Sunday, September 22, 2013

The shale gas bubble: burning your home in order to save it

This is a written version of a comment that I made during the discussion at the last reunion of the Club of Rome in Ottawa.

Ladies and gentlemen, let me comment on a point of this interesting discussion. We have been told, correctly, that the production of shale gas in North America is booming and also that prices are now very low; around 2 dollars per million cubic feet. It is, actually, somewhat more than that but it is still a low price in comparison to what it was some years ago; before the shale gas "revolution"

On the other hand, producing shale gas is expensive. "Fracking" is a technology that was developed long ago, but it was never used on a large scale because it was too expensive in comparison to conventional gas production. And that's reasonable: for fracking you need sophisticated equipment, chemicals, and more. In addition, a shale gas well is rapidly exhausted, so that you must go on drilling in order to keep producing. Indeed, mining technology has this characteristic: it can be used to mobilize more resources, but it can rarely make them cheap.

So, there is a contradiction here: we are using a more expensive technology to produce a commodity whose prices, however, went down considerably. What's happening?

I think the explanation, here, lies in financial factors. What we are seeing, indeed, is mainly a financial bubble in which investors are led to pour money into a market with the hope to make a lot of money. That's a hope, obviously, for the future because, right now, I am sure that nobody can make a lot of money with such low gas prices - actually I think a lot of people are losing money. But this is the magic of the financial market: if everyone believes that a certain commodity will have a large value in the future, then they invest in it, and the result is overproduction.

So, we are talking of a financial bubble and we can compare the gas bubble with the housing bubble, the one that exploded in 2008. There is a difference, though: as the respective bubbles grew, home prices went up while gas prices went down. Well, there is a logic: we have very limited capability of storing the overproduction of gas - so we must burn it. In a way, we are burning gas in order to keep the gas market alive. That's not the case with overproduction of homes: you don't need to burn your home in order to save it; at least not so far (although sometimes rather drastic measures are needed) (*).

So, all that overproduced gas had to be sold on the market and that led to prices going down. It is what we are seeing. Now, the point is for how long the market will be willing to finance the production of something that is generating such small returns (if it is at all). Consider also that in the process we are also destroying water sources and polluting vast areas; to say nothing of the methane leaks resulting from drilling. All these are costs, too - someone will have to pay for them, sooner or later. So, I think we'll see prices going up - it is unavoidable. But that may cut the demand and may cause also production to go down. We seem to be seeing both effects ongoing, right now: lower production and higher prices. It is still too early to see a robust trend, here; but I think this is unavoidable - the shale gas revolution may be already over.

See also this article on shale gas by Ugo Bardi


(*) An apartment building in Italy, near Ugo Bardi's home. Here, the owners couldn't rent the apartments at a price that they judged good enough, so they preferred to keep them vacant. To make sure that squatters won't come inside, they even walled up all doors and windows. They are waiting for the market to miraculously return to the high prices of once. Good luck!


  1. This phenomenon in the energy markets, which you mention,
    that is, financials forcing combustion of non-renewable hydrocarbon resources wastefully, is why we at PRI feel the solution is what we call Federal Fossil Fuels (FFF).

    FFF would be a monopoly buyer of fossil fuels at the mine mouth and well head and at the import terminal, under life of project contracts, ie; long term, at a price guaranteed to provide a pre-determined profit margin to the producer. FFF contracts would require re-injection of gas co produced with oil, unless such gas could be marketed. FFF contracts would consider flared gas, dumped oil, bitumen tailings, and other petro carbon waste as produced, thus reducing the amount FFF would purchase at the agreed price.

    As monopoly buyer, FFF would be monopoly seller to refiners, power plants, and consumers. Given the many studies which show the true cost of a BOE of petroleum to be $400/BOE, FFF would sell all fossil fuels at that price, remiting the balance to the Treasury. We estimate that FFF would generate $2 trillion for the treasury at current consumption rates. Of course, our goal for FFF is drastic reduction of petro fuel consumption.

    As you know, we advocate emplacement of PV on every suitable roof, grid connection of PV systems, and a generous feed-in tariff of $0.25/kwh for PV produced energy, as well as a generous feed-in tariff of $0.15/kwh for Farmer owned wind turbines of less than 1.2 Mwe.

    Our goal would be to replace petro energy with renewables.


    1. The author has missed an important economic element to the present situation. It's not that producers are out there aggressively drilling gas wells, but that they are aggressively producing oil wells that also happen to produce gas. Without access to markets, gas was being burned off in the Williston basin in recent years. However, as pipeline connections have come available, that same gas can generate a positive economic return for the well owners even if the revenues are marginal in comparison to the liquids being produced. As long as liquids prices are running north of $100/bbl or even $90/bbl there will be gas production as a byproduct. The marginal cost for that gas is the cost to deliver it to market. Any return above that cost is a positive economic incentive to sell the gas for additional economic recoveries against a sunk cost. The abundance of gas being supplied at such incredibly low prices is simply because there's more supply than demand... basic economics. If Gas export terminals come online, coal fired power plants continue to be replaced with natural gas fired plants, and transportation vehicles convert to LNG/CNG form diesel/gasoline, we'll see the markets react to the increased demand and the price of nat gas rise. This will only incentivize producers to capture gas that's being burned off and pipe it to market, and so it goes.

  2. Ugo
    I have a British story from my youth of local government taking stern decisions to prevent vandalism by young persons of bus shelters at bus stops in their rural areas (those were the days when the population relied more on publicly run bus services.) The authority removed parts of the wooden seats so that they could not be used comfortably, and similarly panels from the walls to allow cold winds to discourage occupancy.

    My understanding of USA fracking is that tight oil is making money at current oil prices. Most new drilling is now for tight oil and NG commonly found at the same wells is usually flared off. The USA has an existing network of gas pipelines but this is not being extended to most 'tight gas' wells. The US is and has been the world’s number one or two NG producer for decades, but still is marginally a net NG importer. There are places around the continent where it is lower cost to supply NG from outside. Tight oil, on the other hand, of course is being shipped by road tanker and rail from the very numerous new well heads. Like tight NG though the decline in flow rates at individual oil wells is exceedingly rapid - hence the 'Red Queen' problem and frantic drilling rates needed to keep up supply. (Here in Britain we have not understood that any significant supply of tight oil in this country would require tens of thousands of wells across our very limited and highly populated countryside.
    I see today that: Energy rigs in the US fell by seven to 1,761 this week according to Baker Hughes. Gas rigs dropped by 15 to 386 while oil rigs jumped by eight to 1,369.




Ugo Bardi is a member of the Club of Rome and the author of "Extracted: how the quest for mineral resources is plundering the Planet" (Chelsea Green 2014)