Key words :
natural gas cliff,
natural gas prices,
Over the Cliff for Natural Gas in North America?
26 Jan, 2009 09:23 am
Is natural gas production in North America headed for cliff? No one can know for sure; but all signs point down.
But there is reason for North American natural gas consumers to fear the bargain basement prices they are now getting. For the time being, demand is plummeting while supply remains more than ample. New supply is still streaming in due to increased drilling activity in the wake of the fantastic runup in natural gas prices last year to around $14 per thousand cubic feet. But today's low price of around $4.75 is causing drillers increasingly to lay down their drills and await higher prices. Just last year at this time combined natural gas rig counts for Canada and the United States were 1,753 for the week ending January 18, 2008. Today, the comparable count is 1,472, a decline of 16 percent.
We can expect more declines in rig count as long as the low prices persist since many of the largest drillers have already announced plans to reduce drilling sharply this year. In addition, since natural gas is often found in association with oil, the decline in oil drilling will affect natural gas supplies to a certain degree. Perhaps of most concern is that yearly decline rates for existing natural gas wells are now running at an aggregate 30 percent for North America. That means that if all drilling ceased for natural gas, production in a year would be down to 70 percent of today's total. Production would decline below 25 percent of today's level if this moratorium went on for four years.
The upshot is that North America is on a natural gas treadmill and must drill furiously just to stay even. There are several problems, however, that complicate this effort. First, the decline rates appear to be increasing. Natural gas wells drilled in the large shale basins of the United States which have been the major source of new gas in recent years exhibit exceedingly high decline rates, many wells declining 65 percent in the first year. The flows decline by less in the following years, but often by the fourth year the wells are not economical to operate. Second, the high and increasing decline rates imply a need for exponential growth in the number of new wells required to replace losses from existing wells and provide for growth in supply besides. The need for that kind of growth in new wells will also increasingly put upward pressure on the demand for rigs and the personnel to run them.
Third, the energy return on investment or EROI is declining for new sources of natural gas. That means, of course, that it is taking much more energy to get the new, mostly unconventional gas out of the ground. The implication is that much of the new unconventional gas resource won't be worth extracting. Fourth, and perhaps most worrisome, is the possibility of a rapid decline from conventional wells that still make up the majority of production in North America. Petroleum geologist Jean Laherrère has estimated that a cliff in conventional natural gas production awaits North America in the next two to three years as declines in conventional production begin to mirror the prior bust in conventional gas discovery with approximately a 23-year lag.
In addition, liquified natural gas (LNG) imports are not likely to increase much in the next few years since LNG projects are now being delayed for myriad reasons including low natural gas prices, lack of credit, and limited supplies of natural gas for liquefaction facilities. Just when the North American continent may need LNG imports the most, there simply won't be enough LNG regasification capacity on the North American continent to make a decisive difference.
There is one certain and effective response to the risks to North American natural gas supply: conservation. But neither the Canadian nor the U. S. government seems to believe there is a problem. This is the case despite a decade of high natural gas prices and huge price swings that have ultimately sent many industries dependent on natural gas overseas for cheaper and more reliable supplies. Even today, after one of the biggest declines in natural gas prices in history, the North American natural gas price remains some 140 percent above where it was early in this decade.
Until now the ideology of administrations on both sides of the U.S.-Canadian border has led to an almost entirely free-market approach to natural gas supplies. With a new administration installed in Washington recently that may change. But the change may not come soon enough to save North America from a natural gas cliff.
Key words :
natural gas cliff,
natural gas prices,
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Why don't they think there is a problem? EH
Chris Rhodes eludes to a possible price spike in oil in the future related to the current slump in oil exploration and oil field development and compares it to our situation in North America with regard to natural gas. I think it is very likely that we will experience continuing rapid oscillations in prices for both oil and natural gas as the industry lays down its drills due to low prices which will then lead to higher prices as supplies shrink which will then suppress economic activity. Any renewed slump in economic activity will then in turn cause demand for oil and natural gas to slump again with the same effect on prices.
It is very difficult for the industry to plan exploration programs under such uncertainty and they are inclined to sit on the sidelines until there is more clarity. In natural gas, drillers could stand up their rigs quite quickly in response to higher prices; but any renewed drilling might bring on another price slump thereby making their efforts to produce gas profitably futile. It is this kind of instability one expects when resources are no longer cheap and easy to get. And that problem can't be addressed by merely pushing for more drilling and exploration. It has to be addressed on multiple fronts.
Commenter "a" seems to believe that the concern over peak oil and natural gas is unjustified, but he states no reason for his complacency. That the world will peak in its rate of production of both oil and natural gas in the first half of this century is not in dispute. That these peaks will occur soon is being vigorously debated. But the risks are quite high regardless of the exact timing. And the lead time to build a new energy infrastructure is measured in decades, not months or years. Does he believe we should do nothing to prepare? Does he believe the marketplace will simply take care of everything? He doesn't say.
I believe Wheeldog is correct that we need to find ways to reduce our consumption of energy and other resources dramatically. There is so much waste in our current system that we could get a good start on this without tremendous hardship. That would buy us some breathing room and provide us with some resources to devote to building a sustainable society. Will we embrace that opportunity? Wheeldog has his doubts and I share his concern.
Mr. Henderson wonders why neither the Canadian nor the U. S. governments believe there is a problem. I have probably overstated my case. Neither government has taken any substantial action to address the problem, but there are elements inside both governments that are concerned. These elements include scientists and legislators who have been sounding the alarm but getting almost no traction. Perhaps the most informed of these is David Hughes, just recently retired from the Geological Survey of Canada.
As I mentioned, the free-market ideology of the Harper and Bush administrations has probably been a major reason for lack of a response so far. And, perhaps the recent success of drilling in the vast shale gas deposits located in the United States has also dampened any concern. But it is ultimately the rate of extraction and the actual recoverable resource rather than the mere size of a resource which matters. I think this fact eludes policymakers in Washington and Ottawa who tend to be swayed by optimistic projections of a 100 years of natural gas by some in the industry since it is industry lobbyists which whom they commune on a regular basis rather than their own scientists. We may have a 100 years of natural gas left (which I doubt), but if the rate of extraction is only 20 or 30 percent of today's rate, we will be in for a very rude surprise.
Now, such claims are almost always followed by the phrase "at current rates of consumption." If we were able to increase the rate of production to meet growing demand (another doubtful proposition), then the resource would run out much sooner. Consider that an annual growth rate in production of say, 7 percent, would mean a doubling in the rate of production every 10 years. If you do the calculations, you get exhaustion of the reserves some time in year 31. In actuality, the resource would last longer but the peak would come much sooner and thereby cause the rate of production to decline stretching out the time to exhaustion quite a bit. So, the actual behavior of reservoirs will certainly differ from this simple calculation, but the general conclusion is sound. 100 years of natural gas at current rates of consumption doesn't mean 100 years of supply unless you have zero growth in production rates. And, even with zero growth in production rates you will still get a peak and decline long before 100 years is up.
Keep in mind that the world and North American economies are utterly dependent on the *rate* of energy production and that a peak and decline has severe implications regardless of the ultimate size of any energy resource.
1....The movement against coal and in favor of nat gas for electricity production in the US e.g. California will further increase the demand for nat gas.
2.....In relation to governments not understanding the issues have a look at the December developments in Colorado where the nat gas industry is now packing up and leaving in droves. Essentially the permitting period was increased to 60 - 65 days compared to a week in other states. This was accompanied with a lot of increased regulation and oversight. Drillers are packing up and either stacking rigs or moving elsehwere.
3.....The cost of recovery, particularly in unconventional sources is around $8 currently. Drillers can't or won't borrow and will rely on cash flow. At these prices there is no return so they are stopping.
4.....Developments in Europe and particularly in the UK will increase the demand for LNG imports putting a bigger floor under the international price. So there is not much use looking at LNG imports as providing any relief in the future anyway.
5.....On Peak oil. Whether it is legitimate or not, one thing is obvious, the era of cheap oil is over. This is just an interim respite in a longer term bullish market and if anything the current price is giving false comfort. When the market rebounds it will be savage and continuous. It will cause another slowdown. It will have to happen a few times before attitudes change and serious long term change is ushered in. Nuclear power is the only significant long term answer whichever way it is sliced and diced. More specifically, the molten-salt reactor and the Integral Fast Reactor, both proven technologies which have been shelved and are superior to current water cooled technology. http://dailyreckoning.com/the-ultimate-alternative-energy/
BTW, 'peak oil' is horse manure. Did you know Canada has more oil reserves than Saudi Arabia (and it doesn't have to be strip-mined either...).
He also tells us that the oil reserves in Canada are greater than those in Saudi Arabia. In this he is technically correct though he fails to tell us that the vast majority of those reserves are in the form of tar sands. Conventional oil production in Canada is on the decline. That leaves the tar sands which currently yield around 1.3 million barrels a day. This sounds impressive until you understand that total world consumption for all liquid fuels is running about 83 million barrels per day and that's down from about 86 million barrels in 2008.
Even if the tar sands are able to achieve the government's planned target of 3 million barrels a day by 2015 (which I doubt), it would still amount to a drop in the bucket. It is the all important rate of production which is key, not the size of the reserve. It is the rate of production that the health of the world economy and society depend on. If the amount of oxygen available to you right now as a human being were decreased, say, by one-quarter, you would notice it even if a very large reserve of oxygen remained in the atmosphere.
With the International Energy Agency now predicting oil peak by 2020, we have little time to prepare. Even if peak is delayed, it wouldn't hurt us to get ready for a world of declining oil and limited natural gas supplies early. Waiting until the last moment is likely to prove disastrous since the kinds of infrastructure adjustments that will be necessary take years to implement.