Recent discoveries of shale gas have given the world much hope. But not everybody is optimistic.
“Shale gas is expensive to produce and the current price of gas is not high enough to warrant profitable shale gas production…The hydraulic fracturing process used to extract the gas is extremely polluting and devastating for the environment.Although the energy industry is excited about shale gas production, I am afraid that nobody has really thought about the environmental damage or the geological impact,” says Puru Saxena, the founder and CEO of Puru Saxena Wealth Management. Based out of Hong Kong, Saxena is also the editor and publisher of Money Matters, a monthly economic newsletter. In this interview he speaks to DNA.
In the last few months, the Indian media has been abuzz about various shale gas deals. What exactly is the business like?
Shale gas is natural gas which is extracted from shale or rock.This gas is trapped within this rock which lies very deep under the earth’s crust.The energy industry uses a technology known as hydraulic fracturing, which cracks the shale (rock) and allows the gas to escape from the shale.In the process of hydraulic fracturing, a sludge of water, chemicals and sand are blasted at very high pressures and this creates cracks in the shale, which releases the gas.This gas is then captured through a drill pipe and collected on land, before being transported.
How is it different from natural gas?
Chemically, both are the same; only their origin in different.
What can shale gas be used for?
Bothshale gas and natural gas are used for the same purposes: heating, electricity generation, transportation and industrial usage.At present, the cost of producing shale gas runs around US$7 per mcf which is higher than conventional natural gas.
A lot of companies discovering shale gas seem to be of the view that these discoveries will be a big game changer. Do you subscribe to that view?
In our view, shale gas is not a game changer.First and foremost, shale gas suffers from very high depletion rates.
Why is that?
Typically, the flow rate (a measure of the volume of gas extracted) declines by 50-60% after the first year’s production and the energy industry does not want to deal with this fact.Secondly, shale gas is expensive to produce and the current price of gas is not high enough to warrant profitable shale gas production. Last but not least, the hydraulic fracturing process used to extract the gas is extremely polluting and devastating for the environment.
Although the energy industry is excited about shale gas production, I am afraid that nobody has really thought about the environmental damage or the geological impact.Remember, hydraulic fracturing involves cracking the below-surface shale rock by using intense pressure and at this stage, we do not know whether this will cause any geological instability.
Some analysts are of the view that increased shale gas production in the US and Canada could help prevent Russia and Persian Gulf countries from dictating higher prices for the gas they export. What is your view on that?
If our homework is correct, North American shale gas production will not flood the entire world with cheap gas.As I mentioned earlier, the cost of production is around US$7 per mcf and I am not even sure if North America will produce sufficient shale gas to export to Europe. Until the shale gas movement matures, Europe will continue to depend on imports from Russia and the Gulf.
You seem to be a believer in the peak oil theory. Can you tell our readers what exactly does the theory say?
Peak Oil means that the daily flow-rate of total liquids (conventional crude oil and unconventional sources) is about to max out or peak on a global basis.Yes, we firmly believe that the flow-rate of total liquids is in the process of peaking on a global basis.
How is that?
At present, the world produces roughly 74 million barrels per day of conventional crude oil and it produces roughly 12.5 million barrels per day of the unconventional stuff (natural gas liquids, ethanol, bio-fuels, tar sands and heavy sour crude).It is notable that over the past 5 years, the supply of conventional crude oil has remained flat and this despite the fact that the price of oil spiked to almost $150 per barrel in 2008. So, you have to wonder why (despite a record-high oil price) the world has not produced more oil over the past 5 years!?
So why has the world not produced more oil in the past 5years?
The truth is that the world’s largest oil-fields are struggling to maintain daily flow-rates and this is due to geology.Most of the large oil-fields in the world were discovered decades ago and similar to world-class athletes, they are now past their prime.Not many people realise that oil-fields are subject to the geological laws of depletion and once half of the oil in any field has been extracted, then the pressure, hence flow-rate goes into an irreversible decline.Today, roughly 70% of the world’s 800 largest oil-fields are past their prime and staring into an irreversible decline. The problem is that these 800 largest oil-fields produce a huge proportion of the world’s total oil. Furthermore, new gigantic discoveries have almost dried up and over the past 35 years, the world has discovered less than 5 world-class commercially-viable oil deposits.
So what can we make out of that?
It is clear to us that the world’s conventional crude oil production will struggle to grow and the unconventional stuff is our only hope. Even here, we do not expect much growth and ultimately, we believe that the ongoing depletion of conventional crude oil will overwhelm any production increases from the unconventional stuff. According to our estimates, the world will struggle to produce more than 90-91 million barrels per day of total liquids (conventional plus unconventional) and if global demand continues to rise by 1.25-1.5% per annum, then we will need that much oil within 3 years. Once global demand starts to hit against available supply, the price of oil will spike and ultimately, we will see shortages.Unfortunately, the world is not prepared for this epic event.
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