‘Central banks, governments can’t print barrels of oil and shale gas is no game changer’

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?
Both  shale 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.  

No, the world is not running out of oil.  Oil will be around for hundreds of years and ‘Peak Oil’ has no correlation with oil reserves. ‘Peak Oil’ is only concerned with the daily flow-rates; all that matters is how much we can produce on a daily basis.

Some time back in one your columns you wrote that “If I was asked to pick the biggest threat to a sustainable economic recovery, Peak Oil would top that list.” Why did you say that?
The entire global economy depends on oil; crude is the lifeblood of our society. Although many people are not aware, crude oil is the single most important natural resource.  After all, global transportation is totally dependent on crude, agriculture relies on oil and all the synthetics, polymers and chemicals are derived from crude oil.  Needless to say, our modern day world would not have been possible without crude oil.  

What are you hinting at?
Our research suggests that the supply of crude is about to peak on a global basis and this is happening at a time when global usage is on the increase. The developing nations are desperate for more oil and we suspect that the world’s supply will not be able to keep up with consumption.  Unfortunately, we are not prepared for this outcome and we have left it too late.  So, when the supply of total liquids peaks on a world-wide basis, humanity will be in for a big shock.  First, the price of oil will rise remorselessly and then, we will get shortages followed by rationing. It goes without saying that a shortage of oil does not bode well for economic growth and the world will sink into a big recession. In our view, ‘Peak Oil’ is a far bigger threat or risk than the ongoing credit crisis, because central banks and governments cannot print barrels of oil! So, when shortages emerge, there will not be any quick-fixes, bailouts or ‘stimulus’ to help the global economy. 

The crude oil prices have been in the range of $70-80 for a while now. Where do you that going in the days to come?
Over the near-term, the price may remain range-bound but if global demand climbs to 90-91 million barrels per day, then the price of oil will ignite. We could get there within 3 years. 

What is the amount of oil the world is currently using?
At present, global usage is around 86.4 million barrels per day and current production and spare capacity is more than sufficient to cater for today’s consumption.

Has the demand for oil gone down during the recession?
The demand for oil was not affected much during the biggest global recession in decades. During the depths of the crisis, global consumption fell by less than 5% and it is almost back to the pre-crisis level.  Although consumption is trending down in the developed world, usage is going through the roof in the developing nations and this is more than offsetting the weak demand in the West.

You wrote in a recent column that as far as the global economy is concerned, Barack Obama’s six-month moratorium on new offshore drilling is an even bigger disaster. Can you elaborate?
Less drilling means less oil; it is as simple as that.  In our view, offshore oil is our only hope to combat ‘Peak Oil’ and if politicians impose a ban on offshore drilling, this will further choke the world’s oil supply.  If Mr. Obama’s moratorium continues for several more months, then the US will have to import more oil from overseas and this will reduce the available supply for other countries.

Where will the next wave of oil demand come from?
Global demand will continue to rise and this is due to the increasing usage in Asia, Latin America and the Middle East.  For instance, oil consumption is exploding in both China and India and both these nations now use up roughly 14% of the world’s supply! In fact, the combined oil demand in these two nations has doubled over the past decade and with extremely low per-capita consumption levels, demand can only go one way and that is up! Apart from China and India, nations in the Middle- East are burning more and more oil and so are the Brazilians in Latin America.  As these economies continue to develop, I have no doubt in my mind that their energy usage will skyrocket.