Tag Archives: Shale Oil

Peak Oil, Sustainability

Are Shale Oil Bankruptcies Coming Soon?

Richard Ha writes:

This Wall St. for Main St. video has oil and energy expert Robert Rapier as guest and it’s a very interesting discussion.

Robert, an internationally known energy expert who was recently on 60 Minutes, discusses various scenarios around the price of oil and cause-and-effect. I like Robert because he has no fear. He calls it like he sees it. He has a chemical engineering background and he has actually run a petroleum plant. He knows what it takes to make ends meet.

Here are some highlights of the discussion:

Robert says that because March and April are normal maintenance months it’s not likely that oil will drop into the $40/barrel range, unless it’s only for a very short time. Usage has started to ramp up in the last few weeks.

He thinks that oil will be in the $50-$70/barrel range for the next few years. The trend will be for the oil price to rise due to demand. T. Boone Pickens feels the price will hit $100/barrel in two years. Robert thinks it will be a little longer. $100 per barrel oil is not good. Any higher than that is bad.

Hedges come off in the next year, so most producers are hoping desperately for higher prices. Demand has increased by one million barrels every year for the last five years, mostly supplied by shale oil. But shale oil wells deplete very quickly. 

Rig count, normally a leading indicator, has fallen but we haven’t seen supply drop yet. Hedges running out in a year will add to upward pressure. Within the year we will start to see the effect of declining rig count.

Robert thinks Saudi will talk about raising prices at the next OPEC meeting. He doesn’t think Saudi Arabia expected to drop to the $40s.

Shale oil is not a panacea. The U.S. has a huge infrastructure advantage over the rest of the world. We have pipelines, water, and refineries in position. For the rest of the world, it means new capital spending. So supply from world shale oil will probably be minimal.

Conventional oil has been declining and U.S. shale oil will not last very long so the world needs to go to natural gas or deep water, and that will put pressure on natural gas prices. After shale oil and gas, there is no more. 

If you like to see the background to the oil and gas supply markets, I highly recommend Robert Rapier’s view of things. It gives you an insider view.

Here in Hawai‘i we depend on oil for 70 percent of our energy. We will transition to natural gas and before long that price will start to rise. We need to grab all the advantages we can get.

Do not throw away the Thirty Meter Telescope, geothermal, and biotech crops. These all help us cope in a world of declining petroleum products.

Big Island, Food Security, Geothermal, Peak Oil, Renewable Energy Sources, Sustainability

Shale Oil & Gas: The Overhype

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Richard Ha writes:

Art Berman says we don’t have as much shale oil and gas as we think we do. He feels that the shale oil and gas sector is largely uneconomic.

The first time I heard Art Berman speak was on a panel discussion at a 2009 Association for the Study of Peak Oil conference. He studied four thousand Barnett shale wells in Texas and found that the average well gave up 72 percent of its production in the first year.

He definitely had a different perspective than an oil company executive panel member, who said that according to his hyperbolic curve calculations, the average well would produce for 22 years.

I knew someone was wrong. I thought that the oil company executive was just blowing smoke, to sell stocks. I imagined that by the end of the 22nd year, the amount of gas production from his gas well would fill a balloon an hour.

Many thousand of wells later, several credible studies from other sources, such as by this Post Carbon Institutes study by David Hughes, support Art Berman’s initial observations.

We need to pay attention to this because we rely on oil for seventy percent of our energy, and this makes Hawai‘i especially vulnerable. It’s much better to be safe than sorry.

The Big Island is lucky to have an alternative to oil and natural gas to make our base power electricity: Geothermal.

As time goes on, and as oil and natural gas prices rise, future generations will have a competitive advantage over the rest of the world. We will be over our geothermal “hot spot” for 500,000 to a million years.

It takes energy to do work. No energy, no work done. But it is the net energy left over from getting the energy that society uses to grow the economy. And since two-thirds of our economy is made up of consumer spending, it boils down to how much extra money the rubbah slippah folks have that will determine the health of our economy.

So Kumu Lehua was right. He asked me: “What about the rest?” 

That is the key question. What about our kupuna on fixed income? The single moms? The working homeless? If they had extra money, they could spend it and everyone would benefit. Farmers are price takers, not price makers, and they would benefit. If the farmers made money, the farmers would farm.

Asking what about the rest will help us with food security. It all boils down to cost. That is to say, what are the combination of things that gives us the best net energy profile? This is more about common sense than rocket science. If we take our time to look for two solutions for every problem and one more just in case, we will find the solutions that make us competitive with the rest of the world.

This, in the final analysis, is about survival and adaptation. And it is about all of us; not just a few of us.

Peak Oil

Why LNG is Such a Bad Risk

Richard Ha writes:

We are getting ready to make huge liquified natural gas (LNG) decisions, and LNG is a big risk. We need to understand the risk and who’s going to be left paying the price.

The first time I heard about shale oil and gas was at an Association for the Study of Peak Oil (ASPO) conference. I attended five of those conferences, the only person from Hawai‘i to do so. Hawai‘i County paid for the trip to the 2010 ASPO conference, held in Washington D.C., and is still benefitting from that small investment.

That discussion about shale oil and gas though was at the 2009 ASPO conference, in Denver, and it turned into a sharp discussion between the geologist Art Berman and a drilling company executive.

Art said he had studied data from 4,000 wells in the Barnett Shale and found that the average well gave off 72 percent of its production in the first year.

The executive countered that his figures showed a hyperbolic curve indicating that production lasts for 22 years.

Somebody was wrong. Later I learned that hyperbolic curves only mean that the following year is less than the one previous.

I didn’t know the definition then, but common sense told me that at the end of 22 years, maybe just a gallon might be coming out per hour. I felt like the executive was just trying to sell stock.

Later, a study of 19,000 wells showed that the average well gave more than ninety percent of its production in its first five years. This was not rocket science – even a banana farmer could tell that you would need to replace one-fifth of the wells each year just to stay even. More if production is higher in the first few years.

As of 2010, it was common knowledge that the average shale oil and gas well depleted in a short time, and it was a subject of intense discussion among those of us who attended the ASPO conferences.

In the meantime, some of the folks out there trying to sell stocks were using the terms “resource” and “reserves” interchangeably in describing what was available. The phrase “Saudi America” started to be thrown around.

The U.S. Energy Information Administration (EIA) finally estimated that the U.S. had an economically accessible shale oil supply of about 100 more years.

But David Hughes, a Canadian geologist, challenged the availability of the Monterey Shale oil due to its geological characteristics. Instead of being flat, the resource rock was wavy and squished. It was hard to access via horizontal drilling.

And then this March, the EIA quietly changed its estimate. In a low-key announcement, it readjusted its estimate of Monterey Shale oil availability – which was two-thirds of our national recoverable supply – downward by an amazing 96 percent.

I saw the announcement and realized its significance immediately. Readjusting the estimate of the US supply of oil downward by two-thirds was a huge, huge deal. But the news kind of just slipped by.

Shale gas has the same characteristics of shale oil – it depletes rapidly. If you ask me who I believe about shale oil and gas? Based on his track record, I believe the data and conclusions of David Hughes.

He based his studies on the same historical data and information the U.S. EIA used, but analyzed it in a more meticulous and targeted way. His data shows natural gas declining much, much faster than does the EIA. A recent University of Texas study agrees more with David Hughes than with the EIA.

This Peak Prosperity podcast features an interview with David Hughes talking about shale production and how he did his analysis. It’s a good interview (47:24). Alternately, you can read the transcript here.

On p. 300 of his report, in figure 3-116, Hughes shows an interesting graph of the EIA’s forecast for shale gas projections and how, in the long term, they are greatly overestimated.

At the end of Hughes’ study on natural gas, he cautions (click to enlarge) :

David Hughes report

Here on the Big Island, based on the precautionary principle, I would rely on geothermal rather than liquid natural gas for our electricity generation. A faster decline probably means a faster rise in natural gas price. If we rely on LNG, the rate payer will assume that risk.

And in Hawai‘i we do not have methane underground. So the bad effects of fracking does not apply to us at all. We have drilled 85,000 wells by now. It’s a mature industry that deals with H2S routinely.

In the future, geothermal could also help us solve our transportation problem by providing hydrogen for fuel-celled vehicles. The cost of hydrogen comes from either natural gas or from passing electricity through water. Eventually, the cost of making hydrogen from natural gas will pass the cost of making hydrogen from electricity from geothermal. Then we will have a permanent advantage over the rest of the world. That’s what we want!

Geothermal is climate change-friendly and as infinite as we can get—we will sit for 500,000 to a million years over the “hot spot.” And we are one of the few places in the world with these circumstances and this opportunity.

We have truly come to a crossroads in our history. We must put our personal agendas behind us and do the right thing for ourselves and future generations.

Big Island, Community, Philippines, Renewable Energy Sources, Sustainability

Kauai Island Utility Co-op Execs To Brief On How They Formed Their Co-Op

Richard Ha writes:

We have invited Dennis Esaki, a founder of Kauai Island Utility Cooperative (KIUC), and David Bissell, CEO of KIUC, to speak to us about how one forms a community-based utility. Having such a utility cooperative here on the Big Island would give us more control over our destiny.

It will be held this Friday, December 19, 11:30 a.m., at the former C. Brewer Executive Center in Wainaku. The event is sponsored by the Big Island Community Coalition, the Hilo Hamakua Coast Development Corporation, and the Hawaii Farmers and Ranchers United. The Ed Olson Trust is providing the Wainaku Executive Center facilities. Please R.S.V.P.

The Kauai Island Utility Cooperative was formed in 2002 when Citizens Communications’ Kauai Electric announced that it was selling the Kaua‘i utility. We have a similar situation right now in that Hawaiian Electric Industries (HEI) recently announced it is selling to NextEra.

NextEra plans to use utility-scale solar, backed up by liquid natural gas (LNG) as a bridge fuel. The average shale oil and gas well lasts only five years, so that model is a concern for Big Island rate payers. (This link is an even more in-depth explanation of how shale oil is massively over-hyped, and analyzes the best data available.) Fortunately, we have geothermal we can use in place of LNG on the Big Island. We have options.

This is not an endorsement of converting to a co-op so much as it is an informational briefing.

Please R.S.V.P. to richard@hamakuasprings.com.

Peak Oil

The Cost of Farming

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Richard Ha writes:

Now that the GMO discussion has stabilized, let’s move forward.

There is a big picture here that is not being discussed. In the coming weeks, I will be writing about various input costs of farming, because as costs go up we need to be planning and preparing. 

Today I want to discuss what farming looks like from a farmer’s point of view. 

Farmers were shocked back in 2008 when the cost of nitrogen fertilizer spiked. Ammonia is a key component for making nitrogen fertilizer, as well as plastics and pesticides, and the cost of ammonia is highly correlated with the price of natural gas.

Impact of Rising Natural Gas Prices on U.S. Ammonia Supply

Natural gas is the primary raw material used to produce ammonia. Approximately 33 million British thermal units (mm Btu) of natural gas are needed to produce 1 ton of ammonia. Natural gas accounts for 72-85 percent of the ammonia production cost, depending on the size of the ammonia plant and the price of ammonia (TFI (a)). Ammonia prices were weakly correlated with natural gas prices before 2000, but became strongly correlated after 2000….  Read the rest

Natural gas had been cheap, but its cost started rising and, in 2008, it reached $12/thousand cubic feet (mcf). I addressed the State Farm Bureau convention and told the farmers it was not their fault that fertilizer and input costs had risen so much and that their costs were suddenly so high.

After 2008, the price of natural gas declined dramatically because of shale oil and shale gas production. It dropped below $3/mcf. Right now it’s slightly higher, a little over $4/mcf,  because of winter home heating. 

So we’ve seen the effects of high natural gas prices on farming input before, back in 2008, and we know it will go up again.

What exactly is the outlook for the price of natural gas and therefore fertilizer, plastics and pesticide costs?

On the mainland, thousands of wells produce natural gas. Keep in mind, though, that the average gas well produces 90 percent of its total production – 90 percent of everything it’s going to ever produce – in its first five years. In contrast, Saudi Arabia oil fields have lasted for more than 50 years.

It’s only common sense that natural gas prices are going to rise, and therefore our farming input costs will go even higher. The only question is how fast and how high?

Coming up I’ll write about what people are predicting, as far as when prices will go up and how high they will go.

Biofuel, Peak Oil

We Need More People With Cutting-Edge Energy Knowledge!

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Richard Ha writes:

Hawai‘i should be sending more people to the Association for the Study of Peak Oil (ASPO) conference. The folks at ASPO are on the leading edge of energy data interpretation. We need more people with cutting -edge energy knowledge.

aspo logo

For example, for several years now ASPO folks have been utilizing Energy Return on Investment (EROI) as a tool to evaluate energy
options.

If HECO had understood the concept and its parameters, it
may not have committed to Aina Koa Pono’s biofuel project so wholeheartedly.

Biofuels, in general, have very low EROI ratios (net energy). It takes a ratioof 3 to 1 just to maintain society’s petroleum infrastructure. Biofuels, except for cane ethanol, are lower than 2 to 1.

If we can’t make money in Hawai‘i now with cane ethanol, what makes us think we can do cellulosic biofuels, which are more costly and more difficult?

Despite spending hundreds of millions of taxpayer dollars, there are zero commercial competitive cellulosic biofuels in production
today. Zero. We wish AKP well, but it should use its own money, not that of the rate payers.

The shale oil and shale gas story is probably only be an interim solution. Aubrey McClendon, the fracking cheerleader of Chesapeake Energy, has been removed as its Chairman and will soon resign as CEO. The ASPO folks have known for several years that shale oil and gas is a bunch of financial smoke and mirrors.

When HECO responded to Consumer Advocate questions about how it justified its pricing, the utility used the Energy Information Agency (EIA) 2012 AEO report’s high-case scenario for its long-term forecast.

But the EIA’s short-term forecast, just a couple of weeks ago, estimates the 2014 price of oil at $101/barrel – while HECO estimates that oil will cost $180/barrel in 2015. The rate payer wouldn’t care about this if they didn’t have to subsidize the biofuels at $200/barrel.

Putting a secret $200/barrel biofuel surcharge on rate payers, and then telling them, “Trust us, this won’t hurt much” – while raising the pay of top executives – stands in sharp contrast to the CEO of Japan Airlines, who insists on being treated exactly like his workers. Watch that short (2:20) video for a very different approach than we are used to. Really interesting.

Related articles
Is HECO Seriously Damaging Its Credibility?
Shale Gas & Shale Oil, Only a Short-Term Bubble
Energy & the Future of the Big Island
Geothermal, Peak Oil

Are Shale Gas & Shale Oil Hope or Hype?

Richard Ha writes:

This video is well worth watching.

It’s called “Shale Promises or Shale Spin? The Economics
Behind Hydrofracking. A Conversation with Deborah Rogers.” If you are following this subject at all, you should watch it.

Deborah Rogers began her financial career in London working
in Corporate Finance, specifically venture capital.

Upon her return to the U.S., she worked as a financial consultant for nearly a decade for several major Wall Street firms, including Merrill Lynch and Smith Barney.

She has also served on the Advisory Council for the Federal Reserve Bank of Dallas and on a task force for the Texas Commission on Environmental Quality.

She currently serves on a regional steering committee for the Oil and Gas Accountability Project (OGAP) and has the responsibility of addressing economic questions.

An entrepreneur herself, she founded Deborah’s Farmstead, an
artisanal cheese-making operation, now one of the premier artisanal cheese dairies in the U.S.

She was featured in a lengthy NY Times article by Ian Urbina on June 26, 2011 entitled Insiders Sound an Alarm Amid a Natural Gas Rush.

Shale gas and shale oil: Are they hype, or hope? We farmers want to know.

Nitrogen fertilizers, chemicals, plastics and other farm supplies are made from natural gas as long as it is cheap. Do we really have a hundred years’ worth of supply, and will it be cheap?

At the 2009 Association for the Study of Peak Oil conference in Denver, the petroleum geologist and consultant Art Berman described his analysis of 4,000 wells in the Barnett Shale. He showed that the average gas well produces 70 percent of its total production in the first year.

Also on the panel, though, was an oil/gas company executive, who said their calculations show that gas wells will produce for 22 years.

Now, three years later, we see that there are wells generating $120/day and they are still in production. What does that mean in
the whole scheme of things? Who is right?

There is more data now, and it still, consistently, shows that shale gas – and, by the way, shale oil – depletes really quickly, like 90 plus percent in the first five years.

And it costs $4 million or so to drill each well. Now that there is so much more data, the math on this is easy.

Farmers do not care who is right. Farmers only care about what is right. So while we do appreciate the low, below-break-even costs of nitrogen fertilizer, chemicals, plastics and other farm supplies today, we are also calculating what our costs might be if the price of natural gas rises to $5, $6, $8/mcf (thousand cubic feet).

If we cannot control the price of oil or natural gas, what do we do?

We must pivot to what is cheap and stable and actually works. 

The petroleum age is barely 150 years old and already we are worrying that it will not last another 50 years; it might last even fewer years than that.

On the other hand, the Big Island will be over the geothermal hot spot for 500,000 to a million years.

The rubbah slippah folks get it. This not rocket science!

Geothermal, Peak Oil, Renewable Energy Sources

Shale Gas & Shale Oil, Only a Short-Term Bubble

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Richard Ha writes:

From ShaleBubble.org:

THEY TELL US

WE’RE ON THE CUSP OF AN OIL & GAS REVOLUTION.

But what if it’s all just a short-term bubble?


The Reality is that the so-called shale revolution is nothing more than a bubble, driven by record levels of drilling, speculative lease & flip practices on the part of shale energy companies, fee-driven promotion by the same investment banks that fomented the housing bubble, and by unsustainably low natural gas prices. Geological and economic constraints – not to mention the very serious environmental and health impacts of drilling – mean that shale gas and shale oil (tight oil) are far from the solution to our energy woes.

This makes total sense to me.

In 2009, at the Association for the Study of Peak Oil and Gas (ASPO) conference in Denver, I attended a panel discussion on natural gas production.

Arthur Berman, a petroleum geologist and energy consultant, talked about analyzing 4,000 Barnett Shale wells. He found that an average well produces 70 percent of its production in the first year. This made sense to me: It’s a gas.

An industry person on the panel said that life span of the wells is calculated to be 22 years. Obviously, they must produce at a very low rate later in their life span, compared to their first year’s production. One has to keep drilling more just to stay in one place.

In this landmark report “Drill Baby Drill,” J. David Hughes of Post Carbon Institute takes a far-ranging and painstakingly researched look at the prospects for various unconventional fuels to provide energy abundance for the United States in the 21st Century. While the report examines a range of energy sources, the centerpiece of “Drill, Baby, Drill” is a critical analysis of shale gas and shale oil (tight oil) and the potential of a shale “revolution.”

From the Executive Summary of “Drill Baby Drill:“

World energy consumption has more than doubled since the energy crises of the 1970s, and more than 80 percent of this is provided by fossil fuels. In the next 24 years world consumption is forecast to grow by a further 44 percent—and U.S. consumption a further seven percent—with fossil fuels continuing to provide around 80 percent of total demand.

Where will these fossil fuels come from? There has been great enthusiasm recently for a renaissance in the production of oil and natural gas, particularly for the United States. Starting with calls in the 2008 presidential election to “drill, baby, drill!,” politicians and industry leaders alike now hail “one hundred years of gas” and anticipate the U.S. regaining its crown as the world’s foremost oil producer. Much of this optimism is based on the application of technologies like hydraulic fracturing (“fracking”) and horizontal drilling to previously inaccessible shale reservoirs, and the development of unconventional sources such as tar sands and oil shale. Globally there is great hope for vast increases in oil production from underdeveloped regions such as Iraq. 

However, the real challenges—and costs—of 21st century fossil fuel production suggest that such vastly increased supplies will not be easily achieved or even possible. The geological and environmental realities of trying to fulfill these exuberant proclamations deserve a closer look.

Click here to see a report about the role of Wall Street investment banks in the recent shale gas drilling frenzy and related drop in natural gas prices, written by Deborah Rogers from Energy Policy Forum.

The petroleum age is not even 150 years old, and already we are worrying about supply. In contrast, consider that the Big Island will be over the “hot spot” for 500,000 to a million years.

We don’t need $200/barrel Aina Koa Pono biofuel, which will make us less competitive. What makes sense is the $57/barrel oil equivalent that is geothermal.

We in Hawai‘i need to prepare for worse case scenarios.

So how much time do we have and how do we take care of all of us?

We need to be practical: What works, works.

This is about competition. Low cost trumps high cost.

It’s about net energy. The energy left over from what’s expended in getting the energy is what we have left to use.

And it’s about common sense. When kids picking guava or waiawi in a pasture hear hoof beats, they run first. Then they look to see if it’s a horse or the wild bull.