Best of the Week
Most Popular
1.US Dollar Crashes, Gold And Bitcoin Skyrocket As Economic Recovery Lie Is Exposed - Jeff_Berwick
2.Now Obama Warns Americans to ‘Be Prepared’ for Disaster… What Does He Know? - Jeff_Berwick
3.EU Referendum - Britain's Immigration / Migrant Crisis Explained - Nadeem_Walayat
4.EU Referendum - British People vs Establishment Elite, Vote LEAVE an Act of Defiance! - Nadeem_Walayat
5.Prominent Billionaire Investors Warn of Financial Crash, Quietly Position Themselves - MoneyMetals
6.Bankers Warn of BrExit Financial Armageddon if British People Vote for Freedom - Nadeem_Walayat
7.Bad U.S. Jobs Report Prompts Stocks Bear Market Rally Towards New All Time Highs! - Nadeem_Walayat
8.Gold And Silver – Friday May Have Marked A Pivotal Turnaround - Michael_Noonan
9.EU Referendum - British People vs Establishment Elite, the Illusion of Democracy and Freedom - Nadeem_Walayat
10.Felix Zulauf: Monetary Stimulation Creates Bubbles, Not Prosperity Nor Growth - GoldandLiberty
Free Silver
Last 7 days
Gold And Silver: Security, And BREXIT - 25th June 16
Dow, Euro & Brexit Recap - 25th June 16
Resistance Holding Gold Stocks after Brexit - 25th June 16
Venezuela vs. Ecuador (Chavismo vs. Chavismo Dollarized) - 25th June 16
Gold, Silver And PM Stocks Summer Doldrums Risk - 24th June 16
Here’s Why China “Economic Hard-Landing” Worries Are Overblown - 24th June 16
Jubilee Jolt: Markets Crash, Gold Skyrockets as Britain Takes Brexit - 24th June 16
BrExit Morning - New Dawn for Britain, Independence Day! - 24th June 16
LEAVE Wins EU Referendum - Sterling and FTSE Hit Hard, Pollsters, Bookies and Markets All WRONG! - 24th June 16
Trading BrExit - British Pound Plunges, FTSE Stock Futures Slump on LEAVE Shock Referendum Win - 24th June 16
EU Referendum Shock Results Putting BrExit LEAVE in the Lead Hitting Sterling Hard - 24th June 16
Final Opinion Poll Gives REMAIN 52% Lead, Bookmakers, Markets and Pollsters ALL Back REMAIN Win - 23rd June 16
Does BREXIT Matter? Outlook for Sterling - 23rd June 16
Keep Calm and Vote BrExit - Last Chance to Break Free of EU Superstate - 23rd June 16
Here’s the Foreign Policy Trump and Clinton Really Want - 23rd June 16
Details Behind Semiconductor Stocks Leadership - 23rd June 16
Trading BrExit - Stocks, Bonds, Sterling, Opinion Polls, Bookmaker Odds and My Forecast - 23rd June 16
BrExit Looks Set to Win EU Referendum, Final Opinion Polls Give LEAVE Lead Over REMAIN - 22nd June 16
Proof that the Gold Bears are Wrong - 22nd June 16
Here’s a Trillion-Dollar Investment Opportunity for Those Few with No Debt - 22nd June 16
BrExit to Save Europe from Climate Change Refugee Migration Apocalypse - 22nd June 16
Increase In U.S. Rig Count Will Not Cap Oil Prices - 22nd June 16
Are Copper and China Stocks Set to Rally? - 22nd June 16
SPX May Break Its Trendline - 22nd June 16
Believe it or Not: More Kids Live At Home Now than Since The Great Depression - 21st June 16
EU Referendum Latest Opinion Polls Show LEAVE Halting REMAINs Surge - 21st June 16
British Pound Outlook - BREXIT, Europe and You - Does your vote matter? - 21st June 16
Fascist Victory Behind the European Union - 21st June 16
EU Referendum Opinion Polls Analysis Shows Strong Momentum in REMAINs Favour - 21st June 16
Is It Time to Dump Gold and Buy Platinum? - 21st June 16
Could Central Bankers Be Gold and Silver's BIGGEST Allies? - 20th June 16
Words Still Mean Things – Brexit With Graham Mehl - 20th June 16
Baroness Warsi the Manchurian Candidate Quits LEAVE for REMAIN, Boris Johnson Next? - 20th June 16
FTSE Soars, Stock Markets Bounce on LEAVE Polls Surge, Bookmakers Widen BrExit Odds - 20th June 16
Brexit Would Trigger Devolution of Europe - 20th June 16
Stock Market Week Of Uncertainty - 20th June 16
Will Gold’s Bullish Price Chart Outperform Gold’s 5 Bearish Indicators? - 20th June 16
Bonds And Stocks At All-Time Highs: Are Markets Confused Or Broken? - 20th June 16
Silver Sleeping On the Job - 19th June 16
BrExit Odds Sink, REMAIN Polls Boost by Jo Cox Killing by Radical Right Extremist, Conspiracy? - 19th June 16
How Elliott Waves Tell You When to "Jump In" & When to "Jump Out" of Markets - 18th June 16
Stock Market Inflection Point During Bifurcation - 18th June 16
Gold And Silver – Insanity Is World “Norm.” Keep Stacking! - 18th June 16
Gold Stocks - Bull Markets that Follow Epic Bears - 18th June 16
The Fed Giveth and the Gold Bullion Banks Taketh Away… - 17th June 16
Brexit: "The Vote Heard Around the World" - 17th June 16
Gold Stocks Summer Breakout? - 17th June 16
Stock Investors Get Higher Returns and More Dividend Income - In Less Time With Less Risk - 17th June 16
How to Use the Gold-to-Silver Ratio? - 17th June 16
Inflation, Deflation & Associated Trading Prospects - 17th June 16
Overnight Markets Struggling to Stay Flat - 17th June 16
Gold Price Surges to Highest in Nearly Two Years On Central Bank and Brexit Haven Demand - 17th June 16
Stock Market Thinking Upside Down; Dow 18k Still Key - 17th June 16
Jo Cox MP Terror Attack Killing Claimed for "Britain First" - Witness Report - 17th June 16
Stock Market, Iron Ore, Bitcoin – Is Silver Next for Chinese Momentum Investors? - 16th June 16
EU Referendum Campaigning Suspended Following Shooting of MP Jo Cox, Suspect Named as Tommy Mair - 16th June 16
Why People are Migrating to the UK, Illegal Immigration, Housing Crisis Consequences - 16th June 16
Stocks Fluctuate Following Recent Decline - Bottom Or Just Pause Before Another Leg Down? - 16th June 16
The US Consumer-Driven Economy Has Hit a Brick Wall - 16th June 16
Bitcoin Price Going Parabolic Again, Now At $730 and Up 60%+ In Last Three Weeks - 16th June 16
China's Hard Landing Has Already Begun! - 16th June 16
Crude Oil Price - Oil Bears vs. Support Zone - 16th June 16
Central Bankers Are Wrong About Inflation and Deflation - 15th June 16
Alignment Of The Dow, Interest Rates, Debt and Silver Cycles Will Deliver A Fatal Blow - 15th June 16
Stock Market Bounce May be Over - 15th June 16
EU Referendum: Have the Bookmakers Got it Wrong? LEAVE Opinion Polls Lead - 15th June 16
Gold Price Rally - 15th June 16
How to Invest for Brexit Report - 15th June 16
Stock Market Short of the Decade? - 15th June 16
Stock Market Sell Off Coming! - 14th June 16
QE - The Good, Bad & Ugly - 14th June 16
This Demographic Shift Makes Our Social Security Useless - 14th June 16
Gold Stocks Ultimate Objective in a World of Monetary Transition - 14th June 16
Philosophy of the New World Order - 14th June 16
The Brexit Game - Boris Johnson vs David Cameron EU Referendum Zombies - 14th June 16
EU Referendum: LEAVE Opinion Poll Lead of 51% to 49% Whilst Bookmaker Odds Still Strongly Favour REMAIN - 14th June 16
George Soros Making Big Bets on Gold - 14th June 16

Free Instant Analysis

Free Instant Technical Analysis


Market Oracle FREE Newsletter

Why 95% of Traders Fail

Shale Natural Gas Miracle Pill or Empty Promise?

Commodities / Natural Gas Apr 27, 2010 - 02:50 AM GMT

By: Puru_Saxena

Commodities

Best Financial Markets Analysis ArticleAs you may be aware, over the past few weeks, much has been made of this unconventional source of energy.  Some fine publications have even called shale gas a ‘game changer’ and most people are now convinced that shale gas has made ‘Peak Oil’ irrelevant.  So, is shale gas really the miracle pill or is it yet another empty promise from a desperate industry?


Before we attempt to answer this question, we want to throw some light on shale gas, which is nothing more than natural gas trapped within shale (rock) formations, deep under the Earth’s crust (Figure 1).  In the past, due to limitations in drilling technology, shale gas was not accessible.  However, with the advent of horizontal drilling and hydraulic fracturing (more on this below), the energy industry in the US has managed to release the gas from the shale formation. 

Figure 1: Geology of natural gas resources

Source: EIA

It is worth noting that hydraulic fracturing is a process whereby water, sand and chemicals are injected at high pressure deep into the ground to break up the porous shale and allow for enhanced recovery of gas.  Although this sounds simple enough, the problem is that this process of injecting chemicals close to the water table may pose a serious health risk.  In order to get to the bottom of this matter, the US Environmental Protection Agency is moving forward with an investigation into the potential adverse effects of hydraulic fracturing on water quality and public health.  So, it is still unclear as to whether this new technology is safe or if it will cause serious health problems for those who live close to the shales. 

Apart from environmental and health concerns, shale gas may not turn out to be the ‘game changer’ due to geological realities.  It is notable that despite the optimistic forecasts from the gas companies, shale gas wells are prone to extremely high depletion rates and after twelve months of production, the daily output has shown to plunge dramatically. Furthermore, the marginal cost of production in shale is around US$7-8 per thousand cubic feet (mcf). Therefore, in the current environment, whereby natural gas is trading around US$4 per mcf, shale gas is uneconomical.

The fact remains that this year the EIA expects total natural gas production in the US to decline by 2.7% to 58.7 billion cubic feet per day (bcf/d) and only increase by a modest 1.1% in 2011.  So, if shale gas is such a big deal, why is total natural gas production not going through the roof?

The truth is that wishful thinking about the decline rates is the sole support for unrealistic expectations. Contrary to the rosy future being presented by the gas companies, recent studies carried out in the operating gas fields in Barnett Shale (Figure 2) confirm that the geological realities are very different.

Figure 2: Shale gas basins in the US

Source: USGS, ALL Consulting

You may want to note that Barnett in Texas is the first commercially developed shale play and it is a model for other areas such as Marcellus and Haynesville. Furthermore, the Barnett Shale currently contains approximately 12,000 gas wells and since 2002, most wells in this shale were drilled horizontally using hydraulic fracturing.  It is estimated that so far, this shale has produced 5.64 trillion cubic feet (tcf) of gas, so it really is the poster-child for shale gas modeling.

Now, it is interesting to observe that although the operators in Barnett claim a gas bounty of 26 tcf, independent studies reveal that only 10 tcf of gas may ever be extracted. Moreover, even though the operating companies claim a gas recovery rate of 2.5-3.5 billion cubic feet per well, a recent decline-curve analysis of 2,000 wells shows a gas recovery rate of only 0.95 bcf per well!  In other words, the economics of the Barnett Shale may not live up to its reputation; certainly not at today’s depressed natural gas price. And if Barnett’s economics are not favourable in today’s environment, what chance do the other shales have?

Look. At this stage, nobody really knows how this will play out but the reality does not seem to be as pretty as the operators’ claims.  Now, we do not want to ruin the ongoing festivities but a recent study by Wood Mackenzie estimates that total natural gas production in the US is set to rise by only 15% over the next decade!  This sluggish increase in output can be traced to the fact that the existing conventional natural gas fields are also depleting at a frantic pace.  Therefore, much of the additional supply of shale gas will only offset the depletion of the existing conventional gas fields.

In any event, we do not believe that shale gas will solve our problems or fully compensate us for the ongoing depletion in the world’s oil-fields.  Remember, the world’s transportation system is totally dependent on crude oil and an over-supply in natural gas will not make much difference.  For instance, only 0.16% of the automobiles in the US are currently powered by natural gas and even if shale gas turned out to be a winner, the transition towards natural gas powered vehicles will take decades.

It is our conjecture that although the development of shale gas is a step in the right direction, it is not likely to be a ‘game changer’.  In a world where roughly 93% of the world’s transportation runs on oil, an over-supply of natural gas will not quench our thirst for petroleum.  So, instead of ushering in a new natural-gas economy, we should all be thinking in terms of oil conservation. 

Our research confirms that unless we discover a lot of oil very promptly, the world will struggle to produce more than 89-90 million barrels per day of total liquids.  Today, global usage is 86.5 million barrels per day and with demand rising by roughly 1% every year, aggregate consumption may surpass available supply within the next 3 years.

A few years ago, people used to scoff at ‘Peak Oil’, but now it is widely accepted that the world is losing roughly 4 million barrels per day of output every year due to the ongoing depletion. Fortunately, up until now, new capacity additions have been sufficient to offset this decline.  However, as Figure 3 illustrates, the era of excess capacity is now coming to an end and from next year onwards, new projects will struggle to offset the ongoing depletion in the existing oil-fields. When that happens and supply becomes tight, the price of oil will surge and perhaps cause another super-spike.

Figure 3: Day of reckoning is around the corner

Source: Peak Oil Consulting

In summary, as long as the global economy is growing and demand for energy is on the increase, the price of oil will keep climbing and the energy industry will prosper. Accordingly, we have allocated about a third of our managed capital to outstanding companies in the energy sector and we are confident that these holdings will produce solid growth over the course of this business cycle.

Puru Saxena publishes Money Matters, a monthly economic report, which highlights extraordinary investment opportunities in all major markets.  In addition to the monthly report, subscribers also receive “Weekly Updates” covering the recent market action. Money Matters is available by subscription from www.purusaxena.com

Puru Saxena

Website – www.purusaxena.com

Puru Saxena is the founder of Puru Saxena Wealth Management, his Hong Kong based firm which manages investment portfolios for individuals and corporate clients.  He is a highly showcased investment manager and a regular guest on CNN, BBC World, CNBC, Bloomberg, NDTV and various radio programs.

Copyright © 2005-2010 Puru Saxena Limited.  All rights reserved.


© 2005-2016 http://www.MarketOracle.co.uk - The Market Oracle is a FREE Daily Financial Markets Analysis & Forecasting online publication.


Post Comment

Only logged in users are allowed to post comments. Register/ Log in

Catching a Falling Financial Knife