Yergin on oil, II

Michael Giberson

I second Lynne’s recommendation of Yergin’s column in the Saturday Wall Street Journal.

On the topic of Hubbert’s peak and peak oil generally, I particularly recommend these two paragraphs:

Hubbert insisted that price didn’t matter. Economics—the forces of supply and demand—were, he maintained, irrelevant to the finite physical cache of oil in the earth. But why would price—with all the messages that it sends to people about allocating resources and developing new technologies—apply in so many other realms but not in oil and gas production? Activity goes up when prices go up; activity goes down when prices go down. Higher prices stimulate innovation and encourage people to figure out ingenious new ways to increase supply.

The idea of “proved reserves” of oil isn’t just a physical concept, accounting for a fixed amount in the “storehouse.” It’s also an economic concept: how much can be recovered at prevailing prices. And it’s a technological concept, because advances in technology take resources that were not physically accessible and turn them into recoverable reserves.

Yergin’s proposed alternative to thinking in terms of “peak oil” is to think in terms of a plateau in production, you might call it a long-drawn out peak, which will be limited more by price and demand than by exhaustion of supplies.

The WSJ article is accompanied by a 20-minute video interview, mostly about Yergin’s new book, The Quest, to hit the stores tomorrow.

Natural gas from shale: long lasting or going fast?

Michael Giberson

Daniel Yergin and Robert Ineson have an op-ed in the Wall Street Journal discussing the development and implications of natural gas from shale in the U.S. market. Not much will be new to you if you’ve been following the commentary here for a while, but they do provide a very good, general overview.

The basic story:

The companies were experimenting with two technologies [to access shale gas]. One was horizontal drilling. … The other technology is known as hydraulic fracturing, or “fraccing.” Here, the producer injects a mixture of water and sand at high pressure to create multiple fractures throughout the rock, liberating the trapped gas to flow into the well.

The critical but little-recognized breakthrough was early in this decade—finding a way to meld together these two increasingly complex technologies to finally crack the shale rock, and thus crack the code for a major new resource. It was not a single eureka moment, but rather the result of incremental experimentation and technical skill.

The result: “The supply impact has been dramatic. … Proven reserves have risen to 245 trillion cubic feet (Tcf) in 2008 from 177 Tcf in 2000, despite having produced nearly 165 Tcf during those years. … With more drilling experience, U.S. estimates are likely to rise dramatically in the next few years.”

Yergin and Iseson assess the effects on electric utilities, energy-intensive manufacturing, and other parts of the economy.  They even claim abundant natural gas will help facilitate renewable energy development (but while there are complementarities between gas and intermittent power sources, renewable resources would be better facilitated in the short run by high gas prices).

The other natural gas shale story in the news concerns shale-resource-skeptic Art Berman who claimed on his blog that World Oil magazine killed his monthly column due to pressure from an executive at an independent oil and gas development company.  The tiff attracted commentary from Tom Fowler at NewsWatch: Energy (“Who killed Art Berman’s column?”) and Kate Mackenzie at FT Energy Source (“Shale gas row gets nasty”).

Berman has been challenging the shale boom talk for some time, saying that data he has collected indicates shale gas wells are peaking and declining much faster than expected and therefore the resource is not nearly as significant as some claim. Recently he presented his views at the Association for the Study of Peak Oil and Gas conference in Denver: “Shale plays: A time for critical thinking.”  (Berman has also published counter-arguments made to his position on his blog, “Rebuttals To Our Shale Play Research.”)

Fowler’s post seems particularly thoughtful – he has interviewed Berman in the past, he reports on responses from World Oil and Petrohawk Energy (the oil and gas development company fingered by Berman) – and Fowler promises more information to come.  Of course, the life or death of Berman’s column is the sideshow, but the main event is the substance of Berman’s claims.  I suspect there will be more information to come on the substance as well.

For what it is worth, it appears to me that oil and gas companies believe in the potential of shale gas in a big way. Many of the graduates of the Energy Commerce program at Texas Tech University (where I teach) work for companies heavy into shale gas plays.  The names of several of these companies show up on a couple of Berman’s ASPO-USA slides: Chesapeake, Devon, Petrohawk, Southwest Energy, Encana, XTO, and EOG Resources.  I don’t know if we have students at Range Resources or Newfield, the other two companies mentioned on Berman’s slides, be we probably do. These companies are spending their money on shale resources as if it is a real, long-term resource, and that’s as good an indication as any available to an outsider looking in.

One nit to pick with Yergin and Iseson: they claim that while the “revolution in shale” has been around since 2007, awareness of the issue only reached Washington in the past few months.  Maybe that point is true at the higher levels of Washington society, but down at the data and analysis level Washington has been aware of the issue at least since November 2006.

In November 2006 the U.S. Energy Information Administration produced a preliminary report on Bakken Formation production in Montana and the Dakotas called “Technology-Based Oil and Natural Gas Plays: Shale Shock! Could There Be Billions in the Bakken?” The article states up front: “The Bakken Formation of the Williston Basin is a success story of horizontal drilling, fracturing, and completion technologies.”  In June 2008 the EIA followed with a brief analysis called, “Is U.S. natural gas production increasing?“, which focused on Barnett Shale development in Texas and the potential elsewhere.  Analysts have known for years about the boom in shale gas resources.