Transition Tywi Trawsnewid, a ‘transition town’ group in Carmarthenshire, put on a film about fracking last night. Fracking is a dead-end technology but — one possible glimmer on a dark horizon — the economics are unstable.
Since the extract below was written, the oil price has slid further to $45-$50 a barrel. At this level, fracking is too costly to be ‘profitable’ (at least, in nations where there is any meaningful regulation).
From Solving the Grim Equation pps 86-87:
“The USA’s much-publicised ‘energy revival’, dependent on hydraulic fracturing – fracking — of oil-bearing shale rocks, has been over-magnified, yielding mainly debts and serious pollution….
…..Frackers are running out of cash. Bloomberg News analysed 61 fracking companies in 2014 and found that their debts had nearly doubled in four years, but their revenues rose just 5.6%. Possibly, if the crude oil price rose to $150 a barrel or more, some frackers would be able to repay their loans a little more easily, but an oil price at least 50% higher than the level current in September 2014 would slash demand and force societies to adopt less energy-intensive economies. The sliding oil price in the closing months of 2014 and into 2015 made fracking even less viable economically.
Bloomberg found that the 61 companies had debts of $164.6 billion by the first quarter of 2014. In several, interest payments ate over 20% of revenues. At one, Quicksilver, interest payments almost reached 45% of revenue.
“Drillers are caught in a bind,” said Bloomberg. “They must keep borrowing to pay for exploration needed to offset the steep production declines typical of shale wells.
“For companies that can’t afford to keep drilling, less oil coming out means less money coming in, accelerating the financial tailspin.”
If easier oil were to be found, no one would be fracking.
But the easy oil has gone.”
Cambria Books published my book Solving the Grim Equation in summer 2015
Gail Tverberg, an experienced actuary, is essential reading for all who are concerned about our present impossible marriage between infinite growth economics and the finite world on which we live. Here she explains why plunging commodity prices are not the good news you might think:
So oil prices have fallen. That’s great news, isn’t it? Must mean there’s loads of the black stuff on tap. Well, it’s not that simple — although the media too often try to pretend that prices are a straightforward relationship between supply and demand.
This extract is from my new book, Solving the Grim Equation, pages 76-77.
“World oil consumption continues to edge upwards by 1%-1.5% annually.[i] The US Energy Information Administration (EIA) expects oil use in 2015 to grow by another 1.5% to 92.89 million barrels a day, 130,000 barrels less than daily production. Annual consumption would be pushing towards 34 billion barrels.
The EIA reckoned that in 2009 the world’s proven reserves of crude oil totalled 1,342.2 billion barrels. That equalled 43.3 years’ supply at the 2009 consumption rate. By 2013, reserves had inflated to 1,646.0 billion barrels, a phenomenal 22.6% growth in four years although no major new oilfields have been discovered. By 2013 the world appeared to have some 50 years of oil reserves. The inclusion of ‘tight oil’, which is ‘liberated’ by hydraulic fracturing, commonly called fracking, boosts the reserve figures but has a low return on the energy invested in extraction. The issue is not so much the absence of oil under the ground, but absence of money to give producers a profit sufficient to reinvest in exploration. The market is held back by impecunious consumers more than by dry wells. The actuary Gail Tverberg, who analyses energy and commodity prices, comes to this conclusion:[ii]
‘Many people have the impression that falling oil prices mean that the cost of production is falling, and thus that the feared “peak oil” is far in the distance. This is not the correct interpretation, especially when many types of commodities are decreasing in price at the same time. When prices are set in a world market, the big issue is affordability. Even if food, oil and coal are close to necessities, consumers can’t pay more than they can afford.’
Oil with a high return on energy invested in extraction gives pricing flexibility. Where the energy return is small, the price needs to be consistently high, or there is no financial incentive to extract it.
Saudi Arabia, Venezuela and Canada are supposed to have the world’s largest oil reserves. In both Venezuela and Canada, the energy gain from drilling ‘oil’ is low and in Canada is sometimes negative. The tar sands in northern Alberta are strip mined, and carried in trucks to processing plants where water is added to create a slurry, which is placed in separation vessels. The bitumen rises to the top. It is diluted with naphtha and further separated in centrifuges. The bitumen is processed again to yield gas oil, naphtha and hydrocarbon gases. The liquids are cleaned up with hydrogen to remove sulphur and nitrogen compounds. The naphtha is from local natural gas which is ‘stranded’ – i.e. there is not enough of it to justify exporting it through a long-distance pipeline. That limited supply of natural gas is an important element in the energy-heavy process to convert bitumen into synthetic crude oil.
The current financial cost of producing synthetic crude oil from sands is about $90 a barrel.[iii] Ignoring the heavy environmental damage, the immediate production cost means that unless the oil is sold at over $100 a barrel, there is scant reason to produce it, and insufficient return to justify new investment. So is it realistic to assume that Canada will supply the world with over 173 billion barrels? Hardly. The oil price was on a plateau in 2011 and 2012, and in 2013 and 2014 trended downwards to below $100 a barrel, in September sinking close to $90. The fall continued in October and November, to under $80, followed by a precipitous collapse in late November and early December to under $63, and in January 2015 to below $50, for benchmark WTI (West Texas Intermediate).”
[i] US Energy Information Administration, Short-Term Energy Outlook, September 9th 2014.
[ii] ‘Low oil prices: sign of a debt bubble collapse, leading to the end of oil supply?’ by Gail Tverberg, http://ourfiniteworld.com/2014/09/21/low-oil-prices-sign-of-a-debt-bubble-collapse-leading-to-the-end-of-oil-supply/, September 21st 2014.
[iii] ‘Peak Oil becomes an issue again after the IEA revised its predictions’ by Tom Dispatch, http://oilprice.com/Energy/Crude-Oil/Peak-Oil-becomes-an-Issue-Again-after-the-IEA-Revised-its-Predictions.html, January 9th 2014.
Later note: in August 2015 oil prices slid further. On the 21st, the West Texas Intermediate price dipped below $40 a barrel.
Official launch on Tuesday July 7th — ‘Solving the Grim Equation’, published by Cambria Books and written by me, Pat Dodd Racher
Upstairs at The Angel, Rhosmaen Street, Llandeilo, at 7.30pm.
Author and One Planet Council patron David Thorpe will lead a question and answer session and discussion.
The Grim Equation means that increased consumption now will result in lower consumption in the future.
Exciting pioneer projects in Wales show that families can reduce consumption dramatically and use less energy, and still live happily. Pioneers have had to battle against hostility in local government, but thanks to the Welsh Government’s ‘One Wales One Planet’ policy the chances of projects being approved are increasing.
The One Planet Development policy, and guidance in Technical Advice Note 6, and the establishment in Wales of the One Planet Council, can give Wales a leading role in the inevitable One Planet future — because we have only one planet on which to live.
The cover of the print version of ‘Solving the Grim Equation’, written by me, coming soon from Cambria Books
Reblogged from Under the Pecan Leaves — the week’s environmental news:
including — Canadian government forbids meteorologists to talk about climate change; USA awards Gulf of Mexico leases to ExxonMobil.
Instead of slowing down as we approach the cliff edge, we are running faster.
Reblogged from Gail Tverberg’s Our Finite World:
Gail understands and explains both complex systems and the deficiencies of conventional economics, which treat the earth’s irreplaceable resources as inputs which can be costed and substituted with other inputs. Conventional economics doesn’t recognise that the air we breathe can’t be substituted, neither can the soil in which crops grow, nor the oceans in which aquatic life used to teem, nor the aquifers holding fresh water under land. As for fossil oil and gas, products of millions of years of solar energy, how clever to burn them in a few decades!