Seven Marcellus natural gas myths, or, you’re playing with fire, America

From an Article by Terry Etam, The BOE Report, November 26, 2018

Sometimes a phenomenon comes along that captures the public’s attention in near totality, and we find ourselves losing our minds and joining the parade. The dot com boom was one example, a time when random new websites became worth billions despite the presence of any revenue. The US housing boom was another example. When people with no income, no jobs, and no assets suddenly started buying homes, a few fringe weirdos thought that that wasn’t right, but the mainstream line of thought was so captivated by the booming housing market that it paid no attention. Nothing seemed absurd at the time because almost everyone read the future the same way.

The energy business is not exempted from this phenomenon. In the natural gas world, an onslaught of publicity from shale gas producers, brokerage houses, trading firms, government agencies, and you name it have chimed in with one voice to declare that the US is now at the dawn of a century of cheap natural gas. Some commentators have heralded the rise of “just in time” natural gas, where storage is of decreasing value because of the inventory of thousands of drilled and uncompleted wells that can flood the market at any time that prices rise. The forward curves for natural gas prices reflect this mentality, and the viewpoint is as nearly universal as it can get. This view has been built largely on the massive reserves of the Marcellus and Utica region.

Courageous contrarians have however noticed a few attention-grabbing cracks in that wall of beliefs. Second hand analysis is one thing, but here is a startling admission from the horse’s mouth. On October 24th 2018, Range Resources Ltd held its third quarter conference call. Reading a 15-page conference call transcript may not sound thrilling, but they can be invaluable. Recall that Range is one of the largest Marcellus shale producers with, according to their IR presentations, “thousands of top quality locations.” During the conference call, an analyst asked Jeff Ventura, Range’s CEO, about sweet spot exhaustion in the Marcellus, and whether it would occur in a 1-5 year time frame or a 6-10 year time frame. Here was Ventura’s response:

‘…you can take state-of-the-art technology and pump that in Centre County or you can pick the county of your choice and the wells still aren’t very good. So in fact they aren’t good at all. So it’s important where you are drilling…So the cores are limited, the cores are known, people have drilled a lot of wells in them. And I think within, you said in the, is it in the first 5 or years 6 through 10, I think it’s clearly within the first five you’ll see that core exhaustion and you’ll start seeing it with deteriorating capital efficiency.”

The importance of these comments should not be understated.

Consider them in the context of a few widely-held Marcellus gas beliefs upon which the US has staked its energy future:

1. The US has a hundred years of gas supply – this statement arrived early in the Marcellus’ development, when every new well and area was getting better than the previous. We now know that there are sweet spots, and a lot of not-so-sweet spots. The map below illustrates this perfectly, and it also corroborates Mr. Ventura’s comments:

2. Marcellus growth is limited by lack of pipelines – this was once the case several years ago. These days, there doesn’t appear to be anywhere near enough gas to meet takeaway capacity, as shown in the chart below:

3. Marcellus producers make adequate returns at sub $3 gas – this argument was based on the fact that Marcellus/Utica production kept rising through a low-price environment. What is missed by observers is that producers had to drill and increase production to meet upcoming take-or-pay requirements. In fact, Cabot Oil & Gas, another huge shale producer, in its most recent quarterly financials said that fully one-fifth of natural gas revenue was from selling gas acquired in the open market to meet sales obligations. This is a very clear sign that it may be cheaper to buy the gas than to drill for it.

4. Drilled but Uncompleted inventory (DUCs) is like readily available storage – this belief is possibly the one that has exposed the US to the most danger, if winter is colder than normal. If this statement was true, there would have been a huge drawdown in the number of DUCs as winter approached with storage at extremely low levels. However, the DUC inventory hardly budged, and no new rigs came running back either:

5. Longer lateral wells improve productivity- what they really do is simply chew up the reservoir faster. There are productivity gains in that a single well can extract more gas, but it’s not free, and it simply accelerates development of the field. See the above chart that shows drilling activity in the Marcellus. Consider that new horizontal wells are now up to 3 miles in lateral length. The top 5 producing counties are Susquehanna, Bradford, Lycoming, Washington and Greene. Together these 5 have an area of 4,676 square miles, and have a total of 5,609 producing wells (and a total of 7,110 wells drilled). As a gauge of dominance, in 2016 these 5 counties accounted for 82 percent of the value of Marcellus gas as reported in MarcellusGas.org. As Range said, the sweet spots are within sight of exhaustion, and subsequent locations will be of lower quality.

6. The stock market will support production growth – every single third quarter conference call for a major shale producer showed that this is categorically untrue. Analysts almost unanimously asked about capital efficiency, returns to shareholders, share buy backs, etc. No one wanted to hear about growth.

7. Solution gas will save the day – this view arises from the massive rise in natural gas output from the Permian basin in the US, and to a lesser extent Bakken solution gas. However, these gluts are localized, and will bleed off into regions other than the main US consuming areas. Permian gas is destined to head south or west, and won’t be of any help to the regions with real winters.

Almost everyone has been overwhelmed by highly speculative forecasts – ironically, exactly like the fears of climate change itself. People have been hammered with both messages for so long that doubting either is considered foolish to think otherwise.

We now therefore have entered winter with dangerously low inventories. The US is separated from a physical disaster, one that would make a hurricane look like a thunderstorm, by hopes for a mild winter and a bucket of dangerous misconceptions.

If you think that is hyperbole, consider what is happening in lower mainland of British Columbia. One of several pipelines that carries natural gas to the region is operating at 80 percent of capacity for the winter. Even with this relatively minor disruption, residents have been warned of potential gas shortages and to turn down furnaces, etc.

Now consider that Vancouver’s winter is tee shirt weather for a large swath of North America’s population. What do you suppose a natural gas shortage would look like in Chicago or Toronto at severely sub-zero temperatures? What would your neighbourhood look like if gas supplies were shut off in the dead of winter? Or even cut in half?

If the winter turns out warm, everyone can have a good laugh at the naysayers and doomsday fools. Let us hope that holds true. If winter is colder than average or a polar vortex returns, and storage is depleted, it is hard to describe what would happen, because I can’t really picture it. The Vancouver example, of a very minor shortage in a very temperate climate, gives an indication that the problem could be of unprecedented proportions.

Mother Jones championed the laborers of West Virginia

From an Article by Alexander C. Kaufman, Mother Jones Magazine, August 17, 2018

Fracking companies used 770 percent more water per well in 2016 than in 2011 across all the United States’ major gas- and oil-producing regions, according to a new study.

The number of new fracking wells decreased as gas prices fell, but the amount of water used per well skyrocketed, with up to 1,440 percent more toxic wastewater generated in the first year of each new well’s production period by 2016.

The research, published Wednesday afternoon in the peer-reviewed journal Science Advances, raises new concerns that hydraulic fracturing, the controversial drilling technique used to extract oil and gas trapped deep in bedrock, imperils vital drinking water reserves.

In regions where the warming climate is drying sources of fresh water, fracking intensifies pressure on an already-strained system while increasing the availability of fuels that cause emissions, speeding up the rise in temperatures.

Fracking also produces huge volumes of wastewater laced with cancer-causing chemicals, salts and naturally-occurring radioactive material that can cause earthquakes and contaminate aquifers when pumped underground.

“We saw this dramatic rise in water use and wastewater,” Avner Vengosh, a co-author of the study and professor of geochemistry and water quality at Duke University’s Nicholas School of the Environment, said in a phone interview. “They’re drilling much more.”

The study found that if gas and oil prices rise and production increases to the levels of the early 2010s, when fracking first took off, water use and wastewater production could multiply 50-fold for gas drilling and 20-fold for oil extraction by 2030. Even if future drilling rates stay at 2016 levels, the study predicts “a large increase of the total water use for both unconventional oil and shale gas basins,” with a surge in wastewater creation to match.

To conduct the analysis, the researchers compared well information from the US Energy Information Agency and state environmental and natural resource agencies to data collected by the services DrillingInfo and the FracFocus Chemical Disclosure Registry. The data set covered six years and more than 12,000 individual wells.

Mounting research shows that rising fossil fuel emissions, which increase the temperature of the planet, pose grave risks to water supplies. Water levels in 21 of the world’s 47 largest known aquifers are trending negative, according to a 2015 study published by a group of NASA scientists in the journal Water Resources Research. Another NASA study, published in the journal Nature in May, found that California alone lost four gigatons of water from 2007 to 2015.

The demand for water, driven largely by agriculture, is on pace to increase by 55 percent globally between 2000 and 2050. Food production already accounts for 70 percent of water withdrawals around the world, but, by some estimates, farmers need to increase water use by 69 percent to feed the total global population by the year 2035.

“At a time when large parts of our county are suffering through persistent droughts and year-round fire seasons, it’s truly unconscionable that the fossil fuel industry would be allowed to divert vast volumes of water to fracking for oil and gas,” Seth Gladstone, a spokesman for the environmental group Food & Water Watch, said in an email. “The fact that the burning of this oil and gas is driving our climate chaos and intensifying the droughts and fires makes this reality all the more shameful and absurd.”

The American Petroleum Institute, the oil and gas industry’s biggest lobby, declined to comment on the findings of the study before it was released, stating that it would review the details of the report. But, in an email, spokesman Reid Porter said the industry focuses on “reclaiming and practical reuse of waste, using treatments that reduce the waste produced, thereby reducing the amounts that have to be disposed.”

Despite oil and gas industry pushback, other research shows wastewater can contaminate drinking water. In April 2016, former Environmental Protection Agency scientist Dominic DiGiulio concluded that methanol, a chemical that causes permanent nerve damage and blindness, seeped from unlined pits holding fracking wastewater into a massive aquifer in Wyoming.

The EPA later found diesel and benzene, a carcinogen, in wells near the water reserve, but held off on linking the contaminants to fracking, which the Obama administration touted for increasing natural gas production and reducing the nation’s reliance on carbon dioxide-spewing coal.

In December 2016, the EPA issued a landmark finding that fracking can contaminate water.

But the agency failed to put any regulations in place to establish a national standard for addressing the issue before President Donald Trump took office, installing former Oklahoma Attorney General Scott Pruitt, a man with brazenly public ties to the oil and gas industry, as EPA administrator. Almost immediately after the Senate confirmed his nomination, Pruitt began eliminating regulations on the fracking industry.

“We don’t have a national policy, and each state will have different ways of dealing with [fracking],” study co-author Vengosh said. “Given that there’s no uniform regulation in the US, and the weakening of the EPA to have no say in anything these days, that could be a problem.”

Fracking isn’t the only source of contaminants putting stress on water systems. The study comes amid rising concerns over perfluorinated chemicals, including compounds used in firefighting foam and nonstick Teflon, in water sources across the country.

A growing number of states are setting strict new limits on the cancer-causing chemicals, which remain in the water for decades. But the EPA has yet to regulate perfluorinated chemicals―and went as far as to suppress a federal report that recommended lowering the maximum limit by nearly seven times the current standard.