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U.S. Shale Plays

Energy Independence: Fact or Fiction?

Arthur E. Berman

Reagan High School

San Antonio, Texas

March 25, 2014


Introduc4on

3/2/12 The Big Fracking Bubble: The Scam Behind the Gas Boom | Politics News | Rolling Stone

1/13www.rollingstone.com/politics/news/the-big-fracking-bubble-the-scam-behind-the-gas-boom-2012030…

The Big Fracking Bubble: The Scam Behind theGas BoomIt’s not only toxic – it’s driven by a right-wing billionaire whoprofits more from flipping land than drilling for gas.

by: Jeff Goodell

A natural gas drilling rig stands on aChesapeake Energy Corp. drill site in BradfordCounty, Pennsylvania.Daniel Acker/Bloomberg via Getty Images

Aubrey McClendon, America's second-largest producer of natural gas, has never been afraid of a fight. Hehas become a billionaire by directing his company, Chesapeake Energy, to blast apart gas-soaked rocks amile underground and pump the fuel to the surface. "We're the biggest frackers in the world," he declaresproudly over a $400 bottle of French Bordeaux at a restaurant he co-owns in his hometown of OklahomaCity. "We frack all the time. What's the big deal?"

McClendon dominates America's supply of natural gas the same way the Tea Party-financing Kochbrothers control the nation's pipelines and refineries. Like them, McClendon is an influential right-wingpower broker – he helped fund the Swift Boat attacks against John Kerry in 2004, donated $250,000 to thepresidential campaign of Rick Perry, and contributed more than $500,000 to stop gay marriage. But unlikehis fellow energy czars, McClendon knows how to tone down his politics and present a friendlier, lessideological face to the public. He secretly gave $26 million to the Sierra Club to fight Big Coal, and built aGoogle-like campus for Chesapeake's 4,600 employees in Oklahoma City, complete with a 63,000-square-foot day care center, a luxurious gym and four cafes manned by cook-to-order chefs. He even voted for

According to Arthur Berman, a respected energy consultant in Texas who has spent years studying the industry, Chesapeake and its lesser competitors resemble a Ponzi scheme…


Cri4cal Thinking and Confirma4on Bias •  Critical Thinking:

Ø  Open-minded analysis based on evidence, Ø  What do I think about the subject vs. what others think, Ø  What does it mean? Ø  What does this imply?

•  Confirmation Bias Ø  Tendency to favor information that confirms beliefs or hypotheses, Ø  Selective use of information.


Energy Independence—Fact or Fic4on: Key Points •  Energy underlies and connects everything—business, the economy, politics, the quality of life: it is not a separate topic. •  Oil, natural gas & coal dominate modern energy supply and will not be replaced quickly or easily: living with less will define Earth’s future unless population is reduced. •  Business as usual is over because of high energy costs and debt. •  Not all energy sources are equal and everything called “oil” is not really oil. •  It takes energy to get energy. •  Energy extraction from oil and gas has become less efficient over time despite technology—oil and gas production from shale is not a revolution; it is a retirement party. • The United States will not become energy independent.


The True Nature of Capital and Trade

•  World oil produc4on is on an undula4ng plateau: we are not running out of oil but cannot bring new supply on line fast enough to replace depleted fields and to meet growing demand.

•  A barrel of oil contains 5,700,000 Btu or 1,700 kwh; 11 years of human labor. •  At average wage, it would cost $500,000 to equal the output found in a barrel of oil that costs $100. •  The real “trade” is between cheap fossil energy & manual human labor: as price of energy increases,

benefit of the trade decreases, only slightly offset by increases in efficiency. •  Capital/currency was ini4ally a claim for for work or labor; now, these are a claim for natural resources. •  Currency, stocks and bonds are really deriva4ves of primary capital: energy and other natural resources.

Technology converts primary into secondary capital—manufactured products & services. •  Capital has no intrinsic value. •  Economists view energy like any other commodity and assume a decreasing cost curve—true un4l the 20th

century.

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s)of)B

arrels)Per)Day)

World)Crude)Oil)&)Condensate)Produc9on)

Produc'on)Plateau)

Source:((EIA(


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Oil%and%other%liquids%

2013%U.S.%Primary%Energy%Consump8on%

The Fuels That Run Our Society

•  Oil, natural gas and coal dominate our primary energy supply. •  We must be realis4c about the present contribu4on and efficiency of renewable energy to

our overall energy needs.

Source: EIA


The Reality of “Ge`ng Off of Oil”

•  At present rates of switching to renewables, it will take 1000 years to get off of oil, natural gas, and coal.


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Natural$Gas$ Methane$ CNG$ Lignite$ Wood$ LNG$ Ethanol$ Anthracite$ Gasoline$ Crude$Oil$ Diesel$

MJ/l%

Energy%Density%Comparison%(Volume)%%

The Fuels That Run Our Society

•  Not all barrels are equal. •  Energy density is the key to efficiency. •  A gallon of ethanol does not contain the same energy as a gallon of gasoline. •  A barrel of Bakken oil does not contain the same energy as barrel of West Texas Intermediate. •  Natural gas as a transport fuel faces a significant energy density problem that we don’t hear

much about in the press (not to men4on an infrastructure problem). •  Renewable energy doesn’t even show up on the graph because its energy density is so low.

Source: EIA


What is Oil and What Is Not

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r)Day)

World)Crude)Oil)and)Other)Liquids)Produc:on)Crude"Oil"&"Condensate" NGL" Other"Liquids" Processing"Gain"

Crude Oil & Condensate

Natural Gas Liquids

Other Liquids

Processing Gain

•  For 2012, crude oil and condensate represented 83% of total liquids. •  Natural gas liquids represent 10% of “oil (lower energy density than oil). •  Biofuels (not petroleum) and processing gain (not produced oil) represented the remainder. •  When it is said that the world is producing >91 Mmbopd, only 75 Mmbopd is crude oil &

condensate, and less than that is truly “oil” (condensate has a lower energy density than crude oil).

Source: EIA


Poli4cs and Oil


2012 World Crude Oil Supply

•  The Middle East produces 32% of the world’s daily crude oil supply.

•  Russia and Saudi Arabia each produce 13% of supply.

•  The U.S. produces 8%. •  Other major oil producers include:

Ø  China, Ø  Iran, Ø  Canada, Ø  Iraq.

75,606&

24,102&

12,719& 12,217&9,123&

7,678& 6,638&

3,127&

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Europe&

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il)Pe

r)Day)

Crude)Oil)Supply)By)Region)

9,922$ 9,832$

6,486$

4,129$

3,367$3,138$ 2,983$ 2,804$ 2,635$ 2,593$ 2,520$

2,300$2,061$

1,817$

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China$ Iran$ Canada$ Iraq$ UAE$ Kuwait$ Mexico$ Nigeria$ Venezuela$ Brazil$ Angola$

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arrels)of)O

il)Pe

r)Day)

Crude)Oil)Supply)By)Country)

Thousands of Barrels Per Day Percent of World

Russia 9,922 13%Saudi Arabia 9,832 13%United States 6,486 9%China 4,129 5%Iran 3,367 4%Canada 3,138 4%Iraq 2,983 4%UAE 2,804 4%Kuwait 2,635 3%Mexico 2,593 3%Nigeria 2,520 3%Venezuela 2,300 3%Brazil 2,061 3%Angola 1,817 2%

Source: BP Source: BP


Oil Consump4on Pakerns: The World

•  The developing world is using more oil & the developed world (OECD) is using less. •  Partly due to maturing economies and partly to the recession.

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nge'20

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Change'in'Oil'Consump9on'2007:2012'

Source: BP


OPEC Oil Consump4on Pakerns and Net Export Capacity

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Change'in'Oil'Consump9on'2007:2012'

•  The world’s biggest oil exporters are increasing their internal use of oil faster than importers. •  This means that there will be less net oil to export in the future. •  Net exports will go to the highest bidder—that is not the U.S. and Europe. •  U.S. carrying capacity ~$95 Brent; China maximum carrying capacity ~$115-‐120 Brent. This

defines energy independence.

Source: BP


"Essen1ally, for a company like mine and many others, $100 a barrel is becoming the new $20 in our business." -‐-‐John Watson, Chevron CEO

3/7/14 Oil companies feel a pinch as their expenses swell - Houston Chronicle

www.houstonchronicle.com/business/energy/article/Oil-companies-feel-a-pinch-as-their-expenses-swell-5289696.php#/0 1/2

ENERGY

By Zain Shauk

Oil companies feel a pinch as their expenses swell

Chevron chief says labor and capital costs have doubled in last decade

Mayra Beltran, Staff

Chevron CEO John Watson is a keynote speaker during CERA Week at the Hilton Americas on March4, 2014, in Houston. ( Mayra Beltran / Houston Chronicle )

March 4, 2014 | Updated: March 4, 2014 11:12pm

Rising labor and capital costs are challenging oil companies, even as oil prices hover at $100 abarrel or more, executives said Tuesday on the first full day of the IHS Energy CERAWeeksummit in Houston.

To continue reading this story, you will need to be a digital subscriber toHoustonChronicle.com.

Capex Compression: E&P Costs Rising Faster Than Revenues

•  Supply and cost are determined by geology and technology: •  For any given oil price, deple4on drives us to more difficult geology and higher costs: ultra

deep water and the Arc4c. •  Technology can move us back to easier geology and lower costs: shale plays with horizontal

drilling and hydraulic fracturing.

50

Listing Oil Majors: Capex and Crude Oil Production

• Capex flattening this year

• Cash flow growth over production growth

• Implies unraveling

Historical and Forecast Crude Oil Production and Capex (Provisional, subject to Revision) Combined data for BG, BP, COP, CVX, ENI, OXY, PBR, RDS, STO, TOT, XOM

Source: Bloomberg via Phibro Trading LLC

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• The vast majority of public oil & gas companies require oil prices of over $100/bbl to achieve positive free cash flow under current capex and dividend programs

• Nearly half of the industry needs more than $120/bb. The 4th quartile, where most US E&Ps cluster, needs $130/bbl or more.

Source: Goldman Sachs Oil Price Required by Oil Companies to be Free Cash Flow Neutral After Capex and Dividends

The Industry Needs $100+ Oil Prices

Source: Douglas-‐Westwood Source: Douglas-‐Westwood


Share of Deepwater + Unconventional Oil increases in

non-renewable oil production 2000-2030

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Growth of Deep Water & Unconven4onal Oil, 2000-‐2030

•  Conven4onal oil produc4on will decrease while unconven4onal & deep water produc4on will increase.

•  Deep water produc4on will peak by 2025 and then decline. •  Shale oil will increase rapidly un4l 2015 and then grow more slowly. •  Heavy oil will grow gradually throughout the next 2 decades. •  NGL produc4on will reach almost 20% of total “oil” by 2030—50% of 2000-‐2030

produc4on increase! •  Total oil produc4on including shale oil will grow slowly but cost will probably increase

considerably. •  Technology makes many things possible but rarely decreases cost in old, extrac4ve

industries like oil and gas.

Natural Gas Liquid (NGL) production

continues to rise along with gas production

NGL production increase through 2030 associated with:

• NGL’s associated with shale gas production in North America

• Shift in Russia gas production from dry gas to wet gas regions in West Siberia

• By-product of increased gas production for power generation and petrochemical industry in Middle East

• By-product of increased gas production associated with LNG projects

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BP World Energy Outlook (2012)

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Source: Hyperdynamics


Why Oil Prices Will Be At Least $100/barrel in the Future

Why oil prices will stay at least at $100/bbl (2012 dollars) in the future

Conventional producers need $100/bbl. oil to balance budgets

Unconventional producers need $100/bbl. oil to make a profit (2015 production and costs)

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•  Exporters of conven4onal oil need $100/barrel (2012 Dollars) to balance their budgets. •  Unconven4onal producers need $100/barrel to make a profit. •  Produc4on growth of 8 MMbopd for 2010-‐2020 for stable oil price of ~$100/barrel ($2012). •  Produc4on growth of only 3 Mmbopd for 2020-‐2030, significantly below demand, and prices

reach levels that will destroy demand at the cost of the global economy. •  Poten4al solu4ons:

Ø  Increase heavy oil produc4on and export shale oil technology around the world (higher price),

Ø  Increase in Arabian basin (Saudi Arabia, Iran & Iraq) conven4onal produc4on (higher price & poli4cally undesirable),

Ø  Reduce oil demand through shis to natural gas and/or renewables through financial incen4ves (hard to do quickly and higher price).


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$/BB

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US Dominance $25/bbl

The Oil Plateau $100/bbl

Iraq/Iran War

Oil Embargo New North Sea, West Siberian Production

Conventional Peak oil

Following the price stability of US dominance for most of the 20th century, the following 30 years is a period of price instability. Stability ($100/bbl +/- 20%) returns in 2010 although at a higher price. The next price pressure point will come at the end of the current decade when deep-water and US shale oil production peaks.

2020 Next Potential Oil Price Squeeze


Oil Became a Key Factor in World Poli4cs Aser WWII

FDR and Abdulaziz on USS Quincy, 1945

•  Franklin Roosevelt commissioned study to determine why the U.S. won WWII. •  Availability of petroleum compared to our enemies. •  Mee4ng between FDR and Abdulaziz on USS Quincy aser Yalta (1945). •  U.S. would stabilize Saudi Kingdom in exchange for dependable petroleum supply. •  The core of U.S. foreign policy since 1945. •  Support of Shah of Iran part of this policy, as is opposi4on to Islamic Republic of Iran. •  Gulf War and Iraq invasion consistent with this policy (not a personal issue of the Bush presidents).


Oil and World Poli4cs: U.S. Involvement in Iraq is Mostly About Oil

•  115 billion barrels of proved oil reserves—second largest in the world •  25% of undiscovered oil reserves—greatest geographic concentra4on in world •  Huge proved undeveloped and probable reserve base •  Outstanding opportunity for field op4miza4on with modern technology


The Middle East: A Perpetual Cause of Energy Uncertainty

•  Supply interrup4on during Libyan civil war caused a spike in global oil price.

•  Saudi Arabia faces poten4ally explosive challenges: ü  Succession and the age of Saudi leaders, ü  Increased spending to appease public will cause a

budget deficit for the first 4me by 2015, ü  Increased internal consump4on means less

revenue, ü  Youth unemployment & increased foreign

workers. •  Two of its neighbors – Iraq and Iran – have the poten4al

to drama4cally increase their oil output. •  If oil pricing power shiss to Iran or Iraq, either or both

could opt to receive payment for their oil in a currency other than U.S. dollars.

•  The Iran nuclear issue has added a risk premium to oil price already.

•  The Syrian crisis could spread into a regional war that would completely disrupt global oil supply.


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2011$U.S.$D

ollars$Per$Barrel$of$O

il$

World$Oil$Prices$in$2011$U.S.$Dollars$

Period'of'Globaliza:on'

1970s''Oil'Shocks'

Demand''Destruc:on'

Present'Reality'

World Crude Price (Constant 2011 USD)

Arab-‐Israeli War Iran-‐Iraq War

1st Iraq War 2nd Iraq War

Great Recession

Arab Spring

The Great Modera1on

Source: BP


What We Are Told

“The Spraberry Wolfcamp could possibly become the largest oil and gas discovery in the world,” said Pioneer Natural Resources Co. CEO Scok Sheffield.


Energy Independence—Fact or Fic4on: Key Points

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U.S.)Crude)Oil)Produc9on)&)Consump9on)PRODUCTION" CONSUMPTION"

7.41)MMbopd)Gap)

•  The U.S. now produces slightly more than it imports (Dec. 2013) largely because of reduced consump4on—a bad thing for the economy.

•  For 2013, the U.S. imported more oil than it produced. •  Even at the 9.6 MMbopd es4mate by the EIA for 2016, the U.S. will s4ll import more

than 5 Mmbopd.

Source: EIA.


Concluding observa4ons

•  Alterna4ves to oil must be developed but it is unlikely that they will account for a meaningful part of our total energy needs for at least 25 years. •  Oil has been at the center of global poli4cs since the end of World War II. •  Developing na4ons are already pu`ng pressure on oil supply and compe44on for dwindling resources will intensify. •  The reality of our energy future is daun4ng. •  With a clear view of this reality we are beker able to work toward solu4ons!


Cri4cal Thinking and Confirma4on Bias •  Isn’t it great that the U.S. is going to produce as much oil as it did in 1970 and that we will be the biggest oil producer in the world?

Ø  How much do we import compared to 1970? Ø  What does it cost to produce all of this new oil compared with the cost in 1970? Ø  Will we ever be energy independent? If not, so what if we are a big producer?

•  We should really get off of oil and supply our needs with renewable energy Ø  How long will it take to get from renewables being 1.2% of total U.S. energy to 100%? Ø  What will that cost in terms of infrastructure? Ø  What is the embedded fossil fuel use and cost to manufacture solar panels, wind

turbines, power grid distribution and back-up for when the sun doesn’t shine and the wind doesn’t blow?

Ø  What about transportation? How long until we can convert to electric vehicles? What is the cost? What about the embedded cost to build the vehicles and the infrastructure?

•  Critical thinking reveals that there are no simple or quick solutions to the energy problem or most problems in the world.

u.s.&shale&plays& - art berman...labyrinth&consul4ng&services,&inc.&...

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