The big fracking bubble
9/7/13 01:12![[identity profile]](https://www.dreamwidth.org/img/silk/identity/openid.png){kind=small}
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talkpolitics
As you can see, fracking has become the new Bonanza. And if we're to trust some US media who are heralding economic growth due to the so called "shale gas revolution", the US should expect to be literally drowned in shale gas and oil very soon. In its Energy Technology Perspectives 2012 report, the International Energy Agency claims that in 2017 the US would replace Saudi Arabia at the leading position in the world in terms of the extracting of energy resources, and thus achieve the much coveted "energy independence". According to the IEA, the planned increase of carbon source production (which was 84 billion barrels per day in 2011), to 97 billion barrels in 2035, would be almost entirely thanks to the liquid gas and "non-conventional sources" (i.e., mostly shale gas and oil), while the production of "traditional energy sources" would begin steadily declining in 2013.
By using the so called "hydraulic fracturing" (or hydrofracking) of the oil and gas deposits (by injecting a mixture of water, sand and chemicals under pressure in order to decompose the various sorts of rock and release the trapped gas as shown above), and thanks to the modern technologies of horizontal, or "directional drilling" (which allows more time for processing the earth layers), a system has been devised where, as it turns out now, these resources could be used only at the cost of some severe environmental pollution.
Here's just one example of the environmental impact. The case of MAX Environmental Technologies is fairly recent. A truck couldn't deliver the processed waste material from their fracking site at the Marcellus field, because as it turned out, it was highly radioactive and contained 10 times more of the Radium-226 quantities than the norm allowed. In result, the company had to request a special permission from the government for the deposition of these highly radioactive materials. The level of radiation was 96 microrem per hour (1 rem is the dose of radiation that causes the same biological impact that 1 roentgen of x-rays or gamma-rays would cause). And the conventional sites for processing industrial waste in the US are only allowed to accept materials up to 10 microrem per hour. The EPA standards allow up to 10K microrem (10 millirem) annually. A simple calculation shows that the radioactivity level of the shale waste that results from fracking, would in cases like this surpass the EPA norm 80+ times. According to Tom Cornell, the speaker of the local authorities, "we cannot allow the depositing of such radioactive waste in any landfill on our territory".
As we know, Radium-226 is not just a naturally occurring radioactive material that's a product of the decay of Uranium-238. It has also been long recognized as one of the major polluting components resulting from the fracking method. When it enters the human body, Radium tends to deposit inside the bone tissues, stimulating the development of lymphoma, bone cancer, leukemia, and aplastic anemia. Besides, Radium severely worsens the quality of fresh water. The mixture that emerges on the surface after hydraulic fracking, contains 16K picocurie of Radium-226 per every liter of fracking liquid. And the official limit for the US industry is 60 picocurie per liter, and for drinking water, just 5 picocurie per liter (EPA standards).
In a recent Le Monde publication, the logical question was asked whether, rather than helping fortify the world economy that's only now beginning to bounce back from the crisis, the so called "fracking revolution" wouldn't turn out to be the next speculative bubble that could burst very soon.
Back in 2011, a NYT investigation demonstrated a number of cracks popping up in the myth of the "shale boom", and revealed that various experts (geologists, lawyers and market analysts) were actually having serious reservations about the truth behind the bombastic marketing tricks of the big oil companies, and a suspicion that they were intentionally and even illicitly overhyping the effectiveness of the shale deposits they're developing, and overestimating the true size of their exploitable resources. The analysts concluded that extracting gas from underground shale deposits could turn out to be much more complicated and expensive than those companies are claiming - which is shown by the hundreds of emails and documents coming from experts of repute in this field, as well as from analysis of the data from several thousand shale drilling sites.
At the beginning of 2012, two US experts published an alarming commentary on the subject at the leading bulletin of the British oil industry, Petroleum Review, claiming that there's a "basis for reasonable doubts about the reliability and durability of US shale gas reserves", and pointing out that the forecasts of the oil companies are subject to the new rules of the Securities and Exchange Commission at the federal agency for control of the financial markets. These new rules, which were adopted in 2009, allow companies to estimate the volumes of their deposits as they please, without any control from any independent institution.
It's no secret that artificially pumping up the estimates about their shale gas deposits allows oil companies to significantly diminish the risks related to their exploitation. But in the meantime, hydrofracking not only potentially has devastating effects on the environment as demonstrated above, but also triggers purely economic problems in the long run, because, as it turns out, ultimately the extraction of shale gas could only be economically viable for a very short period. As the former consultant for the British government, Sir David King shows in an article at The Nature magazine, the shale gas extraction from a well tends to drop by 60-90% just a year after its exploitation has commenced.
Such an abrupt decline obviously makes it very unprofitable to develop such wells in the long-term. Immediately after the well is depleted, the company has to expand drilling in the same area to sustain the production levels that would suffice to cover the debt they've gone into for starting the project in the first place. For this reason, and also because of the slow economic activity, depending on the duration of the exploitation period, the natural gas prices on the US market have undergone a serious drop: from $7 or 8 per a million British thermal units (BTE) to less than $3 in 2012.
The finance experts are also rather pessimistic. Some have called shale economy "an economy of destruction". Because shale wells "swallow" the funds that are invested in them at a stunning rate. In order to avoid a drastic drop of their revenue, the companies are forced to drill in more and more new places. But unfortunately, sooner or later this whole scheme leads to a dead end.
Geologist Arthur Berman, who's a former long-time employee of Amoco (before their merger with BP) admits that he's shocked by the incredibly rapid rate at which shale gas resources tend to get depleted. He calls the Texas town of Eagle Ford the "mother of all shale oil plays", and points out that production in the area has been dropping by 42% every year. This means that, in order to guarantee a stable revenue, the oil companies are forced to drill more than a hundred new wells in the area every year. Which swallows between 10-12 billion dollars annually. If we sum up all the investment that this system has swallowed up to this point, it'd roughly be comparable to the gigantic bail-out amount that was spilled for saving the US banking sector in 2008. The question is, where would all that money come from?
The gas bubble is already having negative impact on a number of the biggest oil companies around the world. Thus, in June 2012 the ExxonMobil CEO Rex Tillerson complained of the bad financial situation, explaining that the decrease of gas prices in America could be good for the end consumers, but it was disastrous for the company, whose revenue had drastically dropped. Tillerson came up with a report at the CFR, one of the most influential think-tanks in the US, complaining that the industry is at the brink of collapse, no longer being able to make profit because all their indexes are currently in the red zone.
Roughly at the same time, British oil and gas company BG Group was forced to "re-evaluate its assets" at the US gas market down to $1.3 billion, which was a significant decrease of their intermediary revenue. And in November last year, after oil giant Royal Dutch Shell reported negative results for the third quarter in a row, their annual decrease reaching 24%; when the Dow Jones agency announced the news, they related this result to their concern of the "damage" priorly being done by the price shift at all stock markets due to the "explosion" of shale gas production.
Chesapeake Energy, which actually was the first company to seriously invest in shale gas extraction, was also the first to experience the full consequences of the overblown shale bubble. Being overburdened with enormous debt, they were forced to sell part of their assets: gas fields and oil pipelines worth $6.9 billion in order to meet the demands of its shareholders. FT analyst John Dizard reported that the company had spent amounts worth several times their operating cash flow to purchase land, to initiate drilling and develop its own programs. In order to sustain this sort of "oil rush", Chesapeake Energy was compelled to take huge loans at "very complex and hard conditions", since Wall Street seldom breaks its established rules in this field. Dizard believes that the gas bubble would probably continue to inflate due to America's utter dependence on these resources, which are otherwise doomed to economic failure and liquidation. He concludes that, having in mind the relatively low revenue from shale wells, drilling will have to continue in order to sustain the industry and keep the wheel turning. Eventually the prices will stabilize at a very low level so they could at least cover the initial investment and the actual value of the produce.
But we shouldn't rule out that in the meantime even much bigger oil companies could be pressed against the wall, facing a financial catastrophe of similar magnitude. If/when this happens, the aforementioned Arthur Berman believes, we could witness two or more big corporate implosions, or why not some sensational deals where every participant would somehow be able to take their money back, while all the capital evaporates overnight. And that would be the worst-case scenario.
In other words, the argument that shale gas could protect the US (or the entire world, to that matter) from the effect of "peak oil" (which is how reaching a point where a combination of various geological and economic limitations to oil production would be reached), turns out to be utterly far-fetched.
A number of recent publications and independent scientific reports seem to confirm that the "shale revolution" wouldn't be able to postpone this "doomsday date" much further. For instance, in their report at the Energy Policy magazine, a group of experts led by Sir David King have concluded that the oil industry has overestimated the world fossil energy resources by about 1/3. They believe the accessible layers do not surpass 85 billion barrels, which is significantly less than the official estimates claim. In this relation, they point out that if a significant part of the fossil resources remain stuck underground, the volume of the possible oil production at price levels that the global economy deems "acceptable" would turn out severely limited, albeit with a tendency toward gradual decline in the short-term (before the ensuing stagnation eventually causes them to explode).
Despite the gas volumes currently being extracted through hydrofracking, the invariable annual decline rates continue to vary between 4.5-6.7%. Which is why King & Co completely reject the notion that the exploitation of the shale gas deposits could save anybody from the incoming energy crisis. In turn, financial analyst Gail Tverberg reminds that the global production of "traditional" fossil resources has actually stopped rising as early as 2005. In this stagnation she sees one of the primary reasons for the 2008-2009 crisis, and a herald of some sorts for the decline that could lead to further escalation of the global economic recession. It's no coincidence that in their report (which was published immediately after the MAE report), the New Economics Foundation forecasts that the so called "peak oil" would be reached as early as 2014 or 2015, and the price of extracting and processing petroleum would surpass the price that the economies of the world could possibly bear without sustaining serious damages to their assets.
The bad thing is that all of these researches and analyses haven't necessarily attracted the attention of any of the media, and neither of the political circles making the decisions, since they apparently continue to be utterly mesmerized by the PR rhetoric of the powerful energy lobby. And the conclusion is that the signs are pretty alarming: apparently, the shale bubble is inflating the artificial opaque balloon that's only temporarily concealing the deep structural instability that's developing beneath the surface (pun unintended). And when this bubble eventually bursts, that would provoke a tremendous crisis in the supply of energy resources, and a sharp rise of their prices. And thus, extremely painful consequences for the global economy.
(no subject)
Date: 8/7/13 17:43 (UTC)But the idea oil and gas industries are being taxed into thin air, and aren't making lots of money, that's a bunch of malarkey.