michael gurstein on Thu, 10 May 2012 07:00:00 +0200 (CEST)

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<nettime> Orlov: Shale gas the view from Russia


(Somehow this seems relevent...

Orlov: Shale gas the view from Russia

The official shale gas story goes something like this: recent technological
breakthroughs by US energy companies have made it possible to tap an
abundant but previously inaccessible source of clean, environmentally
friendly natural gas. This has enabled the US to become the world leader in
natural gas production, overtaking Russia, and getting ready to end of
Russia's gas monopoly in Europe. Moreover, this new shale gas is found in
many parts of the world, and will, in due course, enable the majority of the
world's countries to achieve independence from traditional gas producers.
Consequently, the ability of those countries with the largest natural gas
reserves-Russia and Iran-to control the market for natural gas will be
reduced, along with their overall geopolitical influence.

If this were the case, then we should expect the Kremlin, along with
Gazprom, to be quaking in their boots. But are they? Here is what Gazprom's
chairman, Alexei Miller, recently told Süddeutsche Zeitung: "Shale gas is a
well-organized global PR-campaign. There are many of them: global cooling,
biofuels." He pointed out that the technology for producing gas from shale
is many decades old, and suggested the US turned to it out of desperation.
He dismissed it as an energy alternative for Europe. Is this just the
other's sides propaganda, or could Miller be simply stating the obvious?
Let's explore. I will base my exploration on Russian sources, which is why
all the numbers are in metric units. If you want to convert to Imperial, 1
m3 = 35 cubic feet, 1 km2 = .38 square miles, 1 tonne = 1.1 short tons).

The best-developed shale gas basin is Barnett in Texas, responsible for 70%
of all shale gas produced to date. By "developed" I mean drilled and drilled
and drilled, and then drilled some more: just in 2006 there were about as
many wells drilled into Barnett shale as are currently producing in all of
Russia. This is because the average Barnett well yields only around 6.35
million m3 of gas, over its entire lifetime, which corresponds to the
average monthly yield of a typical Russian well that continues to produce
over a 15-20 year period, meaning that the yield of a typical shale gas well
is at least 200 times smaller. This hectic activity cannot stop once a well
has been drilled: in order to continue yielding even these meager
quantities, the wells have to be regularly subjected to hydraulic
fracturing, or "fracked": to produce each thousand m3 of gas, 100 kg of sand
and 2 tonnes of water, combined with a proprietary chemical cocktail, have
to be pumped into the well at high pressure. Half the water comes back up
and has to be processed to remove the chemicals. Yearly fracking
requirements for the Barnett basin run around 7.1 million tonnes of sand and
47.2 million tonnes of water, but the real numbers are probably lower, as
many wells spend much of the time standing idle.

In spite of the frantic drilling/fracking activity, this is all small
potatoes by Russian standards. Russia's proven reserves of natural gas
amount to 43.3 trillion m3, which is about a third of the world's total. At
current consumption rates, that's enough to last 72 years. Russian gas
production is constrained by demand, not by supply; it is currently down
simply because Eurozone is in the midst of an economic crisis. Meanwhile, US
production has surged ahead, for no adequately explored reason, crashing the
price and making much of it unprofitable.

Let's compare: Gazprom's price at the wellhead runs from US$3 to $50 per
thousand m3, depending on the region. Compare that to shale gas in the US,
which runs from $80 to $320 per thousand m3. At this price, the US cannot
afford to sell shale gas on the European market. Moreover, the overall
volume of shale gas being produced in the US, even given the feverish
drilling rate of the past couple of years, if cleaned up, liquified, and
shipped to Europe in LNG tankers, would not be enough to book up just the
LNG terminal in Gdańsk, Poland, which is currently standing idle. It seems
that Gazprom has little to worry about.

The US, on the other hand, does have plenty to worry about. There has been
much talk already about groundwater pollution and other forms of
environmental destruction that accompanies the production of shale gas, so I
will not address these here. Instead, I will focus on two aspects that are
just as important but have received scarcely any attention.

First, what is shale gas? Ask this question, and you will be told: "Shut up,
it's methane." But is it really? The composition of shale gas is something
of a state secret in the US, but information about the gas produced from the
nine Polish shale gas test projects did leak out, and it's not pretty:
Polish shale gas turned out to be so high in nitrogen that it does not even
burn. Technology exists to clean up gas that is, say, 6% nitrogen, but
Polish shale gas is closer to 50% nitrogen, and, given high production
costs, low yields, rapid depletion and low wellhead pressure, cleaning it up
to bring it up to spec (which is 1% nitrogen) would most likely result in a
net waste of energy.

Even if shale gas is low enough in nitrogen to burn, the problems do not end
there. It may also contain hydrogen sulfide, which is toxic and corrosive
and has to be removed before the gas can be stored or injected into a
pipeline. It probably contains toluene and other organic
solvents-ingredients in the fracking cocktails-which are carcinogenic.
Lastly, it may be radioactive. All clays are mildly radioactive, and shale
is a sort of heat-treated clay. While Barnett shale is not particularly
radioactive, Marcellus shale, which has recently been the focus of frantic
drilling activity, is. Thanks to Marcellus shale gas, radioactive radon gas
is being delivered directly to your kitchen, via the burners of your stove,
or to a power plant smokestack upwind from where you live. This is expected
to result in increased lung cancer rates in the coming years.

Second, why is shale gas being produced at all? Natural gas prices have
fallen through the roof, and are currently around $2 per thousand cubic
feet. This works out to around $70 per thousand m3. If shale gas costs from
$80 to $320 per thousand m3 to produce, it is unclear how one might make any
money with it.

But perhaps making money with it is not the point. What if shale gas is just
a PR campaign (with horrific environmental side effects)? Going back to what
Alexei Miller said, what if the entire point of the exercise was to increase
the capitalization of shale gas exploration and production companies? The
number one company in shale gas is Chesapeake Energy, the owner of the
Barnett basin and a major player in the Marcellus basin. This company almost
went bankrupt in 2009, but then managed to claw its way back to
profitability in 2010 and 2011 by drilling, and drilling, and drilling, and
then drilling some more. Sixty percent of their revenue is from drilling
operations. And now there is a scandal involving Chesapeake Energy's
(former?) chairman, Aubrey K. McClendon, who apparently awarded himself a
stake in each well his company drilled, used them as collateral for billions
in loans, and used the loans to bet that natural gas prices will go up (they
haven't). In the meantime, natural gas drilling rig count has dropped to a
ten-year low. Given that shale gas wells deplete very quickly, it looks like
the shale gas boom is over.

But now that it's over, what was it, exactly? It appears to have been
something like the dot-com bubble: companies with no conceivable way of
turning a profit using hype to attract investment and drive up their
valuations. Since 2008, various kinds of hype-based market manipulations
have become the staple of economic life in the US, and so this is nothing
new or different.

One interesting question is, What sort of bubble will the US attempt to blow
next, if any? There is the Facebook IPO coming up. Facebook is a ridiculous
time-waster and, as such, seems a bit overpriced. Are we going to attempt
blowing up another dot-com bubble? Another round of subprime mortgages does
not seem to be in the works. What's a bubble boy to do? If there are no more
bubbles to blow, then it's back to just plain printing money.

So this whole shale gas thing didn't work out as planned, did it? But could
it have? Had it turned out to be much better in every way, could it have
swung geopolitical influence away from Russia and Iran and back toward the
US? Alas, no.

You see, there is no such thing as a global natural gas market. Yes, there
are some LNG tankers sailing about, but that is very much a point-to-point
trade. There is a closed North American market, a European market, and
another market in the Asia-Pacific region. These markets do not interact.
The North American market and the European market could have potentially
shared just one producer: Qatar. Qatar once wanted to export LNG to the US,
but then decided to export it to Europe instead, generating less of a loss,
because European gas prices are substantially higher. And the reason Qatar
is dumping natural gas in Europe is because it has gas to dump: its northern
gas field is a very "wet" field, with a substantial percentage of natural
gas condensate. Qatar's OPEC quota is 36-37 million tonnes of oil per year,
but natural gas condensate is not considered to be oil and is not covered by
OPEC quotas. Exploiting the condensate loophole allows Qatar to export 65.7
million tonnes: 77% over quota. The LNG is just concomitant production, and
Qatar can afford to export LNG to Europe at a loss. This is a juicy bit of
trivia, but really something of a footnote: an exception that proves the
general case: there is no global natural gas market.

There is still, however, a global American disinformation and PR hype
market, although this too is changing. The view from Russia is that it is
pretty clear what this was all along: American propaganda and financial
shenanigns. Nothing to see here, people, keep moving.


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