July 15 (Bloomberg) -- Where others see a U.S. energy revolution of cheap and abundant fuel, David Hughes sees a short-term bubble that will bring higher economic and environmental costs.
The Canadian geoscientist, founder of the consulting company Global Sustainability Research, is part of a movement pushing back against conventional wisdom that the U.S. is on the verge of energy independence amid surging oil output and a 100-year supply of natural gas. Projections of 2,384 trillion cubic feet of gas supplies provide false confidence because they don’t adequately account for the cost of production declines of as much as 47 percent a year that come with drilling in shale, Hughes said.
While President Barack Obama endorses the use of more gas as a power-plant fuel and the U.S. considers expanding exports to exploit the current glut, shale skeptics such as Hughes and Bill Powers, a director of Calgary-based energy producer Arsenal Energy Inc., warn that consumers and industry will feel the pain of rising prices when supplies fall short of estimates they say are based on a mistaken belief that the torrid growth seen in the past five years will continue.
“Human nature doesn’t change, and we extrapolate recent trends far into the future even if those trends are woefully unsustainable,” said Powers, author of “Cold, Hungry and in the Dark: Exploding the Natural Gas Supply Myth.” Advances in shale-gas technology won’t continue forever, he said, “and we’re probably seeing them reach their maximum potential as far as production growth goes.”
Wells drilled into the hard rock of shale produce a burst of oil and gas after being hydraulically fractured -- a technique that cracks the rock to release hydrocarbons. The flow rapidly diminishes as gas must migrate farther through the rock to reach the fracturing site where it can enter the well. To counter the declines, companies drill more wells, longer wells and intensify the fracking process, all of which can raise costs.
About $42 billion must be spent every year just to offset decline rates in shale gas wells that generated revenue of about $33 billion in 2012, Hughes estimated in a report earlier this year for the Post Carbon Institute, which advocates options for a more sustainable world. Proceeds from higher-priced petroleum liquids contained in the most lucrative wells have helped offset the deficit for now, though the industry faces higher costs from increasingly uneconomic wells as the best prospects are exhausted, he said.
To Hughes, cheap gas and abundant gas are “mutually exclusive” in the long term. Instead of providing a reason to accelerate fossil fuel use, new supplies of crude and gas from shale fields just give the U.S. more time to develop alternative energy solutions, he said.
According to Arthur Berman, a Houston-area geologist and director of Labyrinth Consulting Services, basing U.S. policy on what he sees as overly optimistic supply and low-price projections is foolish.
Shale production mushroomed in the past decade as producers expanded the use of horizontal drilling and fracking to wrest oil and gas from previously impermeable rock. Gas output in the U.S. climbed 25 percent from 2007 to a record last year, according to U.S. Energy Information Administration data.
In April, the Potential Gas Committee, which issues a biennial report with support from the Colorado School of Mines, said the U.S. had a technically recoverable resource base of 2,384 trillion cubic feet of gas at the end of 2012, while other estimates claim the resource can last 100 years, the committee said on its website.
The surge in supplies pushed prices down to a decade low last year below $2 per million British thermal units -- a price that only added to gas’s appeal as consumers and industry switched to the cheaper fuel to save money.
T. Boone Pickens, the billionaire who advocates a plan to replace imported oil with domestic gas, says it should become the preferred fuel in vehicles. At the same time, the continental U.S. may see as many as six gas export projects built, sending as much as 10 billion cubic feet a day by the end of 2022, the head of Freeport LNG Development LP said in an interview last month.
Decline rates cited by the skeptics already have been incorporated into many supply estimates, said Erica Bowman, chief economist at America’s Natural Gas Alliance, an industry group whose members include Chesapeake Energy Corp., Apache Corp. and Devon Energy Corp.
“We have a very large, abundant supply of natural gas, and we have it at prices that are very affordable, and honestly, we have so much supply that we need the demand outlets,” said Bowman.
Skepticism about shale’s potential was raised as early as 2009, when Berman drew rebukes from Chesapeake and Devon for his work questioning the projections for shale gas as overly optimistic. Berman, who was among the first to point out the steep declines in production after a well is drilled, continues to sound the warning bell for policy makers about what he sees as unrealistic estimates.
“They’ve got sugar-plum fairies dancing in their heads about this infinite supply and how much money we’re going to make and the net for the U.S. economy,” Berman said in a July 2 phone interview.
Wells drilled before 2012 in the top U.S. shale gas areas indicate an average field decline of 37 percent a year, according to data compiled by Hughes. That includes 47 percent in the Haynesville Shale in Louisiana and 29 percent in Pennsylvania’s Marcellus Shale.
Gas prices rose this year to more than $4 per million Btu before subsiding to a current level of about $3.60. As lower-quality wells raise the cost of production and tighten supplies, gas may rise to $6.50 in 2018 and to $8 or more in 2022, with spikes into double-digit prices possible within five years, Hughes says. Powers, the author, also said gas prices may surge into the double digits in the future.
Jeremy Grantham, who co-founded global investment manager GMO LLC, is another sharing that bullish view, estimating in an April report that gas prices may triple from last year’s low in five years, to about $6 or $7.
Gas remains far from parity with oil on an energy-equivalent basis, Pickens said, which would require gas prices of about $16 per million Btu when oil is $100 a barrel.
“I’ll never see $16 natural gas in my lifetime,” Pickens, 85, who scoffs at the pessimism of skeptics, said in a July 12 interview.
ICF International, an industry consultant, estimated in a report that the U.S. and Canada have 1,500 trillion cubic feet of gas that can be developed at a cost of $5 or less per million Btu. That includes about 800 trillion cubic feet of shale gas, ICF said.
For now, low prices have flattened U.S. gas production as producers divert their resources to drilling for more profitable oil. Yet output still is “kind of hanging in there,” said David Pursell, a managing director at Tudor Pickering Holt & Co. in Houston.
The country’s gas resource “is not endless, but it’s pretty dang big,” Pursell said, and it can be counted on for decades. He said the government should stay out of the way and let the market work.
Daily U.S. gas output is forecast to be 70 billion cubic feet in 2013 and 70.4 billion cubic feet next year, compared with 69.2 billion in 2012, according to a July 9 outlook from the EIA.
The expected growth rate is stronger for crude, which is trading for more than $100 a barrel in New York. The EIA forecasts U.S. daily output will average 7.3 million barrels this year and 8.1 million barrels in 2014, from 6.5 million in 2012.
Hughes said U.S. policy priorities should include measures to reduce energy consumption in transportation, such as encouraging the building of higher-density communities that require shorter commutes.
Gas prices at less than $6 won’t generate as much production as people expect, he said.
“At those prices, gas production will decline in the U.S.,” Hughes said. Production would grow at higher prices, but at a significant cost to the economy. The problem with the hype, Hughes said, is that it predicts we’ll have both: “cheap and abundant.”
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