carbonates

Shale Gas: Promises, Promises, Promises

Arthur Berman could be very wrong. His points have been debated for years among those in the shale gas business. They are NOT revelations to anyone who is connected to shale gas and generally are not considered anything more than FUD. I've sat through many late night debates about all of these issues long before Berman ever voiced them.

The first thing Berman does wrong is typical of some engineers. He thinks "average wells" exist. CHK, DVN, and XTO all own very different acreage in the play, have different completion practices and histories, and even have different cost structures. Berman is averaging in the early wells that failed, the vertical wells with the horizontals, the wells in all types of geologic areas, and for every size and skill set of operator. Not even conventional plays will hold up to this type of "average well" analysis. Its a classic over-simplified engineering approach that can kill any new play. Core areas have very different production than the play overall. Berman ignores this.

"The gas companies are assuming a hyperbolic decline curve based on a very limited data set from a few wells, while Dr. Berman found, after studying far more wells.." This is nonsense. These operators have access to FAR MORE DATA than Berman can ever hope to see. Berman is restricted to the data in the public domain, which is reported to the Texas Railroad Commission according to their reporting requirements (which actually cause biases in the data). He can't possibly have BETTER data. That said, I agree that hyperbolic decline curves do overestimate EURs but the same is true for conventional reserves. Hyperbolic curves tend to reflect best case.

Berman's whole approach is flawed because he builds the worst results of the earliest learning curve (which in the Barnett was THE EARLY learning curve) in with later results. By combining these he is assuming that no one improves with experience, and that no operator is better than average.

Profitability is certainly a concern with lower gas prices. That is also true of the conventional Gulf of Mexico (especially deepwater) and all LNG. At some point no natural gas production makes money (yet supply may continue). Reductions in cost of drilling alone can dramatically change the economic potential of a well. At least one study by Drilling Info, Inc. found "there is a 80 to 100x differential in play reserves between static D,C& S costs and $7/mcfg...and $2.50/mcfg." Wellhead cost is not a valid way to address full cycle economics.

"Shale gas companies are funding drilling with debt and asset sales" is probably the one statement Berman makes that I am seriously concerned about. Some companies are clearly doing this, and others are benefiting from the "hype" surrounding their early success in these plays. Then again, isn't that the way the business works for anyone other than the Seven Sisters? It could easily be argued that those who are funding themselves this way are the best businesses, since in the long run they hope to leverage their way into larger and larger market share. That may have been the most effective way to deal with the downturn in 2008. In a rising commodity price market, they will reap the benefits. In a falling market, they seem to have buffered themselves. I think Berman's concern about this may have some validity, but is far too simplistic- again. I have a hard time believing that every operator drilling gas shale wells is doing it at a loss.

Take Berman with a grain of salt. His bias seems to be against all unconventional oil and gas, which I tend to believe is due to resistance to the geologic and engineering paradigm shift that has made gas shale possible. Likewise, he makes more money being controversial than being mundane.

Shale Gas: Promises, Promises, Promises

Yes, you can use the natural gas supplied to your home as auto fuel. You will be legally exempt from paying fuel taxes that are added to the cost of gasoline since natural gas is exempt. That savings alone is significant. You can buy a compressor unit that will allow you to fuel your car at home. As with most alternatives, it is barely economic for most people, but there is a savings in fuel cost (mostly due to taxes), improvements in engine wear (my opinion), improvements in carbon output, and you may be allowed to use the carpool lanes in some places, saving more fuel.


On Oct 27 01:09 PM cusip8 wrote:

> I have a question about nat. gas. I have very little knowledge about
> its components, but most homes on the west coast have a nat. gas
> pipe line service into their home. Would it be possible to have a
> pump at your house and you could fill you car at home with nat. gas,
> or is the gas that is pumped into your house not compatible as auto
> fuel? Wouldn

For Your Perusal: The Glory of Free Market Oil Supply

Your premise that removing production of OPEC and Russia leaves only oil produced by market-based oil producers is probably wrong. Most of the majors produce in Russia and OPEC countries. BP's net in Russia is close to 1 million bbl/day. Shell's net production in Nigeria is about 850,000 bbl/day. Oxy's current net production is at least 400,000 bbl/day in OPEC countries. Total was producing 535,000 bbl/day from OPEC and Russia for 2008. Exxon is not transparent about its production per country, but has major projects both in OPEC countries and Russia. Chevron still has a major stake in Venezuela which has quadupled its income over the past 4 years suggesting Chevron production is rising there. Likewise Chevron is growing production in Algeria. While the overall trend in liquids production numbers is falling for many majors, this graph may more correctly represent a shift away from production towards OPEC and Russian locations more than a decline in overall production of multi-nationals and independents. I suspect you have oversimplified this chart to the point it does not represent the true picture.

I will also point out that considering only liquids production can be misleading since gas production is rising in most parts of the world. Through fuel substitution as well as gas-to-liquids projects, gas is slowly replacing liquids and will likely continue that trend.

Have We Reached Peak Oil?

As an exploration geologist I have changed my views to be more optimistic over the past few years. The reason: a new paradigm shift in both geologic thinking and technological ability that has resulted in HUGE changes of probable and possible natural gas reserves (if you don't get it- then you don't understand the new paradigm). To the extent that natural gas can replace oil, there will not be an extreme consequence from a decline in oil production. In reality, the bigger risk is demand outstripping supply since adding new oil production can take years.

For the most part, I still believe the real threat to oil production has nothing to do with geology, and everything to do with politics, which is why it will not follow Hubbert's Curve. We may be approaching peak political oil much sooner than we reach true peak oil production capacity. There are still many billions of barrels of oil that are not reachable due to political constraints all around the world.

Natural Gas from Shale: Emerging Plays

I think your article sums up the potential fairly well. I see shale gas as a game changer that changes several things. It has already had an effect on world gas prices for NGL, because the US import market is failing to materialize. Europe and Japan are indirectly reaping the benefits of US shale gas in the form of lower prices for imports. At some point many shale gas plays will become NGL sources, and I think this is already being planned in the Canadian plays. Shale gas is likely to change markets for gas on most continents, and has potential to create industrialism in currently underdeveloped countries that have limited know resources at present. Because natural gas requires pipeline infrastructure, many companies are currently pipeline prospecting, to find gas in places where it can be marketed easily. That's one reason I don't think the Alaska gas pipeline is going to get built anytime soon.

There are risks, and many companies in the gas shale market are probably doomed to failure in the present market. That does not mean there will not be winners, but not everyone in the game will win. Drilling costs and initial investments in gas shale plays can be huge. Compared to conventional drilling where a well might drain a square mile of land (~260 hectares), many gas shale wells only drain 80 acres (~32 hectares). If short-term gas prices are high enough they can recover drilling costs in a year or two, but the capital to drill enough wells to ramp up production is significantly higher than the cost of a big-hit conventional gas well. Anachronistic leasing practices and bad regulatory policies abound in the gas shale plays that create another problem. Issues with public policy (NIMBYism), reliable sources of water for fracturing, and possible regulatory restrictions coming from the anti-carbon movement are other issues.

By the way, the Middle East is not without its own potential shale gas and the Saudis are already at work.

Overall, I totally agree that gas shale is already a game-changer, but its going to be a wild ride, and without major changes in consumption (demand) patterns natural gas is doomed to be highly cyclical as gas shale players react and over-react to market prices and other forces that keep them drilling even when the economics of individual wells don't make sense. There will be losers, and a few big winners from an investors standpoint.

How PHEVs and EVs Will Sabotage America's Drive for Energy Independence

Having just returned from a field expedition related to carbon sequestration research, in which my 4WD was the only thing that kept us alive in the 130 degree desert heat, I can seriously relate to the comments by Iowa Corn. I can never imagine the day I will give up internal combustion engines for my truck (much less my marine research vessel). My truck can carry enough fuel to last me a week and travel 500 miles or more- just enough to make one trip. I can't imagine driving through a river or operating in rugged terrain in an EV. As far as I am concerned I am already burning organically grown biofuel- it's called gasoline and it was made by phytoplankton so I feel no moral anguish.

That said, the market will sort this out. I believe you answered your own question when you compared the cost of a Prius to the Volt. Unless Washington manages to interfere with the market enough to cut the cost of the Volt by 50%, the Prius and its clones will continue to dominate in the market that it can satisfy. It will never satisfy the market that requires vehicles to do more than transport a single person over a relatively short distance. It's not going to replace 18-wheelers, airplanes, tractors, or trains, and so is going to remain a minor solution to transportation fuel usage. As for carbon output, the EV is hands down the largest emitter of carbon as long as coal-fired electricity is the source of its power.

As a geologist who has worked in the Atacama Desert looking at lithium deposits, I do still disagree that the ECONOMIC supply of lithium is unlimited, especially when its afficionados see it replacing millions of cars (and still acting as the major supply for electronics, computers, commercial power back-ups, and other device batteries). At current lithium prices, the supply is not large enough to build large numbers of EV's. The market may also solve this problem, as a tenfold increase in lithium prices will significantly increase the economic supply- but seriously damage the economics of EV's. That, influenced by a political trend among lithium producers leaning toward an "OPEC" of lithium exporting countries, is what I see coming as EV's hit the market.

Full disclosure: I own stock in lithium mining companies and oil companies. I don't own stock in GM or Toyota, and none in any battery manufacturers.

The Mac vs. PC Debate Was Never Clearer

I happen to be one of those PC users who buys better computers than anything Apple offers. My home PC uses four processors, has 2 terrabytes of hard drive space, and 4 Gb of RAM. The sad truth is Apple can't do the job- yet I never spend less than $5K for a computer. The real story behind that is that PC's have replaced UNIX boxes (Sun, Silicon Graphics) in most applications. Apple was never part of the story. I used to have a $90K UNIX computer under my desk. Now I only need to pay $5K for even more processing power. Apple is nowhere near the "upper end of the market."

The mistake that Apple has made in focusing on a small high-quality market is that computer users don't always just want ONLY a well-working machine. Most high-end users have specific uses, and if the software on the market that does the job will not run on a Mac, they won't buy one. I fall into that category. I have no prejudice against Apple, they just don't have the support of software companies that I need to get the job done. Since most of the software I use costs much more than the computer, the cost of the computer is trivial (and yes, everyone in my industry who is under the age of 30 uses a PC).

The risk that Apple is still running is that they will gradually lose the small part of the business market that they have now as software designers cease to support their platform, due to Apple's small market. It becomes a visious circle. The risk is not the consumer demand, but the software tools that support the use of the product gradually fading from the market. Unless a software company can make money on the small number of Apple users available, they won't even bother creating the software. That's already happened for me.

Not All Green Jobs Were Created Equal

Most of the "tax subsidies" given to oil companies are also given to every other business, including green energy. Few if any direct subsidies exist for the oil industry. The only examples I can think of are indirect benefits such as research done by DOE, which often funds university research programs directly, not oil companies who happen to benefit from the research.

The so-called subsidies to oil companies are mostly a myth created by spinning the definition of tax deductions. Depletion is provided to all natural resource companies. Depreciation is provided to every industry and every business that buys equipment. The recent threat to change the way drilling costs are accounted for amounts to the opposite of a subsidy, since other businesses are allowed to expense costs related to obtaining their inventory. All US oil production pays royalties to landowners, which in turn gets taxed. Most states tax oil production directly. Probably 35% of the price of a barrel of oil that is turned into gasoline represents taxes. The Mineral Management Service, which oversees oil leasing for Federal lands, is the second largest source of income to the US Government behind the IRS. How is that a subsidy? How much of a return is the US government going to get in taxes for energy produced from "green sources"? Probably not as much as it gets from oil production.

I sincerely doubt the numbers of jobs for fossil fuel investments are correct. Pay for college graduates in the oil industry (engineers, geologists, geophysicists) ranks among the highest. Starting pay can be six figures straight out of school. The engineering jobs I have seen in "green sources" are considerably lower, and the "green" collar work I have seen offered is barely above minimum wage and is mostly seasonal work. Those workers will spend several months a year drawing unemployment because the vagaries of that type of work. I instead would give as an example, the fact that research work done by the Gas Research Institute using Federal funding, has added TRILLIONS of dollars to the US economy. Without this work, gas shales would not be at the level they are now, and we would not have 100 years worth of known gas reserves in the United States. Likewise, thousands of highly paid workers in the oil industry would be looking for jobs.

My Oil Outlook

Your strategy certainly sounds valid and I agree that $58 oil seems a certain bet especially due to your #3 reason. But, I have followed USO since its conception and I concluded early on that it did not do a good job of following oil spot prices. I am still trying to understand why, but I just produced a graph comparing daily closing prices for WTI Cushing Spot with daily closing prices of USO over the last 3 years. What I see that bothers me is that USO has not followed the gains in spot oil prices for most of 2009 directly. USO has seen small net change while WTI spot has moved strongly upward. I don't know if this is because contango in the market is affecting USO, or something else. The bottom in WTI was 12/23/08 at $30.28 and USO closed at $30. USO made a bottom later on 2/18/09 at $22.86 while WTI was at $34.67. The disparity has continued to grow since then. This was the problem that kept me away from USO early on when it was still new.

I'm still more comfortable owning individual oil stocks, yet these certainly are not pure plays on oil and gas prices. I do use DUG as a very short term hedge against my oil stocks. At least with individual oil stocks I can pick and choose based on how well I understand their business efficiency. I'm still struggling to understand the price behavior of USO. For all I know, USO may have more upside potential than actual oil prices since USO is lagging behind oil at present.

Response to Jack Lifton's 'Lithium Batteries: Nothing But Illusion'

Lithium is toxic, eMedicine says this:
"An estimated 10,000 toxic exposures occur per year. These data indicate a gradual increase over the past 10 years." for the US.

The FDA banned lithium as a medication for many years due to its toxicity. Overdoses are a risk. Most MSDS sheets say something like this:

"Corrosive. Causes eye and skin burns. Water-reactive. Reacts violently and/or explosively with water, steam or moisture. May ignite or explode on contact with moist air. May cause severe respiratory tract irritation with possible burns. May cause severe digestive tract irritation with possible burns. May cause central nervous system effects. May cause lung damage. Light sensitive. May cause kidney damage. May cause pulmonary edema. "

As lithium carbonate it is only slightly safer.


On Apr 22 03:50 PM speculawyer wrote:

> Indeed, I think you hit on one of the most important points in your
> 'fourth' section. The amount of lithium in a lithium iron phosphate
> battery (the most promising Li-Ion battery for automotive applications)
> is relatively small. Less than 12% of a lithium iron phosphate battery
> is made up of lithium. The Iron, the phosphorous, and other less
> expensive materials make up the bulk of such batteries.
>
> Altaman, lithium is NOT highly toxic nor very expensive. In fact
> lithium is used as a medication for people with bi-polar disorder.
> Of course too much of any one thing, including water, can kill you.
> Lithium is NOT considered a highly toxic chemical.

Response to Jack Lifton's 'Lithium Batteries: Nothing But Illusion'

Lipton is right about one thing. Lithium is not abundant enough based on current economically recoverable reserves to supply a large automotive market. Lipton is correct in asserting that the Bolivian supply is overestimated, and since Bolivia clearly intends to nationalize its lithium reserves, the supply is hardly without its restrictions. Uyuni does have problems with both concentration and contaminants. I am a professional geologist who has visited Uyuni and Atacama salars to make a personal evaluation of the lithium reserves (note my name). Neither of you have touched on the environmental cost of these lithium supplies and that that may eventually place serious limits on supply (it already has in the US as I doubt anyone is going to allow mining the Great Salt Lake or the Salton Sea).

What neither of you seems to be explaining is that reserves are entirely based on economics. If lithium goes to the price of gold, there will be plenty of it available. However, I don't think many automotive applications will support a dramatically higher price for lithium. Lithium supply is currently expected to fall at least 30% below demand by at least one producer (Admiralty). The automotive market would likely destroy itself by creating more demand than the market can hope to supply.

Rather than debating and inferring definitions about reserves and resources, here is the AGI definition:
Reserves: Identified resources that can be extracted profitably with existing technology (my note: understand that as price goes up, so do reserves)
Resource: Reserves plus all other mineral deposits that may eventually become available.

There are plenty of lithium resources, since it is present in seawater. There are NOT plenty of reserves, since it can't be extracted from MOST resources profitably.

If any of you care to read a CURRENT resource/reserve estimate please read this (any 1992 estimates are based on seriously obsolete economics and are WRONG for that reason among others):
www.meridian-int-res.c...

As Natural Gas Prices Decline, Natural Gas Stocks Rise

I still think it will take a cold winter to bring gas prices back up, or an especially active hurricane season.

I see no real progress in Washington towards encouraging natural gas use. Most of the actions taken in Washington so far this year will hurt both domestic natural gas producers and domestic oil producers, and give Canada and other sources of imports an economic advantage.

The one thing that is still a wild card in all of this is that pesky decline curve on shale gas wells. While shale gas added tremendously to production last year, most of those wells have anywhere from 60-80% annual declines. It takes continuous drilling to keep most gas shale plays producing steadily. The gas shale effect could go away by the end of this year.

I'm holding the natural gas stocks I have (I have a large position in coal bed methane), but not buying more for now. I think we will see more declines before we see the next bull market for gas. In fact, I think we are going to see a serious shake-out with a few natural gas producers going broke this year as they watch their leases expire undrllled, or desperately try to drill to hold the leases at a loss.

Li-ion Batteries and How Cheap Beat Cool in the Chevy Volt

From a geologist:

The brine operation in Nevada still operates, but it does not sell lithium on the open market. The operator consumes all of its own production.

The USGS report from 1994 is completely out-of-date, obsolete and irrelevant. You really need to read some recent references.

Unless lithium prices rise enough for hard rock mines to be economic I will stick to my point. The brine-resources are not large enough to supply an automotive lithium battery market as well as the electronics market they already supply. If lithium were to rise in price to hundreds of dollars per lb. for battery grade, then the hard rock miners might come back into the market. However, that is unlikely to be in the US because the regulatory environment makes US hard rock mining uncompetitive. How do the economics for car battery packs work at $100 per lb? $200/lb? $500/lb?


On Mar 28 01:23 PM NorthernPiker wrote:

> carbonates, lithium is not a rare metal. It is marginally more abundant
> than lead in the earth’s crust and vastly more abundant than lead
> in seawater. Based, on the 1994 domestic US price of $4.41 per kilogram
> (up from $4.21 in ’93), it can be mined economically; however, mining
> cannot compete with a cheaper brine operation.
>
> Prior to 1997, the major producer of lithium was the US, from two
> sources – a brine operation in Nevada and a mining operation in North
> Carolina. The NC mine shut down in 1997 because it could not compete
> with the growing brine operations in Chili. This blog claims that
> North Carolina has reserves of 2.6 million tons of lithium, ½ the
> reserves of Bolivia.
>
> www.nicholas.duke.edu/...
>
>
>
> From the USGS 1994 yearbook:
> “The United States has been the largest producer and consumer of
> lithium and the two U.S. companies have been the leading lithium
> carbonate producers in the world for many years.” …
>
> “Lithium carbonate, … Truckload lots, delivered $2.00 (per/ lb)”
>
>
>
> minerals.usgs.gov/mine...
>
>

Li-ion Batteries and How Cheap Beat Cool in the Chevy Volt

You already heard from one and you don't believe me. I am a geologist and engineer who has studied the lithium industry and visited the lithium mining operations of Chile and Bolivia. I know what I am writing about: lithium is not abundant enough at present prices to meet the supply that would be needed to convert any significant proportion of the auto fleet to lithium batteries.


On Mar 28 08:39 PM NorthernPiker wrote:

> John, I share somewhat your lack of qualifications to speak to mining
> costs.
>
> Based on the USGS 1994 Yearbook, “Production of lithium carbonate
> from brine in Nevada (and the Andes, I assume) is much less energy
> intensive (and simpler) than the production from the spodumene” (the
> ore type found in North Carolina).
>
> minerals.usgs.gov/mine...
>
>
> As for what mining production costs are, I have only a press release
> from Western Lithium Corporation on drilling results for one of the
> five deposits (lenses) at its King’s Valley hectorite clay property
> in Nevada. (Yeah, it’s not even spodumene but it is an ore.)
>
> “The PCD lens contains Indicated Resources of 48.1 million tonnes
> grading 0.27% lithium, or the lithium carbonate equivalent (seekingalpha.com/symbo...)
> of 688,000 tonnes LCE and Inferred Resources of 42.3 million tonnes
> grading 0.27% lithium, for an equivalent of 606,000 tonnes LCE, both
> at a cut-off grade of 0.20% Lithium.”
>
> “Economic assumptions for base-case cutoff grade (high-lighted),
> $3.50 Lithium Carbonate USD/lb, 60% metallurgical recovery; $45 USD/ton
> processing, $2 USD/ton Mining; Rounding errors may exist”
>
> finance.yahoo.com/news...
>
>
>
> Below a price of $4.50 per lb. or $10/kg (seekingalpha.com/symbo...),
> this ore body seems somewhat marginal when one considers capital
> needs, the ongoing drilling costs and risks – market pricing, energy
> cost escalation, … However, they may be able to tap into battery
> stimulus money to improve the project economics. The development
> of this significant lithium ore body would help to prevent the pricing
> of LCE from going absolutely silly.
>
> John, I agree that it would be good to hear from some mining engineers.
>

Homes vs. Businesses - Which Are Better Targets for Reducing Energy Use?

"Certainly commercial and industrial demand response represents "the easy stuff," said Rick Nicholson"

I agree that industrial users have good incentive to reduce energy usage. However, there are large parts of the commercial market that will have a very difficult time cutting energy usage. One of the major reason is the traditional way leases are handled in buildings with more than one tenant. Where the leases are triple-net, many of the costs of running the building are shared on a pro-rated basis by the tenants, leaving no incentive for the tenants to cut energy usage, as the other tenants might offset their savings. The landlord has no incentive to save money because they are not paying the energy costs, and upgrading equipment to save energy will be considered a capital improvement, not maintenance, so upgrading will provide no direct benefit to the property owner.