Magical thinking: Kunstler and Berman on natural gas euphoria

In Episode #192 of the Kunstlercast which aired February 2nd, James Howard Kunstler and Duncan Crary have done us all a great favor by interviewing noted petroleum geologist, Arthur Berman.

Berman’s popular in the peak oil world. In addition to his day job as a petroleum geologist and consultant, he’s on the board of the Association for the Study of Peak Oil and an editorial board member of the Oil Drum. He occasionally makes appearances on CNN and maintains his own blog at Petroleum Truth Report.

Recently, Berman gave a series of presentations called US Shale Gas: Magical Thinking and the Denial of Uncertainty, and that’s what Kunstler wanted to talk to him about.

What’s at stake

This interview comes at a critical point in our public debate on energy. Berman offers a reality check that questions claims repeated by industry insiders, economists, financial analysts and even politicians that the US has 100 years worth of fossil fuel energy left. According to pundits, new technology is allowing us to frack deposits of shale to release natural gas and trapped in the sedimentary rock.

Berman’s take is that this is likely a mass delusion morphing into a bubble. He says the idea that we can become energy independent from the rest of the world is simply a “fairy tale.” His own experience and analysis of the data suggests that it’s “absolutely preposterous” that domestic reserves of natural gas will allow the US to become energy independent.

Madison Avenue gas bags

Intrigued, Kunstler asks Berman to talk about the propaganda being fed to US consumers and investors on the natural gas story. Berman offers two reasons why this campaign has been so successful.

First, the fracking of shale is considered a manufacturing process; simply apply the technology and produce gas that might otherwise be left in the ground. It sounds whiz bang and like so much other technotopia, reads as convincing simply or being a technological solution.

Second, fracking proponents claim these large deposits of shale will produce for decades. The decline rates on shale gas wells were touted as nearly defying the laws of physics; meaning high production rates at first with only a very slow tapering off rate over an extended period of time. (This might be a good time to brush up on your trigonometry.)

In other words, the natural gas industry is claiming that fracking is a proven technology that will reap financial benefits at a low risk for decades.

The devil’s in the details

The idea that poor quality deposits of natural gas can provide a century of energy is based on a study conducted by the Colorado School of Mines in 2009. By their own admission, the report notes that their “assessment assumes neither a time schedule nor a specific market price for the discovery and production of future gas supply.” Meaning, their estimate is based on resources they consider technically recoverable. It doesn’t matter where it’s located (ie: under the Statue of Liberty), how deep the deposit is, or if the field is too small to be commercially viable.

This is where Berman defines the semantic difference between of a reserve and a resource.

Paraphrasing, “a reserve is a subset of technically recoverable resources” that is commercially viable. This subset typically amounts to only 20-25% of the total technically recoverable resource. In order to prove the reserve exists, the producer must drill an actual well. Even if the reserve of shale gas amounts to a very generous 50% percent, this equals approximately 12 years of natural gas at current rates of consumption.

An aside

Stepping aside for a moment, let’s remember that our financial system is based on compounded debt that requires growth in the economy to keep the wheels of finance spinning. Therefore, current rates of consumption is an inadequate function in our economy.

Doing the math

Berman goes on to include the natural gas the industry anticipates to be extracted from reserves using conventional, non-shale gas deposits and comes up with a combined total of just 20-25 years worth of natural gas.

The optimistic scenario laid out by Berman is decades less than what the American public is being told.

At this point in the interview, Kunstler shifts the discussion to a brief history of the gas shale plays in the US in order to segue to the more important topic of depletion rates.

You’ll want to have map handy for this part of the discussion, but the bottom line is the assumptions of production that were based on models didn’t pan out very well at all. Shale gas concentrations aren’t uniform; there are sweet spots where wells produce significantly better than in other areas.

By Berman’s account, only a stunning 10-15% of the total area in which thousands of wells have been drilled turned out to be economically viable business ventures.

In the words of a famous auto mechanic turned US Marine: “Sur-prise, sur-prise sur-prise!”

Off the cliff

With half a decade or more of production data, the plotted depletion rates are not likely to keep on keeping on in a slow and gentle decline; they more closely resemble a linear drop in output.

Here Kunstler presses the point and asks Berman if the older fields, such as the Barnett in Texas, have peaked.

It’s too soon to tell according to Berman. But yes, we could be at the peak right now in some of these fields. The key factor is whether or not the natural gas companies are willing to drill more wells, even if they do so at a financial loss.

Show me the money

The costs are staggering. Leased land prices can go for $15k to $30k per acre. Horizontal drilling and multi-staged fracks are several times the cost of vertical wells adding another $5 to $6 million dollars per well. Kunstler points out that all this temporary infrastructure means a moveable feast of tons of additional steel pipe and convoys of trucks to bring in the water required for the fracking process in places where water is insufficient for the operation.

Current overproduction caused by initial excitement in the marketplace, as well as unintended natural gas coming as a by-product from oil fields has produced a glut in the natural gas market. This accounts for the declining price of natural gas while production costs are going up.

All of this leads Berman to remark that, “Nobody is making money at $2.”

So if they aren’t making money, will the companies cut back on production or go out of business? Taking this question a bit further, Kunstler asks if these fluctuations of production and price will wreak havoc on middle class consumers.

Here Kunstler is making a connection to the oil market. When the price of WTI petroleum goes above $85-90 a barrel there’s strong evidence to suggest that the American economy slows down and heads into recession. If the pattern of supply and demand for natural gas follows suit, we might expect to experience similar events of demand destruction in our economy.

Berman believes that the producers are well aware that a 100 year supply does not exist. By reducing their drilling and holding on to land leases, they hope to dry up the glut and reward shareholders on a longer term basis.

Robbing Peter to pay Paul

To speed up this process, the industry is lobbying the US government to switch over vehicle fleets and outdated power plants to natural gas which is cleaner burning than coal. The current price of natural gas and the promise of lower emissions make such investments look enticing. Of course, converting portions of our infrastructure to run on natural gas is risky strategy if we only have 20-25 years of domestic supply available. It’s important to remember that this conversion will be done using oil as a fuel source, take years if not decades, and require vast amounts of investment capital.

Kunstler, already a sharp critic of the money fantasies of the investor class, is particularly interested in knowing where the capital for such a shift would come from.

Berman describes how private investors, as well as countries such as Norway, France, China and India have all entered the market. The other major source for fresh capital comes from petroleum companies such as BP and Exxon.

Now, here’s where the interview gets really interesting.

The big oil companies, which abandoned the US decades ago to pursue more profitable ventures overseas, are back. Why? Because in order for companies like Exxon to maintain their stock value, they need to replace their reserves each year. With worldwide gas and petroleum depletion rates over 5%, the search for new reserve sources is forcing companies to invest in lower quality deposits.

Not only do additional reserves boost their stock prices, speculative companies in need of cash are able to use these claimed assets in the ground as collateral. (It would very be interesting to know what percentage of our 100 year supply has been used as collateral?)

Fools rush in

Kunstler sums this up nicely when he likens today’s natural gas delusion to the 1849 gold rush. Berman concurs, but notes that the cost of entry into natural gas, already in the billions of dollars, is significantly higher.

Where does this leave us?

Berman predicts another five years or so of good production from the shale gas fields. However, the industry must contend with a growing disenchantment from the public due to environmental contamination of aquifers and shallow earthquakes caused by the fracking process. This may result in additional time to conduct environmental assessments and implement new safety procedures, which will add cost. But will it change the actual recovery picture?

Berman also predicts a return to the gasoline lines we saw in the 1970’s in the next couple of years. Noting that our electric grid is already stressed, he suggests that brown-outs will become a part of daily life. Despite the dire prognostications, Berman doesn’t consider himself a “doomster.” Rather, he believes this is “what the future looks like based on a rational approach to supply and cost.”

Kunstler quips that “doomsters are realists who makes you feel bad.”

The interview wraps with a warning that all of our technology and chest thumping can’t produce an infinite supply of cheap fossil fuels from declining reservoirs. The hype and spin in the media may benefit oil companies and their political supporters during an election year, but they do an injustice to our welfare.

As Berman notes, pretending that there are no risks associated with shale gas is a form of magical thinking.

Based on this interview, you might conclude that our current domestic energy policy amounts to a poking a lot of holes in the ground while crossing our fingers.

–JB Sties, Transition Voice