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Shale, the Last Oil and Gas Train: Interview with Arthur Berman

By James Stafford | Wed, 05 March 2014 23:20 | 13

How much faith can we put in our ability to decipher all the numbers out there telling us the US is closing in on its cornering of the global oil market? There’s another side to the story of the relentless US shale boom, one that says that some of the numbers are misunderstood, while others are simply preposterous. The truth of the matter is that the industry has to make such a big deal out of shale because it’s all that’s left. There are some good things happening behind the fairy tale numbers, though—it’s just a matter of deciphering them from a sober perspective.   

In a second exclusive interview with James Stafford of Oilprice.com, energy expert Arthur Berman discusses:

•    Why US gas supply growth rests solely on Marcellus
•    When Bakken and Eagle Ford will peak
•    The eyebrow-raising predictions for the Permian Basin
•    Why outrageous claims should have oil lawyers running for cover
•    Why everyone’s making such a big deal about shale
•    The only way to make the shale gas boom sustainable
•    Why some analysts need their math examined
•    Why it’s not just about how much gas we produce
•    Why investors are starting to ask questions
•    Why new industries, not technologies will make the next boom
•    Why we’ll never hit the oil and gas ‘wall’
•    Why companies could use a little supply-and-demand discipline
•    Why ‘fire ice’ makes sense (in Japan)
•    Why the US crude export debate will be ‘silly’

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

Oilprice.com: Almost on a daily basis we have figures thrown at us to demonstrate how the shale boom is only getting started. Mostly recently, there are statements to the effect that Texas shale formations will produce up to one-third of the global oil supply over the next 10 years. Is there another story behind these figures?

Arthur Berman: First, we have to distinguish between shale gas and liquids plays. On the gas side, all shale gas plays except the Marcellus are in decline or flat. The growth of US supply rests solely on the Marcellus and it is unlikely that its growth can continue at present rates. On the oil side, the Bakken has a considerable commercial area that is perhaps only one-third developed so we see Bakken production continuing for several years before peaking. The Eagle Ford also has significant commercial area but is showing signs that production may be flattening. Nevertheless, we see 5 or so more years of continuing Eagle Ford production activity before peaking. The EIA has is about right for the liquids plays--slower increases until later in the decade, and then decline.

The idea that Texas shales will produce one-third of global oil supply is preposterous. The Eagle Ford and the Bakken comprise 80% of all the US liquids growth. The Permian basin has notable oil reserves left but mostly from very small accumulations and low-rate wells. EOG CEO Bill Thomas said the same thing about 10 days ago on EOG's earnings call. There have been some truly outrageous claims made by some executives about the Permian basin in recent months that I suspect have their general counsels looking for a defibrillator.

Recently, the CEO of a major oil company told The Houston Chronicle that the shale revolution is only in the "first inning of a nine-inning game”. I guess he must have lost track of the score while waiting in line for hot dogs because production growth in U.S. shale gas plays excluding the Marcellus is approaching zero; growth in the Bakken and Eagle Ford has fallen from 33% in mid-2011 to 7% in late 2013.

Oil companies have to make a big deal about shale plays because that is all that is left in the world. Let's face it: these are truly awful reservoir rocks and that is why we waited until all more attractive opportunities were exhausted before developing them. It is completely unreasonable to expect better performance from bad reservoirs than from better reservoirs.

The majors have shown that they cannot replace reserves. They talk about return on capital employed (ROCE) these days instead of reserve replacement and production growth because there is nothing to talk about there. Shale plays are part of the ROCE story--shale wells can be drilled and brought on production fairly quickly and this masks or smoothes out the non-productive capital languishing in big projects around the world like Kashagan and Gorgon, which are going sideways whilst eating up billions of dollars.

None of this is meant to be negative. I'm all for shale plays but let's be honest about things, after all!  Production from shale is not a revolution; it’s a retirement party.

OP: Is the shale “boom” sustainable?

Arthur Berman: The shale gas boom is not sustainable except at higher gas prices in the US. There is lots of gas--just not that much that is commercial at current prices. Analysts that say there are trillions of cubic feet of commercial gas at $4 need their cost assumptions audited. If they are not counting overhead (G&A) and many operating costs, then of course things look good. If Walmart were evaluated solely on the difference between wholesale and retail prices, they would look fantastic. But they need stores, employees, gas and electricity, advertising and distribution. So do gas producers. I don't know where these guys get their reserves either, but that needs to be audited as well.

There was a report recently that said large areas of the Barnett Shale are commercial at $4 gas prices and that the play will continue to produce lots of gas for decades. Some people get so intrigued with how much gas has been produced and could be in the future, that they don't seem to understand that this is a business. A business must be commercial to be successful over the long term, although many public companies in the US seem to challenge that concept.

Investors have tolerated a lot of cheerleading about shale gas over the years, but I don't think this is going to last. Investors are starting to ask questions, such as: Where are the earnings and the free cash flow. Shale companies are spending a lot more than they are earning, and that has not changed. They are claiming all sorts of efficiency gains on the drilling side that has distracted inquiring investors for awhile. I was looking through some investor presentations from 2007 and 2008 and the same companies were making the same efficiency claims then as they are now. The problem is that these impressive gains never show up in the balance sheets, so I guess they must not be very important after all.

The reason that the shale gas boom is not sustainable at current prices is that shale gas is not the whole story. Conventional gas accounts for almost 60% of US gas and it is declining at about 20% per year and no one is drilling more wells in these plays. The unconventional gas plays decline at more than 30% each year. Taken together, the US needs to replace 19 billion cubic feet per day each year to maintain production at flat levels. That's almost four Barnett shale plays at full production each year! So you can see how hard it will be to sustain gas production. Then there are all the efforts to use it up faster--natural gas vehicles, exports to Mexico, LNG exports, closing coal and nuclear plants--so it only gets harder.

This winter, things have begun to unravel. Comparative gas storage inventories are near their 2003 low. Sure, weather is the main factor but that's always the case. The simple truth is that supply has not been able to adequately meet winter demand this year, period. Say what you will about why but it's a fact that is inconsistent with the fairy tales we continue to hear about cheap, abundant gas forever.

I sat across the table from industry experts just a year ago or so who were adamant that natural gas prices would never get above $4 again. Prices have been above $4 for almost three months. Maybe "never" has a different meaning for those people that doesn't include when they are wrong.

OP: Do you foresee any new technology on the shelf in the next 10-20 years that would shape another boom, whether it be fossil fuels or renewables?

Arthur Berman: I get asked about new technology that could make things different all the time. I'm a technology enthusiast but I see the big breakthroughs in new industries, not old extractive businesses like oil and gas. Technology has made many things possible in my lifetime including shale and deep-water production, but it hasn't made these things cheaper.

That's my whole point about shale plays--they're expensive and need high oil and gas prices to work. We've got the high prices for oil and the oil plays are fine; we don't have high prices for the gas plays and they aren't working. There are some areas of the Marcellus that actually work at $4 gas price and that's great, but it really takes $6 gas prices before things open up even there.

OP: In Europe, where do you see the most potential for shale gas exploitation, with Ukraine engulfed in political chaos, companies withdrawing from Poland, and a flurry of shale activity in the UK?

Arthur Berman: Shale plays will eventually spread to Europe but it will take a longer time than it did in North America. The biggest reason is the lack of private mineral ownership in most of Europe so there is no incentive for local people to get on board. In fact, there are only the negative factors of industrial development for them to look forward to with no pay check. It's also a lot more expensive to drill and produce gas in Europe.

There are a few promising shale plays on the international horizon:  the Bazherov in Russia, the Vaca Muerte in Argentina and the Duvernay in Canada look best to me because they are liquid-prone and in countries where acceptable fiscal terms and necessary infrastructure are feasible.  At the same time, we have learned that not all plays work even though they look good on paper, and that the potentially commercial areas are always quite small compared to the total resource.  Also, we know that these plays do not last forever and that once the drilling treadmill starts, it never ends.  Because of high decline rates, new wells must constantly be drilled to maintain production.  Shale plays will last years, not decades.

Recent developments in Poland demonstrate some of the problems with international shale plays.  Everyone got excited a few years ago because resource estimates were enormous.  Later, these estimates were cut but many companies moved forward and wells have been drilled.  Most international companies have abandoned the project including ExxonMobil, ENI, Marathon and Talisman.  Some players exited because they don’t think that the geology is right but the government has created many regulatory obstacles that have caused a lack of confidence in the fiscal environment in Poland.

The UK could really use the gas from the Bowland Shale and, while it's not a huge play, there is enough there to make a difference. I expect there will be plenty of opposition because people in the UK are very sensitive about the environment and there is just no way to hide the fact that shale development has a big footprint despite pad drilling and industry efforts to make it less invasive.

Let me say a few things about resource estimates while we are on the subject.  The public and politicians do not understand the difference between resources and reserves.  The only think that they have in common is that they both begin with “res.”  Reserves are a tiny subset of resources that can be produced commercially.  Both are always wrong but resource estimates can be hugely misleading because they are guesses and have nothing to do with economics.  

Someone recently sent me a new report by the CSIS that said U.S. shale gas resource estimates are too conservative and are much larger than previously believed.  I wrote him back that I think that resource estimates for U.S. shale gas plays are irrelevant because now we have robust production data to work with.  Most of those enormous resources are in plays that we already know are not going to be economic.  Resource estimates have become part of the shale gas cheerleading squad’s standard tricks to drum up enthusiasm for plays that clearly don’t work except at higher gas prices.  It’s really unfortunate when supposedly objective policy organizations and research groups get in on the hype in order to attract funding for their work.

OP: The ban on most US crude exports in place since the Arab oil embargo of 1973 is now being challenged by lobbyists, with media opining that this could be the biggest energy debate of the year in the US. How do you foresee this debate shaping up by the end of this year?

Arthur Berman: The debate over oil and gas exports will be silly.

I do not favor regulation of either oil or gas exports from the US. On the other hand, I think that a little discipline by the E&P companies might be in order so they don't have to beg the American people to bail them out of the over-production mess that they have created knowingly for themselves. Any business that over-produces whatever it makes has to live with lower prices. Why should oil and gas producers get a pass from the free-market laws of supply and demand?

I expect that by the time all the construction is completed to allow gas export, the domestic price will be high enough not to bother. It amazes me that the geniuses behind gas export assume that the business conditions that resulted in a price benefit overseas will remain static until they finish building export facilities, and that the competition will simply stand by when the awesome Americans bring gas to their markets. Just last week, Ken Medlock described how some schemes to send gas to Asia may find that there will be a lot of price competition in the future because a lot of gas has been discovered elsewhere in the world.

The US acts like we are some kind of natural gas superstar because of shale gas. Has anyone looked at how the US stacks up next to Russia, Iran and Qatar for natural gas reserves?

Whatever outcome results from the debate over petroleum exports, it will result in higher prices for American consumers. There are experts who argue that it won't increase prices much and that the economic benefits will outweigh higher costs. That may be but I doubt that anyone knows for sure. Everyone agrees that oil and gas will cost more if we allow exports.

OP: Is the US indeed close to hitting the “crude wall”—the point at which production could slow due to infrastructure and regulatory restraints?

Arthur Berman: No matter how much or little regulation there is, people will always argue that it is still either too much or too little. We have one of the most unfriendly administrations toward oil and gas ever and yet production has boomed. I already said that I oppose most regulation so you know where I stand. That said, once a bureaucracy is started, it seldom gets smaller or weaker. I don't see any walls out there, just uncomfortable price increases because of unnecessary regulations.

We use and need too much oil and gas to hit a wall. I see most of the focus on health care regulation for now. If there is no success at modifying the most objectionable parts of the Affordable Care Act, I don't suppose there is much hope for fewer oil and gas regulations. The petroleum business isn't exactly the darling of the people.

OP: What is the realistic future of methane hydrates, or “fire ice”, particularly with regard to Japanese efforts at extraction?

Arthur Berman: Japan is desperate for energy especially since they cut back their nuclear program so maybe hydrates make some sense at least as a science project for them. Their pilot is in thousands of feet of water about 30 miles offshore so it's going to be very expensive no matter how successful it is.

OP: Globally, where should we look for the next potential “shale boom” from a geological perspective as well as a commercial viability perspective?

Arthur Berman: Not all shale is equal or appropriate for oil and gas development. Once we remove all the shale that is not at or somewhat above peak oil generation today, most of it goes away. Some shale plays that meet these and other criteria didn't work so we have a lot to learn. But shale development is both inevitable and necessary. It will take a longer time than many believe outside of North America.

OP: We’ve spoken about Japan’s nuclear energy crossroads before, and now we see that issue climaxing, with the country’s nuclear future taking center-stage in an election period. Do you still believe it is too early for Japan to pull the plug on nuclear energy entirely?

Arthur Berman: Japan and Germany have made certain decisions about nuclear energy that I find remarkable but I don't live there and, obviously, don't think like them.

More generally, environmental enthusiasts simply don't see the obstacles to short-term conversion of a fossil fuel economy to one based on renewable energy. I don't see that there is a rational basis for dialogue in this arena. I'm all in favor of renewable energy but I don't see going from a few percent of our primary energy consumption to even 20% in less than a few decades no matter how much we may want to.

OP: What have we learned over the past year about Japan’s alternatives to nuclear energy?

Arthur Berman: We have learned that it takes a lot of coal to replace nuclear energy when countries like Japan and Germany made bold decisions to close nuclear capacity. We also learned that energy got very expensive in a hurry. I say that we learned. I mean that the past year confirmed what many of us anticipated.

OP: Back in the US, we have closely followed the blowback from the Environmental Protection Agency’s (EPA) proposed new carbon emissions standards for power plants, which would make it impossible for new coal-fired plants to be built without the implementation of carbon capture and sequestration technology, or “clean-coal” tech. Is this a feasible strategy in your opinion?

Arthur Berman: I'm not an expert on clean coal technology either but I am confident that almost anything is possible if cost doesn't matter. This is as true about carbon capture from coal as it is about shale gas production. Energy is an incredibly complex topic and decisions are being made by bureaucrats and politicians with little background in energy or the energy business. I don't see any possibility of a good outcome under these circumstances.

OP: Is CCS far enough along to serve as a sound basis for a national climate change policy?

Arthur Berman: Climate-change activism is a train that has left the station. If you’ve missed it, too bad. If you're on board, good luck.

The good news is that the US does not have an energy policy and is equally unlikely to get a climate change policy for all of the same reasons. I fear putting climate change policy in the hands of bureaucrats and politicians more than I fear climate change (which I fear).

See our previous interview with Arthur Berman.

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  • Crazy Cooter on March 06 2014 said:
    Wonderful interview. I wish y'all had stuff like this more often!
  • Bertrand Mancline on March 06 2014 said:
    If Berman did not predict the massive US shale boom in the first place, he is certainly in no position to tell us how long it will last.
  • Claus Geiger on March 06 2014 said:
    These days Denmark had 90% of its electricity out of wind turbines. Without storm it is about 50%. This is possible everywhere. So forget about shale oil and shale gas and fracking and start to make the US another renewable country. Support the Green Party and ban fundametalist Republicans...
  • Engineer-Poet on March 07 2014 said:
    Denmark briefly got 122% of its immediate electrical demand from wind.  Combined with the output of the "must run" generators needed to keep its grid from blacking out, that means that it had to export a huge fraction of that.  Despite this "success", Denmark only averaged 30% wind energy for the first 11 months of 2013.

    What happens when EVERYONE tries to go the way of Denmark?  Everyone can't all export power at the same time.  This has "FAIL" written all over it, it's just a question of how far activists and governments will go to paper over the unavoidable problems... and how much abuse the public will tolerate before they demand an end to price-gouging.

    Meanwhile, France's grid (77 gCO2/kWh) has a fifth of the carbon emissions of Denmark's (385 gCO2/kWh).  Is France officially the "greenest" grid in Europe?  Nope, France is a pariah state.  France is "doing it wrong", with 50-odd nuclear reactors.

    Ideology trumps fixing the climate.  Until ideology is taken out and shot, the climate will be the loser—and many of the world's living species, humanity among them.
  • David Veale on March 07 2014 said:
    Engineer-Poet... I wonder what living in France will be like after the next major war (unless we've achieved world peace, that is). I suspect that a geiger counter placed just about anywhere would sound like a popcorn popper. There's no need for anyone to actually blow up one of their power plants; all it takes is to bring the grid down (just about guaranteed in any war) and shut down diesel supply for backup generators. Feel lucky?
  • Lee James on March 08 2014 said:
    This is a wonderful no-holds-barred interview. As an "alternatives to fossil fuels" enthusiast, I am sobered by Mr. Berman's assessment of the prospects for renewable energy.

    I believe it will be difficult to develop the "pull" effect of renewable energy technology to attain a 20% contribution level and a clear tipping-point.

    But I also see a "push" effect from fossil fuels -- pushing us away because the net benefit of using fossil fuels is declining so rapidly.

    We are simultaneously pushed away from the downsides of fossil fuel (cost, health, safety and environment) and pulled by the attraction of sustainable energy (efficiency, cleanliness, low fuel cost).

    In summary, the combination of the pull from viable alternatives, with the push away from fossil fuels will enable us (by necessity) to go lighter on the planet.

    I think a key point in all of this that it will not only be increasingly less expensive, more efficient wind and solar that will get us there. We will live our lives differently and smarter, in general. In the end, it will be a whole constellation of citizen choices that will comprise "the solution."
  • John Galt III on March 10 2014 said:
    I'm 67 and I have been reading that we are running out of all and gas for about 50 of those years, but the world keeps producing more. This guy says shale is all the oil companies have left. That is utter rubbish. Example: Nobel Energy has discovered 40 trillion cu ft. of nat. gas in the Mediterranean in Israeli and Greek Cyprus waters. Lebanon will be drilling in their waters soon. The Palestinians won't drill because the other Arab states won't let them.

    Israel just discovered 250 billion barrels of kerogen/shale oil. If the go ahead is given Israel will use technology developed by Shell to get it out. Jordan working on the same technolgy with Shell itself.

    Thorium in LFTR's/MSR's could solve the energy problem in 5 minutes but Obama doesn't like nuclear. It won't matter as China and India are spending on this BIG TIME.

    The left wants 2000 year old technology in windmills and solar. Local wind and solar make sense. Massive scale wind and solar is 100% anti-environment.

    Get with thorium or get out of the way.
  • Scott Ward on March 10 2014 said:
    Renewable energy technologies -- wind, solar hydro, and geothermal -- produce electricity. They cannot provide substitutes for myriad products from hydrocarbons.
  • John Tucker on March 11 2014 said:
    I'm just a tiny retail investor with an energy focus. I happened to call this winter's gas crisis correctly, months before it happened. Everyone gets lucky occasionally.

    I enjoyed and appreciated this article immensely, your conclusions strongly reinforce my little opinions.

    There is one linkage that I have never seen anyone make in print, and that is the link between Federal Reserve Policy and the expansion of oil and gas production in continental US ... you say quite a lot about how expensive fracking is, a point which a lot of analysts have been missing. But we've been living in an environment where the cost of capital has been extraordinarily low for an extended period of time and that time period may possibly be coming to an end. Has not the low interest rate environment greatly aided the drilling efforts? And isn't a change likely to have some uncomfortable effects on oil and gas supplies and prices rather sooner than most people are anticipating? I wonder if anyone else is privately considering this relationship.
  • Schuyler Hupp on March 11 2014 said:
    Wind and solar power technologies are subsidized with fossil fuels and have much embodied energy behind them. I would imagine that as fossil fuels are further depleted and become less economical, that this will translate into higher costs for wind and solar. More efficient use of energy will come into play, but mostly I think that behavioral changes will be in order, e.g. using less energy. For me, how people might harness wind and solar power in the far future is a really interesting question. Ultimately, the problem is not energy or technology, but the cognitive limits and innate human characteristics that have apparently led to overshoot.
  • Martin on April 23 2014 said:
    Unstated is that the largest source of hydrocarbons in the world, larger than all other sources combined (including coal), is nat gas from Methane Hydrates. Nobody has figured out how to economically tap the source, but the Japanese are experimenting with it and someone is sure to figure it out eventually.
  • Wang Gang on June 12 2014 said:
    As a 30 year reservoir engineer who has performed many many reserve evaluation, I can tell you Art is 100% correct in his comments. The declines used to make these oil company forecasts include all kinds of assumptions. They have taken the most aggressive approach to reserve estimates and quoted them as gospel truth supported by their consulting firms who are paid to "help". Remember Enron and Author Anderson? Art is so often demonized by those who only are only the mouth piece for oil companies. Politicians love this kind of talk, but to the extent is starts influencing policy then we will all pay a price for that when the bubble bursts. Do not get too use to low prices, oil and gas is getting harder and harder to find. Technology will help, but higher prices are here for a long time.
  • Gary Ward on July 01 2014 said:
    Nat Gas is declining because rigs are declining in all areas besides the Marcellus. The Marcellus is the cheapest to exploit and profitable in the $4.50 range. There are plenty of Nat Gas to be found by with limited exploration $$, E&P players are going after oil. I don't see this is as a sign we have depleted resources, but a sign Nat Gas demand and price is too low.

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