Will fracking postpone Peak Oil?

Much has been said both here and and elsewhere on the internet about the capacity for the fracking frenzy to defer Peak Oil as a threat.  I’m far from convinced, but these latest news which just arrived today on the ABC have made me make the most of the wet weather to write another post!

Major oil discovery in outback SA

http://www.abc.net.au/news/2013-01-24/major-oil-discovery-in-outback-sa/4481982

Brisbane company Linc Energy says it has discovered up to 233 billion barrels of shale oil in the Arckaringa Basin in South Australia’s far north.

The company says independent consultants have confirmed the finding after drilling and seismic explorations in shale rock.

Linc Energy holds rights over more than 65,000 square kilometres of land around Coober Pedy.

In a statement to the Stock Exchange, the company said reports from US-based consultants Gustavson, and DeGolyer and MacNaughton indicate underlying rock formations “are rich in oil and gas prone kerogen.”

Shale oil is costlier to extract than conventional crude and involves ‘fracking’ in which water is pumped in to break up the shale.

South Australian Mining Minister Tom Koutsantonis says the value of the finding could be worth $20 trillion and could turn Australia into an oil exporter.

“What they think they’ve found, or they have found but whether it’s economic to recover or not is still the question, is vast reserves of shale oil,” he said.

“It’s basically oil which is trapped in low-permeability, clay-rich rocks so it’s within the rocks and you fracture-stimulate those rocks to release the oil.

“There are processes now where you can unconventionally retrieve these reserves.

“If the reserves and the pressure was right over millions of years and the rocks have done the things they think they’ve done they think they can extract vast reserves of oil out of South Australia which would have a value of about $20 trillion.

“South Australia is blessed with abundant resources but there are a few setbacks and those setbacks are that they’re remote and they’re deep.”

The South Australian Chamber of Mines and Energy says it is much to early to say if the reserve can be profitably tapped.

Chief executive, Jason Kuchel, says major works would have to be carried out in order to access the oil.

“There’s a lot of infrastructure that needs to go particularly if there’s a lot of gas to be had rather than liquid,” he said.

“Up in the Cooper Basin where we have a lot of gas, of course it requires a lot of pipelines to be able to get that product to market whereas at least with oil you can pull that out of the ground, put it into a truck and get it going to market relatively quickly.”

So there you have it…….  we’re saved…!

However, at almost the same time I viewed this news item, I was also made aware of this article http://seekingalpha.com/instablog/121744-mark-anthony/1354531-the-real-bakken-shale-well-decline

I urge you to read it, even if only to check the maths….  The author, some chap called Mark Anthony, writes “In a previous article “The Real Natural Gas Production Decline“, I discussed a simple and effective way of estimating the real declines and realistic EURs (Estimated Ultimate Recovery) of shale wells based on two things that shale gas and oil producers can not lie about: number of wells added during a period of time, and the total daily productions.”

The idea is simple he says…. “All shale wells are in steep decline. Thus as the producers put new wells into production, a considerable portion of the new production merely compensates the decline of existing wells. If we assume producers add just enough wells to exactly compensate for the decline, then the EUR times number of wells added equals the amount of production during the same period.”

He then goes into the maths, the basis for which are indeed fairly simple….

Let the combined daily decline of existing wells be D, and IP being the Initial Production rate per well:

Total Production x D = IP x Well Additions

EUR = Total Production/Well Additions = IP/D

I don’t particularly want to copy/paste the rest of this blog, I’ll let you establish how he achieves the numbers, but the outcome is that Shale oil costs $65 a barrel to produce, that each well costs $11.60M to establish, and that at $65 a barrel, the oil companies barely make $11.65M, just breaking even for the well capital spending….  But, Mark Anthony adds,  “the capital spending is not the only cost. We have not calculated the production and maintenance costs, the General & Administrative costs. Thus, at the current oil price, [they are] not making any real profit in developing Bakken shale wells.”

So then, how do they manage to report positive profits for the quarters?  Creative accounting is how I would describe what Mark Anthony divulges…  Is a business profitable, if it continues to borrow more debts quarter after quarter, and it continue to spend many times more on capital spending than the revenue it takes in? “This is neither profitable, nor sustainable” says Mark.  He can see that when the banks get suspicious and stop lending money, then the shale industry will collapse.

But consider the effect on the economy of continued investing in the “drill, baby, drill” program.  Over-production lowers fuel costs at the pump, it employs people instead of them being on welfare, and it even allows politicians to deny Peak Oil and claim the US will be self-sufficient in oil in the future.

And what does it really cost?  The investment banks probably get their funds at low rates from the major banks, who get their funds at ultra-low rates from the Fed and then leverage it up 8-fold through fractional reserve banking, and the Fed creates the funds out of thin air and books the lot as solid assets.

As long as the supply of money doesn’t run out, it cannot fail – the usual Ponzi scheme.  And Bernanke has said again and again that he will always print money to avoid deflation.

So, maybe, just maybe, this whole sordid system may continue for years yet.  Only net energy will put an end to it…….

Michael Lardelli, a friend of mine from the Yahoo list Running on Empty wrote this very pertinent letter to the editor of Indaily following this article’s publication:

Kevin Naughton is correct in adding a dash of scepticism in his report on shale oil discoveries in SA’s north (Black Gold Fuels Boom-Sayers, InDaily 24 Jan. 2013) . Reserve figures of 100+ billion barrels sound extremely impressive when the entire world “only” uses 30 billion barrels of oil per year (1000 barrels per second). However, the critical issue for Australia’s future will be how rapidly this oil can be produced, not how large the reserves actually prove to be. There is growing scepticism in the USA in the wake of the huge claims that have been made there regarding shale oil. Shale oil wells are expensive to drill and require (and pollute) large amounts of water per well (not so plentiful in SA’s north). But the greatest concern from an economic viewpoint is that, unlike for conventional oilfields, the production volumes from shale oil wells typically are lower and drop off rapidly. This means that, to maintain any significant level of production, a high rate of continuous drilling of new wells is necessary. This is extremely expensive and has huge environmental impacts. The real profitability of much of US shale oil production is in doubt and the current drilling frenzy (which appears to be abating) is driven more by financial shenanigans rather than oil sales. So we should indeed remember the lessons of Olympic Dam when hearing all this good news. And what about SA’s fuel security? Well, we no longer have a refinery so any oil from SA’s north will have to be sent elsewhere ….

Watch this space……….