Peak Oil: Energy Investor Bill Powers Discusses the Looming Shale Gas Bubble
The book's title — Cold, Hungry and in the Dark: Exploding the Natural Gas Supply Myth — pokes fun at the statement made by former Chesapeake Energy CEO Aubrey McClendon at the 2011 Shale Gas Insight conference in Philadelphia, Pennsylvania.
"What a glorious vision of the future: It's cold, it's dark, and we're all hungry," Powers said in response to the fact that there were activists outside of the city's convention center. "I have no interest in turning the clock back to the dark ages like our opponents do."
What Powers unpacks in his book, though, is that McClendon and his fellow "shale promoters," as he puts it in his book, aren't quite as "visionary" as they would lead us all to believe.
Indeed, the well production data that Powers picked through on a state-by-state basis demonstrates a "drilling treadmill." That means each time an area is fracked, after the frackers find the "sweet spot," that area yields diminishing returns on gas production on a monthly and annual basis.
Powers posits this could lead to a domestic gas crisis akin to the one faced in the 1970's.
We discuss these issues and far more in the interview below:
SH: Tell me more about the premise of your book, why you wrote it, and what you think some of the biggest findings were from your book.
BP: What I really take a look at and show is that shale gas, while it's an important resource, its importance has been vastly over-stated. We do not have a 100-year supply of shale gas.
The increasing demand, which has been brought about by the low prices of the last few years, is going to lead to another 1970s-style gas crisis. That will happen sometime between 2013 and 2015. We are seeing gas — while there's been a lot of promotion of the 100-year supply myth — the facts simply just do not support it. That's the premise of the book.
SH: Why and how is gas such an important resource in the U.S. to begin with that a crisis akin to that which happened in the 1970s could happen here again?
BP: Well, the U.S. produces over 60 billion cubic feet per day, which is the energy equivalent of 10 million barrels of oil per day.
We've already seen a major move away from coal-fired power plants towards increased reliance on gas, we're seeing legislation come in such as MATS that would be implemented by 2015 and would shut down many coal-fired power plants. We're seeing increased consumption not just from the electrical power industry but also from the industrial sector. We're seeing a big fertilizer plant being built in Iowa right now that will consume huge amounts of natural gas. We're seeing a pick-up of natural gas consumption in manufacturing after more than a decade of decline, and we've seen an increasing number of homes in the U.S. that are heated by natural gas.
SH: Increasingly so because of the increase in gas power plants and the switch-over, right?
BP: We've seen more homes in the Northeast switch away from heating oil to gas and we've seen many homes for decades in the Midwest heated with gas, so that is something that I think is going to have a very big impact on the rise of gas prices and a very big impact on a lot of Americans. That's going to lead to higher electricity prices, higher home heating costs, as well as higher food costs, because the natural gas component of fertilizer is so significant.
SH: Do you think that there will be a switch back to coal then because of the gas crisis? Or is it a broader problem than just a simple switch-over?
BP: Well, I don't think we're necessarily going back to coal. I talk about this in the book, there are ways to mitigate a gas crisis.
One is increased efficiency, distributed power, obviously solar and wind. But also energy storage is going to become increasingly important. Rather than having natural gas-fired peaking plants, we are going to need to use better grid-management systems where batteries will be very important, where you can store electricity that can be used with wind and solar. In California you have grid parity where they are using roof-based solar systems.
One of the ugly things I talk about in the book is that up to 77% of all of the electricity and potential energy that comes into a power plant via coal, or uranium, or gas is wasted by the time it reaches the consumer through conversion loss and line loss. So, I believe we're leaning more toward a distributed power industry, I would say somewhat at the expense of the incumbent utilities, because producing electricity closer to the point of consumption will greatly enhance efficiency and there is a lot of room to squeeze efficiency out of the grid.
In short, we are not going back to coal, we are not going back to heating oil. We are going towards increased efficiency and alternative energy.
SH: This is a little bit tangential, but I want to return to coal because it's so intertwined with gas in the U.S.. Is there sort of a parallel decline in coal production in the U.S., or is there just so much exportation of coal in the U.S.? Or rather, is it just a combo of both of these factors?
BP: Well, one of the things about coal is that it's becoming increasingly expensive to mine. One of the things to understand is that the energy value per ton of coal continues to go down in the U.S., so the price of coal is in an upward trajectory and I think it will – even though prices have not been good lately — you know we've depleted the best reserves of coal available.
That's not to say that in the Powder River Basin or in the Illinois Basin there's not plenty of coal, but the energy value of it continues to decline. This all leads one to believe that over the years prices will rise.
Given the fact that there is a decline in production there and elsewhere, doesn't it seem like a foolish decision for use of gas itself? And overall, how much gas is wasted by the industry as a whole that could be used as an actual fuel source?
BP: It's hard to tell, but there is a significant amount of flaring in the Bakken, I mean more than any field in the U.S.
You know, flaring is regulated by state agencies. In Texas, there are very strict rules on the amount you can flare in one year. I'm somewhat surprised and I don't want to pick on the state of North Dakota, but they certainly can do better.
I don't know the costs of building out the infrastructure to build a gathering system into North Dakota and Montana, but I definitely think that it's possible. You know, there have been a lot of wells built in the last five years in North Dakota, so I don't know how long those flares last or whether it's economic to build infrastructure out, but I think at some point it may make sense.
SH: Because we're focusing on this oil field right now, this is an example that's being very widely promoted as a success story. What's the reality of productivity in the Bakken Shale both in oil and gas?
BP: From a gas standpoint, it's hard to tell; it's not significant in gas because it's an oil field.
Production in oil is probably leveling out close to 700,000 barrels a day. The wells there have a very steep decline. Will it get over a million barrels? That's very difficult to say, it's very questionable.
We've certainly seen a production peak in Montana and Saskatchewan, and I don't think North Dakota is that far from peaking. I do think the lack of transportation has pushed out the peak date because companies have delayed drilling wells because of that, but I think now the transportation is in place through additional pipelines and rail systems.
I think it will peak out somewhere in the 750,000 range. It may go a little higher, but not too much higher than that.
SH: Your book is coming out a few months after the report by David Hughes and Deborah Rogers. Are your findings in line with that or different?
BP: It's very much in line with what David Hughes has found. I sat on a panel with him in Austin, Texas last year and I've known him for a number of years, and his work pretty much, I would say, validates my thesis.
SH: Did you have the same methodology?
BP: His "Drill, Baby, Drill" is different in the sense that it looks at actual drilling results. I go to state agencies, and in the case of the Woodford Shale, since the state of Oklahoma is so bad at [recording] data, I had to use company data to try to find out how much it's producing overall.
SH: You both looked at source data, but it was different sources: he went to the wellhead data, you went to the state agencies. But still, both show a far different picture than the industry claims. Is yours very similar to Dave's?
BP: Dave did a data download of all of the wells and kind of built his book from there. Whereas what I did was, I said to myself, "Okay, here's the Arkansas Oil and Gas Commission, here are the number of wells that have been drilled, here's the production from those wells over the course of their lifetime and say what is the estimated UR [unrecovered reserves]."
My book is based on production history. And what Dave does is that he publishes that production history as well as making projections about how many wells would be needed to keep production flat in some of these places.
That's not something I would be able to do, but it's clear that several of the fields such as the Bakken, Haynesville, and the Fayetteville are maturing quickly and are headed into decline. Those three are in decline. And so this is going to offset any gains from the Marcellus, in my opinion, and that leaves 60% of U.S. production — which is non-shale production — in terminal decline and that's going to cause a big problem.
SH: From your findings, what is the most productive field for gas?
BP: Right now the biggest field is the Marcellus. It produces about 7 billion cubic feet a day.
SH: Looking more broadly, in your book you have a section on shale promoters. When you say that, what do you mean and who are some of them?
BP: Okay, we'll start naming names! As you may have guessed: Aubrey McClendon. He makes many statements that are just not supported by any empirical facts and his promotion over the years has turned out to be not validated by the drilling.
And then I talk about [T. Boone] Pickens. He really promoted — what I find somewhat distasteful about him — is that he pushed the NAT GAS Act to get tax breaks for natural gas vehicles. What I find problematic with that is that he's done the Pickens Plan where he created a non-profit to push this through Congress, but he's also not only put his own money in it, he's raised money through private individuals. I find that very distasteful.
SH: Is that via BP Capital or something else?
BP: No, that's the Pickens Plan, a non-profit. However, what they really push is something that will benefit him uniquely in the sense that he is the largest shareholder in the biggest provider of natural gas refueling stations, Clean Energy Fuels Corporation. He owns, I want to say, 16 million shares of it, which is about $250 million worth.
SH: He's a promoter, but he's a self-promoter, similar to Aubrey?
BP: Correct. It's a very self-interested promotion of gas, and he uses wrap-yourself-in-the-flag, 'we can't give $700 billion a year to the enemy, we've got to get off foreign oil' appeal to Americans' patriotism to push forward an agenda that will uniquely benefit him.
SH: That's actually interesting because I wanted to ask you about the "Declaration of Energy Independence" agreement between Chesapeake and Clean Energy Fuels, and the Natural Gas Highway, so you see where the interests align.
Is that even happening? Will there be infrastructure for natural gas vehicles in the U.S.?
BP: It's unlikely. I will say this: obviously I can't speak as to what they will pay truck stops to install this. But even if they do, truckers have got to get commitments: this is a huge cost, to buy a CNG (compressed natural gas-fueled) truck. And then there's a payback period that may or may not happen. And I also don't know if the trucks are as powerful on CNG versus diesel. I don't know how effective the engine conversions are, I am not sure of that. And I think that is the question on whether there will be a wide-scale adoption of CNG trucks.
SH: And then, looking at the broad picture, if there is a gas crisis like the 1970s, what does that look like for this country?
BP: It's ugly. If we look at the 1970s, schools were closed because of high gas prices. Energy bills went up, you saw consumer confidence went down and you saw very high periods of inflation. Home heating, electricity prices, food: all going up. And that is not something I think consumers are expecting or are they prepared for.
SH: How can the worst of this be prevented?
BP: What I think people should be talking about … I have a whole chapter on ways to mitigate the gas crisis, and obviously, that's increased efficiency, whether that's in your home, [or] citywide.
The way you heat your home, the way you consumer electricity, to think to yourself — the price of solar panels has gone down massively in the last five years and what's the break-even point in my state. That's a decision in California now: it's the break-even point in a lot of places; and by 2014, it will be … it is in San Diego and Los Angeles County, but they have very high electricity rates and it's very sunny.
One of the other big things is having energy storage. There's a guy by the name of Bill Powers who I got to know through the book who's an electrical engineer who lives in San Diego, and if you google him — "Bill Powers, San Diego" — he's one of the leading experts on distributed power and he's testified before the California Power Commission.
He has solar panels on his roof and he's pretty much off the grid. He has eight car batteries clipped together and they store energy when he's out of the house. And he can go for almost a week without the sun shining. And I think that is going to become a reality in a lot of areas of the country. Just as I think solar is going to become how we power all these electric cars, and I talk about that as an alternative to natural gas vehicles.
SH: To close it off, can you explain if and when there are decreasing rates of shale production in the U.S., why will there never be an import boom to replace that gas to sufficient levels?
BP: Well, if we look at Canada right now, the biggest supplier of gas to the U.S. by a huge margin, the second is Trinidad and Tobago.
Trinidad and Tobago has declining reserves and is also one of the biggest suppliers of LNG in the Western Hemisphere. So what you have is a very tight world LNG market. The world LNG market is about 11 Tcf (trillion cubic feet) a year.
And that will go up with Australia, but that will be somewhat offset by Qatar already at maximum production. Indonesia is a top five producer, and they're going down; Oman is a top ten producer and they're going down. We're seeing increasing demand in the Middle East and huge demand in Asia. I also think China will become an importer of LNG.
SH: So there's LNG terminals being built in China?
BP: Everywhere. They've had a huge increase and they are going to suck up any available cargoes. And there's a huge push for them to get away from coal because of the pollution we're seeing in Beijing and Shanghai; it's killing people and leading to social unrest.
They're not just going to wait for solar panels and other things, this is stuff they can do right now. These facilities are being built right now. The world LNG market is tight, and it's going to be tight for a long time, so there's certainly not the incremental supply to make up for a slowdown in shale gas production from the U.S.