A Texan tragedy: ample oil, no water

The Guardian has an article on the unfortunate intersection of the Texas drought and shale oil boom - A Texan tragedy: ample oil, no water.

Beverly McGuire saw the warning signs before the town well went dry: sand in the toilet bowl, the sputter of air in the tap, a pump working overtime to no effect. But it still did not prepare her for the night last month when she turned on the tap and discovered the tiny town where she had made her home for 35 years was out of water.

"The day that we ran out of water I turned on my faucet and nothing was there and at that moment I knew the whole of Barnhart was down the tubes," she said, blinking back tears. "I went: 'dear God help us. That was the first thought that came to mind."

Across the south-west, residents of small communities like Barnhart are confronting the reality that something as basic as running water, as unthinking as turning on a tap, can no longer be taken for granted.

Three years of drought, decades of overuse and now the oil industry's outsize demands on water for fracking are running down reservoirs and underground aquifers. And climate change is making things worse.

In Texas alone, about 30 communities could run out of water by the end of the year, according to the Texas Commission on Environmental Quality.

Nearly 15 million people are living under some form of water rationing, barred from freely sprinkling their lawns or refilling their swimming pools. In Barnhart's case, the well appears to have run dry because the water was being extracted for shale gas fracking.

The town — a gas station, a community hall and a taco truck – sits in the midst of the great Texan oil rush, on the eastern edge of the Permian basin.

A few years ago, it seemed like a place on the way out. Now McGuire said she can see nine oil wells from her back porch, and there are dozens of RVs parked outside town, full of oil workers.

But soon after the first frack trucks pulled up two years ago, the well on McGuire's property ran dry.

No-one in Barnhart paid much attention at the time, and McGuire hooked up to the town's central water supply. "Everyone just said: 'too bad'. Well now it's all going dry," McGuire said.

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Peak oil researcher says shale profits proving ephemeral

FuelFix has a post on Shell's recent profit decline and asset writedowns, driven by poor performance from their North American shale oil assets - Peak oil researcher says shale profits proving ephemeral. The post points to an article by Art Berman, continuing his long line of analysis questioning the longevity and financial basis of the shale oil boom - Shale boom profits bypass big oil. Even the Wall Street Journal was prompted to ask "So why has Shell just wiped $2 billion off the value of some shale assets supposedly rich in the hydrocarbon liquids that everyone craves?". They couldn't come up with an answer.

A prominent proponent of peak oil theory — the idea that global petroleum production will peak and then begin dropping off permanently — says that recent Big Oil profit drops show that profits from shale are more elusive than commonly expected.

Many of the oil industry’s big players wrote down the value of their shale assets for second quarter — a move that indicates the continuing challenge of making many of the shale plays financially viable, according to Art Berman, a petroleum geologist and director of the Association for the Study of Peak Oil. Berman, a Houston-area geologist, has been questioning the economics of shale gas for years, particularly in terms of the potential reserves.

Last week, Shell reported a 20 percent profit drop for second quarter, which it partially attributed to write-offs of some of its shale positions rich in natural gas liquids and oil, according to Simon Henry, Shell’s chief financial officer, at the second quarter earnings call.

“Recent revelations and write-downs of shale assets in North America by Shell, ExxonMobil and Chevron support our research that big companies cannot make money on low rate-low volume shale wells,” wrote Art Berman in an article on Petroleum Truth Report. Berman said that when ExxonMobil purchased XTO Energy in 2010, it began the acceptance of shale reserves as a potential income driver, and optimistic estimates were made about the potential production of many of these wells. But falling oil and gas production helped push earnings down 57 percent for the second quarter.

Berman predicts that the companies will begin to move out of the shale plays because of the difficulty in making them profitable. “I believe that we are seeing the slow liquidation of these organizations but they cannot let the investment public know that this is what is occurring,” Berman wrote. “Hence the cornucopian rhetoric about the shale revolution and North American becoming the next Saudi Arabia –pure poppycock, of course.”

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Drilling Fast To Stay On A Plateau In the Bakken

Rune Likvern has a very long look at shale oil production statistics for the Bakken in North Dakota at The Oil Drum - Will the Bakken “Red Queen” Have to Run Faster?.

This post is an update and continued expansion to my previous posts about tight/shale oil in Bakken/Three Forks in North Dakota (ND):

* Is Shale Oil Production from Bakken Headed for a Run with “The Red Queen”? * Is the Typical NDIC Bakken Tight Oil Well a Sales Pitch?

This post documents:

* At present oil prices Bakken tight oil has the overall prospects of being profitable. * Between 70-75% of the studied wells (well cost @9Million and oil price @$90/bbl) were found to have a prognosis for being at or above breakeven (being profitable). * If (or rather when) average well productivity declines further, this will add a new meaning to the term tight oil. * Developments in average well productivity.

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‘Saudi America’ remains a Washington fantasy

The FT has an article by John Dizard explaining why he thinks the shale oil boom will prove far more disappointing than many are claiming - ‘Saudi America’ remains a Washington fantasy (it seems to be readable without a subscription - though you may have to go via Google News). He quotes Bernstein's Bob Brackett as predicting oil production in the Bakken (North Dakota) will peak in 2019 at 1.2m barrels per day.

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Has Peak Oil Been Vindicated Or Debunked ?

The impending demise of The Oil Drum seems to have prompted something of a resurgence in interest in peak oil.

Matthew Yglesias has a post at Slate on the state of the peak oil debate - Has Peak Oil Been Vindicated Or Debunked ?. I love the way the oil price graph demonstrates the impact the supposed flood of shale oil (combined with the great recession) has (or more accurately, hasn't) had on oil prices - as we switch from depleting conventional oil to unconventional oil, the floor price for oil gets ever higher and the environmental damage per barrel gets bigger - just as peak oil theory predicts...

I will admit that I've always found the "Peak Oil" debate to be a little bit confusing, especially because both the words "peak" and "oil" turn out to have some ambiguity to them. But recently a couple of my favorite bloggers were debating the implications of the "unconventional oil" boom for the debate, with Karl Smith proclaiming peak oil dead while Noah Smith says it lives on. My approach would be to try to skip past some of these definitional issues and look at prices.

Above you see the nominal prices for Brent Crude Oil and West Texas Intermediate. As you can see, historically the prices are identical because oil is a globally traded commodity. You can also see that in the late 1980s and throughout the 1990s the price was low—around 20 dollars a barrel. These were the happy days in which the oil crises of the 1970s had been put behind us, and everyone got to hail the economic genius of Ronald Reagan and Bill Clinton. You can also see the supply disruption induced by Iraq's invasion of Kuwait and the subsequent geopolitical crisis that left George H.W. Bush without the reputation for economic mastery that Reagan and Clinton enjoy. Then you see a rise, then a fall, then a steady rise. Eventually the rise gets really crazy and people are in freak-out mode. Then comes a global recession and a huge collapse in prices. At this point we look around the wreckage and wonder wtf just happened. Was there an amazing oil bubble comparable to Irish real estate? Or has the recession just pushed prices down artificially?

Now with some subsequent years of data we can see that despite the slow growth in developed countries prices have very certainly not returned to the halcyon days of the Reagan-Clinton years. We can see that the Iraq/Kuwait price spike actually looks like a bit of a joke. We can see the impact of the unconventional oil, which has created this anomalous gap between the WTI price and the Brent price. It's a big gap. This is nothing to sneer at. Not only is it causing an economic boom in North Dakota and select portions of Texas, but it plausibly explains some of why America's overall economic performance has been so much better than Europe's. But even so, America's oil boom hasn't pushed U.S. oil prices back down to mid-aughts levels and it certainly hasn't pushed U.S. oil prices back down to 1990s levels. The good old days of genuinely abundant liquid fuel really do appear to be behind us.

It's probably worth noting the WTI - Brent spread mentioned above has disappeared now - you have to keep on drilling pretty fast if you want to maintain production from fast depleting shale oil wells - and the previously exponential rate of growth in drilling has now stopped as Stuart Staniford shows in the chart below - US Oil Rig Count and Oil Production.

The Slate article above references this blog post from Noahpinion - Peak Oil is dead! Long live Peak Oil!.

One of my favorite websites, The Oil Drum, is shutting down, and I am mad! Everyone is attributing the shutdown to the death of the "Peak Oil" meme, which in turn is attributed to fracking. The first is probably true; Peak Oil mania is over. But the second is false. Fracking has not killed Peak Oil. It just hasn't fit the narratives that many of the Peak Oilers spun.

The thesis of Peak Oil is simple: Global oil production will soon peak and begin to decline. But there were two possible stories that the Peak Oilers told about how this would happen:

"Good Peak Oil": In this case, we find something that's better than oil, and switch to that, just like we once transitioned away from whale oil. In this case, oil prices and production would both fall.

"Bad Peak Oil": In this case, we don't find something better than oil, and as oil becomes more scarce, the price would go up, while oil production and overall economic activity both contracted.

What we got was neither of these. Or more accurately, we got a little bit of both, coupled with something else that doesn't fit with either story. What happened was this:

1. Global demand for oil increased, due to growth in emerging markets, pushing up oil prices in the 2000s - from around $20 to over $100, a five-fold increase.

2. At the new higher price, it became economical to tap expensive oil sources like tight oil (fracking), deepwater oil, and oil sands.

3. Even at the new higher prices, it has not been economical to increase "conventional" oil production. Instead, all net production increases have come from "unconventional" sources. And most of that "unconventional" production is not actually "oil" at all, but "liquids", which includes things like natural gas liquids.

4. There was a several-year lag in the mid-2000s where global oil production plateaued even as prices increased. This culminated in a dramatic spike in oil prices in 2007-8 which then subsided due to the global recession and the dramatic increase in unconventional oil production.

5. Oil prices are still over $100, even as global growth has been slow. Meanwhile, oil usage in rich countries has declined significantly.

This story does not easily fit with either of the Peak Oil scenarios. But it has important elements of both.

First of all, the peak in conventional oil, coupled with a dramatic surge in unconventional oil, looks a lot like the "Good Peak Oil" scenario, in which technology produces a new alternative energy source, and we switch to the new thing.

But the seemingly permanent increase in oil prices, and the fall in oil demand in rich countries, fit the "Bad Peak Oil" story. It indicates that the world is hitting oil supply constraints.

(And of course what the Peak Oilers missed was unconventional oil itself. Some of them missed the technology entirely, while others merely failed to anticipate that the industry's terminology would switch from "oil" to the more weaselly "liquids".)

So what happened was NOT that we switched to something better than oil. We switched to something worse than conventional oil: unconventional oil, which is more expensive to extract and/or to refine into usable products. This has left us permanently poorer than we would be if conventional oil hadn't hit global supply constraints. Filling up your gas tank is twice as expensive now, in real terms, as it was two decades ago. And that looks unlikely to change. In the wider economy, increased transportation fuel costs may be a main driver of the Great Stagnation, which manifests most clearly in the stagnation of transportation technology since the 1970s.

Basically, what happened is this: Scarcity attacked humanity, and Human Ingenuity battled back. Through heroic efforts, doomsday was averted. But Ingenuity did not win a smashing victory, as it did when we switched from wood to coal, or from whale oil to oil. Instead, humanity was forced into a fighting retreat, with Ingenuity executing a brilliant rear-guard action and forcing Scarcity to call off its pursuit...for now. But humanity has lost ground.

And Scarcity may not wait very long before launching another attack. Future increases in shale oil production (including tight oil and oil shale) is likely to be a lot more expensive than the low-hanging fruit we have picked thus far. Coupled with continued rises in developing-country oil demand and continued decline in conventional oil fields, this could cause another rise in oil prices. That will bring back the "Peak Oil" meme, which only seems to interest most people as an investment story. But sadly, The Oil Drum will not be around to chronicle the return of Peak Oil.

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HUGE CAPEX = FREE CASH FLOW ? NOT IN SHALES

Energy Policy Forum has an interesting article by Deborah Lawrence Rogers about the financials of the companies frantically scraping the bottom of the barrel in the Bakken - HUGE CAPEX = FREE CASH FLOW? NOT IN SHALES.

Taking a universe of 5 shale companies, some primarily with shale gas assets and others with shale oil, it is of note that there has been a significant deterioration of free cash flow since 2010. But what is even more interesting is that some of these companies are reporting that net income has been growing though free cash is falling.

Not wishing to bore everyone with an esoteric discussion of financial statements, it is of note that when a company shows a growth in net income with a concomitant deterioration of free cash flow, it may be an indicator that management is taking aggressive steps to boost earnings artificially. Not always. But possibly.

So how much deterioration has there been in free cash flow? It is impressive.

When you adjust the figures to include capital expenditure (and dividends where appropriate), their free cash available is negative. Significantly negative.

This is highly problematic because if a company cannot generate cash from operations then it has to go outside and get the monies through borrowings or equity offerings. In other words, debt or dilution for investors.

Free cash flow of Continental Resources, a big player in the Bakken, has dropped from ($430M) to ($2.4B) since 2010, all of it negative. And Continental is not the only one. Devon Energy’s free cash flow has dropped from ($1.2B) to a significant ($3.5B) over the same time frame. Range Resources, who are drilling primarily in the Marcellus, booked a negative free cash flow of ($556M) in 2010 and this has deteriorated to ($1.0B). Kodiak Oil and Gas, another Bakken player, had negative free cash flow in 2010 of ($170M). It has now deteriorated to ($1.0B). Chesapeake is interesting because its free cash flow for 2012 ($3.3B) is now roughly equivalent to its level in 2010, ($3.4B). But over the last two years Chesapeake has liquidated approximately $13 billion in assets with no commensurate gain to free cash flow. Management still needs to move outside the company to generate cash to continue operations. And yet, shareholders have had their underlying assets disappear to the tune of $13B to pay down debt.

Clearly there is a pattern here of severe deterioration. But that is not all. CAPEX has exploded during this time which means that companies have spent enormous sums of money drilling wells that are not providing enough cash to continue drilling operations on their own. Not even close. For instance, Continental’s CAPEX grew from $1.0B to $4.1B. Devon’s CAPEX grew from $6.4B to $8.2B. In total, these 5 companies spent approximately $56B in capital expenditure since 2010 while the free cash generated from this $56B spending spree is non-existent. In fact, it is worse than non-existent because it is alarmingly negative.

This is not sustainable. It could be argued that it is not even moral. It is a failed business model of epic proportion. While companies could make the argument at one time that this was a short term downtrend, that no longer holds water because this pattern is long term.

The most troubling aspect of this is that we are fast tracking exportation of this commodity in spite of the glaring financial anomalies. It is extraordinary that some members of Congress proclaim whole heartedly for fiscal responsibility while turning a blind eye to fiscal irresponsibility among their campaign donors and promoting exportation.

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The shale gas revolution: is it already over?

Ugo at Cassandra's Legacy has a post on the shale gas "revolution" (I always liked Suart Staniford's description of the boom as the "frantic scraping of the bottom of the barrel") - The shale gas revolution: is it already over?.

The production of natural gas in the US has not been increasing for about two years. Fitted with a Gaussian function, it shows a peak in the second half of 2012 and, from then on, a tendency to decline. Decoupled in its various components, the data show that shale gas production is still increasing, but not fast enough to compensate for the decline of conventional gas production.

Are we already seeing the end of the "shale gas revolution"? It is too early to say but, surely, these data agree with the viewpoint of those who had been seeing the whole story as a short lived financial bubble. (see, e.g., a recent series of statements by Arthur Berman)

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US shale boom starts to fade

The SMH has an article opining that prospects for US shale oil production are fading - US shale boom starts to fade.

For the past three years, the boom in the US shale oil industry has outstripped all expectations. Production surged far faster than any forecasts; drillers raced to secure space in new pipelines to get their crude to market. Now, at the periphery, that may be changing - at least for a while.

News from two of the country's less developed shale plays in Colorado and Ohio last week offer a reality check for the wave of euphoria that has washed across the industry. The stumbles mark a break from the past few years, when nearly every new project was an overnight success and output grew and grew.

On Thursday, Ohio, home to the Utica shale, finally released annual data on 2012 production that showed the state pumped less than 700,000 barrels of oil from its shale wells -- barely enough to fill a small oil tanker. North Dakota's Bakken shale pumps more than that every day. Even state officials said it the result was "lower than initially estimated."

The day before, NuStar Energy LP had said it would shelve a plan to reverse a pair of underused refined products pipelines to ship crude from Colorado's Niobrara shale oil play to Texas. It failed, twice, to garner enough commitments from potential customers to justify investing in the conversion. Neither development was a surprise to industry experts, and both were likely affected by extenuating circumstances.

A growing preference for rail shipments likely dimmed interest in long-term commitments to use NuStar's pipeline. Ohio's shale may yet offer up large volumes of liquid gas and condensate, if drillers can find new ways to coax it out.

Yet taken together they offered a sign that the flush of enthusiasm and rush of investment that piled into shale fields from one coast to the other has hit a curve. While the basic technologies of hydraulic fracturing and horizontal drilling was enough to coax an unexpected gusher of oil from shale rock in many regions, these more challenging seams may require incremental innovation to unlock.

Platts has an article boosting the prospects for the shale industry finding more plays like the Eagle Ford in Texas - Did the shale revolution already find its biggest oil field at the Eagle Ford?.

In case you didn’t catch it, investment house Credit Suisse had a wonderfully informative conference call for their clients last week on how they see the future of the shale revolution that has engulfed the oil patch in the last decade and become hyper-active especially in the last several years.

Among the bank’s conclusions: shale is a vital component of current US production which is growing at a huge clip — CS sees as much as 10 million b/d of US oil production in the next several years, up from 6.5 million b/d last year. CS also noted consistently improving well results from big plays such as the Permian Basin in West Texas and Bakken Shale in North Dakota.

Moreover, it’s not only the upstream that is exploding, but also companies that supply the technologies to eke out more oil in less time. Even ancillary services are exploding, such as technologies that can treat and dispose of water — a crucial component of well fracturing. And all this will require many billions of investment dollars into a shale economy still years away from the mature development stage.

But one other thing Credit Suisse said, which echoes the sentiments of many in the industry, was that it was “skeptical” a new large field on the order of the Eagle Ford Shale in South Texas would happen. The Eagle Ford is one of the most prolific shale fields which boasts an estimated 943,000 b/d of liquids production and is forecast to produce 1.6 million b/d by late 2018. Instead, Credit Suisse said existing areas with “stacked” pay targets — i.e., layered formations –are better bets right now. When you consider how far industry has come in the last five years alone, it seems almost reactionary to make such a statement. And Credit Suisse is far from alone in that view: many executives share it — even from top shale producers.

Five years ago, the Eagle Ford Shale hadn’t even been discovered, at least not officially. Although a few companies were out there quietly working the field, it was Petrohawk Energy that announced a gas find there in October, 2008. By that time, other shale fields had already been discovered — the Haynesville in Louisiana, a gas field; the Bakken oil field in North Dakota; and of course, the granddaddy of them all, the Barnett in North Texas which sparked the widespread move by operators to shale exploitation in the early 2000s, although the field’s first wells were drilled in the early 1980s.

The Oil Drum has a skeptical look at the endless treadmill of drilling that shale oil / gas extraction requires- Is the Typical NDIC Bakken Tight Oil Well a Sales Pitch?.

In this post I present the results from dynamic simulations using the typical tight oil well for the Bakken as recently presented by the North Dakota Industrial Commission (NDIC), together with the “2011 average” well as defined from actual production data from around 240 wells that were reported to have started producing from June through December 2011.

The use of the phrase “Typical Bakken Well” by NDIC as shown in Figure 01 is here believed to depict what is to be expected from the average tight oil well.

The results from the dynamic simulations show:

If the “Typical Bakken Well” is what NDIC recently has presented, total production from Bakken (the portion that lies in North Dakota) should have been around 1.1 Mb/d in February 2013.
Reported production from Bakken by NDIC as of February 2013 was 0.7 Mb/d.
Actual production data shows that the first year’s production for the average well in Bakken (North Dakota) presently is around 55% of the “Typical Bakken Well” presented by NDIC.
The results from the simulations anticipate a slowdown for the annual growth in oil production from Bakken (ND) through 2013 and 2014.

...

The production developments in Bakken and other tight oil plays are very much a function of monthly additions of producing wells, developments in well productivity, decline rates (for the growing population of “older” producing wells), development in costs, strategies deployed by the companies for development of their acreage, adequate infrastructure and not least the developments/expectations for the oil price.

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Deutsche Bank: Don’t bet on the IEA's prediction of U.S. oil dominance

Reading the pages of the Business Spectator in recent months I've noticed a seemingly endless stream of articles by Robert Gottliebsen claiming the US "shale gas revolution" will result in US energy independence, a resurgence in US domestic manufacturing and the demise of Australia's LNG export industry (unless the unions are crushed and construction costs dramatically lowered).

I usually just write these sort of crazed ramblings off as some sort of PR campaign on behalf of BHP in particular (someone needs to give Marius Kloppers some good press) and the mining and energy industries in general, as they fight the endless battle of capital against labour.

Maybe I'm missing something but from my high level understanding of the US gas industry, the natural gas "cliff" predicted by the likes of Julian Darley never eventuated courtesy of the shale gas boom - however US gas production isn't making new highs (so where is the glut people keep claiming exists ?) - instead the price collapsed due to a combination of manufacturing moving offshore (particularly gas intensive industries like fertiliser and chemicals) and the recession in the US causing demand to slump. Should the US return to growth and industry return based on the lure of cheap gas I think we'll find gas prices climbing rapidly again.

The IEA gave this sort of delusional thinking (US energy independence ahoy !) more momentum recently with the new World Energy Outlook report echoing Citibank's claims earlier this year that the US will soon be the world's leading oil producer (again, thanks to shale oil). Its probably worthwhile remembering that 10 years ago the IEA was claiming global oil production would now be over 100 million barrels per day (currently it stands at 90 million barrels per day, with significant contributions from biofuels and natural gas liquids).

Technology Review has a look at the report - Shale Oil Will Boost U.S. Production, But It Won’t Bring Energy Independence.

The idea that the U.S. could overtake Saudi Arabia, even temporarily, is a stunning development after years of seemingly inexorable declines in domestic oil production. U.S. production had fallen from 10 million barrels a day in the 1980s to 6.9 barrels per day in 2008, even as consumption increased from 15.7 million barrels per day in 1985 to 19.5 million barrels per day in 2008. The IEA estimates that production could reach 11.1 million barrels per day by 2020, almost entirely because of increases in the production of shale oil, which is extracted using the same horizontal drilling and fracking techniques that have flooded the U.S. with cheap natural gas.

As of the end of 2011, production had already increased to 8.1 million barrels per day, almost entirely because of shale oil. Production from two major shale resources in the U.S.—the Bakken formation in North Dakota and Montana and the Eagle Ford shale in Texas, now total about 900,000 barrels per day. In comparison, Saudi Arabia is expected to produce 10.6 million barrels per day in 2020.The shale oil resource, however, is limited. The IEA expects production to start gradually declining by the mid-2020s, at which time Saudi Arabia will reclaim the top spot. ...

The other potential issue is whether opposition to fracking in local communities might put the brakes on shale oil development, Sears says. Concerns that fracking will contaminate drinking water have led to objections in some areas, as have concerns that shale oil requires far more drilling wells than conventional oil production. Even if the U.S. is able to quickly develop its shale oil resource, it isn’t likely to be enough to completely eliminate oil imports. The IEA expects that the U.S. will still import 3.4 million barrels per day in 2035. The U.S. consumes nearly 19 million barrels per day, leaving a gap of more than 7 million even at the expected peak in shale oil production in the mid-2020s. However, the IEA expects the gap will be reduced partly by increased use of biofuels and natural gas in transportation, as well as improved vehicle efficiency, which could lower demand for oil.

The IEA does conclude that the United States will nearly be energy self-sufficient by 2035, but that’s after offsetting oil imports with exports of coal and natural gas. To be truly energy independent, the United States would have to invest in technology for converting natural gas and coal into the liquid fuels needed for transportation, or have other technical breakthroughs, such as improved batteries or biofuels, that would quickly reduce the demand for oil.

The Globe and Mail reports that Deutsche Bank analysts aren't convinced by the IEA's predictions for US oil production - Don’t bet on U.S. oil dominance.

An influential report arguing that the U.S. will soon become the world’s largest oil producer made a lot of headlines, especially in Canada where the implications are huge.

Too bad its findings are wrong, argue the energy analysts at Deutsche Bank.

It’s not that the oil isn’t there, but the conditions needed to develop it are lacking, Deutsche Bank analysts Paul Sankey, David Clark and Silvio Micheloto write in a note entitled ‘Why the U.S. WON"T surpass Saudi Arabia as Number 1 oil producer.’ (The emphasis is the authors’. And if you’re wondering if these guys know what they are talking about, Mr. Sankey has been ranked No. 1 for the last two years by Institutional Investor for coverage of integrated oil companies.)

A combination of U.S. policy restricting exports and sagging domestic U.S. demand for oil products will keep prices soft relative to the rest of the world, making the projects needed to create the huge U.S. supply growth uneconomical, they wrote Thursday in their critique of the report by the International Energy Agency which pointed to a huge shift toward North America in oil production.

“We don’t think the U.S. can become the largest oil producer in the world. Why not? Price, cost and returns. None are really dealt with by the IEA.”

OilPrice.com has an interview with longtime shale gas critic Arthur Berman - Shale Gas Will be the Next Bubble to Pop - An Interview with Arthur Berman.

The “shale revolution” has been grabbing a great deal of headlines for some time now. A favourite topic of investors, sector commentators and analysts – many of whom claim we are about to enter a new energy era with cheap and abundant shale gas leading the charge. But on closer examination the incredible claims and figures behind many of the plays just don’t add up. To help us to look past the hype and take a critical look at whether shale really is the golden goose many believe it to be or just another over-hyped bubble that is about to pop, we were fortunate to speak with energy expert Arthur Berman.

Arthur is a geological consultant with thirty-four years of experience in petroleum exploration and production. He is currently consulting for several E&P companies and capital groups in the energy sector. ...

Oilprice.com: How do you see the shale boom impacting U.S. foreign policy?

Arthur Berman: Well, not very much is my simple answer.

A lot of investors from other parts of the world, particularly the oil-rich parts have been making somewhat high-risk investments in the United States for many years and, for a long time, those investments were in real estate.

Now these people have shifted their focus and are putting cash into shale. There are two important things going on here, one is that the capital isn't going to last forever, especially since shale gas is a commercial failure. Shale gas has lost hundreds of billions of dollars and investors will not keep on pumping money into something that doesn’t generate a return.

The second thing that nobody thinks very much about is the decline rates shale reservoirs experience. Well, I've looked at this. The decline rates are incredibly high. In the Eagleford shale, which is supposed to be the mother of all shale oil plays, the annual decline rate is higher than 42%.

They're going to have to drill hundreds, almost 1000 wells in the Eagleford shale, every year, to keep production flat. Just for one play, we're talking about $10 or $12 billion a year just to replace supply. I add all these things up and it starts to approach the amount of money needed to bail out the banking industry. Where is that money going to come from? Do you see what I'm saying?

Oilprice.com: You've been noted suggesting that shale gas will be the next bubble to collapse. How do you think this will occur and what will the effects be?

Arthur Berman: Well, it depends, as with all collapses, on how quickly the collapse occurs. I guess the worst-case scenario would be that several large companies find themselves in financial distress.

Chesapeake Energy recently had a very close call. They had to sell, I don't know how many, billions of dollars worth of assets just to maintain paying their obligations, and that's the kind of scenario I'm talking about. You may have a couple of big bankruptcies or takeovers and everybody pulls back, all the money evaporates, all the capital goes away. That's the worst-case scenario.

Oilprice.com: Energy became a big part of the election race, but what did you make of the energy policies and promises that were being made by both candidates?

Arthur Berman: Mitt Romney, particularly, talked about how the United States would be able to achieve energy independence in five years. Well, that's garbage.

The Oil Drum also has some cynical words about the potential of shale gas - Tech Talk - Global Oil Supply .

One of the headlines this week from the IEA Report suggests that the United States will be the top global oil producer in five years. Yet back in DeSoto Parish in Louisiana, where the Haynesville Shale discovery in 2008 started the bonanza, revenues are now falling and school board budgets are strapped as the end of the glory days are beginning to appear.

Just this week Aubrey McClendon said that Chesapeake’s prospects for oil in Ohio, where Chesapeake had high hopes for the Utica Shale, are now dim. It is easy to look at one of the large maps showing all the shale deposits in the United States that the Oil and Gas Journal include in their print editions, and to be carried away (as the IEA apparently are) with the vast acreage that is shaded on the map. Unfortunately, as we can see, reality tells another story. The size of the resources have been measured in the past, and with the best plays being given preference, the recognition of decline rates and unprofitable wells have not yet been given the prominence in the popular press that they will ultimately draw.

It seems unrealistic to anticipate the levels now being projected for future North American production of oil. Nevertheless, these projections do tend to crowd conflicting stories on the subject out of the spotlight. Further, if the predictions for American production gains, even in the short term, turn out to be optimistic, then the impacts may be even more exaggerated than is currently appreciated. Consider that OPEC now expects that North America will continue to provide the greatest y-o-y increase in supply over other nations, and there are in fact, few other nations that will contribute much more in the next year.

Stuart at Early Warning also has a post on the IEA report - IEA: US To Be World's Largest Oil Producer. Plus Energy Bulletin has a set of links to commentary too - Commentaries on the IEA WEO 2012 - peak postponed? - Nov 14.

I am less persuaded myself that using a thousand oil rigs to generate an extra one million barrels per day of oil is necessarily a sign of a large and long-term sustainable increase in US oil production (as opposed to, say, frenzied scraping of the bottom of the barrel). But, still, I'm not certain beyond a reasonable doubt just how deep this particular barrel can be scraped.

At any rate, one thing that is interesting is that the chart above shows the US second peak just reaching 10mbd of oil, and yet the US will be the largest producer of oil. Since the IEA says Saudi production is currently at 9.5mbd and Russia at 10.75mbd, the implication is that neither Russia or Saudi Arabian production will increase at all between now and 2020 when the US will surpass them.

Apparently, the strategy of massed hordes of drilling rigs fracking for shale oil can only be of benefit in the United States.

It used to be Saudi Arabia that was used to fill in the wedge between desired supply and expected demand in official energy projections. Apparently the agencies have now accepted that Saudi Arabia cannot or will not increase production and the US is now being assigned the role of supplier of last resort for future energy projections.

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