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Shale Gas Will be the Next Bubble to Pop - An Interview with Arthur Berman

By James Stafford | Mon, 12 November 2012 23:11 | 11

The “shale revolution” has been grabbing a great deal of headlines for some time now. A favourite topic of investors, sector commentators and analysts – many of whom claim we are about to enter a new energy era with cheap and abundant shale gas leading the charge. But on closer examination the incredible claims and figures behind many of the plays just don’t add up. To help us to look past the hype and take a critical look at whether shale really is the golden goose many believe it to be or just another over-hyped bubble that is about to pop, we were fortunate to speak with energy expert Arthur Berman.

Arthur is a geological consultant with thirty-four years of experience in petroleum exploration and production. He is currently consulting for several E&P companies and capital groups in the energy sector. He frequently gives keynote addresses for investment conferences and is interviewed about energy topics on television, radio, and national print and web publications including CNBC, CNN, Platt’s Energy Week, BNN, Bloomberg, Platt’s, Financial Times, and New York Times. You can find out more about Arthur by visiting his website: http://petroleumtruthreport.blogspot.com

In the interview Arthur talks about:

•         Why shale gas will be the next bubble to pop
•         Why Japan can’t afford to abandon nuclear power
•         Why the United States shouldn’t turn its back on Canada’s tar sands
•         Why renewables won’t make a meaningful impact for many years
•         Why the shale boom will not have a big impact on foreign policy
•         Why Romney and Obama know next to nothing about fossil fuel energy

Interview conducted by James Stafford of Oilprice.com

Oilprice.com: How do you see the shale boom impacting U.S. foreign policy?

Arthur Berman: Well, not very much is my simple answer.

A lot of investors from other parts of the world, particularly the oil-rich parts have been making somewhat high-risk investments in the United States for many years and, for a long time, those investments were in real estate.

Now these people have shifted their focus and are putting cash into shale. There are two important things going on here, one is that the capital isn't going to last forever, especially since shale gas is a commercial failure. Shale gas has lost hundreds of billions of dollars and investors will not keep on pumping money into something that doesn’t generate a return.

The second thing that nobody thinks very much about is the decline rates shale reservoirs experience. Well, I've looked at this. The decline rates are incredibly high. In the Eagleford shale, which is supposed to be the mother of all shale oil plays, the annual decline rate is higher than 42%.

They're going to have to drill hundreds, almost 1000 wells in the Eagleford shale, every year, to keep production flat. Just for one play, we're talking about $10 or $12 billion a year just to replace supply. I add all these things up and it starts to approach the amount of money needed to bail out the banking industry. Where is that money going to come from? Do you see what I'm saying?

Oilprice.com: You've been noted suggesting that shale gas will be the next bubble to collapse. How do you think this will occur and what will the effects be?

Arthur Berman: Well, it depends, as with all collapses, on how quickly the collapse occurs. I guess the worst-case scenario would be that several large companies find themselves in financial distress.

Chesapeake Energy recently had a very close call. They had to sell, I don't know how many, billions of dollars worth of assets just to maintain paying their obligations, and that's the kind of scenario I'm talking about. You may have a couple of big bankruptcies or takeovers and everybody pulls back, all the money evaporates, all the capital goes away. That's the worst-case scenario.

Oilprice.com: Energy became a big part of the election race, but what did you make of the energy policies and promises that were being made by both candidates?

Arthur Berman: Mitt Romney, particularly, talked about how the United States would be able to achieve energy independence in five years. Well, that's garbage.

Relevant Article: High Risk Investing - The New Trend in Energy: Interview with Andrew McCarthy

Anybody who knows anything about oil, gas and coal, knows that that's absurd. We were producing a little over 6 million barrels a day thanks to an all-out effort in the shale oil play. We consume 15 million barrels of oil a day and that leaves the gap of 9 million barrels per day. At the peak of U.S. production, in 1970, the U.S. produced 10.6 million barrels per day. Like I said, either the guy doesn't know what he's talking about, or is making a big joke of it.

Obama didn’t talk so much . . . He's a hugely green agenda kind of president and I'm not opposed to that, but he's certainly not for the oil and gas business. It wasn't until he got serious about thinking about his re-election that he decided to take credit for what really happened.

Oilprice.com: Japan recently announced that they are going to be phasing out nuclear power. What are your views on nuclear? Are we in a position to abandon this energy source?

Arthur Berman: No. Japan is a special case. The disaster at Fukushima, the nuclear reactor, was right on top of a major fault. So, that was a dumb place to put it.

To wholesale abandon nuclear power because one reactor was incredibly stupidly planned, to me seems like a bit of a . . . well, I can't tell people how they should react, but if I were a Japanese citizen, and the truth was that we have no oil, we have no coal, we have no natural gas, the next question is, "Well, if we get rid of nuclear, what are we going to do?"

It's a really good question to ask. If you don't have anything of your own, how are you going to get what you need? The answer is that they have to import LNG and that's very expensive.

Right now, natural gas is selling in Japan for $17 per million BTUs. You can buy the same BTUs in Europe for $9 today, or in the US for $3.25

Relevant Article: The Myth of Affordable Energy - Interview with Ed Dolan

Oilprice.com: What about Germany’s decision to also phase out nuclear power?

Arthur Berman: For Germany to abandon nuclear… that decision is truly delusional because they haven't had any problems over there. Nor is Germany particularly earthquake prone or tsunami prone. They have forced themselves into a love relationship with Russia.

Oilprice.com: What are your views on Canada's tar sands? Are they a rich source of oil that the U.S. needs to exploit? Or do you think they're a carbon bomb, which could do irreparable damage to the climate?

Arthur Berman: Well, that's a very good question. I suppose they're both, as are virtually all things that burn. Right? They're a very rich source of oil. And they're dirty. It requires a lot of natural gas heating to convert them into some usable form, a lot of processing, but here's the thing, if the United States doesn't buy that oil from Canada, do you think Canada's just going to say, "Oh. Okay. Nevermind. We'll forget about all this."

No. They're going to sell it somewhere else. They'll probably sell it to Asia. So, the issue of the carbon bomb doesn't get resolved by the United States not taking the oil.

So, to me, that's off the table. Yes. I think it's an incredibly sensible play to get your oil from a neighbour, and a neighbour who you trust, and it doesn't require overseas transport and probably getting involved in periodic revolutions and civil uprisings.

Oilprice.com: Is there any technology, any development you see coming in the future that can help us get where we need to be? Is conservation really the only answer or do you have any hopes for some of the alternative energy technologies, such as solar or, even, some of these more advanced technologies such as Andrea Rossi’s E-cat machine?

Arthur Berman: Oh. I have all the enthusiasm for technology that you could ask for. I'm a scientist and I love technology but I heard a very good presentation several years ago on your exact question and the man who gave a talk said, "I'm going to give you a rule to live by. If it's not on the shelf today, then a solution is no sooner than ten years in the future." So, when you talk about E-cat and you talk about algae and all this kind of stuff, it's not on the shelf today. So, that means it's in some sort of pilot stage of testing.

Work harder guys. Work harder and faster because you've got a lot of work to do. So, yes, I'm enthusiastic. I think there are some great ideas out there but I don't see any of them helping us in the coming five to ten-year period.

Oilprice.com: Environmentalists talk about the evil of fossil fuels, but have they really done their research to see how vital it is to pretty much everything that we base our modern lives upon?

Arthur Berman: Well, that's exactly right. My oldest son and his family until recently lived in California, and in California people think electricity comes from the wall. They don't have any idea that most of their electricity comes from horrible coal-fired power plants in New Mexico and Arizona. As long as they don't have to see it, they don't have a problem.

But, in this world, and in this life, we're all connected and if you see something you don't like, there's a good possibility that whatever they're doing there has something to do with something you're using. So, this is an issue.

Oilprice.com: Arthur, thank you for taking the time to speak with us. For those readers who may be interested in contacting Arthur please take a moment to visit his website: http://petroleumtruthreport.blogspot.com/

[Audio currently unavailable]

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  • DCarrs on November 17 2012 said:
    Arthur Berman really should acquaint himself with a few facts regarding Germany's rapid transition away from nukes (and fossil fuels) towards renewables:

    1. the German people overwhelmingly reject nuclear energy, and German politicians seem to have some bizarre idea that in a democracy you listen to the people

    2. nukes can catastrophically fail for many reasons other than earthquakes and tsunami

    3. Germany was and remains a net exporter of electricity, with renewables growing at a massive rate - over 25% of total electricity now and projected to exceed 40 or even 50% by 2020.

    As for his views on the Canadian tar sands, that kind of justification could be used to excuse all kinds of immoral behavior. And his assumption that Canada would just sell it to Asia is far from certain.

    > "I think it's an incredibly sensible play to get your oil from a neighbour"

    He says that having just admitted it could "do irreparable damage to the climate"! That is the opposite of "incredibly sensible".

    Berman seems to be very uninformed on what unmitigated climate change will bring, and how rapidly renewable energy is growing worldwide. The only thing stopping renewables from powering any country is political will which is missing partly because of people holding beliefs similar to Arthur Berman's.


    P.S.

    > "Environmentalists talk about the evil of fossil fuels, but have they really done their research to see how vital it is to pretty much everything that we base our modern lives upon?"

    I think the better question is whether you have really done your research on what "environmentalists" understand. It certainly is not your ridiculous caricature of them.
  • Carnardie on November 17 2012 said:
    Berman's wrong when he says that most of CA's electricity comes from coal. In CA it's under 2%. Even nationwide, he's wrong - it's now about a third from coal and dropping since peaking in 2010. Cheap natural gas is doing what environmentalists were unable to do - move the country away from coal.

    My sources: http://energyalmanac.ca.gov/overview/energy_sources.html
    http://www.eia.gov/todayinenergy/detail.cfm?id=5331
  • Mark Robinowitz on November 18 2012 said:
    California is part of the Western power grid and it definitely depends on coal burning in nearby states. Read about the "Four Corners" power station which sends lots of electrons across the state line.

    It will be interesting to see what happens to the US power grids when the shale gas bubble bursts, especially since coal is peaking, too.
  • yt75 on November 18 2012 said:
    Good interview, thanks for that.
    (even if e-cat can simply be classified as a scam)
  • yt75 on November 18 2012 said:
    @Carnadie

    Art Berman's "most" is exagerated, but your under 2% refers to in-state generation from the source you posted, this in-state generation total accounting for 70% of California consumption (your source as well).
  • AU Trader on November 18 2012 said:
    This article is way off base. I live in san antonio next to the eagle ford. It is a complete boom. EOG even has some mega wells, 5000 barrels/day run rate. There's between 10 and 25 BILLION barrels here.

    And guess what - there is another layer below eagle ford - much deeper but companies are going there to in the wells already drilled.

    I'd ignore this Berman guy.
  • ElSid on November 19 2012 said:
    If what he's saying about up to 42% decline rates is true, that means all those wells that were drilled two years ago are done? So, if that's a mathematically valid number (I suspect it's anecdotal) then that portion of production will be running dry soon and supply will drop. How does that make natgas a bubble?

    Actually, producers would welcome tighter supplies, and a normalizing of prices, higher.

    Sorry, but Chesapeake is a bad example as they are *financially* overstretched because their leader is a megalomaniac CEO. There are plenty of companies that produce a high percentage of natgas (as opposed to liquids) that are making money on it, even at these prices.
  • John on November 24 2012 said:
    @DCarrs Please read some German newspapers and you will understand that Mr Berman is 100% right about nuclear energy in Germany. Of course Germans are able to close their nuclear plants, they can replace them with gas from Russia. But price of electricity in Germany has sky-rocketed in the last year and more price hikes are expected in the future. More and more Germans can't afford electricity any more. But mainstream political parties are all deeply involved in this nonsense and they will never admit how foolish they were, at least not before the next election in 2013.
  • Martin on January 22 2013 said:
    German electricty exports are a hoax.
    They work like this:
    At 2am or some other random unpredictable time the wind turbines generate lots of electricity that is not needed. Then Germany pays money to another country to take the electricity so their power net doesn't collapse.
    The only thing the German nuclear power phase out does is make germany completely dependent on neighboring states and the EU. They can simply switch of the lights if they want to.
  • marley hollis on February 07 2014 said:
    au trader is delusional eagleford wells average 300 bbls ip and decline at a 50% rate first year.5000 bbls/day is pure lying.
  • fox on March 14 2014 said:
    @john: anybody who still thinks that nuclear should be pursued after the Fusukushima tragedy needs his head examined. As if totally unresolved issues such as safe storage (for about 5,000-10,000 years and therefore almost undoable and in any case prohibitively costly) were not enough, the human, environmental and economic costs involved in even one major incident should be sufficient to exit nuclear as fast as possible. Nuclear is cheap only if you exclude all the costs associated with it. So while Germans do pay higher prices now, anyobody would have to pay far far higher prices if you would charge people for the true costs of nuclear that will inevitably arise over the next 50 centuries or so.

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