Years, Not Decades For Shale Oil & Gas

For those who have been following the shale oil and gas revolution story, the latest development to the industry as a result of the oil price slump is not very surprising. The latest seminar presented by Art Berman, a geological consultant and 36-year veteran in petroleum exploration and production, provides a very good overview of the shale oil and gas industry and insider insight where things are and where it is heading.

The presentation (below) is about one hour (another 30 minutes of Q&A at the end), and is well worth the time for anyone who wants to be informed on the subject. Below is a summary for those who are time challenged. The presentation slide deck can be found here.

Key Takeaways

  • The oil and gas shale plays will add years, not decades, to the US domestic oil and gas supply.
  • At current prices, oil and gas from shale plays are profoundly un-commercial.
  • The shale ‘revolution’ is made possible by the endless supply of essentially free money from the capital market, thanks to the financialization of the exploration and production (E&P) industry.

There is no shale oil revolution

  • What revolution? We have known about these sources for decades. True enough, technology improvements have allowed the resources to be located and extracted more efficiently. But ultimately, the price of oil was high enough for these shale plays to make sense.
  • So there is no revolution. It is a final, desperate effort to squeeze the last remaining petroleum from the worst possible rock.

Commercial viability

  • Oil and gas from shale is called unconventional, a euphemism for ‘expensive’.
  • We equate success with volumes – the amounts we produce and how we increased production in such a short time. But what about the cost of production? Can you make money?

Where tight oil and gas fit in the overall scheme of things

  • US conventional oil production peaked in 1970.
  • Both tight oil and gas production will peak in the next 10 years.
  • At the current rate of consumption, there are 8 years of shale gas proven plus proven-undeveloped reserves and 3 years of tight oil proven plus proven-undeveloped reserves.
US-crude-oil-production
US conventional oil production (in blue) peaked in 1970. Tight oil is shown in red.
  • In the context of global oil production, tight oil is but a tiny sliver.
  • Global conventional oil production probably peaked in 2005.
global crude oil production
Global crude oil production since 1980. Tight oil contribution to the overall picture, as shown in red, is insignificant one way or another. Note also conventional oil production (blue) peaked in 2005.

 

  • The US is 10th in oil reserves including both conventional and tight oil. It is a long 5th in natural gas.

(Click for a larger image)

proven oil and gas reserves by country
CProven crude oil and natural reserves by country. The US is 10th in oil and 5th in natural gas.
  • Oil production in the US will peak around 2016 and decline thereafter. 2016 will also mark the low point of US oil imports.
US-crude-oil-produtcion-&-net-imports
Oil production in the US will peak around 2016 and decline thereafter.
  • As for shale gas, all plays except Marcellus are also in decline state. Marcellus is projected to decline around 2020. The future of US gas supply is a single bet on the Marcellus shale.
US shale gas production
All shale gas plays except Marcellus are already in decline state.

Wisdom of LNG exports

  • About 10 Bcf/d of pipeline expansion and LNG exports are sanctioned by 2020. Another 4-5 Bcf/d of demand from mandated coal fired generation plants retirement.
  • The newly announced Power of Siberia Pipeline between China and Russia will deliver 1.4 Tcf of natural gas to China over 30 years for $400 billion. This sets a benchmark price of $10/MMBtu for Asia – without linkage to oil prices. Russia also plans to export through the pipelines to Japan and Korea. This mega deal and benchmark setting have monumental implications for the LNG industry.

(Click for a larger image)

Power of Siberia pipeline
The Power Of Siberia Pipeline will supply $400 billion of natural gas from Russia to China over 30 years. It sets a benchmark price of $10/MMBtu for Asia, a benchmark against which all LNG exports to this region now need to compete.
  • A survey of LNG cost across existing and proposed LNG terminals in North America would make one wonder the entire rationale of the LNG exports proposition – the lowest breakeven price for the Gulf Coast terminal will struggle to compete with the Russian price threshold.
break-even North American LNG project costs
Break-even costs of existing and proposed LNG projects across North America.

Causes of Price Slump

The current oil price crash is the result of over production (by tight oil producers) and demand destruction due to weak global economy.

Supply went from a deficit of about 0.5 MMbpd throughout 2013 to outstripping demand by more than 1-1.5 MMbpd in 2014. Within the context of 90+ MMbpd supply/demand market, a 1 MMbpd surplus or deficit is nothing out of the ordinary, i.e. it points to no glut or scarcity.

Enabler of the Shale Boom

The shale boom was enabled by the central bank’s policy which brings interest rates down to zero. In a world where investors are hungry for yields, investment banks took the opportunity to financialize the E&P industry. By offering interest rates of 6 – 10%, E&P became the subprime securitized investment vehicle of the post Financial Crisis period.

Companies had infinite access to capital with no performance requirements other than to avoid debt covenants (net asset values must not drop below a certain threshold). From 2000 through 2013, $690 billion had been plowed into the industry.

Collectively, the E&P companies are chronically cash flow negative, meaning the unmanageable debt will never be paid from cash flow. Nobody bothered to ask if this industry will make money.

The financialization of the E&P business created a boom in production and economic activity with no reference to its lack of commercial substance.

References

All images are from the presentation.

Tight oil Shale gas

This article is part of the Tight oil Shale gas in-depth topic. Get a crash course and read the latest developments on this topic.

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