Alice In Shale Gas Wonderland

This article was written as a Guest Commentary for The Oil Depletion Analysis Centre (ODAC) of which I am a trustee.

It is hard to know where to begin regarding Ambrose Evans-Pritchard's article entitled "Energy crisis is postponed as new gas rescues the world." But since the speculative world he invokes has more to do with Alice In Wonderland than the hard reality of engineering and science, let us begin - at the end.

Evans-Pritchard caps his evangelistic encomium with this: "I am not qualified to judge where gas excitement crosses into hyperbole. I pass on the story because the claims of BP and Statoil are so extraordinary that we may need to rewrite the geo-strategy textbooks for the next half century."

He admits his lack of gas qualifications but surely he is enough of a journalist - and an economist - to ask some basic fact-checking questions. If he had, he would have discovered that people like Aubrey McClendon, CEO of Chesapeake Energy, have been brazenly hyping shale gas - even employing well known gas expert Tommy Lee Jones to promote the stuff - in the hope of making a fortune. Given that Mr McClendon is reputed to have lost around $2bn in the recent financial debacle, his keenness is perhaps understandable (though he still managed to earn more than $100m last year).

As for BP saying anything earth shattering, according to geologist David Hughes, "(Chief Executive) Hayward said nothing that wasn't in the latest BP report, which wasn't much different from previous BP reports (ie. 60 year Reserves/Production where it has been in past BP reports)."

What none of the boosters want to talk about is the reality of shale gas. It is true that there is most likely a lot of shale gas around, especially in the United States, but after this, the story goes down a rabbit hole. Shale gas is not like the conventional gas finds that gave the US vast supplies of cheap methane. Shale gas is locked in until the rocks holding it are fractured in a process known as hydro-fracing. This requires a lot of work, a lot of wells, a lot of water (2 - 5 million gallons per well), and some rather unpleasant chemicals. Having made all this effort, the production decline rates look like the cliffs at Beachy Head. Within two years production has typcally dropped by 80%.

Not surprisingly therefore, these expensive wells have an average commercial life of less than eight years. Worse still, in August of this year, World Oil pointed out that total production of many wells was only a third of what operators had predicted. Furthermore, of the two dozen or so shale plays in the US, Barnett appears to have the best geological profile and is responsible for 80% of current shale gas. Many of the other plays have much lower gas content density, which would likely mean yet more wells and more fracing for less gas.

But you ask, unlike Evans-Pritchard, if these wells are expensive, what happens if either the price of gas falls or drilling declines precipitously (the former of course being a likely trigger for the latter)? Very good question, because US natural gas has now sunk to roughly half the price of the median break-even price of shale gas. In a nice moment of symmetry, gas drilling has also fallen by half. Of course, drilling can and will increase, but only when the economics justify it. For the moment, it looks like US gas production may decline by up to 14% this year (according to Bernstein Research), which would actually leave the US supply a few percent short, though it will be easy to fill the gap with gas in storage or imports.

There are least two key missing points which make the article so misleading. The first is that shale gas flow rates are always much lower than conventional gas, which in practical terms makes it an expensive and unlikely replacement either for conventional gas or for oil. The second and far more profound omission is that the geology of gas shale varies widely across both America and the world, so that to extrapolate from the best - Texas Barnett shale - to the world is like saying we should be able to grow bananas in Norway just because they grow in India.

Natural gas is a very useful energy source and it emits less carbon than any other fossil fuel. If large, new, easy-flowing sources of it were found, it could relieve some short-term energy worries and reduce geopolitical tensions. However, shale gas, though possibly a useful crutch, is not going to rescue the world, for the reasons outlined above. Alice was finally woken from her dreamworld and brought back to reality by a hot cup of tea. That may not be enough to get us to face the disappointing reality of shale gas.

My thanks to Dave Hughes for his recent presentation: 'Natural Gas in North America: A Panacea to Replace Imported Oil?'

Is Obama The Green Wave's Last Chance To Count?

There seem to be all kinds of waves and cycles in life, everything from the watery ones that King Canute wanted to prove he couldn't control through Kondratieff economic waves to really important cycles like the rise and fall in fashionable hemlines.

Now that the wheels appear to be coming off the world economic wagon in quite a serious way, it is easier to ask whether some grand cycles and waves are coming to major inflexion points, in particular the ascendant new green business wave and the old, but undoubtedly, effective fossil-fuel wave that has been mainly rising for hundreds of years.

Economic waves, such as Kondratieff waves, are still being argued over after nearly a hundred years and they involve quite a lot of assumptions and some complex notions, which necessitate a fair amount of detailed study in order to gain some literacy in their operation.

However, I am not going to attempt a disquisition on economic cycles, a subject I am currently exquisitely poorly positioned to talk about in depth, but rather I want to pose the following simpler but possibly rather more significant questions.

Firstly, if we grant that the world economy is going through a major downward dislocation and further that green movements, both citizen and business, tend to lose steam when money is scarce or energy prices drop, does the current upswing in matters of sustainable living and renewable energy have enough momentum to keep going through what could be a prolonged contraction, or must it be helped somehow?

I admit that this is a rhetorical question, because based on the evidence, I don't think there is as yet anywhere near enough real green business momentum to ride out what may be a very difficult period. So that brings me to even more important question number two. Is there enough political momentum to carry through the kinds of changes we need?

Much of the environmentally aware and energy savvy world is waiting with baited breath to see what future US president Obama is going to do to try to revive the American - and perhaps the world - economy, while hoping that he does this in large part by unleashing a tidal wave of green-collar jobs and energy saving, green energy and clean tech initiatives.

If Obama does this, then we might not have to run the experiment of seeing whether fledgling new green business strategies can make it through very hard economic times - an experiment that Thomas Friedman would surely say will come to a sticky end (again). The question will then be how best to make a new green wave part of the answer given the current state of tight money, imperfect public knowledge, and notoriously fickle voter and political will.

Friedman's point is that now is the moment for bringing in fuel taxes and widespread carbon taxes - it has to be done when there is political capital in the bank. The trouble is there is not much else in the bank, though since the US government seems willing to engage in financing by the printing press and national debt, there could be money for just about everything that green strategists could wish for.

Climate activists have been saying for some time now that we have only a few years in which to act to save the climate (peak oil analysts perhaps put the figure in negative decades), but if Friedman and activist-analysts are collectively right, then America may genuinely have just a few months to get on the right course, because if Obama's political capital starts to wane, all hope of bold strategic and infrastructural moves may be foreclosed. If scientists are right, and this really is our last chance to avoid runaway climate change, then this will be our final opportunity for a green wave that can actually get us on track for a very different - and better - 21st century.