According to oil company director Bill Powers of Arsenal Energy Inc. based in Calgary, Canada, the demise of the fossil fuel industry is already in motion and will pave the way for the inexorable rise of renewable energy. In a presentation at the IEA in April, Powers told agency staffers that:
“Renewables, especially rooftop solar, will take a leading role in a distributed power revolution now underway. The utility industry is vigorously fighting distributed power’s advancement.”
The US shale gas bonanza was largely enabled by bubble economics – “low interest rates and easy financings” – but is unravelling as financial wishful thinking hits the wall of production reality, and is already a “commercial failure,” Powers told the IEA. Almost “every player” has experienced “huge debts on balance sheets” and “enormous write-downs of shale gas reserves.”
In 2012 alone, he said, Southwest Energy wrote down reserves of Fayetteville from 5 to 3 trillion cubic feet (tcf); Chesapeake Energy wrote down Haynesville and Barnett proven reserves by 4.6 tcf (erasing 20% of its proven reserves); EnCana wrote off $1.7 billion in shale gas assets; British Petroleum wrote off $2.1 billion due to failed investments in Fayetteville and Woodford shales; and BHP Billiton wrote off $2.84 billion in shale assets – to name just a few.
Since the beginning of the shale boom, total asset write-downs by the largest shale players are approaching $35 billion, reports the Oil and Gas Journal.
Powers, whose book Cold, Hungry and in the Dark: Exploding the Natural Gas Supply Myth anticipated many of the challenges being experienced by the industry, warns of an imminent 1970s style “natural gas deliverability crisis,” which through the course of the next decade will “destroy consumer confidence and shake the American economy to its foundation.”
The crisis will follow a decline in the Marcellus shale which, although originally claimed to contain 410 tcf of gas reserves, in fact likely has just 50 tcf of technically recoverable reserves.
Powers forecasts that Marcellus will peak before the end of 2015, pointing out that Chesapeake Energy, the largest landowner and producer in the Marcellus has already “dropped most of its rigs and is running down its inventory of wells.”
Are 60% of US shale ‘recoverable’ reserves commercially unviable?
Such reservations are increasingly recognised by industry experts. In a new paper for the Oxford Institute for Energy Studies, Ivan Sandrea – a senior partner at Ernst & Young London for global oil and gas in emerging markets – points to an analysis of 35 independent shale gas and tight oil focused companies “active across the major US plays and accounting for 3 million barrels of oil per day per of production,” showing that in the last six years “their financial performance has steadily worsened” despite production growth.
In the new age of expensive, difficult-to-extract unconventionals, investment expenditures in production costs nearly match total revenues every year, and “net cash flow is becoming negative while debt keeps rising.” Sandrea also blames the “close link between rising debt and production, the rising cost of debt to total revenues and negative cash flow, which add to concerns about the sustainability of the business.” The cash flow per share of US independents investing in shale oil and gas “is negative” and “trending more negative with time.”
Although he alludes to some vague optimism in the industry that these trends will reverse in a few years when shale explorations are more “fully understood and financially evaluated,” there seems little evidence from the economic and production fundamentals that this is likely.
In North Dakota’s Bakken, for instance, Sandrea observes that despite robust production growth, “the average production rate per well is not increasing as before and the amount of new wells it takes to obtain a similar increase in overall production is rising.”
Overall, he describes the shale oil and gas business as “analogous to an equation that operators have yet to solve.” Based on “an holistic review of the consensus and experience to date, the equation may still not be workable for a few more years, if at all.” His sobering conclusion is that only about 40% of purportedly recoverable US shale oil and gas reserves may be commercially viable:
“… who can, or will want to, fund the drilling of millions of acres and hundreds of thousands of wells at an ongoing loss? … The benevolence of the US capital markets cannot last forever for all players… A more realistic outcome is that sections of the industry will have to restructure and focus more rapidly on the most commercially sustainable areas of the plays, perhaps about 40% of the current acreage and resource estimates, possibly yielding a lower production growth in the US than is currently expected.”