7:57 PM, Blogger Jon Murphy said...

Looking at the map, it looks like there is a large shale in Michigan. Without knowing details about the shale, if it is economically viable as Bakken, then it could really help the Detroit area

 
At 7/15/2012 8:40 PM, Blogger Unknown said...

The shale in Michigan is the Antrim shale. It is mostly a gas-bearing shale, I don't think there's much oil in it.

However, in SW Michigan the Utica shale exists in a different depositional basin than the Utica shale in Ohio, and *that* might have oil in it. Devon and some other companies have already leased hundreds of thousands of acres there. It's in the general Grand Rapids, Holland, Kalamazoo, Muskegon area. Don't know if Detroit will benefit much.

 
At 7/15/2012 8:51 PM, Blogger juandos said...

"if it is economically viable as Bakken, then it could really help the Detroit area"...

Why waste it on Detroit?

 
At 7/15/2012 8:58 PM, Blogger Benjamin said...

So why are we subsidizing, and then mandating the use of ethanol?

This is by far the largest renewable, green, "sustainable" (read: "uneconomic") subsidized federal energy program going.

Corn farmers have received $85 billion in cash grants (subsidies) in the last 15 years, and now still have a mandated use of their product.

BTW: A weak corn harvest os going to shoot ethanol prices to the moon (see the R Squared energy blog, a good nonpartisan source).

Unintended consequences galore.

Why is not ethanol the butt of daily scorn?

 
At 7/15/2012 9:02 PM, Blogger Jon Murphy said...

Benjimin-

I'm going to say this one last time:

THERE ARE NO MORE ETHANOL SUBSIDIES. They were discontinued at the beginning of the year. WILL YOU PLEASE LET THIS GO?

 
At 7/15/2012 9:06 PM, Blogger juandos said...

"So why are we subsidizing, and then mandating the use of ethanol?"...

Gee pseudo benny haven't they updated your version of wikipedia yet?

You should consider the wise words of a great man...

 
At 7/15/2012 9:12 PM, Blogger Jon Murphy said...

By the way, sorry for spelling your name wrong, Benjamin, in my post above.

 
At 7/15/2012 9:38 PM, Blogger Paul said...

"Why is not ethanol the butt of daily scorn?"

We reserve that spot for either you or your boyfriend.

 
At 7/15/2012 10:09 PM, Blogger hancke said...

Corn ethanol subsidies ended but not other ethanol subsidies. Advanced RFS2 ethanol enjoys a $1 per gallon subsidy along with a forced market courtesy of the EPA.

http://theenergycollective.com/jemillerep/90551/epa-cellulosic-biofuel-technology-forcing-regulation

 
At 7/16/2012 4:18 AM, Blogger David said...

Don't forget D.C. Gas is abundant there.

 
At 7/16/2012 8:13 AM, Blogger VangelV said...

It is “ironic to see that the current outcome for Europe seems to be increasing emissions due to higher coal-fired power generation as gas prices are so high.

When reality intervenes there is nothing ironic about it. Europe has to move to coal because coal makes sense. At the same time shale gas makes no sense and The Economist, as usual, is behind the times. Drilling for shale gas is falling as is shale gas production because companies need to invest more energy into getting the gas out than the energy that they produce.

I would have thought that Mark would have figured out that this posting is not compatible with those that show that the shale players are now transitioning to portraying themselves as 'shale liquids' players as they move away from shale gas. How exactly do users of gas benefit from reduced drilling and falling production and how does the new demand get satisfied unless prices go substantially higher.

It is time for clear thinking on this subject. Sadly, we are unlikely to get it until after the burst bubble becomes apparent to the financial press and academics.

 
At 7/16/2012 8:14 AM, Blogger VangelV said...

THERE ARE NO MORE ETHANOL SUBSIDIES. They were discontinued at the beginning of the year. WILL YOU PLEASE LET THIS GO?

There are mandates that force oil companies to use ethanol in their gasoline. Let those mandates end and we can really go of this subject.

 
At 7/16/2012 8:20 AM, Blogger bart said...

Over the past five years America has recorded a decline in greenhouse-gas emissions of 450m tonnes...

And of course that has nothing to do with the decline in travel and gasoline usage and general decline in GDP.

To every season, spin, spin, spin...

*yawn*

 
At 7/16/2012 8:23 AM, Blogger bart said...

There are mandates that force oil companies to use ethanol in their gasoline. Let those mandates end and we can really go of this subject.

It may be self correcting, since corn prices are going through the roof currently.

The greenies may very well get apoplectic when the mandates end though.

 
At 7/16/2012 8:26 AM, Blogger bart said...

Peak cheap oil


Oil analyst Chris Nedler explains the Catch-22 aspect of oil prices in a recent article:

Research by veteran petroleum economist Chris Skrebowski, along with analysts Steven Kopits and Robert Hirsch, details the new costs: $40 – $80 a barrel for a new barrel of production capacity in some OPEC countries; $70 – $90 a barrel for the Canadian tar sands and heavy oil from Venezuela’s Orinoco belt; and $70 – $80 a barrel for deep-water oil. Various sources suggest that a price of at least $80 is needed to sustain U.S. tight oil production.

Those are just the production costs, however. In order to pacify its population during the Arab Spring and pay for significant new infrastructure projects, Saudi Arabia has made enormous financial commitments in the past several years. The kingdom really needs $90 – $100 a barrel now to balance its budget. Other major exporters like Venezuela and Russia have similar budget-driven incentives to keep prices high.

Globally, Skrebowski estimates that it costs $80 – $110 to bring a new barrel of production capacity online. Research from IEA and others shows that the more marginal liquids like Arctic oil, gas-to-liquids, coal-to-liquids, and biofuels are toward the top end of that range.

My own research suggests that $85 is really the comfortable global minimum. That’s the price now needed to break even in the Canadian tar sands, and it also seems to be roughly the level at which banks and major exploration companies are willing to commit the billions of dollars it takes to develop new projects.

 
At 7/16/2012 9:36 AM, Blogger VangelV said...

My own research suggests that $85 is really the comfortable global minimum. That’s the price now needed to break even in the Canadian tar sands, and it also seems to be roughly the level at which banks and major exploration companies are willing to commit the billions of dollars it takes to develop new projects.

I think that you are missing something. The $85 figure assumes that things are pretty elastic and that new projects would not pull resources away faster than the supply chain can provide them. But if you talk to some of the companies that assumption may not be very valid. What we have instead is a supply chain that is very old and very fragile. Many of the most skilled people in the sector are quite old because a series of booms and busts have cleaned out younger workers with little seniority. This is why many company planners fear massive cost overruns for projects already in the pipeline and why final cost figures have tended to disappoint companies that were counting on the assumptions turning out.

 
At 7/16/2012 9:52 AM, Blogger Che is dead said...

"Maybe Che will someday comment about ethanol, the GOP moonshine that is our nation's largest renewable, sustainable, and socialized program, by far." -- "Benji"

The biofuels industry is at loggerheads with House Republicans, who are eyeing its funding for elimination in the farm bill. Biomass and biofuels groups warn that the loss of $800 million in guaranteed federal support would stall progress in developing the fuel source and cause job losses in rural communities that can least afford it ... While the [Democrat controlled] Senate farm bill included mandatory funding of $800 million over five years for energy programs, the House bill offers only discretionary spending on energy programs, while cutting $500 million from the funding level in the 2008 farm bill. House Republicans say the plans to choke off funding for biofuels and biomass projects reflect the basic fiscal reality that cuts have to come from somewhere. -- The Hill

 
At 7/16/2012 10:37 AM, Blogger VangelV said...

The biofuels industry is at loggerheads with House Republicans, who are eyeing its funding for elimination in the farm bill. Biomass and biofuels groups warn that the loss of $800 million in guaranteed federal support would stall progress in developing the fuel source and cause job losses in rural communities that can least afford it ... While the [Democrat controlled] Senate farm bill included mandatory funding of $800 million over five years for energy programs, the House bill offers only discretionary spending on energy programs, while cutting $500 million from the funding level in the 2008 farm bill. House Republicans say the plans to choke off funding for biofuels and biomass projects reflect the basic fiscal reality that cuts have to come from somewhere.

Funny how those same Republicans were eager to vote for subsidies in the first place and have done little to advance the idea of eliminating the mandates. If you get rid of the mandates the subsidies would not matter because very little corn would be used to produce fuel ethanol.

Sorry but the two parties are just as corrupt as they always have been.

 
At 7/16/2012 11:38 AM, Blogger bart said...

I think that you are missing something. The $85 figure assumes that things are pretty elastic...

That $85 is for right *now*.

 
At 7/16/2012 1:28 PM, Blogger spotteddog said...

I'd like to see a post on shale ethanol. A cross between shucking and fracking. Just don't say it in public. Benji and Vangel could get the comments started:-)

 
At 7/16/2012 3:10 PM, Blogger bart said...

I'd like to see a post on shale ethanol. A cross between shucking and fracking. Just don't say it in public. Benji and Vangel could get the comments started:-)


I feel so unloved... -g-

 
At 7/17/2012 1:38 PM, Blogger bart said...

President Obama proclaimed that the US has 100 years of natural gas (UNG) supply.

Do we really have 100 years of natural gas (NG) supply? Why did Chris Nelder claim that we have only 11 years or less NG supply left? The Potential Gas Committee, the EIA and the USGS gave different estimates of US NG resources. People may interpret the numbers wrong. They may not understand the differences between resource, reserve, and economical reserve.

The PGC claimed we have 2192 TCF of discovered and undiscovered potential NG resources. Marketed NG production was 22 BCF in 2010. So 2192 TCF divided by 22 BCF/year is about 100 years of supply.
I will show that it is naive to jump to a conclusion based on that.
The Difference Between Resource and Reserve
In the oil & gas industry, resource means the amount of gas or oil that remains underground, and reserve means what could be produced from the resource.
Only a portion of the resources could be recovered technically.
Only a portion of the technically recoverable resources could be produced economically.
Only a portion of the economically producible resources could be produced into supply. That is called reserve.
This graph explains what are non-discovered and speculative resources, and what are discovered and proven reserves:

http://www.nowandfutures.com/download/d4/future_natural_gas_estimates.png



Please read Chris Nelder for details. We extracted 28.6 TCF of gas in 2011. So 273 TCF of proven gas reserve only lasts for ten years. How do NG industry experts and geologists estimate the resources and reserves? I found that these two groups calculate things differently. Investors should know why they calculate the estimates differently.


http://www.nowandfutures.com/download/d4/shale_gas_oil_us(eia).png


The Marcellus Shale counts for about half of US shale gas reserves. Recently USGS slashed reserve estimate of Marcellus from 410 TCF to 84 TCF. In response EIA also revised their number to 141 TCF.
Let me do a case study on Marcellus Shale.
The Top-Down Reserve Estimate of Marcellus
This is the preferred approach of NG producers:

Drill some demonstration wells to get some production data.
Use the Arps formula to fit a few months' production data.
Extrapolate the type curve to 40-50 years of well lifespan to calculate an EUR (Estimated Ultimate Recovery).
Extrapolate the results of the demo wells to the whole area.
Calculate number of wells that could be drilled based on well spacing and area of the play. Multiplied it by the average EUR, then multiply it by an effective recovery percentage.

 
At 7/17/2012 1:39 PM, Blogger bart said...

(continued)


This EIA document explains how the estimates were obtained:

http://www.nowandfutures.com/download/d4/how_natural_gas_estimates_were_made(eia).png



The typical well spacing is 2000 feet apart, or 80 acres per well. The unit conversions are:

1 mile = 5280 feet
1 square mile = 640 acres
1 acre = 43560 square feet
80 acres spacing = 8 wells/SQM

Here is how EIA came up with 410 TCF for Marcellus (page 21):

The area of the Marcellus play is 94893 square miles.
At 8 wells per square mile, 759144 wells can be drilled.
The average EUR/well is 1.18 BCF. So total is 896 TCF.
Discount it by an effective recovery factor of 45.8%.
The result is 410 TCF technically recoverable gas.

I think this approach is flawed:

Fitting the Arps Type Curve based on merely the first few months of production data and extrapolating to 500 months of production is wrong. It leads to overestimated EURs. The Arps formula diverges to infinity with B>1 as I explained.
Producers drill demo wells with more laterals of longer length. The laterals could extend up to 9000 feet away. So they are draining gas from beneath 4 or 5 well sites away. In doing so, they can show higher production rates per well. But the data does not represent the production potential for the area fairly. When they drill the next well on the next 80 acres patch, they may discover that the gas was already drained.

Following the USGS revision, EIA slashed the Marcellus reserve from 410 TCF to 141 TCF. That invalidated the previous calculation. The USGS geologists have a more scientific approach.
The Bottom-Up Reserve Estimate of Marcellus
A geologist would estimate the reserve as below:

Calculate the Gas-in-Place (GIP) based on the geology: The thickness of the shale layer and the gas content per volume or per ton of the shale rocks.
Calculate percentage of recoverable GIP.

This is reasonable to me. I checked this overview with a chart on page 8 giving parameters of the Marcellus Shale:

Total area of Marcellus is 95000 square miles
The thickness of the shale layer is 50 to 200 feet.
The gas content is 60-100 CF per ton of material.
Geologists calculated the GIP to be 1500 TCF.

 
At 7/17/2012 1:39 PM, Blogger bart said...

(continued)


The density of shale rocks is 2.5 tons/M3 or 0.0708 tons/CF. So Average gas content is 5.664 times the shale volume. Using 100 feet average thickness, GIP = 5.664*95000*640*43560*100 = 1500.08 TCF. My math is good!
Halliburton (HAL) disclosed that only 10% of GIP could be recovered. Various sources put the recovery factor at 5% to 10% or less. But somehow Chesapeake (CHK) got a 30% recovery factor magically.
Assuming a 9.4% recovery factor, the 1500 TCF of GIP in Marcellus would produce 141 BCF technically recoverable gas. That's the new EIA estimate. Chesapeake's mileage may vary.

Calculating the EUR Per Well
Let's calculate the EUR per well, using the upper bound numbers: 100 cubic feet of gas per ton of rocks, and 200 feet shale layer.
GIP = 100CF/ton*0.0708ton/CF*80Acres*43560SQF/Acre*200FT
The result is GIP = 4.93 BCF per well. Assuming 10% recovery, the EUR would be 0.5 BCF per well.
Even CHK's optimistic 30% recovery factor gives EUR of 1.5 BCF. That is way below the 3.75 BCF in CHK's type curve.
In Barnett Shale, the GIP was estimated to be 327 TCF. The NG industry projected an EUR of 1.42 BCF and recoverable reserve of 44 TCF. So far, they drilled 16000 wells and developed 66% of the 3000 square miles core area. The cumulative production is only 10.8 TCF. That's 3.3% GIP recovery factor and 0.675 BCF per well. The GIP of the thickest core of Barnett is 52 BCF per well, BTW.
How could producers ever make a profit at that kind of EUR? They quietly retreated from Barnett and switched to other shale plays, without admitting defeat. The gas content in Barnett averaged 320 CF/ton. That is four times better than Marcellus, and the highest of all US shales. That must be the reason Barnett was developed first. Do they expect success in Marcellus with 1/4 the gas content?
How could they place wells only 2000 feet apart, when the wells were drilled with 9000 feet or longer laterals?
If the well spacing was increased, then fewer wells could be drilled. Thus the resource assets of producers would value less. Likewise, with a lower EUR, the asset values must be written down.
It is much worse! A low EUR means a shale play might not even be profitable at reasonable NG prices. When an asset could not bring in profits, should its value not be marked down to zero?!

Implications to Investors
Investors check balance sheets and quarterly operation reports to determine a company value. Knowing the real reserve estimates and the realistic EURs, what do you see when you look at the balance sheets of major NG producers?
What happens to the equity values when the assets on the books must be marked down by half or more, or reduced to near zero?
I see grave danger in the US NG industry. They told us the shale gas boom story for years. It is time for the investors and the NG industry to wake up to the reality. The industry has survived so far by keep begging banks for more money to keep drilling. For example, CHK earned $1.068B in gas and oil revenue in Q1 of 2012 while spent $4.4B in capital expenditures.
This is unsustainable! I foresee a looming collapse of the US NG sector. In my follow-up articles I will discuss in details. I urge people to scrutinize the financials of these names:

 
At 7/17/2012 1:40 PM, Blogger bart said...

Chesapeake Energy [CHK]
Anadarko (APC)
Devon Energy (DVN)
EnCana (ECA)
ConocoPhillips (COP)
Southwestern Energy (SWN)
Chevron (CVX)
WPX Energy (WPX)
EOG Resources (EOG)
Occidental (OXY)
Apache Corp. (APA)
Ultra Petroleum (UPL)
QEP Resources (QEP)
Cabot Oil & Gas (COG)
EQT Resources (EQT)
Exco Resources (XCO)
Range Resources (RRC)
Newfield Exploration (NFX)
Noble Energy (NBL)
Pioneer Natural (PXD)
Marathon (MRO)
Quicksilver Resources (KWK)
Forest Oil (FST)
Linn Energy (LINE)
Energen Resources Corp. (EGN)
SandRidge Energy (SD)

Invest in Coal, Not Natural Gas
Mean while, deeply discounted US coal producers are poised for a strong rebound. There is a myth that natural gas is now dirt cheap and abundant, and coal is dirty and expensive and abandoned. Some thought the entire coal sector is doomed, and that the NG sector will thrive.
Nothing is further from the truth. Coal is not going away. The shale gas boom will turn to bust. Amid surging electricity demand, reversal of the coal-to-gas fuel switch and rapid growth of exports, US coal producers continue to curtail productions, which is bullish:


http://www.nowandfutures.com/download/d4/coal_production_and_curtailments(eia).png

 
At 7/17/2012 1:40 PM, Blogger bart said...

(continued)


China's coal imports in the first half of 2012 reached 140M tons, up 65.9% Y-o-Y. That's bad news to Chinese coal producers but good news to the oversea producers. I predicted that the Chinese coal industry faced peak coal, peak water and peak labor. Recent data suggests that other than the top three producing provinces, productions in other provinces are collapsing. I will discuss the black lung in Chinese coal miners and more in my future articles.
I call to short certain NG players after the NG prices recovery, but not now. After the Patriot Coal (PCX) bankruptcy, I increased my positions in James River Coal (JRCC), Arch Coal Inc. (ACI), Alpha Natural Resource (ANR) and Peabody Energy (BTU). I encourage readers to consider other US coal producers as well:

Cloud Peak Energy (CLD)
Consol Energy (CNX)
Black Hills Corp. (BKH)
Walter Energy (WLT)
Westmoreland Coal (WLB)
Nacco Industries (NC)
Alliance Resource Partners LP (ARLP)
Market Vectors Coal ETF (KOL)


(HT Mark Anthony and ProdigyOfZen)

 

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