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The Shale Ponzi

Well, because that’s what it is: a Ponzi scheme, aimed at gathering in sucker-investors to boost share prices of oil and gas companies, with the hope that some miracle will occur to make financially broke societies capable of paying three or four times the price for oil and gas that their infrastructure for daily life was set up to run on, back when it seemed to be running okay. This is just not going to happen.

Let’s start with shale gas. The gas is there in the “tight” rock strata, all right, but it is difficult and expensive to get out.

The process is nothing like the old conventional process of sticking a pipe in the ground and getting “flow.” It’s not necessary to go into the techno-details (you can read about that elsewhere) but to give you a rough idea, it takes four times as much steel pipe to get shale gas out of the ground.

Plenty of money was available around 2004-5 when the campaign to go after shale oil and gas got ramped up over premonitions of global peak oil. How come there was money then and not now? Because we were at peak cheap oil and hence peak credit back then, which is to say peak available real capital.

So, the oil and gas companies were able then to attract lots of investment money to set out on this campaign. They brought as many drilling rigs as they could into the shale oil and gas play regions and they drilled the shit out of them. Natural gas was selling for over $13 a unit (thousand cubic feet) around 2005, and it was that high precisely because conventional cheap natural gas production was in substantial decline.

That was then, this is now. As a result of drilling the shit out of the gas plays, the producers created a huge glut for a brief time. They queered their own market long enough to wreck their business model. Unlike oil, natural gas is much more difficult to export — it requires compression and refrigeration of the gas to a liquid, seaboard terminals to accomplish all that (which we don’t have), and expensive tankers, so there was no way to fob off the surplus gas on other nations.

The domestic market was overwhelmed and there was no more room to store the stuff. So, for a few years the price sank and sank until it was under $2 a unit by 2011. Since shale gas production is just flat-out uneconomical at that price, the companies engaged in it began to suffer hugely.

In the process of all this a pattern emerged showing that shale gas wells typically went into depletion very quickly after year one. So all of the activity from 2004 to 2011 was a production bubble, aimed at proving what a bonanza shale gas was to stimulate more investment. It required a massive rate of continuous drilling and re-drilling just to keep the production rate level — to maintain the illusion of a 100-year bonanza — and that required enormous quantities of capital.

So the shale gas play began to look like a hamster wheel of futility.

After 2011 the rig count began to drop and of course production leveled off and the price began to go up again. The trouble is, once the price rises into that range it becomes too expensive for many of its customers, especially in a contracting economy with a shrinking middle class, falling incomes, and failing businesses. So what makes it economical for the producers (high price) will make it unaffordable for the customers (no money).

Because of the complex nature of these operations, with all the infrastructure required, and all the money needed to provide it, the shale gas industry will not be able to go through more than a couple of boom / bust cycles before it begins to look like a fool’s game and the big companies throw in the towel.

Obviously I haven’t even mentioned the “fracking” process, which is hugely controversial in regard to groundwater pollution, and a subject which I will not elaborate on here, except to say that there’s a lot to be concerned about. However, I believe that the shale gas campaign will prove to be a big disappointment to its promoters and will founder on its own defective economics rather than on the protests of environmentalists.

The fundamental set up of life in the USA — suburban sprawl with mandatory driving for everything — hasn’t changed during the peak cheap-oil transition and represents too much “previous investment” for the public to walk away from. So we’re stuck with it until it manifestly fails. (Life is tragic and history doesn’t excuse our poor choices.)

The price of oil has stayed around the $90 a barrel range much of 2012. Oil companies can make a profit in shale oil at that price. However, that’s the price at which the US economy wobbles and tanks, which is exactly what is happening. The US cannot run economically on $90 oil.

If the price were to go down to a level the economy might be able to handle, say $40 a barrel, the producers of shale oil would go broke getting it out of the ground.

As the US economy stumbles, and the banking system implodes on the incapacity of debt repayment, there will be less and less capital available for investment in shale oil.

As with shale gas, the shale oil wells also deplete very rapidly, and production requires constant re-drilling, meaning more rigs, more employees, more trucks hauling fracking fluid, and more capital investment. This is referred to as “the Red Queen syndrome,” from Lewis Carrol’s Through the Looking Glass tale in which the Red Queen tells Alice that she has to run as fast as she can to stay where she is.

The bottom line for shale oil is that we’re likely to see production fall in the years directly ahead, to the shock and dismay of the ‘energy independence’ for lunch bunch.

If the price of oil does go down to a level that seems affordable, it will be because the US economy has been crushed and America is mired in a depression at least as bad as the 1930s, in which case a lot of people will be too broke to even pay for cheaper oil.

Hence, the only possibility that America will become energy independent would be a total collapse of the modern technological-industrial economy. The shale oil and gas campaign therefore must be regarded as a desperate gambit by a society in deep trouble engaging in wishing and fantasy to preserve a set of behaviors that can no longer be justified by the circumstances reality presents. MUCH more at http://redgreenandblue.org/2013/01/01/kunstlers-2013-forecast-part-2-f
racking-on-the-global-hamster-wheel-of-futility/2/

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Production at the world's third largest source of oil has polluted surrounding waters with toxic substances, according to a new study. The findings add fuel to a fiery debate over a proposed pipeline connecting Canadian oil sands with US refineries.

Lakes as far as 56 miles away from production facilities near Fort McMurray, Alberta, show unnaturally high levels of substances linked to cancer. Researchers say they are the result of roughly half a century of development at the Athabasca oil sands.

Scientists at Queen's University in Kingston, Ontario, called the findings, released Monday, "worrying" and warned of future effects from the spread of oil sands contaminants.

“We’re not saying these are poisonous ponds,” John Smol, a professor and the study's lead author told The New York Times. “But it’s going to get worse. It’s not too late but the trend is not looking good.”

It is worrying because oil sands production near Fort McMurray is on the rise. In 1980, Canada was producing the equivalent of 100,000 barrels of oil a day. By 2010, it had risen to 1.5 million barrels. By 2025, it's slated to increase again to 3.7 million barrels per day.

Monday's findings may bolster support for those who say treatment of the oil sands – a viscous form of oil – poses serious environmental threats. The same day the report was released, protesters assembled at locations across the United States to oppose the construction of Keystone XL. The pipeline would transport the Athabasca oil sands product to refineries in the US for the production of gasoline and other fuels.

President Obama has delayed making a final decision on issuing permits for the project, citing a need for greater study of its potential environmental costs. Last December, a Texas judge briefly ordered TransCanada Corp., the company behind the project, to stop work on the pipeline, after a property owner challenged the company in court. More at http://www.csmonitor.com/Environment/Energy-Voices/2013/0108/Canadian-
oil-sands-pollute-nearby-lakes.-Report-is-blow-to-Keystone-pipeline

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