Dislikes 'cynical review'

I recently subscribed to you publication to further my role as a responsible investment analyst working in the energy industry. After seeing an excellent piece outlining the difficulties of drilling for shale gas in Texas in the journal, I paid for a year's subscription.

However, in the first edition of the journal to which I subscribed, I was surprised to read your very cynical review of environmental protests against fracing in the UK—a review which makes large numbers of inaccurate assumptions (OGJ, Aug. 26, 2013, p. 18). I'm someone with a mean appetite for "extravagances of adult discourse," an investor enamored with facts and balance, but also one who happens to adopt a cautious attitude on the development of shale gas.

I also know a little about completion methods–enough to know that operating standards vary wildly across the industry and the impact the widespread use of contractors has on attainment of operating standards. Asserting caution over the lack of regulation of systemic risks across a weakly regulated industry is not a juvenile argument. For the record, I think fracing for shale gas can be done safely–if you assure these issues are dealt with (from the Investor Environmental Health Network):

  • Manage risks transparently and at board level.
  • Reduce surface footprint.
  • Assure well integrity.
  • Reduce and disclose all toxic chemicals.
  • Protect water quality by rigorous monitoring.
  • Minimize freshwater use.
  • Prevent contamination from waste water.
  • Minimize and disclose air emissions.
  • Prevent contamination from solid waste and sludge residuals.
  • Assure best-in-class contractor performance.
  • Secure community consent.
  • Disclose fines, penalties, and litigation.

But away from such "juvenilia." My real concern here comes in the final sentences of your editorial:

"When feel-good environmentalism prevails in politics, moreover, affordable energy that can be developed and used with imperfect yet manageable environmental consequence gets displaced by unaffordable energy. Activists never acknowledge that the unaffordable energy forms they want to force on everyone have environmental consequences, too. The Balcombe protestors need to be reminded that windmills always generate unaffordable electricity and usually are nuisances—and that British winters are nearly always cold."

Those who describe themselves as a journal should act like one. When you make a statement in a journal, you need to provide evidence for your claims.

Please provide evidence that windmills "always generate unaffordable electricity." Not some hearsay that a wind farm was uneconomic, not examples of poorly managed wind farms that have gone wrong—what you need to support your sweeping claim is scientific evidence that wind farms "always" – that is , under all conditions, in any configuration, produce unaffordable energy. The reality is that some forms of renewable energy are approaching grid parity. Yes, they are supported by subsidies, but so are fossil fuels since their most significant externalities (air emissions, particulate emissions, and carbon emissions) are not priced.

But I do not have to defend the entire wind industry. I just need to prove that the best wind farms with the best resource are operating economically, which is thankfully true. It's more than can be said for some shale gas sites, as you report in your own journal.

There is a genuine debate to be had about the choices we make about our energy system, but please don't resort to cheap cynicism and accusations of ignorance directed to those who are cautious about society's impact on the environment. And please, let's be adults and support our claims with evidence.

Matt Crossman
Ethical Research & Corporate Engagement
Rathbone Greenbank Investments
Bristol, UK

Shale decisions

I offer a few comments about the article entitled "Study develops decline analysis, geologic parameters for reserves, production forecast" (OGJ, Aug. 5, 2013, p. 62).

While debating about the exploitation of shale plays, especially the Barnett shale, I must salute the spirit of the true frontier venture of a single man, my mentor and pioneer, the late George Mitchell, who unlocked this vast resource for Americans and gave "how-to" to the rest of the world's explorationists.

Key drivers for decisions on such plays (also known as resource plays), as per priority, are:

(a) Economic model.

  • The most important driver for any exploration/new venture project in the US onshore shale plays is price at the gas sales meter or hub price, since most wells are drilled by independents.
  • The boss wants to see cash flow, revenue projections, and pay-out days; that is, production rate first, then reserves volume.

(b) Technical model (assuming familiarity with drilling and completion technologies).

  • Top-down or bottom-up or side-to-side models lack assumptions that would predict reasonably well the reserves volume (free gas) or production rates per well in case of unconventional reservoirs like shale.
  • A simplified 2D (at least) geological model is essential which respects porosity (known plus assumed) distribution, geomechanical properties, brittleness, sedimentological architecture, age of the targeted and overburden rocks, and depositional environment for permeability prediction, etc.

Concerning the in-place reserves (free-gas) of the Fort Worth basin, the volumetric reserves estimate mentioned (i.e., 444 tcf of natural gas over 8,000 sq miles) makes the average 0.05 tcf/sq mile of area covered by shale and is surely a respectable number. This is not the best free-gas reserves-in-place (RIP) volume in the US Lower 48 basins and shale plays that I am aware of. There is a smaller subbasin with higher free-gas RIP statistics, such as 0.25-.50 tcf/section.

I welcome the effort by the Bureau of Economic Geology (with Rice University) to engage in such a serious, valuable, technical, and economic conversation with the exploration and production community.

Kumar Bhattacharjee

The next oil market

We all know now about the North American shale oil and gas reserves. We know about the rise in production, we know about the employment boom, and of course we all know about fracing.

What we don't know is how this will reshape the geopolitical world, and we should be concerned. The reorganization of the world's oil and gas producers and consumers has only slowly started as the current US administration hinders inevitable development, but the implications of American energy independence are far-reaching.

China has the most need and the least resource of the major geopolitical entities on the globe. We already see Chinese oil and gas contracts with Iran, Venezuela, and any and all who sell product. Russia has resource and wields it every winter through European gas contracts. With declining reserves, the Eurozone will be at the mercy of Russia every winter until the US exports significant LNG. South American countries, plagued by lack of and decaying infrastructure with no reinvestment, corrupt governments, and state-run oil company monopolies, remain isolated geographically, stuck in time. Then we have the Mideast and Africa, major producers in politically unstable places. The US, China, and Russia all have key petroleum interests in these regions. Factor in the Asian economies and the regional interests of Pakistan and India, and the picture of a complex balance of powers and interests emerges. These interests define the regional status quo.

US energy independence will bring an end to the status quo. As we produce domestic hydrocarbon in larger and larger volumes, we may or may not affect prices substantially, depending on the responses of other producers and on worldwide consumption. We will certainly have a reduced strategic interest in the unstable producing regions. This will be reflected in a reduced exercise of power, economic and military, in the region. Russia and China will move brusquely to fill the void, neither player a champion of capitalism. At worst, this may result in a series of regional proxy wars as these two compete for control of the region's resources. India-Pakistan will struggle to compete for barrels in a region controlled by China-Russia, exacerbating existing tensions. At best, these entities will divide the area through economic influence as consumers of the only real product these producer countries have.

Decades of international experiences have clearly demonstrated to private contractors and oil companies large and small that the best profits and operating conditions, the most predictable markets, occur in areas where western-style capitalism prevails. The US always garners the lion's share of corporate budgets where American opportunities are available because they are most likely to earn the profit they project. Contracts will not be changed, accounting data will not be adjusted, and business practices will be straightforward.

And the US industry will be developing what are some of the largest shale oil and gas fields in the world as quickly as it can. Gulf of Mexico production will continue short-term and enjoys infrastructure advantages right now but will eventually feel the squeeze of higher production costs than the onshore. Alaska will never even start.

Most of the rest of the world's major oil fields will be dealing with markets defined by their Russian and Chinese customers, who will hold a lock on their economies and will manipulate the markets and the prices. The government sector will provide oil-field services.

The current oil market of global customers competing to purchase barrels in a global marketplace depends on the US presence in the market to guarantee its integrity. Our withdrawal will alter the nature of the market the barrels are traded in, to be shaped by the Russians and Chinese.

At the same time, the profit-driven US industry will attract the private investment capital while the Russian and Chinese satellite economies and oil fields will be state-run affairs stripped of most of their profitability.

Even the technologies will diverge as the US focuses on shale hydrocarbon extraction, horizontal drilling, and hydraulic fracturing techniques, while the other producers focus on arctic and deepwater technologies and conventional-reservoir hydrocarbon extraction.

Balkanization always ends badly and is reason for concern.

Bill Hornbuckle
Shell Oil Co. (retired)
Bastrop, Tex.