America's Mammoth Natural Gas Inheritance: The Burden of Transition

The July issue of Gregor.us Monthly, The Burden of Transition, takes a renewed look at North America’s quite large natural gas inheritance, but then wonders how our economy could transition more fully to that resource. At our present moment, nothing is more clarifying to the case of peak cheap oil than to watch Brent trade at 73.50 as double digit unemployment negatively blooms across the United States. Strictly on a BTU basis, natural gas is dirt cheap and trades at an equivalent to 24 dollar oil. What a pity. If only we were set up structurally to capture more of this energy, at nearly 1/3 the price of oil.

North America does not have new natural gas deposits. But, we do have a new technique to extract this gas, from shale rock. Over the past year, both a learning curve and a cost curve have kicked in on shale natural gas, and the result is that our total resource base is leaping ahead rather quickly. As one might imagine, there’s a fair amount of dispute over the size and recoverability of this resource. I see a mistake from each side, in the debate.

First, natural gas is not oil. It’s fairly meaningless to tally up the BTU content of a 2000 trillion cubic foot (tcf) resource base (in the USA) and then equate that, say, to Saudi reserves of oil. Liquid energy carries a price premium and for good reason. Additionally, the amount of energy and water that will be required to extract natural gas from shale, at scale, is daunting. Also a big, future call on our natural gas resource base will also require an enormous new buildout of pipelines, and there will be runoff and environmental issues. That said, it strikes me now as futile to resist the upward revisions to the estimated size of our inheritance. Many are still clinging to a view from just two years ago that North American natural gas had peaked. That’s just not the case any longer. It was only a few years ago that Gazprom (OGZPY.PK) and Russia were thought to be the future giants of world natural gas. Fact is, North America is sitting on mammoth NG. And I expect that more reserve additions are coming.

From my newsletter:

A successful energy transition appears to require three things: the development of extraction tools to effectively access the new resource base. The development of new energy tools that can utilize the new resource. And finally, enough economic pain and difficulty to trigger the transition. That economic pain and difficulty of course begins to unfold when the supply of the previous resource declines in both nominal and real terms. This is precisely what happened to Britain, as it transitioned twice, once from wood to coal, and then again from coal to oil.

But there is yet another feature of randomness and chaos in all of these historic energy transitions, that may be the most important of all: Luck. You must be lucky enough to be sitting on top of the next, great deposit of untapped energy when your diminishing energy resource starts to decline. If not, your population and your economic system which have been built on top of an existing, abundant energy resource base will likely face trouble. There is little doubt, for example, that had Britain not been sitting on coal–nay, an extraordinary motherlode deposit of coal–the British Isles would have wound up on a collapse path similar to Easter Island, denuded of its woodlands.

North America is indeed very lucky to be sitting on natural gas, as the brutal reality of global oil depletion presses down upon us. However, society must decide how to use this gift. And, as we’ve seen so far, we not only make poor decisions, but we appear to be unable to even make decisions. The current public discussion about “getting off oil” remains incoherent, fractured and tends to recede to the background after noisy flare-ups. Worse, a new government only 6 months old has invested tens of billions in cars, auto companies, roads and bridges and biofuels. We are just as naked now as we were a year ago, in the face of a global price of oil. We remain a country without an energy policy.

Graphic: Real Price of Wood and Coal in London 1400-1800, by Robert C Allen, from The British Industrial Revolution in a Global Perspective (.pdf)

Comments

[kmi:]

Said new government is also offering tremendous incentives to reduce energy consumption, among other things a 30% reduction in the cost of installing geothermal heating/cooling systems. Also article here recently pointed out $3B in incentives is starting to trickle out any day now for wind and solar.

I realize the portion of US energy in renewables is low but I suspect each and every project has a noticeable impact on our overall use.

I agree the country needs stronger energy policy, and that more focus on NG can help, but to an extent was that not encouraged by cap and trade?

I think overall this administration - even with all the problems facing it - is doing an admirable job on energy policy and is definitely taking us in a new direction.

Aug 04 07:01 AM

[Michael Fit...:]

great article! you are exactly right that this country has no energy policy. here is a strategic comprehensive long-term energy policy for the US:

thefitzman.blogspot.co...

in the article, you say that it takes "enough economic pain and difficulty to trigger the transition". what more than $145/barrel oil and a near complete meltdown of the financial system will it take? the biggest reason the US has no energy policy is because the coal and oil lobbyist have shovelled enough money into the pockets of congress such that they are bought and paid for. look at HR 1835, what is its status? this legislation is a no-brainer, but we depend on congress to actually work. unfortunately, congress' response to the oil crisis is to take away our freedoms, give the executive branch unconstitutional powers, and plan for a police state. that is why natural gas transportation is vital - once oil gets to the point where the government controls and rations it out, a free and democratic US is toast. some say we are toast already....

Aug 04 07:12 AM

[chap08:]

Correct me if I'm wrong, but as I understand it the new techniques for shale gas extraction still require a lot of water - too much water to make the resource base recoverable. It seems odd that we are banking these resources when we currently have no way of recovering them without denying water to our people, agriculture and other industries.

Aug 04 07:23 AM

[Tony Petroski:]

From the author: "And, as we’ve seen so far, we not only make poor decisions, but we appear to be unable to even make decisions. The current public discussion about “getting off oil” remains incoherent, fractured and tends to recede to the background after noisy flare-ups."

Who is this "we?" When "we" owned the oil and it was relatively cheap, did "I" get part of that "inheritance?" The Rockefellers got most of it and I missed out on my share. How do I get my share of the natural-gas inheritance?

Political managing and industrial policy always end up with "noisy flare-ups" because that is the nature of splitting up resources politically. Why not abolish the Department of Energy, a huge impediment to a bright energy future and a relic of the Carter years, and go the Reagan route and get the government out of energy "policy." Free markets can sort out how expensive oil should be relative to natural gas or coal, how fast a transition needs to be made (if made at all) and it can be done without a lot of noisy flare-ups after the initial flare-up of setting back the clock and stopping the stumbling down the path of collectivism.

Aug 04 08:48 AM

[A Barrel Full:]

All natural gas needs is a level playing field, and it will prosper. Unfortunately politicians are more familiar with golf, and think that bunkers are part of the game.

Aug 04 08:51 AM

[Ferdinand E...:]

I don't share your optimism where natural gas is concerned, Gregor, but the third paragraph in your article deserves the widest possible dissemination. If it happens that the gas is actually there, some ladies and gentlemen with advanced academic credentials seem to believe that it will take itself to their kitchens and to local industries.

Anyway, shortly I should have time to take to study this issue, but until then I'll keep my eyes on Russia, Iran and Qatar. These countries might soon announce that they are not going to go along with selling gas at bargain basement prices.

Aug 04 10:07 AM

[Henry Buttal:]

Ironically, most of the U.S. energy consumption modeling that has been performed academically with the goal of determining how to move to a reduced carbon footprint generation future almost always have one source of traditional fuels increasing in consumption - Natural Gas.

Why? Because it is a lower carbon emitter than coal and oil, and is suitable for baseload electricity generation (solar and wind are not viable candidates for that).

And this was before the big production boost from the Barnett and Haynesville. Unfortunately, pragmatism, policy, and politics rarely go hand in hand. But NatGas, long term, will have to be a major part of the U.S. energy solution.

Aug 04 10:09 AM

[Mad Hedge F...:]

Look at Apache's view. “What’s happening in shale gas is that in three years we’ve gone from a nine year reserve life to a hundred year reserve life,” said Steve Farris, CEO of independent oil and gas production and exploration company, Apache (APA).

Aug 04 11:37 AM

[wallyjm:]

boo yah!

Aug 04 02:25 PM

[mister b:]

with current nat gas prices and the expansion of our reserves , i wonder why there's not more interest in gas to liquids ?

Aug 04 04:41 PM

[Fighting Yoda:]

Nat gas can substitute for oil in many ways including in automobiles. To convert a car to use Nat as is just a 4100 convertor kit - extensively used in rest of the world - that is short of Nat gas. But unfortunately not in US- oil and auto politics.

Boone Pickens spent a lot of time/money and effort to popularize Nat Gas for autos - but could not get enough buy in. Before people jump in stating where will you fill Nat gas, Pickens initial plan was to convert big operators that use captive fill up stations only - once enough big operators get converted - there would be scale for use for consumers. But alas our auto/oil politics somehow does not work that way - we favor ethanol and Arab oil.

On Nat Gas itself - there is huge glut - world over- despite super huge production cuts in US. With new pipelines and LNG terminals being built to transport to US - the glut will increase even further.

Aug 04 07:24 PM

[Duude:]

On Aug 04 08:48 AM Tony Petroski wrote:

> From the author: "And, as we’ve seen so far, we not only make poor
> decisions, but we appear to be unable to even make decisions. The
> current public discussion about “getting off oil” remains incoherent,
> fractured and tends to recede to the background after noisy flare-ups."
>
>
> Who is this "we?" When "we" owned the oil and it was relatively
> cheap, did "I" get part of that "inheritance?" The Rockefellers
> got most of it and I missed out on my share. How do I get my share
> of the natural-gas inheritance?
>

Where were you when it was time to put up the capital to lease land, do geological studies to find the oil, build the infrastructure to drill, pipe and refine the crude product? But you did receive an inheritance anyway. Its likely a more advanced economy than we might have otherwise have inherited, (The bigger picture, not the current economy).

Aside of that I agree with your comments about getting government out of the energy business. Micromanaging such an important part of our economic future is full of more pitfalls than potential benefit. And to give this power to the current lot in power will certainly turn out to be as disastrous an event as Chernobyl was to the people of Ukraine 23 years ago.

Aug 04 07:49 PM

[John Petersen:]

It's appalling to think back to the 30s and 40s when natural gas was thought of as a waste byproduct of the oil industry and natural gas reservoirs were routinely bypassed in the oil fields of the Gulf Coast. I spend most of my time writing about energy storage devices but have to wholeheartedly agree that an NG solution would be far easier and cheaper to implement than current plans to electrify transportation. It's easy to raise concerns about infrastructure issues, but in the final analysis I view the interstate NG "grid" as far more stable and reliable than the electric grid. So If I had to build out one or the other, I'd take a long hard look at NG.

Aug 05 01:40 AM

[pockyclips ...:]

If Rhino can sell propane from every hardware and grocery store in the 'hood, it can't be that much more difficult to sell NG. Nothing but knuckle dragging politics keeping us addicted to terrorist oil!

Aug 05 08:18 AM

[pockyclips ...:]

Let's look at the scoreboard for Reaganomics. Airlines, Savings and Loans, and California's first crash come to mind. And don't forget, we owe $160 billion/year starting in 2011 on those 30 year bonds from the Reagan years. Even if Obama and the Dems ran a balanced budget from '09 to '13, there would still have to be a middle
class tax hike. Congress can no longer steal from Social Security to hide our debt.

Aug 05 08:40 AM

[Duude:]

On Aug 05 08:40 AM pockyclips 2020 wrote:

> Let's look at the scoreboard for Reaganomics. Airlines, Savings
> and Loans, and California's first crash come to mind. And don't
> forget, we owe $160 billion/year starting in 2011 on those 30 year
> bonds from the Reagan years. Even if Obama and the Dems ran a balanced
> budget from '09 to '13, there would still have to be a middle
> class tax hike. Congress can no longer steal from Social Security
> to hide our debt.

A little out of touch with reality. The tax cuts of the Reagan years actually led us out of the dark economic morass known as the 1970's into one of the longest economic expansions we'd experienced thus producing more revenue for the government.
Reagan also upped the ante with ever higher military spending which the Soviet Union could not match thus leading to the break up of the Soviet Union and freedom for tens of millions of Eastern Europeans. This was simply cleaning up after FDR and Winston Churchill's disastrous decision-making at the end of World War 2 which awarded the Soviet Union rule over what were sovereign states.
While these cold war tactics came at a cost, the biggest cost was the compromises Reagan had to make with Democrat Congressional leadership in signing off on expensive new social spending which clearly broke the budget. So those 30 year bonds are every bit as much the Tip O'Neil social engineering bonds of the 1980s.

Aug 05 11:07 AM

[pockyclips ...:]

If Reagan takes the credit, then he also gets the blame. On military spending, most of the cost effective weapons systems were bought and (mostly) paid for during the Carter years. The F-15, F-16s, and F-117s are worn out, and are being replaced by systems costing 10 times as much, without 10 times more capability.

Meanwhile, the folks that pay for these planes aren't making 10 times more than they were in the '70s. We're expected to compete
with labor 7 to 10 times cheaper. Our military industrial complex
may have to do likewise. After all, federal spending is"socialism"
in the grand scheme of things, even if the "right" side benefits from it.

If you go back and compare Reagan's and Congressional budgets
during the '80s, you may find a percentage point difference, which doesn't account for the sword of debt hanging over our heads.

On Aug 05 11:07 AM Duude wrote:

> On Aug 05 08:40 AM pockyclips 2020 wrote:

Aug 05 02:53 PM

[jockum:]

reagan won the war at the battle on Iceland. Iceland is now one of the worlds largest holder of potential hydrogen reserves. Abundant energy. Clean energy, without any co2 emissions. Why did we not buy Island when it was dirt cheap. (well it still is). Yes, a quick refitting of coal burning plants, to NG. But while refitting and building out, lets make sure, the system can handle hydrogen as well. (if possible- i really dont know).

Aug 14 09:34 AM