Guest post by David Archibald
It would be churlish to not share Ric Werne’s joy over a lower gas bill. That said, I believe his post “Cheap Natural Gas, but wait – there’s more” is misleading. Let’s see what the charts say. First of all, the natural gas price itself:
Figure 1: Energy Information Administration (EIA) Henry Hub Spot Prices
The natural gas price bottomed in April this year at just under $2.00/MMBtu and is now $3.40/MMBtu. That is an increase of 70% from the low. More is needed because the average price to give a 10% rate of return in $4.50/MCF (1 MMBtu is very close to 1 MCF) as shown in Figure 2.
Figure 2: US Shale Supply Cost Curve
Most of potential US shale gas production is uneconomic at the current price. So why are shale gas wells still being drilled? A lot of acreage is “held by production” in which a well on the lease has to be brought into production in a certain period or otherwise it goes back to the mineral lease owner. The number of rigs drilling for gas is now down to one third of what it was at the peak four years ago.
Figure 3: US Rig Count 1987 – 2012
There were about 700 drilling rigs operating in the US a decade ago. That has almost tripled with most of the rigs looking for oil. So with the number of rigs drilling for gas continuing to drop, that will eventually be reflected in natural gas production. How that works is illustrated by Figure 4.
Figure 4: Steepening Decline Curves in Natural Gas Production
Back in 2000, the wells in production had a 23% decline over the following year. Now the decline rate is 32%. The treadmill has speeded up. To get a longer term perspective, let’s go back to the gas price.
Figure 5: US Natural Gas Price 1987 – 2012
Traditionally, the US natural gas price traded in line with the No 2 Fuel Oil price in energy equivalent terms, so the gas price tracked along with the oil price. If that still held true and with a barrel of oil being equivalent to 6,000 cubic feet of gas, the current oil price of $89.92/bbl would equate to $15/MCF. As shown in Figure 5, as the oil price started rising last decade, the gas price rose along with it until the “Shale Gale” hit. The relationship between gas production, gas price and rig count is shown in the Figure 6.
Figure 6: US Natural Gas Production, Gas Price and Rig Count 1987 – 2012
Rig count and gas price are closely coupled. There is a considerable lag from drilling to production. Drilling activity started rising in 2000 but production declined to 2005. Conventional gas production has continued to decline and the rise in production over the last six years has been due to shale gas.
Figure 7: Rig Count versus Gas Price 2005 – 2012
If we plot gas price relative to rig count, there is a strong correlation. All this is telling us is that higher gas prices draw in more rigs. It is a lagging indicator, like carbon dioxide in climate. High gas prices are the seed of their own destruction.
Figure 8: Production and Gas Price 2005 – 2012
Figure 8 has some predictive ability. For gas prices to rise to the price at which US shale gas on average is economic, production has to fall to about 1,700 billion cubic feet per month from the current level of about 2,000 billion cubic feet per month.
I expect prices and production to seesaw until an equilibrium is reached. Excluding the effect of liquids content, the US shale gas industry will be characterised by profitless prosperity – the majority of players will eventually get a 10%-odd rate of return on being in the business.
eugene w landy says: “What nonesense. Oil and gas are eventually interchangeable.”
‘Eventually’ is a long time. In the shorter term, where oil is used for transport and where gas is used for electricity generation, there’s little scope for interchange.
Doug says: “… while the peak oil people continue to bluster themselves blue in the face …”
1. This article is about gas. 2. Peak Oil is not Peak Energy.
I happen to think that we are at or near peak oil, and it doesn’t feel all that bad. The oil world should be able to pump out similar amounts of oil for many years, while the user world slowly moves as necessary into other energy sources. These are still plentiful, eg. coal, gas, nuclear, geothermal and eventually solar.
Jeremy says: “There is also absolutely no shortage of Oil at current prices – supply is practically unlimited and mainly constrained by various governments”
This is where we need to be careful about the definition of Peak Oil. Since political factors will always prevent us reaching geological peak oil, it is reasonable to use actual peak oil as the definition for Peak Oil. ie, the point at which for whatever reasons global production no longer increases. There are some fairly hefty signs that we are just about there right now, but the nature of the beast is such that (a) we won’t know when it occurred until some time later, and (b) it isn’t necessarily painful.
Jeremy (again) says: “There is really nothing wrong with using coal as long as it is scrubbed clean and especially if it is cheaper …”
Now that is spot on. And again note the importance of a definition – in this context, ‘clean’ has zip all to do with CO2.
Mike Jonas says:
October 7, 2012 at 4:33 am
1a) Oil and gas are inextricably linked.
1b) This article starts out saying my article was misleading, and my article included references to oil. Until David shows up to explain himself, let’s go ahead and talk about oil wells that also produce natural gas, that’s where all the action is in the US anyway.
2) Are you saying all energy sources are inextricably linked?
As long as you commute by bicycle, I guess. I suspect cheap natural gas is about the only thing keeping the USA from falling back into a recession. Don’t bike too much – food prices are linked to transportation costs too.
GOAL: robust economy.
Economic Base: energy.
Reliable energy from all forms in a free market….While parts of the energy business will be boom-bust (as for more than a century) if we also maintain free financial markets, businesses will be able to lock in energy supplies at known prices for reasonable periods. Plentiful supplies will keep prices as low as costs allow.
Farmers will do well. Manufacturing is likely to start returning. Transportation will reflect real costs. We will prosper. But some speculators will go broke. In America, however, they will be given a second chance.
If one of the new energy production modes is actually cost effective- it will gain appropriate market share.
OR:
The government will screw up all of the above, with an “energy policy” that trumps good business and common sense.
“There is nothing in this post that shows that existing shale gas wells are un-profitable. As long as they are bringing in more than their operating costs in revenue they will be profitable and have a positive ROI.”
Anyone who has bothered to listen to the conference calls or read the 10-Ks has learned that shale gas operations are not self financing at less than $7.50 per Mcf. Yes, some wells in the core areas of the best formations can make money at very low prices but those are quite rare; the average well is a capital-destroying loser.
The thing to remember is that the accountants have a huge amount of leeway when reporting profitability. If they estimate an ultimate recovery rate (EUR) that is several times the ultimate recovery indicated by the production data they do not have to fully depreciate the costs of drilling the wells and can reduce losses (or report profits) by as much as they wish. This trick is familiar to people who bought shares in Lucent and Nortel during the tech bubble. The massaging of their depreciation costs allowed the companies to give speculators the type of earnings gains that they wanted for quite some time. On occasion the companies would produce ‘one time’ write-downs where all kinds of assets would be revalued and the game would continue. But when the sector took a hit as a whole once the Fed’s money creation slowed the companies saw their stocks go from near $100 per share to less than a dollar per share. The shale gas companies is using the same accounting strategy to fool speculators into investing in their operations. The problem is that the energy invested in producing shale gas is very high relative to the energy contained in that shale gas and no matter what happens to prices long term profitability will be out of reach for the average shale well during all but a few periods of turmoil.
Lest the sensitive among us be shocked by the discovery, realize that in an environment where government controls what gets to happen in critical areas for exploration, not supporting Climate Change research is suicide for the company. They are sensitive to pressures just like the scientists who are, perforce, required to put the idiocy in their otherwise excellent research papers.
The argument that we don’t have or can’t imagine alternatives to hydrocarbon fuels today means nothing. The majority of people couldn’t imagine steamboats, steam locomotives, hot air balloons, gliders, self propelled aircraft, autonomous drones, space flight, geostationary satellites, or any one of a plethora of other inventions. The native curiosity of man, coupled with a market which could freely accept or reject an invention is what made all of it possible. Don’t kid yourselves, DARPA, as inventive as they are, pale in comparison to what the millions of curious brains have created.
I just see a perfect head and [shoulders] bottom on figure 1.
From an European perspective I can not understand the pricing of gas in the US-without thinking of how perfect it suited with the economic crisis.
If it will last why are not cars converted to natural gas?
Russia is trying to sell gas in offers You cant refuse, will that change with cheep LNG gas?
Will Putin has to leave because of low naturalgasprices? Reagan together with Saudies sunk the Sovjet system with prices of oil at 10 USD/bl.
Shale gas, and shale oil, suffer from the Red Queen Principle. (see http://www.theoildrum.com/node/9506 and http://www.theoildrum.com/story/2006/11/8/6636/36918) You have to drill more at an accelerated rate just to keep production flat. This is because, unlike a conventional gas field, shale gas fields drop precipitously in production, 80% drop in 6 to 8 years. This will mean that shale gas costs rise faster than the spot price, making them uneconomical. It also means that eventually there will be a limit reached when no more wells can be sunk, and output will drop.
Actually the peak oil gurus used to claim peak gas would hit harder and faster than oil. You don’t hear that one much any more, but it is instructive and entertaining to go back a few years and revisit their predictions.
oppti says:
October 7, 2012 at 6:18 am
I don’t fully understand why there are so few CNG vehicles in the US. The State of New Hampshire’s Dept. of Transportation had one. I briefly looked at the market before buying a new car myself, I might have pursued it more if my job were in town and if I had any idea how to get it refueled. (I assume the state has a refueling spot.)
There’s plenty of news coverage when someone starts converting waste fry oil into a diesel substitute or do a LPG conversion. I suspect it’s largely the size of the CNG tanks that’s the biggest block, but the news media’s lack of coverage about cheap natural gas may be a lot of it.
Also, keep in mind we have relatively inexpensive gasoline at less than $1/liter. As much as we whine about that price, it’s low enough to discourage spending money on a CNG conversion or dealing with refueling.
As for Russia, I’m not keeping up with them, but I suspect they won’t be as quick to threaten to cut off someone’s gas supply in the future. It’s in their interest to keep Europeans from joining the fracking revolution.
Vangel Vesovski says:
October 7, 2012 at 5:52 am
“The thing to remember is that the accountants have a huge amount of leeway when reporting profitability.”
This is one of the more idiotic things I have read on WUWT. Companies don’t make money on what accountants say. They make money on what they do and how well they do it. They won’t be drilling multi-million dollar wells if it isn’t profitable. What a bunch of garbage you spout.
Firstly, Ric, thank you for giving me an opening to pen a bit more on this subject (I would not otherwise take the opportunity to distract our audience here with more on this subject).
Secondly, I know (about the 1-yr-old-post); I meant RECENTLY (a post a year old does NOT cover the events occurring for the time period of the year PRIOR to today’s date SUCH AS the presentation given by Prof. George Miley and whose video link I posted above.)
Thirdly, going forward, Ric, it would be a safe assumption on your part to assume that I am aware of what has been published here on WUWT (and CA as well for that matter; other websites, not so much. Who has time to engage on more than one site when actively busy with other affairs?)
4th point. The ‘young’ physicists need to get out more and actually read/review what has and is taking place before they ‘argue’ against clear, demonstrated effects which obviously run counter to their arguments. I am no theoretical physicist, but I *can* perform a proper experiment to determine anomalous energy/heat performance on any given ‘black box’ device whereas the majority of armchair physicists seemingly cannot (nor do they seem to understand what is attempted to be conveyed in test results via written reports when others perform such experiments; I will leave it that.)
Maybe the ‘young physicists’ are unawares of the progress in this are over the last 20 years? Maybe a quick review is called for – “Twenty-Year History of Lattice-Enabled Nuclear Reactions (LENR) – Hiding in Plain Sight”
5th point. Progress with the ECAT(s) is continuing, but since few ever go to ‘primary’ source on this (to the principles, the individuals involved) but would rather, it seems, depend on continued ‘rumor and innuendo’ it is no wonder persistent questions and doubts arise (the personal dealings between businesses bears no responsibility to make their moves or actions public!) Briefly stated, safety certification has been pursued (and achieved!) for the commercial ‘version’ of the ECAT and customer-involved testing has been performed on the 1-MW plant.
Incidentally, I made reference to a link above where details on ECAT progress this year may be found, but I get the sense that ppl are looking for a powerpoint ‘bulleted’ presentation on this subject (or perhaps simply a ‘walks on water’ announcement of some kind?)
When posting here, especially on this subject, I suppose a writer/poster must remember that the reading audience is not always as perceiving or able to recognize important details when surrounded by tons of technical minutia (such when buried in technical reports or existing 10 minutes into a video even!) particularly when more ‘entertaining’ material/posts exist or one only has 5 minutes to spend on the subject before moving on to the next ‘hot’ story …
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As to how long cheap gas (or oil) can sutain us; we really only have to make it to the “Fusion” age.
For decades they have been telling us that humans can get all the energy we need out of just the top 1/16th of an inch of water in San Francisco Bay, via Hydrogen fusion.
So how is it these days with that other boondoggle; the NIF, the National Ignition Facility, with its supernova laser delivering hammer blows to secret fusion concoctions, to release more energy than was in the laser hammer blow; well that’s what they mean by “ignition”, the fuel bang has to be bigger in energy than the sparkplug delivered.
Well actually it’s slightly more complicated than that. You see you have to get those hydrogenous atoms out of the top 1/16th of an inch, of SF Bay, and truck them over to Livermore, to hammer on with the Big Kahuna, so you have to figure in the cost and energy cost (at today’s gasoline prices) to get the fuel to the sacrificial altar in Livermore.
Now I have been to Shiprock, New Mexico, where they have a big coal fired electricity plant, and I have seen the non stop ” death train ” carrying coals to the shiprock plant to get converted into electrons, and aerosols, and black soot, and asthma; not to mention carboniferous global warming.
So at any energy facility, you have transportation bringing in the fuel to the plant, and maybe taking the electricity off to market, and of course getting rid of all the gunk the fuel turns into.
So has anybody seen the water trucks bringing in the SF Bay top water into the NIF to smash?
According to PHYSICS TODAY and David Kramer, they have overshot their “ignition” time limit by two years, and stll no sign of ignition, so they are shifting some of the hammer blows over to making bombs or other projects instead of hitting water with a laser hammer.
Part of the hold up would seem to be in the accounting department, figuring out how much energy it actually takes to get the fuel to the hammer to splat. Kramer’s article has a nice photograph which shows part of the problem; they don’t really know just what is the secret fuel that is in those trucks; and it clearly is not water from the top 1/16th inch of SFBay; and the REAL FUEL takes a hell of a lot more energy to get, and get it over to Livermore to smash, than they ever dreamed of, so I guess we can expect ignition to not happen in our lifetime.
You see the REAL FUEL is NOT Hydrogen, or Deuterium, or Tritium out of th SF Bay mud puddle; instead it is a 2mm diameter polished ball, that needs to be made about as perfectly spherical, as the optical figure of the Hubble Space telescope, out of exotic unmentionable Unobtainium layered materials, and somehow built around the Cryogenically Captivated HDT soup. Well it would be more like ice, even South Polar CO2 ice, than soup.
Now supposedly the Big Kahuna now hammers at 2 megajoules per splat; but who the hell knows how much more energy it takes to make one of those super ball bearing fuel cannisters; that is what takes all the energy to get and truck over to Livermore.
Well they probably machine them one at a time themselves, right there at NIF. So the hydrogenous ball bearings are what they really have to impove on, if they are ever going to get their free fusion energy gizmo making saleable electricity. Well Obama said he would drive the cost of electricity “sky high”, and NIF has that goal figured out pretty well.
Imagine putting down on your job application, that you had experience in bowling alleys, setting up the pins; and you wanted something more exciting and challenging, like replacing the ball bearing fuel pellet in the NIF BK jack hammer splatterER. Maybe you can get close to setting up about 1000 per 8 hour day; about as many as a world champion sheep shearer can shear in a day.
I seem to recall at a laser physics symposium in Texas some where, keynote speaker Charles H Townes told the audience, that if they thought laser implosion was a way to get energy, they were all crazier than a bunch of Texas drunks fighting over a barmaid. Well maybe I ad libbed on his wording; but what he said was consistent with what I interpreted him to possibly have been able to use instead.
And if anybody knows what the heck is special about the top 1/16th inch of water in San Francisco Bay as far as energy is concerned, please enlighten the rest of us.
Well fergit it; figgered it myself; the top 1/16th inch of SF bay is OYL !!
I think a lot of folks are missing the top line in Figure 4. This line is telling in that, as more wells are being brought online, the previous year’s wells drop production. The total uptick in overall production is not that impressive. Knowing a bit about the availability and usability of the US coal deposits, I won’t be afraid to point out that we made an improper decision to bet so heavily on natural gas. Rent seeking industries normally fail. The natural gas industry has worked very hard towards advancing the CAGW agenda at the expense of the coal industry.
Who is John Galt?… Still an appropriate question.
Give us some of these gas prices in the UK please.
Steve R says:
October 6, 2012 at 5:59 pm
“An ideal solution would be … using methane plus coal to make a hydrocarbon with the approximate mol wt of gasoline.”
It’s the Fischer-Tropsch process.The Germans did this when fuels became scarce during WWII. The South Africans may be still doing it.
http://en.wikipedia.org/wiki/Fischer%E2%80%93Tropsch_process
Ian W: Eventually, the price drops far enough and supplies seem secure enough more people purchase the gas or build gas fired generating facilities. This takes time. Therefore, initially there is a slight glut and prices fall, then the elastic demand bounces back and prices rise. Then eventually the base load power generation starts using the gas and the price starts to stabilize.
Or the gas prices continue to fluctuate because of the negative feedbacks that you identify: increased use causes increased prices which cause both decreased use and increased production which causes transient surpluses and low prices, which then causes increased use and increased prices, etc. The idea of “stable prices” is backed by a few nice theories but not much empirical evidence. Almost all prices for almost everything have fluctuated. Right now, it looks like permanent low prices are out of the picture.
Matt C : Knowing a bit about the availability and usability of the US coal deposits, I won’t be afraid to point out that we made an improper decision to bet so heavily on natural gas. Maybe. At the present time all we have done is reduce coal usage and increase gas consumption. As the gas prices rose, some of the power plants that converted from coal to gas have converted back from gas to coal. As is not unusual, fluctuating prices have produced fluctuating allocations.
Meanwhile, the cost of producing electricity from solar power continues to decline due to investments in R&D in materials and in mass production. Already, for some uses in some places (irrigation in the Imperial Valley), the 30 year cost of electricity from PV panels is less than the estimated (with variations and uncertainties as described in this article) 30 year cost of electricity from gas. With continued investments in both energy sources, the prices of both 30 years from now will be different from now. I expect that for daytime uses like powering shopping malls, home heating and air conditioning, and schools, the cost advantage of gas over solar will continue to decline in more and more places. It takes a great leap of faith to assert that either gas or solar is destined to lose the competitive races.
_Jim, just finished listening to a few hours on those updates and thanks for a heads up on lenr advancements. Seem much further than I was aware a year ago and many companies are heading on forward, M.I.T. now involved. I just have a feeling that underneath some of the hurrah they still seem to have a bit of problem with the consistency and lifetime but that might just be older news. Maybe not, but hope this can continue into a reality, but the story on the cover-up by the governments is really interesting now that it is all starting to surface. Sure shines a light on the corruption in science funding tax monies.
The one thing I want to see is some tests that shows these can run for at least a year untouched except adding fuel (h2 or d2), instead of just a month or two. I mean, do the current models require bi-monthly maintenance as if the ‘catalyst’ core degrades over time? If this is going to develop into a “replace your $250 monthly winter gas bill with a $700 replacement of a patented nickel-deuterium catalyst bed every few months but it’s green and burns $50/L processed sea water” sorry, not interested! We have plenty of gas here.
Hope this is not just another scam but it does make one want to see if you can just build one in the garage!
When considering natural, renewable energy, coming primarily from the sun, as the only allowable energy source for the future, after combustible carbon is eventually exhausted, I think it is necessary to consider the limitations imposed by depending on this energy alone. Each person will require a fixed amount of the Earth’s surface area to collect all the energy needed to live. As government subsidized wind and solar power have only been able to provide about one percent of the energy we now use, I suspect that the maximum population supportable by natural energy would be much less than our current population.
If no form of nuclear energy proves practical, we may be living in a last golden age of abundant energy. Some are saying that the current recession was triggered by rising (500%) fuel costs.
[My error. Deleted by mistake. Please re-post, and I will be more careful. — mod.]
Matthew R Marler: Maybe. At the present time all we have done is reduce coal usage and increase gas consumption. As the gas prices rose, some of the power plants that converted from coal to gas have converted back from gas to coal
Not exactly. No “conversion” was necessary. The power producers did not get rid of their coal assets (nor did they convert them.) They simply moved them to be a non-preferred production source asset. The coal boilers were still kept at pressure during periods of near peak loading, ready to produce power should the demand be there. When the variable cost curve flipped on them when comparing the high gas prices relative to coal and process efficiencies, they moved back to coal, which had again become the cheaper variable cost of power. Then the NG turbines became the peak producers instead of the coal assets.
Meanwhile, the cost of producing electricity from solar power continues to decline due to investments in R&D in materials and in mass production. Already, for some uses in some places (irrigation in the Imperial Valley), the 30 year cost of electricity from PV panels is less than the estimated (with variations and uncertainties as described in this article) 30 year cost of electricity from gas.
On an apples to apples basis, you will never find this to be true. Remove all government subsidies from both sides, eliminate net metering, eliminate SRECS, and then start charging homeowners for backup power the same way you do industrial sites that produce their own power and you will find that there is 0 advantage for solar (and indeed you will find that it is not possible due to the capital/capital replacement costs alone.) The only reason it works out for anyone now is the system has been gamed to make it so by not forcing the solar cell owners to bear the full cost of their power choice.
Reposted due to popular request.
Abundant (near)free energy soon available.
Schematics of Rossi’s wonderful ecat leaked to public.
http://thetimchannel.wordpress.com/2012/06/28/e-cat-schematics-leaked-to-public/
Steve R says:
October 6, 2012 at 10:05 pm
“highflight56433 on October 6, 2012 at 8:27 pm
The oil/ng industry lobbies for no coal, no nuclear, no anything esle to drive up the demand for petroleum based products so the price of their products increase to drive up their revenues to stock holders.”
Not sure I understand what you are saying…do you mean they do not lobby? Or they lobby against coal?
The oil industry lobbies heavily against coal via the green movement. The objective is to close or convert coal plants to methane. If those plants close, remaining power production becomes more valuable, whether using coal or methane, or whatever. The object is to reduce production of power against demand, thus to raise the cost, create demand on methane and oil.
WSBriggs says
”The argument that we don’t have or can’t imagine alternatives to hydrocarbon fuels today means nothing. The majority of people couldn’t imagine steamboats, steam locomotives, hot air balloons … or any one of a plethora of other inventions.
The native curiosity of man, coupled with a market which could freely accept or reject an invention is what made all of it possible. Don’t kid yourselves, DARPA, as inventive as they are, pale in comparison to what the millions of curious brains have created”
The industrial revolution, and the modern world have been powered by fossil fuels (mainly until recently, coal). This has brought huge benefits to humankind, and the natural world.
I agree with WSBriggs on the inventiveness of millions of free human beings, allowed and encouraged and facilitated to explore and innovate. But, no matter how inventive, they aren’t going to create new viable, large and economic sources of energy out of thin air. We’re all going to be carbon powered for some decades to come. That’s the reality of world.
highflight56433 says:
October 7, 2012 at 6:57 pm
“The oil industry lobbies heavily against coal via the green movement.”
Latest example, Matt Damon attacking fracking via his film The Promised Land, financed by the Sheikhs. (In that case not trying to kill coal but to kill shale gas; but it could as well be against nuclear or against solar)