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.
Discover more from Watts Up With That?
Subscribe to get the latest posts sent to your email.
acementhead: Thanks. The drawing says it all!
I did not intend to open a can of worms (so to speak) on the LENR. It’s just that this is a science blog and I am always surprised by people’s posts. I suppose if a movement like AGW can keep going on fantasy data, I should not be surprised by what appears to wishful thinking on some topics. As I have pointed out on my own blog on science, if the government spent billions on wind turbines and solar panels that still fail to deliver as promised after 30 plus years, I should not be surprised by people sending for the “stick it to the power company–build your own turbine/panel and make them pay you” offers I get in emails. Alchemy never really died. Probably never will, huh?
Thanks and again, I apologize for temporarily running off track here. Thanks for the opportunity to expand my knowledge in this area and for the websites to check out, including this blog from a year ago. Now back to discussing gas and oil!
This article sounds about right. US production of oil plunged in the 1990s not because of supply problems, but because the price of crude fell below the levels in which the operators could reap a decent profit. NG is no different. Capital poured into the new finds while NG prices remained elevated. Once the extra production caused a steady drop in prices the incentive to keep supplies up fell. Demand would have to see a corresponding increase with supply in order to keep NG net profits up. I think the term is high volume low margins.
Yes, you can convert Methane and Coal to liquid fuels. South Africa is still doing it. CVR Energy is converting coke to fertilizer as we speak in Kansas (somewhat related, though not F-T). In fact I know guys who were working with the Air Force to build an F-T plant to convert coal to jet fuel. The Greens shut it down because they don’t want an outlet for coal. It leads to Global Warm.., I mean, Climate Change. Same reason Keystone was shut down. Perhaps some folks can build an F-T plant in Canada to take Bakken associated gas and then export the fuels?
Steve R on October 6th:
< 2 C8H18
I.e. using methane plus coal to make a hydrocarbon with the approximate mol wt of gasoline. We have abundant coal AND now methane, so how about it all you chemE’s?>>
Along those lines Shell has a colossal plant in Quatar which produces diesel from Natural Gas, sold here in the UK as “V-max”. I think I read that they are planning a similar project in the US.
Also the production of synthetic fuel from coal is well-established, dating back close to a century. South Africa has been doing it since the apartheid embargoes and China is investing heavily.
“””””…..Matthew R Marler says:
October 7, 2012 at 10:03 am
…………………………………………….
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…….”””””
Well the problem with “Solar” whether it be “wind” or “PV” is that we know the sun only supplies about 1kW / m^2 or 100 W / sq ft at the surface I believe at about AM 1.5, and that is peak at normal to the sun earth vector, so geometry factors have then to be applied.
So a whole boat load of land area has to be committed to getting more than very localized small supplies.
It seems that somehow, the purveyors of at least the PV technologies, seem to think they are entitled to a property tax land improvement special dispensation that somehow other land users are not granted. Consequently there is no incentive to be efficient in PV solar usage. Most of the available (in volume) solar panels, are sufficiently inefficient, that nobody in their right mind, would purchase them to install in whatever valuable solar energy collection space they have at their disposeal.
So the manufacturers / suppliers of these panels came up with the cute trick of conning home owners and others into letting the PV purveyor use their valuable solar collection space rent free, and then sell whatever electricity they can generate to the home owner, at a discount from what the electric utility charges. The company then of course writes off the inflated cost of their solar panels as a business expense; well they likely capitalize it at some acceperated depreciation rate. So the taxpayers, are subsidizing the purveyor of these unsalable inefficient solar panels, and the home owner is letting his space be used rent free. Such a deal.
I would rent my solar collection space, on the basis of the 1KW / m^2 plus my local geometry factor, to the company that owns these solar panels; and then THEY can own the electricity they make, and sell the lot of it to the electric utility at an arms length transaction rate they can agree on, and don’t run it through my meter, just tap into my connecting line to the utility.
That way, the PV vendor can get all the benefit of his panels, and just pay me a monthly rent for my solar energy that he can collect, and leave me out of his efficiency factor..
Bottom line is the PV panels need to be able to fully pay the cost of duplicating themselves, from the earth’s raw materials in situ. If they can’t, they aren’t an energy source. And yes, wind is worse yet.
Finally a post with an author who Other will pay attention to!
I’ve written to the GWPF about the Euro-Brit error in thinking that shale gas will bring in a new era of cheap gas. It seems that much of the world, even the global warming skeptic, technical world confuses price and cost in a supply and demand environment. Your principal point, that much drilling has been mineral lease continuation driven is correct, but there are two other points you should address in a followup. I’m in the business in Canada and I know how important they are to the current gas glut and low prices.
The first is that most companies, including the large ones like Devon and Chesapeake, have large debts that need to be serviced, and large cashflow requirements to maintain other aspects of the company, which include shareholder perceptions. Regardless of preferred economics, flowing gaswells represent past expenditures – water under the bridge, as they say. The debt load MUST be serviced, however, so whatever revenues that come from existing operations have a go-forward economic value judged not on past investment but on price vs cost-to-produce. Gas wells are cheap once they are on-stream. The cost-sales price problem resurfaces only when the wells need to be stimulated, cleaned out, have new compressors or additions to field facilities to handle greater water volumes or freezing concerns, to name but a few. At that point the wells will be shut-in. But nobody really wants to shut in a well. The risk of the well not coming back at the pre-shut-in rate, or not coming back at all, is real (and far, far worse for low-rate oil wells, especially lower gravity oil wells). Wells “load up” with water, condensate or oil while shut-in, and the producing flow redirects to other pressure sinks, or the productive channels plug up, not to clean up again.
There are a lot of metaphorical frictions involved in a flowing gaswell no longer at virgin conditions; static friction is a real concern once the initial, higher pressure differentials or gas-fluid ratios are gone. So the desire to pay debt with ongoing profitable operations and the fear of shutdown any operation both lead the individual to keep producing. The hope is that you can survive until the upturn again, like the incoming tide, floats everyone’s boats.
The second consideration you should mention is that much of gas production is the collateral of producing condensates or oil. Your economic model is run on the liquids; the gas is something you need to deal with, not what you are primarily after. You would prefer to make money on the gas also, of course, but you could even suffer a loss on the gas and your liquids-dominant project would still be worthwhile. This situation is standard for wells that produce sulphur: in my career I’ve seen the long railcars stained with sulphur yellow heading to Vancouver for the India-China fertilizer maket, making people local philantropists, and I’ve seen the “houses” of solid sulphur rising above the valley- lows where the unwanted stuff was being piled away from questioning eyes. There was even a time I recall when you PAID to have solid sulphur to be taken off your hands. “Associated gas”, as it is called, is like the sulphur: it will be produced as long as the principal component can carry the project costs by itself.
Shale gas, and horizontal drilling for “shale” oil are relatively minor technical advances. The proportion of gas (and oil) recovery is low, and the cost, high. Nobody is initiatiing either in the current price environment outside the liquids and debt and cashflow issues. But these issues exist and will drive gas into the supply stream for some time. Shareholders who want dividends don’t care if the resource is being squandered; they have their own, short-term needs. Companies who need to maintain their other, non-gas production value can’t care about squandering their gas resources if the alternative is to watch their liquids-production operations decline: any decline in the oil and gas business is a public acknowlegement that your best days are past and the time for your company to be merged/sold/written off, its leaders sent to live beyond the pale.
How does this end? Like a drunken man who staggers for a long time until he falls down, I suppose. That would be until bankruptcy forces mergers and shutting-in of production by a new management determined to “manage” the resource in a “prudent” manner (prudency in business occurs after a crisis, not in anticipation of one). The drunk might successfully stagger, however until until a friend props him up – the equivalent of the economy coming back and industrial need rises about 10%.
The glut isn’t huge on a day-to-day basis, but the glut is cumulative, what with gas storage. But some elements outside of lease continuation as I have outlined, will keep gas production in an oversupply situation even when all producers recognize the non-cumulative reward problem of producing undercost. What is definite in a world of uncertainty, however, is that given the ability, gas prices will rise to more than equal the cost-to-customer because energy in must be less than energy out for all human endeavours. And since shale-gas style of gas production is fundamentally more expensive than the conventional style of prior years, the cost to consumers will rise, and to a level in excess of our memory.
Luke: thank you for the clarification about “conversion”. To me, the main point was the switching back and forth depending on which was cheaper.
about this: you will never find this to be true.
I think your word “never” is unjustifiable.
optti:
Wyoming government is actively pursuing purchasing NG vehicles. So are several other states. It makes sense in Wyoming with all the NG drilling. Yes, we drill for oil and refine here, but the NG is still cheaper than oil. As for price-guessing your way into the correct fuel for the future, it’s not really possible. You pick a fuel and go with it.
RE: UK dissenter: (October 8, 2012 at 6:56 am)
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.
The reality of the world is that there is about a million times more energy (and perhaps a million times more risk) in a nuclear bond than in a carbon chemical bond. I believe that the Energy from Thorium advocates have made a good case for saying that the current solid-fueled nuclear reactor technology is sub-optimal, inefficient, and steam-explosion prone. Perhaps inventiveness will provide a safer, much more efficient, liquid-fueled thorium-breeder or uranium-burner reactor technology that consumes most of the long-lived transuranic, fission-prone, waste products that current solid-fueled reactors leave behind in spent fuel rods.
http://wattsupwiththat.com/2012/10/06/no-cornucopia-of-gas/#comment-1103315
You hav to remember that the British have had marxist idology all of the 1900’s, starting with Churchhill, a relative to our own FDR. That’s why the CIA sposored the British Music invasion in the 60’s. But England having class, didn’t do an Obama, but our women alone did…Just saying…
P. Solar says:
October 7, 2012 at 3:34 am
Thankyou for your suggestions.
Dave Worley says:
October 6, 2012 at 5:25 pm
Natural gas as it is makes a half-decent vehicle fuel. Using it as it is (compressed to 3,600 psi) uses more of the contained energy than turning it into grid power and electric cars. Converting it into a liquid fuel uses 30% to 40% of the energy you started with. The Qatari synfuels project was conceived at a time when the oil price was much lower. Since then, the international oil price has run up to the oil price in energy content terms. So, if the Qataris had built an LNG plant instead of a synfuels plant, that would be selling 30% more product – all at the oil price. That plant is a big, wasteful mistake. Coal for synfuels, almost all grid power should be nuclear. While we are at it, the sooner there are nuclear plants supplying steam and hydrogen to the Canadian tar sands industry, the better. That would save an amount of natural gas that would be equivalent in energy content terms equivalent to 20% of the heavy oil production – effectively increasing that production by 20%.
There is much to be done, to answer Lenin’s question.
Ric Werme – re your 1a) Oil and gas are linked to some extent in production but there’s little link in usage. 1b) see 1a. 2) Peak Oil looks likely to be a long plateau, not an off-cliff fall, so there should be plenty of time to adapt.
David A; converting gas to liquid fuels does have an energy penalty. However you then end up with fuels which can be integrated directly into the existing infrastructure. Also the process can produce kerosene for jets where compressed gas is a non-starter.
Wrt to the Qatari project, exporting the gas as LNG would have incurred significant energy and capital costs too and the writing is on the wall for oil-linked gas prices. From a recent interview with Shell (who financed and built the GTL plant), it cost $19 bn but is generating cash flows – after running costs – of around $8 bn per year.
Doug Proctor’s explanation of the drivers of low gas prices has a strong historical precedent. Daniel Yergin’s excellent book “The Prize” recounts similar production patterns in the early deades of the oil industry.
Mike Jonas says:
October 9, 2012 at 12:38 am
2) Peak Oil looks likely to be a long plateau, not an off-cliff fall, so there should be plenty of time to adapt.
I assume that’s the future peak oil “event” and not the current claim nor the past claims.
My suspicion is that Peak Oil comes after new and cheaper sources of energy are available. Thorium reactors should have been developed decades ago (I see Chinese work on them as a good thing in a global sense), the hot E-Cat (assuming it works) has the potential to make a world a very different place.
Spector said:
”The reality of the world is that there is about a million times more energy … in a nuclear bond than in a carbon chemical bond. I believe that the Energy from Thorium advocates have made a good case for saying that the current solid-fueled nuclear reactor technology is sub-optimal, inefficient, and steam-explosion prone”
I agree; the energy density of fission reactors is orders of magnitude greater than coal or gas. And nuclear power is potentially a source of ‘clean energy’ in every sense. The problem is that the first time nuclear fission came to public notice it was used in bombs at Hiroshima and Nagasaki. I think it had to be, it shortened the Pacific war and saved, possibly, millions of lives. But, nuclear power has had to live with what might described as a PR nightmare legacy ever since. It’s not warranted but it hangs over any debate, and is used mischievously and, unfortunately, effectively by greens and environmentalists, of all shades (although not by James Lovelock).
I hope you’re right about thorium reactors. Their main advantage seems to be Thorium
that they don’t involve uranium which has been given such a bad name. It will take some years-decades to come on stream, meanwhile we should stick to good-old uranium.
Victor Barney said:
“You have to remember that the British have had Marxist ideology all of the 1900′s, starting with Churchill, a relative to our own FDR.”
I’ll just reply to the first part of your comments. I don’t really understand the last part.
It’s true that immediately after WWII the Conservative Party, lead by Churchill, lost the 1945 election to Labour, which came in on a landslide. Various industries were nationalised, social insurance was introduced as was the national health service (NHS). I guess this could all look like Marxism, but it wasn’t, and many in the Labour Party were stalwartly anti-communist. Having said that communists in the trade unions were very active and powerful, and the New Left piggybacked on the cultural social and cultural changes from the 1960s onwards. This wasn’t planned. It just happened.
As for Churchill being a Marxist. He hated communism, in all its awful totalitarian forms. He, and the Conservative governments, which got back in 19551, went along with a corporatist semi-planned economy through the 1950s and 60s. This was partly because planning had seemed to work during the war. As for Churchill being a relative of FDR, that’s demonstrably not true Churchill
“Their main advantage seems to be Thorium that they don’t involve uranium which has been given such a bad name.”
UK dissenter, about uranium. Just remember that thorium when it absorbs the neutron it does then decay slowly to Uranium233 and it is that which splits for the majority of the energy. So any time you see thorium, think uranium. It’s just that the U233 doesn’t ever accumulate for it is always kept at the same low level within the thorium reactors core, as the U233 level drops, more thorium is added never needing to shutdown for refueling. So “involves uranium”, they sure do. Watch some of the videos linked above for a real understanding.
David Archibald says:
October 8, 2012 at 7:42 pm
While we are at it, the sooner there are nuclear plants supplying steam and hydrogen to the Canadian tar sands industry, the better. That would save an amount of natural gas that would be equivalent in energy content terms equivalent to 20% of the heavy oil production – effectively increasing that production by 20%.
I agree and have argued exactly that, but opponents counter with the current glut and depressed gas prices. Nuclear reactors can provide prodigious amounts of heat, especially when not required to provide it at turbine steam quality. We don’t need to build a nuclear powered car… making oil with nuclear power is the next best thing. GK
Wayne, thanks for the correction. I hadn’t looked into the details of thorium-based power and hadn’t realised that uranium, at low dilute levels was involved. Thanks again.
Can’t make conclusions on pricing trends as supplies of Oil and NG are are controlled. There has been huge differences
in the estimates of available NG in shale gas, none of which should be trusted. There will be a huge upswing in LNG exports from US and Brazil beginning in 2014-2016 as Europe and Japan transitions to gas turbine electrical generation and the rest of the world transitions to CNG automobiles.
RE: UK dissenter: (October 9, 2012 at 8:34 am)
“I hope you’re right about thorium reactors. Their main advantage seems to be Thorium that they don’t involve uranium which has been given such a bad name. It will take some years-decades to come on stream, meanwhile we should stick to good-old uranium.”
Dr. David LeBlanc’s applause line was “Come for the thorium — Stay for the reactor!” He points out that the real advantage is the liquid fueled, molten salt reactor technology.
The primary reason for using the more abundant thorium would be a lack of uranium. The molten salt reactor technology is so much more efficient than solid rod fueled reactors that Dr. LeBlanc estimates that a uranium price increase to $500 per kg would only impact the price of electricity produced by 0.2 cents per kw-hr. He says that such a price increase would greatly increase the amount of uranium available to mine. A single fluid, uranium burner reactor would also be much simpler to build than the proposed dual fluid thorium breeder reactor. An experimental uranium burner reactor has already been successfully constructed and tested at Oak Ridge National Laboratories around 1970.
The signature feature of liquid fueled reactors is that they can burn almost all the dangerous long-lived uranium and transuranic waste, leaving behind only the short-lived fission products. On the other hand, Solid fuel rods must be removed after only a small fraction of the uranium is burned due to distortion caused by the accumulation of waste products.
Dr. LeBlanc also points out that molten salt; uranium burner reactors should be much more effective for providing the high-pressure steam needed to recover oil from the tar sands. This application may allow this more efficient technology to develop in a remote region without impacting current installations and alternative technical developments.