And when gas promoters say “per mcf”, those mcf’s are projected over 30 or 40 years, or even longer...but accountants exist to make generous assumptions. In fact, 10 years is a reasonable assumption. That is close to what Arthur Berman, a sceptical Houston geologist, thinks is reasonable. As Mr Berman says: “Unconventional gas has at least twice as fast a decline rate as conventional resources. About 85 per cent of the value of shale wells in the Barnett will be produced in the first 10 years.”
The shale gas fairytale continues
By John Dizard
Published: July 18 2010 08:39 | Last updated: July 18 2010 08:39
There comes a moment towards the end of any financial bubble when even sceptics wonder if they are wrong, and trees really can grow to the sky. They see grey suited investors with the shining eyes of religious converts, gazing on the Revealed Word of sell-side PowerPoint presentations, and feel a little foolish.
That’s how I’ve felt recently about the shale gas mania, which is sweeping the world of sovereign wealth funds, private equity partners, and other people who attend international big-think conferences.
So I looked again at shale gas production reports, development costs, technical papers, and, yes, the PowerPoints. I went to Texas to meet producers, geologists, and landmen.
And I’m sticking with my position. Yes, shale gas is there, but it is expensive to produce, and there is much, much less of it available at today’s low prices than policy people, investors, and energy consumers are counting on. It is not a cheap and simple way to replace coal (in America), or Russian gas supplies (in Europe). I am, however, humbled in the presence of the marketing genius of the promoters who have convinced so many people to buy the story.
Because it is a story. The basic truth about shale is that it is much harder to extract the gas from those rocks than it is from the sandstones that are the source of most “conventional” gas. Gas production rates are dependent on porosity, or the gaps between rock particles, and permeability, or the ability of fluids to move through the rocks due to the connectedness of those gaps. You measure flows of fluid, or gas, through rock with a unit called the “darcy”. Even tight sandstones have gas flows measured in millidarcies, or thousandths of a darcy. Flows from gas-bearing shale, in contrast, are usually measured in microdarcies, or nanodarcies, which means it can be literally hundreds of times harder to get the stuff out.
At this point a shale promoter will point out that with hydrofracturing, or “fracking” technology, he, or, rather, his contractors, can create flows that nature failed to provide. And that’s true, to a point. Fracking, or the forcing of fluids at high pressure into a wellbore, will create cracks in hydrocarbon-bearing rock that will allow the good stuff to flow out. Fracked shale rock frequently produces very high initial flows of gas. Unfortunately, those flows decline far more quickly than they do in fracked conventional sands or even tightly packed sandstone.
In other words, it is difficult and expensive to do better than nature at creating rock formations. So why bother?
Because it is increasingly difficult to find large reserves of gas in conventional rocks. So if you are a promoter of shale gas, you can point to thousands and thousands of hectares (or acres, if you’re American) of prospective producing land. Conventional gas prospects sound puny in comparison. Also, you can usually coax at least a little gas out of a randomly drilled well in a shale formation, which means you don’t have quite as many completely dry wells as you might with conventional prospects.
But “producing” shale wells often doesn’t make economic sense at today’s low gas prices. If shale gas has such wonderful economics, as the PowerPoints and international conference speakers say, why do the operators need to raise so much outside money? Hydrocarbon companies with producing properties should be generators of cash, not users of cash.
American shale gas companies assert that they can profitably produce gas from formations such as the Marcellus in Pennsylvania for $2 or $3 per mcf (thousand cubic feet). But in the fine print you find that represents only the “finding and development” costs, which are only a quarter to a third of the total needed to get a molecule to market.
And when gas promoters say “per mcf”, those mcf’s are projected over 30 or 40 years, or even longer. Not that there are any horizontally drilled, fracked shale wells that old, but accountants exist to make generous assumptions. In fact, wells in one of the first shale fields developed with the new technologies, the Barnett in Texas, have had faster-than-expected productivity declines.
One large German bank’s commodity group is developing its own estimates of the average economic life of shale fields; they think 10 years is a reasonable assumption. That is close to what Arthur Berman, a sceptical Houston geologist, thinks is reasonable. As Mr Berman says: “Unconventional gas has at least twice as fast a decline rate as conventional resources. About 85 per cent of the value of shale wells in the Barnett will be produced in the first 10 years.”
Yes, there is a lot of shale gas in the world. It will take prices perhaps twice as high as today’s to maintain gradual increases in production when capital is no longer provided as freely. If European and American prices are propped up there to maintain domestic supplies, their industries will be that much less competitive. Magic happens in fairytales, not the energy industry.
johndizard@hotmail.com
Copyright The Financial Times Limited 2010.
The shale gas fairytale continues
