Could this be true?

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alwayssaturday
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Could this be true?

 I was discussing Peak Oil with a neighbor and subsequently he sent me this report.  I don't know the pedigree of Stratfor and was hoping that someone would know if their work is credible.  Thanks,  Ron Epner

 


Special Report: Natural Gas and the Myth of Declining U.S. Reserves - Part 1

May 14, 2009 | 1107 GMT
Summary

With the application of new production techniques, the United States is looking at a significant increase in extractable natural gas reserves. This runs counter to the conventional wisdom of recent years, which held that the United States was finished as a major producer of natural gas.

Editor’s Note: This is the first of a two-part series on U.S. natural gas reserves and their effect on energy policy.

Analysis

In 2006, natural gas production in the United States appeared to be in permanent decline. Domestic production had flattened out below the 2002 peak of 693 billion cubic meters, after having briefly risen above a plateau that began in 1997. Continuing decline seemed inevitable, while there was every indication that consumption would remain in the range of 650 billion cubic meters per year, where it had registered since 2000, if not rise higher.

New field discoveries, and new reservoir discoveries in old fields, dropped off dramatically after the natural gas industry took a hit from the recession in 2001. Most important, the outlook for natural gas reserves looked bleak — proven reserves had peaked as far back as 1967 at 8.29 trillion cubic meters, and although reserve estimates climbed throughout the early 2000s, they never reached higher than 4.6 trillion cubic meters.

In other words, the big picture seemed to show a dwindling American energy source that would have to be replaced by imports from Canada, Mexico and overseas (especially in liquefied form) and supplemented by other domestic energy sources.

But in 2006 the picture changed. A combination of high prices and cheap credit provided ample incentive to increase production. U.S. natural gas wellhead prices rose by 274 percent from 2002 to 2008. At the same time, a freewheeling finance sector made it possible to upgrade equipment and facilities and undertake new exploration and drilling projects. Natural gas production expanded by 4 percent in 2007 compared to 2006 and by 6 percent again in 2008, reaching a new record of 736.7 billion cubic meters. As a result, imports in 2008 fell to their lowest level since 1997, and imports of liquefied natural gas (LNG) fell by 54 percent from the previous year. New field discoveries ticked up in 2005 and 2007, and reserves were upgraded by 12.6 percent to 6.73 trillion cubic meters.

But coinciding with these shifts in the price and the financial environment was a combination of new technology and new applications of existing technology that made production from unconventional sources — most notably shale formations — logistically possible and economically feasible for the first time.

New Production Techniques

Conventional natural gas reservoirs are formed when natural gas migrates from “source rocks” upward until it is blocked by an impermeable substance such as a layer of salt or limestone, which traps it and forms the reservoir. In traditional production, the well is drilled through this cap to access the underlying hydrocarbon. But while a conventional reservoir can be extensive, it is only a small and isolated accumulation compared to the greater source rocks beneath. These sources are dense deposits of rock rich in organic matter, such as shale, that have relatively small pores and narrow cracks that restrict gas flows, essentially storing gas and not allowing it to rise. Unconventional natural gas sources include tight sands (gas stored in deposits of sandstone or limestone), coal-bed methane (traditional coal seams) and shale (a fine sedimentary rock made from sea mud millions of years old).

Natural gas producers have long sought to tap these lower layers of source rocks, but early attempts at producing natural gas from unconventional reservoirs were frustrated by the density of the formation and the low ratio of natural gas gained to the volume of rock that had to be worked. Coal seams have been tapped since 1989, but gas reserves from this source have leveled off and production has fallen. Tight sands and shales are the most expensive sources from which to extract natural gas, and the energy price environment of 2006-2008 made possible the application of key technologies that rendered shale gas accessible for the first time.

Two major developments made it possible to extract from shale formations. First came hydraulic fracturing, or “fracing” (pronounced fracking), which originally was developed in the 1980s. The chief problem with drilling down into layers of source rock is that its density makes it difficult to extract any natural gas. The solution is to pump “slick water” (water mixed with sand or another granular material) at a high pressure down into the well, forcing the source formation to fracture. The sand serves as a “proppant,” propping open the cracks after the water is withdrawn and preventing them from closing back up, thus easing the pressure within the formation and allowing natural gas stored within to flow naturally into the well. This technique has led to higher output, roughly doubling the amount of gas that can be extracted per well. When natural gas prices rose to $6-8 per 1,000 cubic feet (28.3 cubic meters) in 2005-2008, companies became able to employ fracturing treatments on a scale large enough to make it commercially viable.

Second came horizontal drilling, a technique pioneered in the 1990s. Instead of sending a well straight down into a traditional reservoir, developers would drill the well down into the source rock and then turn it horizontally and drill at an angle so as to extend the well along the elongated layer of source rock. A particular horizontal well could extend sideways for up to a mile, all the while expanding the area of contact with the source (creating wells that are about three times more productive than their vertical counterparts).

When horizontal drilling was combined with fracturing in the early 2000s, massive new volumes (sometimes up to 35 percent of a formation, depending on geological particulars and other factors) were suddenly available for extraction from shale formations that had been declared depleted decades prior or which could never have been tapped in the first place. All that was needed was the energy price spike in 2006-2008 to make widespread use of these techniques economically feasible. These techniques were first applied at the Barnett Shale in north Texas, which had long been considered exhausted but was revitalized with surprising success. Then they were brought to bear on the gigantic Marcellus Shale that underlies the Appalachian Mountains. Other formations with major reserves include Fayetteville, mostly in Arkansas; Haynesville, Louisiana, which is only gradually being developed but is claimed to be the fourth-largest natural gas field in the world; and Woodford Shale, mainly in Oklahoma.

Other technical advances have included the use of GPS and seismic imaging, which enhance the ability to make measurements of subterranean formations from the surface, better position wells, and more accurately aim the fracturing treatment. Producers are no longer limited to conventional traps but can range along an entire shale formation — which can cover vast distances, as in the case of the Marcellus Shale that runs from eastern Mississippi to eastern New York.

As producers made breakthroughs in production from shales and other source formations, they steered away from less feasible alternative gas sources, such as gas hydrates. Gas hydrates are ice-like solids of natural gas trapped inside a crystalline structure and that fill up sedimentary layers forming giant gas traps, usually under water or in permafrost. Because they are most likely the single greatest source of organic carbon in the world (much larger than all known fossil fuels combined) and contain massive amounts of natural gas per deposit, they have been scoped out by some players in the natural gas industry as an alternative energy source. Yet energy firms lack the technical ability to break down these hydrates and extract the gas, and the economic challenges are immense. Hydrates produce little energy per unit, are stored in less permeable sedimentary deposits and would require lots of heat in cold places to release the gas.

With new techniques also came new revelations regarding the amount of theoretically extractable natural gas reserves. The U.S. Energy Information Administration (EIA) estimated that in 2007, proven natural gas reserves from shale formations rose by 50 percent, reaching 9 percent of total U.S. reserves of 7.56 trillion cubic meters. (Coal-bed methane reserves, the other major unconventional source, though under production since 1989, rose 11.5 percent in 2007, also equaling 9 percent of total U.S. reserves.) Thus, total reserves translate to about 11 years of U.S. consumption at 2008 levels, and the EIA estimates only count proven reserves, which in turn take into account a relatively small number of sites.

Estimates of total unproven reserves range anywhere from 32 trillion cubic meters to 62.3 trillion cubic meters — potentially enough to feed United States consumption for 50 to 100 years or more (although the higher estimates come from studies funded by a hopeful natural gas industry). And many of these estimates assume that natural gas producers will not discover any new formations with extraction potential, which is unlikely. Current estimates are also unreliable because production technologies are still in early stages of development and have not been universally applied. More use and experience plus continued technological innovation are likely to push natural gas producers beyond current capabilities and enable them to access still greater portions of formations.

Moreover, most of the companies involved in unconventional production are small independents (in keeping with the history of the natural gas sector in the United States), which tend to be particularly good at applying and inventing new technology. So far, new production techniques have been applied only to a handful of basins — none of which have been exhausted — and there are several more formations to exploit. All of this paints a promising picture for the new extraction techniques.


Next:
Natural gas reserves and U.S. energy policy

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Stan Robertson
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Re: Could this be true?

It is true that there is a huge shale gas resource in the U.S. But it will require stable natural gas prices of about $7.00 / MCF at the wellhead to sustain it. This resource is uneconomical without horizontal drilling technology. The productivity of the wells is enhanced by the long horizontal sections opened by wells, but the low permeability of the shales leads to rapid depletion of the zone near the well bore and dramatically lower production rates afterward. For practical purposes, most shale gas wells are depleted in less than two years. If one year happens to be a year such as the present one in which natural gas prices are too low then the companies lose money on the wells and cease drilling new ones. The inevitable result will be shortages occurring within a year or two after new drilling ceases.

While new technology has allowed us to explolit previously uneconomical reservoirs, it has generally done so with wells that deplete rapidly. Unlike older wells which might have ten to twenty year well lives, the newer rapidly depleting wells leave us balanced on the edge of sharp declines. Shortages loom immediately ahead when drilling stops. The Obama plan to eliminate the deductibility of intangible drilling expenses will have the effect of quickly producing gas shortages and price spikes, but they will be blamed on the greedy evil oil companies.

 

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re-post from http://www.chrismartenson.com/forum/gas-and-nuclear

A Glut of Bum Data

by Matthew Simmons

For the last several months, I have been baffled at the widespread impression that the United States has suddenly created a serious natural gas glut thanks to the miracle of abundant shale gas plays cropping up all over the place. I now realize I had probably underestimated the remarkable growth we have seen in Barnett Shale gas and the emergence of Haynesville gas and the other shale plays. At first glance, these plays are very impressive. However, they require an exponential increase in drilling and fracing as each individual well has a high decline rate once it begins production.

But I still questioned whether the growth I read about for the past few months – as much as 8 to 9 percent – could really be right, given how high the decline rates have become for almost the entire U.S. gas production base. Moreover, real-time decline-rate data is notoriously hard to capture, even for many important producers.

When the major gas players all reported their 2008 U.S. natural gas production, I finally began smelling what seemed to be a stinking rat: the fact that the top 10 superstar domestic natural gas producers grew their total gas by only 8 percent more than the major gas oil company gas producers declined. Thus, to justify the wild claims by the Energy Information Administration (EIA) that natural gas supply had grown so high, all the small, privately owned independents would have to have grown their gas production twice as high as the top 10 superstars. That is a claim I had a hard time swallowing.

In early April, the EIA came out with a clumsy announcement that its key gas supply report – the so-called EIA-914 production data, which samples a wide number of real gas producers of the real wet gas they actually produce each month – had some technical glitches and was being adjusted. The organization then released a detailed report of the methodology it adopted in 2005 to try to get a better handle on real supply. You have to read this report carefully to appreciate its bizarre nature. Fortunately for the EIA, relatively few people actually read the data.

Now I see that according to the latest EIA-914 report through January 2009, total growth of wet gas, quite different from dry gas, grew by 2.7 billion cubic feet per day (bcf/d) between January 2008 and January 2009. However, the only regions that significantly grew their gas produced over the past 12 months were Texas – an obvious candidate, given the strong production growth of the Barnett Shale, which accounted for most of the U.S. net gas production growth – and the “other states” (excluding such players as Louisiana, New Mexico, Oklahoma and Wyoming) outside the Federal Offshore. These “other states,” according to the EIA model, grew their total gas produced by 1.37 bcf/d, 70 percent of what Texas did (see Figure 1).

We are in the early stages of crushing the natural gas industry because prices have collapsed. They collapsed because we obviously had a massive supply glut. Now supply will soon plummet as the rigs drilling for gas are off 50 percent.

What a tragedy we are facing because we had bum data! This might be far more painful than the International Energy Agency’s famed “missing barrel” mistake of 1997-1999, when a new “missing barrels” category was created to account for an imbalance in supply estimates and reality.

I have been pleading for ages for our oil and gas system either to ignore EIA data or to genuinely reform the data-collection system. Might this be the sad endgame of what was never done?

This is a very sad story in my opinion.

If the American Dream involves reducing our dependence on foreign oil, I suggest that a year or two from now, our natural gas supply might collapse to the tune of 20 to 30 percent. Call it an American Nightmare. I hope for the sake of all of us that my analysis is wrong.

Matthew R. Simmons is the chairman and CEO of Simmons & Co. International and the author of Twilight in the Desert: The Coming Saudi Oil Shock and the World Economy.

_______________
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Re: re-post from Could this be true

 Damnthematrix:Thank you for posting Matt Simmons's article.....most instructive.  It's extremely hard to stay tuned into what is "true" without an army of "truth" investigators to cull though massive amounts of information (in their own field of expertise) and have a forum to discuss everything.  Thank you Stan for your informative post as well.  Ron Epner

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Re: Could this be true?

alwayssaturday - I have no opinion on this debate.  I don't know enough and it's not on my top priority to spend time researching. unfortunately both sources rely on EIA and IEA numbers...government stats which we all know are as reliable as a politician's campaign promises...so analysis of the data seems impossible.  so we're left with source analysis...I'd personally tend to go with PhDs at stratfor vs. the CEO of a houston investment banking firm tied to Wall St who spends his time traveling the world making speeches every week pushing an agenda and recruiting i-banking and institutional sales clients. Stratfor is considered political, so it has a bias as well, but in this case it seems they're going against their neocon bias for intervention in the middle east...if we have our own sources as they seem to be claiming, it reduces our need to militarily own the middle east.  

random facts:

- Simmons is CFR.  has a big impact on its members agendas.

- Simmons is an i-banker.  they make their biggest fees on industry restructuring.  Energy i-bankers are anticipating millions in fees as the industry reallocates capital to alternative energy...they lose it all if the industry stays status quo.

- Simmons is a harvard b-school grad.  HBS is just an elite networking club that feeds people into the greater Wall St / elite corporate network, not an academic or research institution. HBS is one of many institutions responsible for promoting Wall St financial engineering (derivatives), Enron financial "creativity" (fraud), the Fed's monetary system (debt slavery), the global finance institutions (end of the nation-state), and otherwise training people how to become capital owners in private equity and banking industries to extract value from the productive industries they own.  I say all this only to say that advice/guidance from people from HBS (and other places) was what killed Enron, killed our economy, created mega bubbles, sucked the masses into extreme debt, etc. so they're not credible.

- He's on the HBS board of advisors along with the likes of Stan Shuman (also CFR)...i-banker for Murdoch.  With buddies like this you can be assured Simmons' interests are not just objective facts.  All organizations/people have interests, including stratfor, but I trust nothing associated with CFR and HBS.

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alwayssaturday
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Re: Could this be true?

Strabes,  You've shaken my world!  I have been a firm believer in Peak Oil and have been very careful to screen where and whomI get my information from.  I have a deep distrust of the CFR and it's related organizations and now wonder about the validity of someone whom I came to trust, Matt Simmons.  Clearly, whether we have natural gas resources beyond belief or not, we will not have timely access to them but it certainly makes me wonder what the long term weight of the second shoe to drop (peak oil) will be.  Perhaps Lyndsey Williams who claims the US has vast oil reserves may not be so far off......

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Damnthematrix
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Re: Could this be true?

Errrr.....  I think you'll find Simmons has RETIRED from his banking career to spend full time speaking about PO.  Simmons is far more concerned about the end of growth being here than how much money he's going to make restructuring the oil industry, because it is now plain to see no such restructuring is ever likely to occur.

Mike

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Re: Could this be true?

World Oil Production Forecast - Update May 2009

World oil production peaked in July 2008 at 74.82 million barrels/day (mbd) and now has fallen to about 71 mbd. It is expected that oil production will decline slowly to about December 2010 as OPEC production increases while non-OPEC production decreases. After 2010 the resulting annual production decline rate increases to 3.4% as OPEC production is unable to offset cumulative non-OPEC declines. The forecast from the IEA WEO 2008 is also shown for comparison.

The US Energy Information Administration (EIA) and the International Energy Agency (IEA) should make official statements about declining world oil production now to renew the focus on oil conservation and alternative renewable energy sources.

Fig 1 - World Oil Production to 2012 - click to enlarge (oil includes crude oil, lease condensate and oil sands)

World Oil Production

World crude oil, condensate and oil sands production peaked in 2008 at an average of 73.78 million barrels per day (mbd) which just exceeded the previous peak of 73.74 mbd in 2005, according to recent EIA production data. Production is expected to decline further as non OPEC oil production peaked in 2004 and is forecast to decline at a faster rate in 2009 and beyond due mainly to big declines from Russia, Norway, the UK and Mexico. Saudi Arabia's crude oil production peaked in 2005. By 2011, OPEC will not have the ability to offset cumulative non OPEC declines and world oil production is forecast to stay below its 2008 peak.

My estimate of 1.95 trillion barrels (TB) of total Ultimate Recoverable Reserves (URR) of oil is used to generate the forecast shown by the red line below. If Colin Campbell's estimate of 2.20 TB is used, which is 250 billion barrels (Gb) greater than my estimate due mainly to more optimistic assumptions about OPEC reserves, the peak production date remains at 2008. This shows that an additional 250 Gb of recoverable oil reserves does not change the peak oil date and instead increased production rates occur later as indicated by the green line below. Additional reserves and the related production from prospective areas such as the arctic, Iraq, and Brazil's Santos basin are highly unlikely to produce another peak but should decrease the production decline rate after 2012.

Fig 2 - World Oil Production to 2100 - click to enlarge

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