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US Natural Gas: The Role of Unconventional GasPosted by Gail the Actuaryon May 19, 2008 - 7:00pmTopic: Supply/ProductionTags: american petroleum institute, natural gas, tight gas, unconventional naturalgas[list all tags]

US natural gas production has been flat for a number of years. We keep hearing that USproduction is expected to begin declining sometime in the next few years, but it doesn't seem tohappen. While it is not obvious from most published data, the reason production remains level isbecause unconventional gas production has been rising at the same time that conventionalproduction has been declining. In this post, I will look at unconventional natural gas, since itplays such a pivotal role.

Figure 1

Introduction

One reason I am writing this post is because only a few days from now (May 20-21), I will bevisiting BP's tight gas facility in Wamsutter, Wyoming on a trip sponsored by the AmericanPetroleum Institute (API). I may have the opportunity to ask some questions. I thought that if Iput together a post outlining a little about what we know about unconventional gas, and in


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particular tight gas, it might put me in a better position to ask reasonable questions, if I get achance to do so. Also, readers may alert me to some issues I might not otherwise be aware of.

Unconventional Gas and Tight Gas

The major forms of unconventional gas are tight gas, coal bed methane, and shale gas. Theproduction of all three have been rising in recent years. Tight gas is the largest of the three.Production of all three were encouraged under Article 29 of the Internal Revenue Code,Alternative Fuel Production Credit, which became effective in 1980.

Figure 2

One could write volumes on any of the types of unconventional gas. To keep this post fromgetting too long, I will focus on unconventional gas totals and on tight gas.

Production Forecasts

Figure 3 shows a natural gas production forecast that I found on a BP website. It is not toodifferent from other forecasts that one sees for natural gas: Conventional natural gas productionis expected to continue to fall. The various unconventional sources of natural gas will rise to keepproduction flat for several years. Demand for natural gas is expected to be greater than theamount that can be supplied using conventional and unconventional production. We will try tomeet the supply shortfall with imported liquefied natural gas.


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Figure 3

We all wonder, "How reasonable is a forecast of this type?" Can tight gas production be expectedto continue to grow for several more years, or will it quickly reach a peak and decline? Should webe concerned in the next few years? Will unconventional gas actually do better than forecast? Iam not sure I have an answer to these questions, but I will try to lay out some of the issuesinvolved.

What has the EIA's track record on forecasting unconventional gas production?

EIA's track record has been one of consistent under-estimation of the amount that would beproduced. This is an exhibit from one of Advance Resources International's (ARI's) papersshowing EIA's forecasts and the ultimate amount produced:


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Figure 4

EIA's has also tended to miss the decline in conventional natural gas, so that its track record intotal has not been as poor as for the pieces. Going forward, the EIA's forcast (from the 2007Annual Energy Outlook) is shown in Figure 5. It forecasts some increase in unconventional, butnot as steep a rise as in the past. In Figure 5, NA means not associated with oil production; ADmeans associated dissolved.

Figure 5

Doesn't natural gas production tend to peak and decline like oil production?

The United States has different sources of natural gas - conventional gas, both on shore and offshore -- and the various unconventional sources. Geological factors do play a role, as with oil, butthere are other factors that are important as well. I think of natural gas as more of a "pump whatyou need each year" endeavor, until the supply runs low, rather than as having the typical peakand decline pattern that we see with oil production. This is part of the reason production hasbeen flat for many years.

One can see the impact of geological factors when one looks at Figure 1, which shows the declinein conventional natural gas (offset by the rise in unconventional). Reserves for conventionalnatural gas have also been declining, and almost everyone believes that conventional natural gasproduction will continue to decline in the future.

Priceand technologyalso play major roles in determining the amount of natural gas that ispumped, much more than we think of with oil.

The price of natural gas depends on supply and demand. Natural gas is fairly plentiful aroundthe world. While it is difficult to ship natural gas, there are indirect ways the foreign natural gascan compete with US natural gas. Chemical industries can move to cheaper sources of naturalgas. Also, products like fertilizer can be made abroad, and shipped to the United States. In recentyears, pipeline imports of natural gas from Canada have helped to hold down US natural gasprices. Price is also affected by availability of pipelines and by competition with coal and withpetroleum.

Historically, the price of natural gas has been highly correlated with that of oil (R squared = .82for 1986 to 2007, comparing the wellhead price of gas with the price of West Texas Intermediate


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(WTI) oil.) On Figure 6, I show the wellhead price per 1,000 cubic feet of gas and an estimate ofthe price of gas equal to 10.9% times the WTI oil price per barrel. Figure 6 shows annualaverages for he years 1986 thorough 2007. For 2008, the amounts reflect recent May 2008prices (WTI= 125.83; natural gas = 11.71). Recent natural gas prices seem to be lagging behindtheir historical relationship with oil, leaving some room for natural gas prices to rise.

Figure 6What is tight gas?

Tight gas is natural gas found in reservoirs with low porosity and low permeability (generallysandstones with less than 1/10th of a millidarcy permeability). Tight gas requires multiplefracturing to in order for any significant amount of gas to be available. Drilling for tight gas hasbeen compared to drilling a hole into a concrete driveway--the rock layers that hold the gas are

very dense, so the gas doesn't flow easily.

Until recently, tight gas was considered non-economic to produce. Recent technologicaladvances in a number of different directions have made it increasingly possible to extract tightgas. The higher recent prices of natural gas have also tended to support unconventional naturalgas production. There is a huge amount of tight gas in place. Even with technological advances,the challenge is finding a way to extract it economically.

Where can tight gas be found?

This is a map from theAdvanced Resources International website.


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Figure 7

Based on Figure 7, one can see that tight gas resources are very widely distributed. When wellsare drilled, there is a very high rate of successful (not necessarily economic, however) wells--approximately 98%. With such widely distributed resources, the challenge is finding "sweetspots" that can be more economically extracted, and developing techniques that will do this in acost effective manner.

I have not shown maps of coal bed methane and shale gas, but they are also very widelydistributed.

How does technology come into play?

Some examples where technology has come into play with tight gas formations include:

Better technologies to find the "sweet spots" within formations.

Research on the optimal spacing of horizontal wells.

Developing fracing fluids and proppants for stimulating the wells, and determining which isright for each well.

Developing low-energy deliquification methods to separate water from the natural gas.

Developing ways of reducing the ecological footprint, such as drilling multiple horizontal wellsfrom the same pad.

Developing methods for drilling wells more quickly and at lower cost.

In presentations, a person sees graphs such as this one, showing efficiency gains. (EUR isestimated ultimate recovery):


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Figure 8

The effect of these changes is to improve Energy Return on Energy Invested (EROEI), relative towhat it otherwise would have been. With small changes, the economics can be improved enoughto make a larger portions of sites economic, increasing the amount that is economicallyrecoverable.

How has the amount of research on unconventional gas production been changing?

The amount spent on research and development has been falling. The amounts in this exhibitrepresent a summarization byARIof the expenditures of 29 energy-producing companies.

Figure 9


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There is a long lag between research and its widespread benefit--estimatedto average about 16years by the National Petroleum Council. During the 1980s and early 1990s, the Gas ResearchInstitute (a federal program) and the Department of Energy sponsored research programs. Theseprograms contributed to the higher level of research spending during these periods. The researchprograms of the 1980s and early 1990s are now bearing fruit, in the form of increasedunconventional gas production.

These research programs have been discontinued. Companies are continuing to do someresearch on their own, but the amount is lower. There is a very real difference between (1) agovernment program, with funding by companies and with applications tested at many differentsites, and (2) each company doing its own research. If each company does its own research, it

can patent the new application, and eventually use it to improve its own results. The presentvalue of the benefit is relatively small, since it benefits only the company itself, and the timing isquite distant. It may eventually be able to sell the benefits to others, but this will take time.

If companies can work together on research through an organization such as the Gas ResearchInstitute, the results can be shared widely, more quickly. These shared results benefit all, not justa single company. Because of this, the benefit to the industry and society as a whole is likely tocome much sooner than with many small patents by individual companies. Because of the fastertiming, the present value of the benefit of the combined research is likely to be higher than thesum of the present values of the independent research of the individual companies. The cross-fertilization of the combined research programs may also provide benefits. Anti-trust laws do notpermit companies to work together in this fashion, without some federal program.

What are trends in well productivity?

One exhibit prepared byARIshows declining well productivity.

Figure 10

Part of this decline in well productivity will be offset by the recent lower cost of drilling wells,because of efficiency gains. Some of it is expected--companies are now drilling more closelyspaced wells, each draining a smaller area. The lower well productivity does makes it moredifficult to maintain profitability, however.

How is profitability of the unconventional gas industry viewed?


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Figure 11

Figure 11 shows a recent profitability analysis by Goldman Sachs. It seems to indicate that theprofitability of gas projects (nearly all unconventional) which are now underway is acceptable.

Production of unconventional gas is viewed as low risk--the gas is easy to find; the trick isextracting it without losing money. Profitability is not expected to be as high as for some othertypes of ventures, because of its low-risk nature.

What are the prospects for unconventional gas going forward?

ARI shows this chart of its view of reserves and technically recoverable resources.

Figure 12

ARI characterizes the amounts it shows as merely a "snapshot in time" of its view of how muchcan be technically recovered, based on what is known about reservoirs today and currenttechnology. ARI says its estimates are sometimes considered "aggressive". ARI has been makingestimates of this type for several years, and their estimates have been trending upward. It seemsto me that there is a reasonable possibility that ARI's estimates will prove to be accurate, or even


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low, with improving technology. They seem to have a good understanding of the industry, andthe approach they use seems reasonable.

The third layer from the top of the pyramid is the amount ARI estimates to be technicallyrecoverable, but that is not yet included in proven reserves. This layer totals 580 trillion cubicfeet. The footnote indicates that 260 trillion cubic feet (of the 580 trillion cubic feet total) isestimated to be economically recoverable at a price less than $5.00 a thousand cubic feet; 140trillion cubic feet is estimated to be economically recoverable at a price between $5.00 and $6.00a thousand cubic feet; and 180 trillion cubic feet is estimated to be uneconomic at a price of$6.00 a thousand cubic feet. The current price is over $11.00 a thousand cubic feet, so some ofthe uneconomic layer may now be economic. Of the 580 trillion cubic feet of technically

recoverable resources, ARI indicates 379 trillion cubic feet, or 65% of the total, relates to tightgas.

Other organizations provide estimates of technically recoverable unconventional gas resourcesusing older data. In 2003, the National Petroleum Council put together an estimate using datathrough 1998. Its estimate, comparable to the 580 trillion cubic feet, was 206 trillion cubic feet.The USGS in 2006 estimated the amount of undeveloped continuous resources to be 306 trillioncubic feet.

How do the reserves and technically recoverable resources for unconventional gascompare to recent US natural gas production?

The pyramid in Figure 12 shows 105 trillion cubic feet of proven reserves for unconventionalnatural gas as of December 31, 2005, (second layer of pyramid). This level amounted to a littleover half of US total proven reserves of 204 trillion cubic feet as of that date.

The latest date for which proven natural gas reserves are available is December 31, 2006. Provenreserves were then 211 trillion cubic feet, based on EIA data. Natural gas production for 2006was 18.5 trillion cubic feet, so proven reserves amount to about 11.4 years of production. Theseare the published amounts, without consideration of future "resources".

In Figure 12, ARI's estimate of technically recoverable, but not necessarily economicallyrecoverable, unconventional natural gas resources as of December 31, 2006 was 580 trillioncubic feet. If we add this full amount to the proven reserves of 211 trillion cubic feet as of thesame date, we get 791 trillion cubic feet of possibly available resources. 791 trillion cubic feet

amounts to a little less than 43 years of production at the 2006 level. If we include only the 400trillion in resources estimated to be recoverable at $6.00 or less per thousand cubic feet, the totalis 611 trillion cubic feet, or 33 years at 2006 production levels (for all natural gas, not justunconventional).

Clearly, if these resources are available, it could make a big difference to the amount of naturalgas which can be produced going forward.

Where are we headed going forward?

If peak oil is approaching, the price of oilis expected to rise going forward. The price of WTI oil isnow over $120 dollars a barrel, and many are talking about oil at $200 a barrel in the next yearor two. If natural gas follows its historical pattern, its price will tend to rise as well. One mightargue that the price of coal will hold the natural gas price down, but with all of the concern aboutglobal warming, and all of the electrical power plants that use natural gas, I think there is a goodchance that the price of natural gas will tend to rise with oil, especially in North America. Higherprices will tend to make more of the unconventional natural gas economic.

Improvements in technology have clearly made a big difference in the amount if unconventionalgas that can be recovered economically. With the slowdown in spending on research, technologyimprovements are likely to be smaller, but there will still be some improvements. It isunfortunate that the recent energy bills have not included funding for combined unconventionalnatural gas research, similar to that done by the Gas Research Institute. Even if 100% of thefunding were from the industry, it would be beneficial from the point of enabling research on acombined basis, so that society could get the benefit of the research more quickly.


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Discovery is not really an issue with unconventional--we already know pretty well where theresource is, and tools are available (or are being perfected) to find the sweet spots. The industrycomplains that there are considerable problems in actually trying to develop the resources.According to a presentationby Laramie Energy at an EIA conference, one problem is speculatorswho lease land with no intention of developing it. Another is the fact that 50% of Western land inowned by federal or local governments, and cannot be developed. Another issue is the numerouspermitting requirements which delay production. There are also many restrictions because ofendangered species, surface use restrictions, and local ordinances.

We hear the oil industry complaining loudly about access issues. I think they may really have apoint; it can be very difficult to get access to the land where tight gas is located and take the

necessary steps to produce the gas. If some of these access issues can be resolved, this too willhelp natural gas production.

Whether on not unconventional natural gas production will grow in the future will depend onprice, technology, and access. Liebig's Law of the Minimum may also play a role. While we oftenwrite off US natural gas, it seems like there is at least a possibility that the unconventionalnatural gas will make up for the decline in conventional natural gas. The rise in unconventionalnatural gas production may even permit a small increase in total US natural gas production, andreduce the need for imported LNG.

US natural gas production in 2007 was at its highest level in since 2001, and 2008 production isstarting off the year higher than 2007. While no breakdown is available into conventional /

unconventional, it is pretty clear that it is unconventional production that is giving theproduction boost. Natural gas proven reserves have been rising for several years. I think thatproduction of unconventional natural gas is something we need to be examining more closely.The EROEI of unconventional natural gas is not very high, but there is a huge amount of it.

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tropicalcactuson May 18, 2008 - 7:28am Permalink| Subthread| Comments top

GailMany thanks for this informative and well-researched study.

The question really is, how much time will this unconventional gas give us on the 'Red Queen'treadmill before we slip off of it? Does this mean that home heating or electricity shortages areno longer in our 5 year horizon?


westexason May 18, 2008 - 10:26am Permalink| Subthread| Parent| Parentsubthread| Comments top

As you implied, the problem is the number of wells that we have to drill. For example, Texasnatural gas production, from gas wells, in 2006 was the highest we have seen since 1981, but it

took more than twice as many gas wells in 2006 to produce the same amount of gas that weproduced in 1981:

http://www.rrc.state.tx.us/divisions/og/statistics/production/ogisgpwc.html

I think that the fourth quarter of 2007 was the real start of the permanent energy boom/crisis.Whether it is a boom or a crisis depends on what side of the producer/consumer equation thatone is located on. The industry can and will make money from exploiting smaller conventionaloil and gas fields and from exploiting unonventional resources, but the question is whether wecan increase our total net energy output, especially with personnel and equipment constraints.



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Heading Outon May 18, 2008 - 1:10pm Permalink| Subthread| Parent| Parentsubthread| Comments top

Gail:Thanks - this is really helpful in putting things in perspective. If I can tie into Westexas commentabout the number of wells that it is now required to maintain production rates, it might beinformative, when you make the trip, to ask API about the current lifetime of the wells that arecoming on line, the decline rate and the percentage that are economically successful.


Gail the Actuaryon May 18, 2008 - 2:04pm Permalink| Subthread| Parent|Parent subthread| Comments top

I think Liebig's Law of the Minimum is likely to be a big issue also. These facilities are out in themiddle of nowhere. Food and water need to be trucked in, I am guessing. Replacement parts willoften come from overseas. I wonder how long the whole complex operation can be held togetheronce oil supplies begin to decline, and we run into increased financial difficulties.


WNC Observeron May 18, 2008 - 8:16am Permalink| Subthread| Comments top

Don't forget the renewable methane resource - biogas. It is a mature technology, already inoperation throughout the world.

I doubt that biogas has the potential to replace more than a fraction of our present non-renewable methane use. Nevertheless, it can provide us a floor to which we can level off once thenon-renewable methane resources decline in earnest.


kdollisoon May 18, 2008 - 9:14am Permalink| Subthread| Parent| Parentsubthread| Comments top

Biogas could surprise. I read, somewhere, there are 100 million cattle in the U.S. I don't knowhow many would be available for manure recovery, and anaerobic digestion, but I'm guessing thenumber is significant.

Of course, there is, also, landfill, sewage, and opportunities to utilize dedicated crops for biomassas is being done in Germany.

We're going to be on this little planet for a long time (we hope,) so it seems to me that it justmakes sense to use as many renewables as we can.


BC_EEon May 18, 2008 - 1:12pm Permalink| Subthread| Parent| Parentsubthread| Comments top

We're working on this now in BC. Our first projects are using cellulostic feed stock (wood waste

from saw mills), but this is a limited source. The process is being optimized for each feedstocksource such as sugarcane waste, municipal organic waste, or sewage sludge.

However, our process is different in that we don't require gas scrubbing or the FT process. Moreimportantly, the gas is a good output, but the main product will be bio-char (charcoal). Oncethought a nuisance output (until I got involved), the oil outputs will have great applicability.

The light fraction is equivalent to #2 Heating Oil, the heavy fraction might be blended withBunker C, or used in road paving, etc. BC has a large ferry fleet (larger than the Canadian Navy)and using this fuel will go a long way to help meet the renewable fuel mandates set out by theprovincial government.


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Still I advise extreme caution about the volumes that can be produced. We have to be carefulabout maintaining sustainability. Yet, this process might allow us to make a soft landing if wecan power down and turn the corner.


Barrett808on May 18, 2008 - 7:46pm Permalink| Subthread| Parent| Parentsubthread| Comments top

Very cool.


idontnoon May 18, 2008 - 9:01am Permalink| Subthread| Comments top

Coal bed methane has a lower heating value so it must be mixed with a higher grade gas brfore itbe sold. Also the wells tend deplete faster so drilling wells is a continual process.


plucky underdogon May 18, 2008 - 10:50am Permalink| Subthread| Parent|Parent subthread| Comments top

It's true that CBM is very pure (better than 98%, IIRC). As you state, this means it has a lowercalorific value than regular natural gas, not to be confused with Lower Calorific Value (grin). Thisdoesn't mean it's not marketable. My domestic gas bill is quoted in megajoules, not cubic feet,meaning the gas supplier corrects automatically for the calorific value and the customer pays forenergy received. So that particular problem has been solved.

Another thing to take into account is the Wobbe Number, which is a function of upper calorificvalue and density http://www.sizes.com/units/wobbe_number.htm - as described it is not adimensionless number. According to the website, methane falls right in the middle of the WobbeNumber range for commercial natural gases in the United States. IIRC the gas from theMorecambe Bay field (offshore UK) had an out of spec Wobbe Number and had to be blendedwith nitrogen before it could be put into the National Grid.

If you change to a gas of dramatically different specification then you may have to change theburner tips to avoid flame blow-out. This happened in the UK in the late 1960s with the

switchover from coal gas to natural gas ("High Speed Gas"), and was a huge logistical effort,though the world doesn't appear to have come to an end as a result. If the gas goes to a singlelarge user (like CO2-rich Miller Field gas in the UK) then it's simpler.



I understand that one cannot just import any LNG and expect to use it, because of differences ingas around the world. Our appliances in the US are tuned for one specification. Different onesare used some other places.

Comments can no longer be added to this story.plucky underdogon May 18, 2008 - 2:17pm Permalink| Subthread| Parent|

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Typing natural gas pipeline specificationinto Google led me to this interesting paper - see Page4 http://www.beg.utexas.edu/energyecon/lng/documents/CEE_Interstate_Natura...

It mentions gas turbines as one end use that is sensitive to changes in fuel specification, forexample with LNG. This is because GT burners run a lot hotter and therefore nearer to thethermal creep limit than most end uses of natural gas.



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Joseph Somselon May 18, 2008 - 4:06pm Permalink| Subthread| Parent|Parent subthread| Comments top

Natural gas, being a natural product, has a variety of compositions.

Mostly it is methane (CH4) but can have various amounts of propane, butane, and ethane (2CH3+ XCh2) plus non-combustibles like N2, CO2, and He that cost various amounts to remove.

Trying to meet market specifications can doom a gas field economically. Nitrogen is especiallyexpensive to remove with little co-product value, unlike helium.

Comments can no longer be added to this story.dissidenton May 18, 2008 - 9:04am Permalink| Subthread| Comments top

That resource pyramid is just insane: undiscovered and unassessed? Without exploration drillingwhat is their model for the resource? All rocks of similar type have gas? This is most likely in thesame vein as the USGS report from 2000 that was using a trivial statistical model to predict vastoil reserves off Greenland. Basically nothing more than wishful thinking.


weathermanon May 18, 2008 - 9:35am Permalink| Subthread| Parent| Parentsubthread| Comments top

I remember reading that in Canada there are vast tight gas reserves. The gas in Canada is muchharder to extract than the tight gas in the US, but it totals several times the Worlds conventionalnatural gas reserves. The next great challenge?



There are tight gas resources around the world. Other than the US, I don't believe that much hasbeen done with them, because other natural gas that was easier to extract has been available.

This is an exhibit from the National Petroleum Council's Facing Hard Truths report showing an

estimate of the amount in place (not economically recoverable).


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I don't know anything about how difficult Canadian tight gas reserves are to extract. US tight gasreserves were considered impossible, before a lot of research was done.


quixoticon May 18, 2008 - 4:29pm Permalink| Subthread| Parent| Parentsubthread| Comments top

Regarding Canadian resources, AJM Petroleum Consultants from Calgary has good online pdf's

(www.ajma.netthen click on "about ajm", then "news and events", then "past presentations").Also try www.rdfuture.com and click on "natural gas" and scroll down to the 5th graph. Ingeneral, AJM is predicting very expensive times ahead for Canadians and their cold climate. Andthe Canadian Society for Unconventional Gas indicates (if memory serves) that coal bed methanecould only make up about 10% of the shortfall by 2020. I got to thinking a lot about this inFebruary when windchill temperatures got down to minus 50 celsius just north of Calgary.



If nothing else, unconventional takes a long time to ramp up. Besides the infrastructure for the

production, one needs the pipelines to take it to the users.

Some new US pipelines have become available in the last year. I think that is part of the reasonfor the increase in production.


weathermanon May 18, 2008 - 6:19pm Permalink| Subthread| Parent| Parentsubthread| Comments top

Gail

I can't find the link to the site I found this info on. As I remember the problem had something to

do with the holes bieng smaller than in US basins, and more difficult to fracture. They expectedprogress to be slow but the potential resource is immense.


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The Dudeon May 18, 2008 - 6:36pm Permalink| Subthread| Parent| Parentsubthread| Comments top

The Wiki NG article on Canadian 4.1 Unconventional gasmentions the "Deep Basin" in Albertaas a massive source of tight gas; maybe that's the one? Low permeability. Dave Cohen's pieceCanadian Gas - Decline Sets inlikely has more info on tight NG.


plucky underdogon May 18, 2008 - 11:21am Permalink| Subthread| Parent|


Hi diss,

Those YTF ("Yet To Find") numbers are based on things like proven reserves per squarekilometre in basins of known age and geological character, like the ones shown on the maps inGail's posting, adjusted for track record in areas already explored. It's true that they are notprecise, but that doesn't mean they are just pulled out of the air. A good explorer should be ableto quote central estimates and error bars (traditionally P10-P50-P90).

It's not the case that all rocks of similar type have gas, but a given association of mature sourcerock, reservoir rock and seal ("hydrocarbon system") has a nonzero probability of containingproducible hydrocarbon of a given type. That probability can be estimated from drilling history,

in the same system or analogous systems if necessary, and the areal extent of the system can bemapped in a variety of ways. Subtract proven reserves and you've got YTF. You can do this withwell penetrations or without - in the latter case, the error bars are larger, but not infinite.

If that YTF estimate was done bottom-up, i.e. by aggregating the estimates for a large number ofbasins and plays, then it could be quite accurate, even if the individual estimates are way off.Something to do with this http://en.wikipedia.org/wiki/Central_limit_theorem

How do you think oil companies decide where to explore, where not to explore, and when to stopexploring in a given basin?


The Dudeon May 18, 2008 - 11:23am Permalink| Subthread| Parent| Parentsubthread| Comments top

Any chance they'll find some oil by the by?



Find someoil? Sure, all the time.Enoughoil? That's a different question, as I'm sure you know.


dissidenton May 18, 2008 - 12:14pm Permalink| Subthread| Parent| Parentsubthread| Comments top

If they are using actual drilling data then they do have an empirical model to work from. It is notclear from the various articles whether the yet to find reserves are associated with existing fieldsor are, like for Greenland, pulled out of the air.


plucky underdogon May 18, 2008 - 12:31pm Permalink| Subthread| Parent|Parent subthread| Comments top

Hi Diss,


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Undrilled or sparsely-drilled basins are obviously more difficult, and this should be reflected inthe P10-P90 range - which may include zero as a lower limit, meaning non-zero probability thatthe basin is barren for any of a dozen reasons. In the case of Greenland you would be able towork from analogy with the Jurassic and Triassic of the North Sea. It was the same basin beforethe Atlantic opened up, though the subsequent geological history would be very different -thermal history affecting hydrocarbon generation, and tectonic history affecting trap creationand destruction. You might have some approximate mapping from coastal outcrops and regionalseismic.

It isn't a cookie cutter - every basin is unique, and the available data vary widely in type, quantityand quality. So does the amount of time and detail that you can put into the exercise. As you say,

the popular press rarely bothers to mention this important fact.



Unconventional is fairly different from conventional with respect to estimation.

With conventional, one is trying to figure out whether there are fields available which havenatural gas (or oil) that can be extracted in the conventional manner. These are discrete fields,and the world has been pretty well explored. It is difficult to find them. This is the reason why weare told that we are discovering less oil each year than we are extracting.

With unconventional, we know fairly well the extent of rocks in place which have natural gastrapped inside of it. I showed a map in Figure 7 for tight gas. Some places will have more sweetspots than others, but for the most part the resource is there. It has already in some sense beendiscovered, but it doesn't yet pass the proven reserve test.

As I understand it, the amount that is included in proven reserves is the amount that is located inareas which can be drained with existing wells, or has been specifically surveyed and tested. Thearea nearby in the same formation, which we have every reason to believe is similar to what hasbeen fully surveyed, is "undiscovered".

Advance Resources International is a consulting firm that specializes in unconventional naturalgas. They have an amazing amount of material up on theirwebsite. This is a linkto a documentthat describes how they derive their estimates.


dissidenton May 18, 2008 - 6:29pm Permalink| Subthread| Parent| Parentsubthread| Comments top

Thanks for the links and the explanation. Reading the second link the undiscovered category isreally the uncertainty in existing plays. The unassessed resources, which have a volumecomparable to the undiscovered in the pyramid figure, look like a stab in the dark.



Find some oil? Sure, all the time. Enough oil? That's a different question, as I'm sureyou know.

Oh yeah, just speculating on finding the odd Black Swan while they turn the countryside into apincushion.


ReservoirGuyon May 18, 2008 - 10:22am Permalink| Subthread| Comments top


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The unconventional gas is very expensive to extract and prone to cost overruns when things don'twork out.

This is an observation from the field and not the office. At times the pay-back if things don't workout could be in 5+ years !!!!



Correct, and for this reason it's a good idea to run a pilot before committing to large-scale

development. These pilots can be quite big - multiple clusters of 5-10 wells each, to allow you todebug your completion design and data acquisition, and to give yourself a chance of hitting asweet spot and some average reservoir. Then you have to operate the thing for a few years toquantify decline and interference (and dewatering rate in the case of CBM or shale gas) beforemaking the final decision.


The Dudeon May 18, 2008 - 11:30am Permalink| Subthread| Parent| Parentsubthread| Comments top

I've been wondering how rising oil prices will impact drilling - at what stage will it becomeunprofitable? Unfortunately in EROI on the Web part 2 of 5, (Provisional Results Summary,

Imported Oil, Natural Gas)Charlie states that

There is no readily available literature either on, or by which, one might derive the EnergyReturn on Investment (EROI) of Natural Gas. Published summaries of natural gas reservoirstudies and general overviews of drilling practices are sparse. Even with such a broad study, itwould be difficult to assess natural gas production generally because each kind of operation isvery field- specific".



Not only is the EROI site specific, it is changing over time, if changing technology is playing a bigrole. I know John Freise has been looking into the EROI issue. It would be interesting to seemore work done in this area. It is clear EROI is not very high. But can it be made high enough, inenough areas, that we can live with it?



I think the problem with cost over-runs is the reason why these sites tend to ramp up very slowly.There is a need to test whether what is being done is working correctly, and figure out ways toimprove it to make it economical. Problems with extraction are likely, when one is right at the

edge of what can be accomplished technologically, in an economical way.

Arthur Berman of World Oil haswrittena fair amount about Barnett Shale, and its profitability.He says that at last year's prices, most of Barnett Shale wells were not profitable, because declinerates were higher than what natural gas companies were expecting. I think the question thenbecomes whether some of the problems can be fixed with improved technology, and whetherhigher natural gas prices will help pull the wells up to a profitable level. If the answer is "no", wewill see companies pull out of Barnett Shale, and whatever other unconventional natural gasplays are not really economic.


The Dudeon May 18, 2008 - 7:03pm Permalink| Subthread| Parent| Parent

subthread| Comments top


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Which could take us right off the NG treadmill, unless the Gov steps in to subsidize drilling.

Incidentally I suppose Leanan or someone posted here about Chesapeake Energy Swings To 1QLoss On Hedging Losses, about them pulling out of the Woodford Shale.

DOW JONES NEWSWIRES

Chesapeake Energy Corp. (CHK) swung to a first-quarter loss on an unrealized lossrelated to hedging activities.

The company announced that it would sell assets with proved reserves for $623 millionand retain drilling rights on the properties. That sale was expected to close Thursday. Italso said it intends to sell all of its remaining Arkoma Basin Woodford Shale properties,about 85,000 acres in Oklahoma, for $1.5 billion.



Interesting! We should be keeping a watch for these kinds of things.

My impression is that shale gas is generally a step below tight gas on the EROEI ladder, since itwas later to develop and the amount produced has been smaller. It is possible, though, that thereis enough variability among sites that this generalization doesn't make sense.


jbunton May 18, 2008 - 8:48pm Permalink| Subthread| Parent| Parentsubthread| Comments top

I hope that everyone reading TOD knows that these "hedging losses" by oil and gas companiesare generally not losses. The AICPA, about 8 years ago, in its wisdon pretty much fixed it so thatmost (but not all) legitimate hedges have to be "marked to market" each quarter. Illustration: Aproduction company like CHK in 2007 decides to sell forward 60% of its 2008 production for

$7.50/mcf at a time when 2007 prices are $6.00/mcf. In 2008, prices rise to $11.00/mcf. CHKhas to put up margin for the price over the $7.50, but, never "loses" any cash since it ultimatelydelivers the physical product against the contracts. Of course, CHK has an opportunity costbecause it nets only $7.50 for the gas it sold forward. However, since it insures a profit andassures the ability to pay off bank debt, hedging is an integral componenet of many companies.Nonetheless, for all outstanding futures contracts on March 31, 2008 that are priced over $7.50 aloss for the quarter is recorded.


Gail the Actuaryon May 19, 2008 - 11:19am Permalink| Subthread| Parent|Parent subthread| Comments top

Thanks. So really, they are probably not doing all that well for some reason or other--perhaps thereason they sold Arkoma Basin Woodford Shale properties. They obviously don't have hugeprofits they are trying to hide.


jbunton May 18, 2008 - 8:49pm Permalink| Subthread| Parent| Parentsubthread| Comments top

I hope that everyone reading TOD knows that these "hedging losses" by oil and gas companiesare generally not losses. The AICPA, about 8 years ago, in its wisdon pretty much fixed it so thatmost (but not all) legitimate hedges have to be "marked to market" each quarter. Illustration: Aproduction company like CHK in 2007 decides to sell forward 60% of its 2008 production for

$7.50/mcf at a time when 2007 prices are $6.00/mcf. In 2008, prices rise to $11.00/mcf. CHK


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has to put up margin for the price over the $7.50, but, never "loses" any cash since it ultimatelydelivers the physical product against the contracts. Of course, CHK has an opportunity costbecause it nets only $7.50 for the gas it sold forward. However, since it insures a profit andassures the ability to pay off bank debt, hedging is an integral componenet of many companies.Nonetheless, for all outstanding futures contracts on March 31, 2008 that are priced over $7.50 aloss for the quarter is recorded.


calgarydudeon May 18, 2008 - 10:56am Permalink| Subthread| Comments top

Gail

Thank you for the informative post.

It seems that we can transition to a secondary resource base across a range of energy sources:

Natural gas -> Unconventional gasOil -> Tar sands/Orinoco/ShaleUranium -> Thorium

At each of these transitions, I'm assuming that the cost of the energy rises so that renewablesbecome more competitive at each stage. To keep civilization running over a very long period oftime, we would have to use solar/wind/tides/geothermal and fusion (if it ever works).


Steve001on May 18, 2008 - 11:34am Permalink| Subthread| Parent| Parentsubthread| Comments top

In the realm of high-intensity energy sources, no need to look to the fantasy of fusion for longterm viability. Proven advanced fission techniques, specifically fast-spectrum reactors andmolten-salt reactors can produce up to 100x's the energy from a given amount of Uranium as isthe current practice. This means that existing depleted U and reactor "waste" sitting in coolingpools around the country could, in theory, fuel all the power needs of the USA for centurieswithout having to look for more Uranium. Then take the 50-100 years of estimated reasources atcurrent wasteful consumption rates, and multiply that by 100... then consider that Thorium is

approx. 3 times more abundant than U in the earth's crust... you can quickly see that advancednuclear fission has the potential to supply high-intensity power for millennia (and without longlived radioactive waste as all that would be left are fission fragments with relative short halflives).

Maybe fusion will be viable by the time this runs out LOL.


souperman2on May 18, 2008 - 12:57pm Permalink| Subthread| Parent| Parentsubthread| Comments top

Sounds great Steve001.

Will I be able to fit one under the hood of my explorer?


Steve001on May 18, 2008 - 2:37pm Permalink| Subthread| Parent| Parentsubthread| Comments top

Yeah, a nuke under every hood! Just think of the possibilities: 1,000,000 mi between fillups, er, Imean core changes. LOL!

I'm afraid our right to have an SUV in every driveway is going to come under significiantpressure as the supply of liquid fuels comes into crisis. I know synthetic liquid fuels can bemanufactured from any concentrated energy source with, for example, thermochemical

hydrogen production from water, CO2 extraction from the atmosphere, creation of syngas from


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it and catalytic production of hydrocarbons. Others have talked about Ammonia, which is aliquid under modest pressure, a more dense carrier of hydrogen than liquid H2, and can bysynthesized from air (N2) and water (H2). But, I assume using nuclear power to make diesel fuel,gasoline or NH3 will be very expensive? (Maybe others more knowledgeable can expand on that).I think either we have a revolution in battery technology or big personal vehicles will likely go theway of the dodo, sorry to say.


Dezakinon May 19, 2008 - 3:12pm Permalink| Subthread| Parent| Parentsubthread| Comments top

But, I assume using nuclear power to make diesel fuel, gasoline or NH3 will be veryexpensive?

Comparable to cost of coal liquefaction, as most of the equipment is the same. The extra costcomes from nuclear/solar hydrogen production, which some have placed around twice the costof reforming from natural gas. I couldn't imagine production costs for large volumes beingunprofitable if you're selling at $150/bbl. While thats expensive certainly, it by no means killsliquid fuel for applications that demand it. (Air travel, military, etc)

Comments can no longer be added to this story.DaveMarton May 19, 2008 - 4:08pm Permalink| Subthread| Parent| Parent


I assume that the costs for nuclear would be lower than using solar, as you could use theequipment 24/7, but only part of the time with solar?Of course, this might change if costs for solar plus storage dropped sufficiently, but thatpresumably would be the case at the moment.Most of the cost is in the cost of the equipment, rather than any other feedstock or running costsI take it?Thanks.

Comments can no longer be added to this story.Joseph Somselon May 19, 2008 - 5:46pm Permalink| Subthread| Parent|


I estimate the feedstock costs for a nuclear CTG effort to produce, at 100% efficency, per gallonof gasoline or a bit less for diesel, 26 cents of coal, 2 gallons of water, and 6 cents of nuclear heat.In the real world, the yield won't be THAT good, but even doubling these inputs would still leavea lot of margin for fixed capital cost when amortized per gallon against current price of $3.00 agallon before taxes.

The key is achieving 900 or 1000 deg C reactor exit temperatures. Then one can make a C + H20process go endothermally. We're working on the temperature task now, doing component testing

in South Africa. It's literally nuts-and-bolts engineering development for the pebble bed reactor.

If one runs out of coal, you can always use carbonate rock like calcite or even limestone althoughI think more nuclear energy would be needed.

I for one would like to learn some more on the chemistry of the process. I'd hope one doesn'tneed to make hydrogen first and then react with the carbon - a simple hot carbon/water reactionwould be more desirable.


DaveMarton May 19, 2008 - 6:32pm Permalink| Subthread| Parent| Parentsubthread| Comments top


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Thanks, Joseph.To be greedy, any idea of how the costs of doing it with nuclear energy would compare to solar orwind?I am talking ball park only, of course, but wonder how not being able to work 24/7 would belikely to affect costs.

On the plus side, producing the needed temperatures should presumably be no problem withconcentrated solar power, perhaps in a solar tower, although maybe that would not get the heatto where it is needed.


Steve001on May 20, 2008 - 12:10am Permalink| Subthread| Parent| Parentsubthread| Comments top

It would be much more environmentally friendly to scrub CO2 from the atmosphere, rather thanusing buried carbon to provide feedstock for synthetic fuels production. Again, it comes down to$$$, but with oil heading toward $150 and beyond surely it must become economic at somepoint to make liquid hydrocarbon fuels for high-priority applications from captured CO2 andwater using a GHG emissions-free energy source.



Atmospheric CO2 concentrations are 350 parts per million. That means a cubic meter of aircontains 400 milligrams of CO2.

A cubic meter of coal weights 1,350 kg per cubic meter. That's a factor of over 3,000,000 inmaterial handling on a volumetic basis.

Of course, the early process developers will probably prefer coke to coal just for a more pureinput.

Nuclear CTG would be carbon-neutral relative to current transport fuels.

I'll have to do some more research and estimating to get the capital cost and amortizationcharges on a per gallon basis.


DaveMarton May 21, 2008 - 6:04am Permalink| Subthread| Parent| Parentsubthread| Comments top

Here is a research project aimed at fuel from air using solar power:http://www.sun-powered.net/index.php/2007/12/11/sunshine-to-petrol-project-seeks-fuel-from-thin-air/Solar Energy City | Liquid Solar Fuel A fuel from thin air

Early days though.


john miltonon May 18, 2008 - 7:51pm Permalink| Subthread| Parent| Parentsubthread| Comments top


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equipment. Simple methods of getting the methane out of solution also caused a lot of dissolvedsolids to precipitate out, creating a whole 'nother set of difficulties.

I fantasize about some sort of down-hole device -- think big block of ceramic -- that wouldselectively pass methane at a reasonable rate...



Interesting! There is also the gas hydrates problem.

If someone ever figures these out, there could be a lot of methane.



From almost everything I've read hydrates are more likely to be a problem in a different sensethan you're intending...


Gail the Actuaryon May 18, 2008 - 8:51pm Permalink| Subthread| Parent|


Agreed!


Joseph Somselon May 18, 2008 - 4:00pm Permalink| Subthread| Comments top

An excellent post - thank you.

This paints a rosier picture than most about North American gas reserves and future production- or at least a less gloomy one.

I've tried to follow the tight sands issue for a while and still don't see a technological pathforward other than cheaper drilling. As you mentioned, exploration techniques that help withfinding sweet spots would be helpful but seems a big challenge. Better and cheaper fracturingwould help too but again, a difficult technical challenge since we still use brute force methods.


Boofon May 18, 2008 - 5:36pm Permalink| Subthread| Comments top

There is also what I call 'fried sawdust gas'http://www.milenatechnology.com/which unlike other wood gases doesn't contain up to 50% N2 and CO2. If a purity standard couldbe maintained perhaps blends of biogas and bio syngas could be stored in low pressure tanks.

Their role could be to fuel CHP or microturbines for distributed peaking power in areas heavilyreliant on wind and solar.


aeldricon May 18, 2008 - 6:47pm Permalink| Subthread| Comments top

Thanks Gail. Every day TOD introduces me to another piece of the puzzle.


raoberon May 18, 2008 - 7:11pm Permalink| Subthread| Parent| Parentsubthread| Comments top

Agreed. Amazing amount of great information here.


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Now I know why Chesapeake Energy has been running all these TV ads about our "abundant"NG reserves. One can hope that it will soften the coming blows.



It seems like I have been collecting "stuff" on this topic for a long time, and I only ended up usingabout 10% of it.

I am sure several more posts could be written on the topic.


Mark Bon May 18, 2008 - 7:45pm Permalink| Subthread| Comments top

Hi Gail. Production has been roughly flat for awhile, but # of rigs and # of producing wells havebeen increasing since around '00(clickable thumbnail):

Is that increase sustainable and if not what happens when it plateaus or declines?

Producing well #s data from hereand drilling rig # data from here.



The switch to unconventional has resulted in drilling a lot more wells and using a lot more rigs.At some point we run out of rigs. I think this is one of the reasons no one wants to forecast a bigincrease in natural gas production. We can continue to build more rigs if we have the resources,and natural gas continues to look profitable, but that will take time.


memmelon May 19, 2008 - 2:34pm Permalink| Subthread| Parent| Parentsubthread| Comments top

In general at least from my reading the lifetime of unconventional wells is lower so as wasmentioned in a lot of cases you end up with almost continuous drilling campaigns. And thefinancial margins are tight.

With oil the move from large long lasting fields to small shorter lifetime fields puts you on atreadmill with eventually steep declines once the large fields can no longer anchor production.Unconventional gas has the same dynamics as it makes up a large percentage of production welose our anchor conventional production and the unconventional plays cannot be expanded fastenough to prevent a overall decline in production.

Also since the rate of return on investment is often longer the rate at which money will be spentin expectation of future profits while current investment is not profitable is much lower. And ofcourse unconventional gas has to compete with LNG. As LNG production increases this increasesrisk on the financial side. The overall net result is once unconventional NG production becomesprofitable in general it will lag demand ensuring high prices but capped by LNG imports.


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Given that on a worldwide scale we generally have reasonable supplies of NG and its a matter ofinfrastructure esp LNG shipping to match markets we can expect US NG production to follow apath similar to oil. Technical innovation with lagging investment and expansion capped byimports resulting in a logistic decline in production. If LNG does not work out then probably atbest a slow decline with higher prices.

In general since the rest of the world is also very interested in LNG and will be driving LNGexpansion we can expect the US to build LNG terminals.

But note that even with a mix of imports and unconventional production its pretty hard to seeNG supplies able to increase substantially pretty much regardless of price since any surge in LNG

would be offset by a decline in unconventional production. Its almost a repeat of the samedynamics that faced oil production in the US vs cheap imports from the Middle East.

It would be nice to have a better understanding of the current state of the world LNG market toreally understand how North American production fits.

This is a bit dated and predates the rise in oil prices.

http://www.eia.doe.gov/oiaf/analysispaper/global/index.html

http://www.bechtel.com/all_aboard_the_lng_train_48.html



I am having a hard time seeing how LNG will ramp up enough to supply all of the world whowould like it. The belief is that natural gas will compete with coal. This keeps a cap on whatsuppliers think that it could possibly sell for. Also, there are other natural gas usages that wouldseem to require less infrastructure, like making fertilizer and making compressed natural gas forlocal use.

Regarding the continuous drilling campaigns, one company (I forget which one now) said theyhad developed skids so that they could move the drilling rigs from site to site, withoutdisassembling them. This allowed them to get greater usage out of the rigs! Punch out new wells,

as fast as possible, day after day.



Don't disagree on the LNG ramp up but its doable as far as building the terminals. Once NGprices are high enough political opposition will dissipate. I think we are setting ourselves up forpain not building them fast enough to compete on the world market for LNG like we do for oil.However the net result is that we probably won't see any significant expansion in overall NGsupplies.

It's interesting that the way things seem to be working for NG is exactly the same that I'veproposed for oil.Technical advances -> flat to decline production at the expense of depletion. Of course for oil Iargue it started back in the 1990's so we are on the verge of collapse down to a much lowerproduction level.

For NG the same end result as conventional gas depletes we drop down towards about 50% ofthe current production and then slowly decline as we use up non conventional reserves. Thisgives non-conventional another 10% room to grow with LNG becoming very important part ofthe mix.

And of course as usual its a sure bet that the US makes exactly the wrong decision. We should beaggressively using LNG now and save our internal NG supplies until later.


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However I suspect that the US will instead begin to seriously exploit its coal reserves displacingNG for electricity production. Still no cheap NG but I really suspect a big push to coal fired plantsover the next few years.A pretty good report here.

http://www.netl.doe.gov/coal/refshelf/ncp.pdf

I don't think it so much coal competing with NG going forward as coal making up for shortfalls inNG supply.Yet again as usual we did not build enough coal fired plants when we should have before globalwarming became a serious issue. They should have built like mad to get grandfathered in. Its a

good thing they did not from a climate perspective but as you know the US electric grid is not ingood shape itself.

Trying to bootstrap the move off of oil will be all the harder as we put in coal fired plants in aexpensive post peak environment. For example rail expansion to supply the coal would have tocompete with expansion of electric rail to use the electricity generated from the coal. And youhave the danger in a real sense that CTL will take off misdirecting coal from supportingconversion to electric transport and move to renewable electricity generation.

Although overall prices are hard to predict I think we have passed peak cheap NG in NorthAmerica in particular and probably most of the world outside of the middle east.



Here's my predictions of the way the US LNG market would go with a focus on electricgeneration, from 2004:

http://www.energypulse.net/centers/article/article_display.cfm?a_id=623

One big unknown was whether LNG suppliers would prefer long term contracts or would playthe spot market. It looks like a mixture but many are wishing they had more for the spot market.



I don't exactly agree with the expectation that new NG fired plants will be built. I think that NGfired electric plant construction is pretty much over except for momentum so LNG importswould be geared toward supplying current NG plants with growth of coal fired plants making upany increase in electrical usage.

You still have a fairly big crunch in electricity generation looming it seems.

It takes time to build both the LNG terminal and the coal fired plants and I'm skeptical of anyserious overall increase in NG supply.

I find it funny that the McMansion owners that somehow manage to escape the housing bubblebust are probably going to get wiped out with massive increases in electric bills over the next fewyears.

In Southern California where I live as you move off the coast you get into a desert region withvery hot summers called the Inland Empire. These people are experiencing a 40% reduction inhouse prices this year skyrocketing gasoline bills and I'm sure massive electric bills with outagesthis summer. This situation is pretty much true for the entire central valley region of California.So although I don't know about the end of suburbia and the rest of the US I'm pretty sure it willunfold at least in California's central valley region. And of course once these homes drop under200k it will suck the significant population of fools in California causing the coastal regionhousing prices to collapse. California seems to naturally attract the dumbest least successfulpeople from the rest of the nation. Yes I'm here :) But the lack of common sense is amazing.


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As property values plummet I would have thought that homeowner associations might adopt amore liberal attitude to modifications when numbers of properties get abandoned.In America (yes, I have stayed there) I can imagine it suddenly becoming fashionable to go foreco-living, and white roofs suddenly becoming the new trend , or better yet greenroofs.The essentially conservative nature of American society makes new paradigms very powerful,and once they take hold can lead to faster change than in Europe, I feel - no one is going to wantto be the last to display the new accepted behaviours.One should never however underestimate the power of human stupidity.


memmelon May 20, 2008 - 12:45am Permalink| Subthread| Parent| Parentsubthread| Comments top

You really don't understand southern California. Everyone here will keep going till it does notwork anymore then leave for other better places. People live here for the lifestyle once thats gonethey are gone.

Now the northern half of the state starting at say Santa Barbra does have a increasing percentageof people that genuinely care about the their community. And as you get into the central valleythe farmers at least care about how they make a living. So as you head north it gets semi-normal

at least for California standards.

To give you and example I used to work for a company that was on the other side of the 10highway in Santa Monica. I live about 40 miles away when I was hired on they promised theywould open a office for engineers south of LA which would map well to where all the engineerslived. Santa Monica for some reason discourages reasonable bus routes or a subway line out fromtown so commuting by train was not feasible. The area was really only reachable by car.http://en.wikipedia.org/wiki/Santa_Monica,_California

Since the mid-1980s, various proposals have been made to extend the Red Line subwayto Santa Monica under Wilshire Boulevard. However, to this day, no plans to complete

the "subway to the sea" are imminent, owing to the difficulty of funding the estimated$5 billion project. In the past, Santa Monica had rail service operated by the PacificElectric Railway, until it was dismantled in the 1960s.

The dropped the plans for the office because it was too expensive but the CEO who lived near meflew to work in a helicopter because the traffic was to bad to drive.

Thats a taste of how things work in southern California. Do you really think 5 billion dollars is tomuch money for Santa Monica ?



Ok, I'll give you SoCal! :-)

I do think you are painting with too broad a brush though.If you are pointing to specific problems the US has, and using that to predict an inability toadapt, then other areas where those conditions are not so pronounced or do not obtainpresumably have a better chance, or the conditions you give are irrelevant.

For instance, you point to the state of the infrastructure and dispersed suburbs as a major sourceof disruption.


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Well, if they state of Switzerland's infrastructure is ruinous, it is news to me.The same could be said of France, Germany, Holland and Sweden amongst others, not tomention Japan, and none of the above suffer from over-dispersed suburbs.

If you hold debt to be a problem, then China must be favourably places with it's massive savings.

Things are going to get gruesome, but not equally so everywhere.


FuturePunditon May 21, 2008 - 10:47pm Permalink| Subthread| Parent| Parentsubthread| Comments top

memmel,

Your analysis seems long on resentment toward your town (and why?) and short on evidence tosupport your assertion about the Death of the Inland Empire.

Sure, hot summers make for expensive electric air conditioning bills. But compare that to heatingbills in Maine, Vermont, Massachusetts, NH, etc. I do not see the inland areas of SoCal as havinganywhere near the highest heating/cooling total costs per year. Plenty of East Coast places havehot sweaty summers and very cold winters. Ditto for some plains states and Minnesota.

What would be useful: a good table of heating and cooling costs for various regions of the US.



That is an interesting report you linked. According to the report, this is how EIA projections forUS natural gas have changed over time:

Also, the EIA is projecting that only a tiny increase in electricity generating capacity will be

needed going forward. FERC is projecting more. I suppose if I were the EIA, and I looked at thenatural gas outlook and the realistic outlooks for increasing number of coal and nuclear plants in


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the next few years, I would scale back my view of what was needed for electrical production. It isembarrassing to forecast something that is needed that can't really be done. With the lowerelectricity generation needed, one also cuts back on the amount of new transmission linesneeded (but not the replacements needed).



Yep you can see the fairly large gap developing in US electricity generation. The blackhole in roadmaintenance is even larger. Similar problems exist for our sewage and water treatment plants.

http://www.ens-newswire.com/ens/feb2004/2004-02-20-10.asp

Its interesting that when a economy takes the approach of growth at all costs it tends to notmaintain any of the existing infrastructure. I guess to much money gets poured into newprojects.

And in California at least the network supplying Southern California with water has seriousproblems.

http://igs.berkeley.edu/library/htInfrastructureProposal.html

I'm sure the entire western water management system is probably in bad shape.Not only have we massively miss-allocated our resources but we did not even take care of theinfrastructure correctly allocated or not.

So this is the strong foundation America has built for itself to support it as it transitions of oil.Needless to say I always get a big kick out of the anti-doomer posts. About the only thing funnyabout whats coming is people believing we wont have serious problems.

Nuclear powered CTL will save us yeah right and this is supposed to make all the steel, tar andconcrete we need to rebuild with. If its worthwhile to turn coal into liquids and tar into gasolineit seems to me concrete and steel won't exactly be cheap. Dream on as your prius is crushed by abadly decayed bridge and falls into a sewage filled creek. I don't think people really can grasp thefull extent of what we have done. But I'm pretty sure we will be the evil ogre's in our

grandchildren's plays.



One slightly irritating tendency is that of Americans to generalise from their own circumstancesto that of the the world.It is inevitable in a continent wide superpower, but just the same the failure of America tomaintain it's infrastructure should not be universalised, although there are problems elsewhereto be sure.Compared to the resources which have been poured into McMansions,massive shopping malls,

SUVs and so on those needed to build infrastructure and power are slight, even in a constrainedenvironment.Priorities would have to be got right for once, but as Churchill said, Americans always do theright thing, after they have exhausted all the alternatives.

I would not be too ready to abandon all hope.It is usually self-defeating.




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I'm not talking about abandoning all hope. But the first thing we have to do is face up to the factthat we i.e the entire globe has really screwed up and we will pay a painful price. Then at thatpoint we can figure out ways to ease the pain. Its like Alcoholics Anonymous the first step is toadmit your an alcoholic. Only then can you recover. The US is the worst but other countries arenot all that much better.

No one wants to admit the obvious and without that we won't make the painful choices we needto make to get better. Their is no easy way out now its pay now or pay more later. The longer youwait the more painful it will be.

And as far as the rest of the world goes its a game of toss the hand grenades in a crowded room

sure the US is setting on a big pile of them while playing, but everyone is playing the game.



I hadn't really thought about the connection between growth at all costs and failure to maintainthe infrastructure. Clearly, we will have so much money later, that we can do the repairs later. Itis like paying back our debt on loans - only a different kind of indebtedness.


memmelon May 19, 2008 - 11:31pm Permalink| Subthread| Parent| Parent


Gail you should check some of the numbers on our roads using even todays numbers they aremind boggling.Post peak costs are simply beyond.

Also consider that by the point this gets serious its post baby boomer retirement and we will havea tremendous debt in unfunded social security and bankrupt private pensions to deal with.

In short within 15 years post peak the US government is probably technically in default alongwith almost all the private and state pension funds. Once growth goes negative all the pensionschemes blow up.

We are going to be lucky to put in absolutely needed rail infrastructure and stop gap coal firedplants.

Sure they might inflate away the pension debt etc and go in default but we still need hard cashfor the rail and plants. You can't inflate away infrastructure costs only debt and attempts at oldfashioned money printing will only send imports soaring.

The only solution is to embark on electric rail yesterday. And I hate to say this coal fired electricplants today. I don't like the idea at all but our backs are to the corner and if we don't do themnow it will be all the harder later. Wind, Nuclear etc can be brought online but we have to buysome breathing room.If I thought we really had a choice to not do coal fired plants I'd suggest it but we don't. Waiting

just makes it harder and more expensive to put them in. And they won't be fancy plants just basicones.

Also if you think about it on the C02 level if we flipped to electric rail and coal with a strong windpower program the overall CO2 budget is almost certainly lower than driving cars and doing CTLschemes.Use todays scrubbing technologies to do our best. But I think if we simply let the roads degradeand/or flip them over to expensive toll roads and do rail/coal fired the C02 emissions won't be allthat bad.

And the wind power push should start bring the number of coal fired plants down within say 50years at most.

You would have to look but overall it might not be as bad as it looks at first glance.


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In any case we can of course wait till the last minute and I think still pull this off as the last resortbut with the pension thing and other monetary instabilities it bothers me to wait.



You have heard me say some of the same things about pensions. I am not as sure about electricrail. By the time we get them built, I am afraid we will have major problems with electricity,especially in the Northeast and California. I doubt very many coal plants will get built. We willneed additional rail, just to transport the coal.



Correct but its still doable. And of course big PV/Wind tax credits and serious peak usage andmax power charges would help along with a aggressive tax on large cars. So you have ways tobegin to force other demand downwards. Basically hefty energy pig taxes. Keep the economylimping along and we should be able to slowly work of the pension burden plus supporting denseliving and pensioners apartments could easily dramatically cut the cost of retiring. So missingpension money could be made up via pensioner's apartments in exchange for no money. So youget a choice take the apartment or pray. These apartments would do double duty as a WPA likework project for the decimated building industry. Same for the railroads. Then you could moveon to workers apartments. Hopefully better than soviet era flats but pretty much the sameapproach. I'd hope that if the workers where rewarded we would get decent buildings. Thesepensioner flats don't have to be in vital business centers but could be located in some of thecloser in former suburban areas.

In short the US should be able to do a better version of soviet housing and transportationnetwork.If they are nice enough they may act as new town centers and draw in a real downtown andincrease in valuegiving those that want to sell a chance to retire back into the now cheaper countryside inexchange for their flat.

A cluster of downtowns model works out about the same as one central downtown area fromwhat I can tell.And its actually the reality in most large cities.



One country which appears to be in a bigger hole than the US is the UK, my own country, havingarrived there by monumental standards of incompetence.We have a huge energy gap opening which they intend to fill with LNG imports, having built the

terminals at a cost of many billions.Unfortunately they have neglected to secure the supplies, and so far they are unused - thefinancing was set up so that that did not affect the people who ordered them.Many Gigawatts of nuclear and coal plants are reaching the end of their lives in the next fewyears.Short of building off-shore at monumental cost we have limited wind resources, and whatevermay be the case in California for the foreseeable future solar power at this northern latitude is anexpensive distraction, contributing almost nothing when it is most needed.Nuclear takes a while to build, and TPTB display no sense of urgency whatsoever.I had imagined that in practise they would build more coal plants, but it seems that the buildtime for them is almost as long as for nuclear, so it looks as though we will be very cold verysoon.

I wonder if you would comment on coal plant build times?


35/41


Murrayon May 19, 2008 - 11:25pm Permalink| Subthread| Parent| Parentsubthread| Comments top

Nice to see the EIA finally getting close to reality. They now need to move their production peakback from ca 2016 to 2008. Murray


Murrayon May 19, 2008 - 11:12pm Permalink| Subthread| Parent| Parentsubthread| Comments top

Back in the late '70s there was a major surge in drilling that had little impact on production, butleft a lot of mothballed rigs. Back in 2004 when I started investing, close to 40% of "available"rigs were not operating. Most of the surge since has been getting all those rigs operating. If youlook at the monthly rig numbers for 2007 you will see growth in H1 followed by flattening in H2.My conclusion is that there is little to no spare rig capacity, and that therefore the growth ofunconventional production of the last few years will now plateau, and by 2009 will no longeroffset declines. This is one of the key issues for you to discuss Gail.

One of the first EIA graphs you presented had LNG getting to near 6 Tcf/yr by 2020. Thatnumber needs to be quantified in terms of ship cargoes/yr, and then compared to actual shippingand shipbuilding capacities, (for these highly specialized ships). The EIA projection for 2010made ca late 2003 isn't going to happen, mainly for lack of shipping capacity. Note that far thebulk of the worlds LNG tankers are dedicated to specific routes, and not available for spotcargoes.

Congressional testimony in 2004 mentioned unconventional well production rates declining upto 60% in the first year. If memory serves, the global average decline rate for all USA wells wentfrom 18% the first year in the late '90s to about 28% in 2004 or 2005. It could be above 30%now, and is surely growing.

Perhaps these thoughts provide some other areas for discussion. Murray


Gail the Actuaryon May 19, 2008 - 11:22pm Permalink| Subthread| Parent|


Good thoughts - thanks.

Getting the mothballed rigs producing again seems like a big thing. Little question -what's H1and H2?

I wasn't aware of the congressional testimony on decline rates. The Wamsutter facility is new, soI am guessing that they don't have good information about decline rates yet.


Murrayon May 19, 2008 - 11:28pm Permalink| Subthread| Parent| Parent


First half year and second half year.



Hmm what about profitability ? I can see that getting mothballed rigs making money againmakes sense but to grow from here on out NG would have to be fairly profitable. Its not unlikethe big surge in oil production once prices increased. This was spare or easily brought on linecapacity and made sense but we see little growth once serious investment is needed.

We saw the same big drilling campaign then pull back when the US peaked in oil production.


36/41

It seems to be a common pattern. It seems that for some reason the oil/gas industry has a hardtime raising money for the big expansions needed to keep production up down slope. I guess therisk/reward must drop off.

One thing we have never had a post on is the various ways projects both large and small arefinanced and the competitiveness of the oil/gas industry vs other investments. The payoffs mustbe such that infrastructure expansion i.e new drilling rigs etc is hard to accomplish.

Also of course you have a sort of cannibalism effect where its more lucrative to buy existing fieldsthen expand into new ones. This takes money out of expansion. Expansion of existing fields thatare producing to offset declines per field becomes a better investment vs new fields which tends

to slow growth.

It seems to me some very natural limits on growth seem to exist for extraction based industriesand it takes increasingly larger price increases to cause more growth but these tend to be drivenbuy lower production if investment in new fields is not competitive.

If demand is increasing strongly of course this offsets this tendency but if demand is fairly flatthen these infrastructure/economic forces tend to take control.

Flat production flattens demand and leads to flat production and decline.

Or once you go flat its hard to get back :)


Murrayon May 20, 2008 - 10:39am Permalink| Subthread| Parent| Parentsubthread| Comments top

I have to believe that at $11.00-15.00/kcf it is highly profitable. I invested mainly in service anddrilling firms rather than producers, although sometimes (Encana) they are both. When a drillergoes from 40% of capacity idle to full employment and then raises his day rates, profits soar -and they have. The question now could be how fast they can build new rigs and train new crews.For sure they have done everything they could to max out wells/rig/yr. Drive around Texas roadsin the vicinity of Denton (north end of Barnett shale) and rigs are very evident, either drilling orbeing moved.Contrary to a comment from Gail about rigs operating way out in the wilderness (Rockies??),

Texas rigs are close to roads and towns, and drilling is taking off in Pennsylvania, also inurbanized areas. That map of the tight gas formations shows a lot of area near both urbandevelopment and existing pipelines.We come back to the problem of stocks and flows. Lots of stock, low flow rates.My g

the oil drum _ us natural gas_ the role.pdf

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