Why the coming natural gas boom isn't all it's 'fracced' up to be
Filed under: Energy
Please pardon my poor punning, and let me explain: "Fraccing" (rhymes with "cracking") is the oil and natural gas industry's an informal contraction for the technology called hydraulic fracturing, in which water (and in some cases, a chemical mixture) is pumped deep underground to fracture shale and rock and thus free up trapped oil and gas deposits.The financial media has been buzzing with stories proclaiming a new era for America's natural gas industry as new fraccing technology has enabled the tapping of vast dispersed fields in the Eastern U.S. and the "oil patch" states of Oklahoma and Texas. These advances have caused analysts to raise their estimates of America's natural gas reserves to an astounding 1.8 trillion cubic feet, the equivalent of about 320 billion barrels of oil -- far more than Saudi Arabia's proven reserves of around 260 billion barrels of oil.
So is the U.S. about to reclaim its position as a long-term natural gas power? Undoubtedly, fraccing technology greatly expands the amount of gas which can now be extracted. But we should be careful not to confuse the ability to access these previously unreachable reserves with low-cost and relatively straightforward reserves that are now being depleted, for fraccing is neither cheap nor easy.
Further, we should be careful to note that the U.S. oil and gas industry is the oldest and most mature on the planet, and so our "easy" oil and gas have long since been extracted. So as new reserves come online, they may only be offsetting declines in old fields rather than adding to the net supply.
What Happens Underground Doesn't Stay Underground
There are limitations to the new fraccing technologies which are ignored in the inflated promises offered by the typical media story.
The superficial accounts give the impression that the water and fracturing-fluids pumped underground somehow magically stay there, when the reality is that some of the contaminated or even toxic liquids return to the surface, where they have to be treated as industrial waste.
The exact mix of fracturing chemicals each company uses is protected as an industrial secret, but those in the know have revealed that many of compounds used are toxic. Some, such as benzene, formaldehyde, ethylene dioxide and nickel sulfate, are confirmed carcinogens.
These fluids can be handled safely, but that process is costly. Indeed, there is a peculiar financial dynamic to these newly accessible fields: They only make financial sense if prices for natural gas are high, yet the very promise of these new deposits acts to depress natural gas prices.
Though prices of natural gas have recently climbed off a multiyear low, the market is glutted with supply. The net result is that while natural gas from these newly exploited fields may be abundant, it won't be cheap because below a certain point, it makes no sense to tap these expensive-to-reach reserves.
Though industry sources tend to pooh-pooh the contamination of ground water as a low-probability event, there are videos on YouTube of people demonstrating some form of contamination by lighting their tap water on fire.
While gas deposits are generally far below ground-water tables, not all the fluids pumped down stay down. And fraccing requires large quantities of water -- large enough that some locales are against the practice because it competes with local needs and water rights.
Production Estimates May Be Too Optimistic
Another cost factor is mineral rights. In an old-fashioned oil/gas field, the producer owned the mineral rights, sank a well, and pressurized oil and gas flowed out. But tapping reservoirs of gas which lie under urban or populated areas is not quite so straightforward. Mineral rights must be acquired, and that raises the cost of production.
Petroleum engineers have publicly stated that many fracced wells quickly suffer significant drop-offs in production. In other words, the fracturing works well at first but soon loses its productivity. As a result, some industry professionals are asking if the grandiose estimates for natural gas trapped in shale deposits might be overly optimistic. At least a few are openly pessimistic about the claims being made about future production targets, and other are noting the high decline rate in established conventional wells may offset the new capacity. At least one public source states that only 28% of the frac-technology wells are profitable.
If true, this would constitute a significant cost cap on the entire production technology and call into question the high-flying estimates of future production -- at least at today's prices for natural gas.
Another challenge is the dispersed nature of the fields. Collecting the gas from dozens of distant wellheads is non-trivial; the collection and transport pipe systems required are expensive.
Add it all up and what can we conclude? It's fundamentally reassuring to know that natural gas is abundant in the U.S. and Canada, but sobering to find that the extraction, collection, transport and clean-up will cost a lot more than we're paying for cheaply extracted natural gas.
Charles Hugh Smith writes the Of Two Minds blog and is the author of numerous books, most recently Survival+: Structuring Prosperity for Yourself and the Nation.
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Reader Comments (Page 1 of 1)
11-08-2009 @ 4:14PM
Jonathan said...
Please refer To Ecosphere Technologies (esph) which has revolutionized the fraccing industry with their clean water technology. This article does not take into account the low production cost utilizing their technology along with the return of clean water to the environment.
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11-08-2009 @ 5:22PM
Jack said...
Looks like Charles Hugh Smith needs to do a little more research on break even costs and and full cycle costs of completion for unconventional plays. It's amazing what you can get published on the Internet these days. Read a 10Q to see how much costs have gone down on the typical unconventional driller's balance sheet. This is all hyperbole and conjecture....
Shale and tight sands plays are coming in much, much cheaper on a $/mmBtu basis than conventional plays partly because drilling companies have already been there and can rely on well logs to take 'exploration' costs out of 'exploration and production. Some producers have stated that they have experienced almost 99% discovery rates - the only time they drill a dry hole is when they lose a drill bit. Case in point, see Eagle Ford and Granite Wash discoveries of the past few months.
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11-08-2009 @ 7:51PM
investing said...
I wish the blogger (I hate to call these guys authors) would have included the per barrel price of oil that makes the fracced gas profitable. Is it $70, $50, ?? The important point is whether predictable rising oil prices make the gas less expensive, not whether this new gas is more expensive than our old, easier to extract natural gas.
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11-09-2009 @ 12:05AM
Taipei said...
Sorry to be picky, but "media" is a plural noun. "...media has been buzzing.." is incorrect. The singular is "medium".
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11-09-2009 @ 1:56AM
sgentilejr said...
Charles Smith wrote the article and he is a writer, who writes for a living. What he writes does not have to be factual as long as he gets his paycheck each week.____________________
The facts are 1) The USA must try to achieve energy independence, rather than give our nation's wealth away to some unsavory governments around the Globe to buy energy from them.
2) New wells drilled using fracturing and horizontal drilling are producing 5 to 10 times more ng per well per day, which more than offsets the increased drilling costs. 3) Newly drilled (fractured and horizontal techniques) wells are not depleting as fast as old wells and they are maintaining high flow rates much longer.. 4) No one really knows how much oil and ng lies beneath our nation's land or territorial waters, simply because most areas have never been explored or drilled before. 5) energy companies are drilling 5,000 to 15,000 feet down in layers of rock and shale and the average water well is only drilled 100 feet deep, which provides a huge buffet between where the drinking water is located and where the fracturing is taking place and water usually flows down, not up on this planet. The only thing we know for sure is that the core of planet Earth has been endlessly burning at temperatures as high as 7,000 degrees for hundreds of millions of years and that is a huge untapped supply of energy down there just 10 to 20 miles below our feet. It is only a matter of time until we learn how to tap the heat generated by the core and use that heat to power our electric power plants.
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11-09-2009 @ 7:47AM
cabo79 said...
This is a BS story, With the new drilling techniques money can be made at $2.50 per. The going price is now about $4.40 per. Lots of money to be made in gas now, The volatility in the market is the only problem keeping customers away.
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11-09-2009 @ 10:44AM
jerhoad said...
This piece is a beautiful example of un-enlightened, uninformed and poorly researched journalism - perhaps this piece would pass as a paper in a journalism class at Harvard, but it is sophmoric and every way. Sad.
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11-10-2009 @ 12:55PM
Ian said...
Agreed. The writer doesn't bother to illuminate the article with accurate data. For example the reference to 1.8 TCF of gas reserves being equivalent to 320 billion bbls of oil...an overestimate of 1,000 times.
I beleive Mr. Smith is referring to recent NPC and PGC studies which estimated future ultimately recoverable gas resources at roughly 1,800 TCF, of which the great majority is either undiscovered or uneconomic with today's prices and technology.
The impact of enhanced fracturing techniques on shale gas production accounted for about 25 TCF of the 27 TCF year-on-year increase in U.S. proven gas reserves on 1/1/2009. Those additional 25 TCF are roughly equivalent to 4 billion barrels of oil. Given the extended producing life of shale gas wells, this reserve uplift probably saves some 250-400,000 B/D of foreign oil imports annually. Certainly nothing to scoff at, but not the second coming of Saudi Arabia which Mr. Smith hints at!
11-09-2009 @ 11:04AM
Big Boid said...
If you are "fracturing" rock,what is the probability of causing an "earthquake" ?
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11-09-2009 @ 11:30AM
Tom DiGrappa said...
Perhaps Mr. Smith meant 1.8 trillion MCF, which would be 1800 TCF. Mr. Smith numbers are only off by 3 orders of magnitude. Makes you wonder about the "rest of the story".
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11-09-2009 @ 1:51PM
Charles Hugh Smith said...
Thank you for the comments and critiques, and I apologize for the error in proven reserves. I should have made a much clearer distinction between the technology being used on existing wells vs. new exploration.
If possible it would be a service to readers to post links to further info you state here. The http://www.theoildrum.com/ contains numerous articles and industry sources who are skeptical of some of the claims being made about declines rates and costs.
If production costs are only $2.50 per then the nation's energy energy is secured at low cost, and that will be a boon to us all.
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11-15-2009 @ 11:28PM
Izzy said...
Thanks for the reply Charles.