Is Fracking Becoming Uneconomic?

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

PDR


Money Wells Dry Up

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. 

PDR


Environmental News Worldwide Round-up

Helpful round-up of the week’s environmental news from around the world, from Debra on Under the Pecan Leaves:

http://mylandrestorationproject.wordpress.com/2014/05/23/environment-news-this-week-416-422/

News includes marches against Monsanto, two counties in Oregon ban GMOs, wildfires take hold in Arizona, waste water from fracking damages streams, radioactive water from Fukushima being released into the Pacific, and a lot more.

 


Fracking as Crack: Our Dependency Culture

The room thermometer usually says ‘Cool – turn the heating up’, sometimes ‘Too Cold – danger of hypothermia’. It’s not freezing, about 12 degrees C. Why not turn the heating up? Just getting used to a life with less energy!

Fracking? The answer to expensive energy? So our windy politicians would have us believe. Windy? Aware that, like the ‘once they’re gone they’re gone’ posters promoting not-to-be-repeated bargains, we are selling off our planet’s energy stores far too cheaply and far too fast.

Millions of years to create, a handful of decades to burn. Then what? The answer from the business lobby is ‘don’t be alarmed, something will turn up’.

Politicians, too, like to use this argument about energy – but they rarely use it about money. They impose financial austerity because ‘we can’t leave our debts to our children and grandchildren’. We are not supposed to leave our descendants lumbered with debts, but it’s OK to leave them without oil or gas. Why is the ‘stewardship’ rationale not used for energy? After all, money is no more than a social construct, but fossil energy is part of our physical environment. Professor Stephen Hawking has said that our future is in space, not on Earth. Maybe one day we will find somewhere else to go, but it’s looking as though we will have rendered our present home largely uninhabitable before then.

And fracking – hydraulic fracturing — is not an answer. Fracking to release oil and gas is a dirty, polluting process that delivers very little energy gain. Relying on fracking is the equivalent of a heroin addict reusing filthy needles, because that’s what we have become, addicted to fossil energy.

The world’s supergiant oilfields like Ghawar in Saudi Arabia, long discovered and long exploited, have yielded an energy return of around 100 to 1. That’s what created Arab billionaires, oil wells gushing black gold in return for modest energy inputs. Nowadays, typical energy return from conventional oil is about 19 to 1. Tar sands, like the vast tracts in Alberta, Canada, have energy output between five and six times the energy required to extract the stuff. The acronym is EROEI, Energy Return On Energy Invested. Oil shale, the target of fracking, has a return of 1.5 to 1, up to 4 to 1 in the most favourable cases.

The implications have, I am sure, been grasped by our politicians, but they are not keen on sharing the insight with the rest of us. The unpalatable fact is that much of the energy resulting from fracking is absorbed by the process itself.

Wind, wave and hydro power all deliver far better EROEI than oil shale, typically 18:1 and 15:1 for wind and waves and between 11:1 to 267:1 for hydro power. Sad for hydro power prospects that we are running out of surface water in so many areas.

Water in vast quantities is needed for fracking. Water is the principal agent by volume, about one million to eight million gallons per frack, and a well may be fracked many times. One million gallons covers an acre to a depth of over three feet….  It’s not just water, of course, but hazardous chemicals too, sent on their way with explosive charges. Companies regard their chemical mixes as commercial secrets, and the fact that governments are prepared to allow toxic injections into the earth’s surface reinforces the addiction story. Benzene, toluene, ethylbenzene, xylene, methanol, naphthalene, lead, have all been identified in the USA, where pollution – poisoning – of aquifers is an unwelcome accompaniment of fracking. Water has to be transport to fracking wells, and waste water has to be disposed of somehow. It’s a very noxious business.

Fracking is not good news, it’s a proof that as a civilisation we have lost all sense of perspective, just like the drug addict stealing from friends and neighbours to buy their next dose. Fracking is more Edgar Allan Poe than fairy story, a symbol of a dark time.

 References

‘Natural gas fracking fires protest over pollution fears’, by Amy Goodman, www.guardian.co.uk, September 20th 2012.

‘Shale gas fracking Q & A’ by Fiona Harvey, The Guardian April 20th 2011.

‘Searching for a miracle: net energy limits and the fate of industrial society’, by Richard Heinberg, Post Carbon Institute and International Forum on Globalization, September 2009.

The film Gasland by Josh Fox, http://www.gaslandthemovie.com