The relentless decline in EROEI of oil is one of the biggest underreported economic stories of our times. Available net energy—what makes society work—is dwindling away even as production statistics seem to show a North American oil and gas production boom.
Add net exports and net energy together, and the situation, especially for industrialized oil importing nations, starts to look pretty severe even over the short term (from now to 2020).
MAKING SENSE OF HISTORY AS WE LIVE IT
From the start of commercial exploitation of petroleum in 1859 to roughly the year 2000, the inflation-adjusted (to year 2000) price of oil averaged roughly $20 per barrel in most years. A barrel of oil contains the energy equivalent of roughly 23,000 hours of human labor, so $20 per barrel translated to a minuscule energy cost as compared to the cost of the energy sources (principally, human and animal muscle-power) that had built the pre-20th-century agrarian world. The industrial cities of today were founded on ultra-cheap fossil energy. Parking lots were paved, bridges spanned, suburbs and highways constructed—all with a principal fuel source that cost only an insignificant fraction of the cost of human labor.
During the past decade, the yearly average price of oil has jumped to over $100 per barrel. Global annually averaged crude oil prices doubled from $25 in 2002 to $55 in 2005, and then doubled again, from $55 in 2005 to $111 in 2011. The energy of oil is still cheap when compared to the cost of human labor, but it has increased roughly 500% in comparison to its price during the 20th century, the heyday of industrial expansion. We are still wealthy compared to our ancestors; we still enjoy the benefits of cheap energy. Yet now, paving parking lots, spanning bridges, and constructing suburbs and highways costs significantly more than it did previously.
Alternative, renewable energy sources have the potential to replace oil in some applications. Still, the inevitable energy transition away from fossil fuels will take enormous investments, and it will also take time—three or four decades in the best case. It is therefore highly unlikely that society will make sufficient investment, in sufficient time, to avert a steep decline in available energy and a steep increase in energy costs during the coming decades.
The economy can adjust to higher energy prices over time, but that adjustment process may be painful. Since replacing oil with other energy sources will be difficult, and since oil is so pivotal to world trade, the decline of oil will probably ensure the commencement of a historic period of economic contraction—in some respects, a mirror image of the 20th century’s unprecedented boom.9 And that’s a fair interpretation of what we are beginning to see take place around us. Economic weakness plagues the world’s industrialized nations. Efforts to extract “extreme” fossil fuels have taken on an air of desperation. The oil-rich Middle East is in turmoil, with major world powers seeking either to buy influence with rulers or to gain control of resources by destabilizing regimes. Paradoxically, while labor productivity rose during the era of ultra-cheap energy as workers used powered machines to accomplish more tasks, rising energy costs now translate to higher unemployment and downward pressure on wages.
Much of our current economic dilemma has to do with debt—and this in turn also relates to the underlying energy problem. As American economist Robert Gordon has documented, cheap oil and electrification drove rapid economic growth during the mid-20th century.10 By the 1970s, the expansion of oil- and electricity-based infrastructure was reaching a point of diminishing returns in terms of its ability to keep the economy expanding: most families already had a car or two, as well as a houseful of electric appliances and gadgets. As globalization took hold, American factory workers found themselves competing with workers in poorer nations, and real hourly wages stopped growing. With demand stagnating, new ways had to be found to keep the engine of economic growth humming. Since the 1970s, growth in consumption has been maintained to an ever-greater degree simply by borrowing, with rising consumer debt as a significant driver of commerce. During this period in the United States, debt (all debt, not just government debt) rose at three times the rate of GDP growth. As debt ballooned, the financial industry increased in size relative to manufacturing, agriculture, and the other components of the economy. The financial industry then began blowing bubbles as a way of increasing profits. The most recent of these was the US housing bubble, whose collapse in 2007–2008 left us where we are now. The end of the era of cheap oil and the inflation and collapse of history’s biggest debt bubble are historically intertwined.
With energy literacy, an understanding of energy history, and a peak-oil-informed perspective, current economic and geopolitical events become much more readily understandable—if no less causes for concern.
DEPLETIONIST ECONOMICS
Standard economic theory says that peak oil should present no problem. If any resource that is in high demand becomes scarce, its price will rise until someone finds a substitute. After all, petroleum itself was initially a substitute for whale oil. If crude oil can no longer be produced at the rate at which the world wants to consume it, we will adapt. We’ll drive electric cars. We’ll burn biodiesel made from algae.
Yes, we will find substitutes for oil—at least in some instances. But there is no guarantee they will be superior, or even affordable. All the substitutes currently available are problematic in one way or another.
There’s a school of thought that says (in effect) that the more money we spend on energy substitutes, the better. If we spend lots of money on new energy sources (borrowing the money, if necessary), doing so will increase GDP—which is essentially a measure of how much money is spent in the economy. And a higher GDP is assumed to translate to a higher standard of living.
This line of thought may be misleading. While we tend to think of money as the prime mover of the economy, in fact it is energy that gets things done. More and cheaper energy translates to a more complex society with a growing economy; less energy, and more expensive energy, translates to a stagnant or shrinking economy that sheds complexity.11
Again, the primary implication of peak oil is an end to economic growth as we have known it during the past few decades. In order to adapt to peak oil, we will need not just different energy sources, but transformations in the ways we use energy. We will be less mobile and will need to adapt our trade dependencies and redesign our cities and our lives accordingly. We will need to rethink our food systems to make them more locally based and less dependent on petrochemical inputs. We will need a new economic paradigm in which growth is no longer the goal, one in which conservation of natural resources is a much higher priority than is currently the case.
In short, peak oil turns out to be a very real problem, and a very big one indeed.
* * *
All of the trends discussed above—the steep rise in oil production costs in recent years, the leveling off of world crude oil production rates, the economic pain that is resulting, and the implications for future economic growth—constitute the “game” that fracking is attempting to change. How much, and for how long, does it change that game? Let’s take a look at what has been accomplished and what’s been promised with this new technology.
SNAKE BITES
1. THE INDUSTRY SHILLS SAY:
Thanks to new technologies we have a 100-year supply of natural gas here in the United States.
THE REALITY IS:
That 100-year figure is arrived at by extrapolating results from the very best wells to entire regions and ignoring future demand trends. It’s grade-A snake oil.
2. THE CONVENTIONAL WISDOM SAYS:
Fracking is a “game changer” for domestic oil and gas production. “We can drill our way to energy independence in the United States.”
THE REALITY IS:
Shale gas and tight oil, like all fossil fuels, are finite resources. The rate of supply from both will rapidly decline in the near future. If we don’t develop long-term renewable energy alternatives now, we will be caught short.
Hydraulic fracturing and horiz
ontal drilling have increased production of natural gas and oil by tapping vast shale deposits. But the industry has made extraordinary claims about the extent and longevity of the shale boom—claims that the evidence does not support.
Chapter Two
TECHNOLOGY TO THE RESCUE
Fracking will end America’s reliance on imported oil. The United States can look forward to a hundred years of cheap natural gas. The US will soon become energy independent and will surpass Saudi Arabia to become the world’s foremost petroleum producer.
These are extraordinary claims, but they are not entirely without basis. To quote a gas exploration company representative’s repeated assertion at a presentation I attended in 2009, “The proof is in the production.”1 Just a few years ago, US natural gas production was declining and apparently set to go off a cliff. Instead, today’s gas-in-storage is at or near record highs, the price of natural gas has recently retreated to historic lows, and there is serious talk of exporting liquefied natural gas to other nations by ocean tankers.
Similarly, US oil production—which had been generally declining since 1970—is now on the rise, primarily because of the application of hydraulic fracturing and horizontal drilling in tight reservoirs. In 2012, US oil production soared by 766,000 barrels per day, the biggest one-year boost ever; domestic production is at its highest level in 15 years.
Nevertheless, claims that have recently been made for the potential of fracking technology to produce spectacular amounts of shale gas and tight oil for decades to come have drawn skeptical responses from some geologists. The boom has been going on for a few years now—long enough to generate data and to permit reasonable observers to gain some perspective.
In this chapter, we will review the long history of the technology behind the shale gas and tight oil booms in the United States, and the short history of the booms themselves. Then, in Chapter 3, we’ll drill into data to see whether the facts really support the industry’s claims.
A BRIEF HISTORY OF FRACKING
The essential purpose of hydrofracturing is to create and maintain fractures in oil- or gas-bearing rock; these fractures enable oil or gas to migrate toward a well bore so it can be extracted from the ground.
The idea of fracturing rock to free up hydrocarbons goes back almost to the beginning of the oil industry. In 1866, US Patent No. 59,936 was issued to Civil War veteran Col. Edward Roberts, who developed an invention he titled simply, “Exploding Torpedo.” Roberts would lower an iron cylinder filled with 15 to 20 pounds of gunpowder into a drilled borehole until it reached oil-bearing strata. The torpedo was then exploded by means of a cap on top of the shell connected by wire to a detonator at the surface. Roberts also envisioned filling the well bore with water to provide “fluid tamping” to concentrate the concussion and more efficiently fracture the rock.
The invention worked. The Roberts Petroleum Torpedo Company went on to “shoot” thousands of Pennsylvania oil wells with explosives, and production from the wells increased as much as 1,200% within the first week after the procedure. Roberts’s contracts with well owners gave him a royalty of 15% of subsequent oil production; understandably, many drillers wanted the benefit of “shooting” but not the cost, so they built their own torpedoes, exploding them at night with no observers around—a practice that gave rise to the term “moonlighting.”
In the 1940s, Floyd Farris of Stanolind Oil and Gas studied the use of water as a fracturing agent, carrying out the first hydraulic fracturing experiment in 1947 at the Hugoton gas field in southwestern Kansas. His experiments led to the first commercial application of hydrofracturing in 1949, when a team of petroleum production experts applied it to an oil well near Duncan, Oklahoma. Later the same day, Halliburton and Stanolind successfully fractured another well near Holliday, Texas. Starting in the 1970s, the use of hydrofracturing became widespread within the petroleum industry, often in efforts aimed at “enhanced oil recovery” (EOR) in conventional oil and gas fields. However, oil- and gas-bearing shale rocks remained mostly out of bounds for drillers.
In the 1980s and 1990s, George P. Mitchell of Mitchell Energy & Development, now part of Devon Energy, discovered that shale has naturally occurring cracks. Some shales are more fractured than others; if hydrofracturing could be applied where cracks are already present, large amounts of gas might easily be released.
In 1991, Mitchell pioneered the use of horizontal drilling for natural gas, guiding wells down a kilometer or so, then bending the well bore to extend horizontally another kilometer. This accomplished two things: it provided more contact between the well bore and oil- or gas-bearing strata, and it allowed producers to drill horizontally beneath neighborhoods, schools, and airports—which would prove to be a great advantage in cases like the Barnett shale, where significant gas deposits lie beneath the City of Fort Worth.
A few years later, Mitchell developed “slick-water” fracturing, which involves adding friction-reducing gels to water to increase the fluid flow in fractured wells. Mitchell then combined horizontal drilling and slick-water hydraulic fracturing, and focused his efforts on producing gas from the Barnett formation in Texas.
Over the following years, the industry worked to develop more complex mixtures of fracturing fluids with ingredients including fine sand and a laundry list of chemicals, many of them toxic. Some of these materials (such as sand) act as “proppants,” which are injected after the rock is initially fracked in order to prop open the newly created rock fractures. Other ingredients perform a range of functions, from optimizing fluid flow, to scouring the inside of the well casing. The exact formulas for fracking fluids are typically proprietary and carefully guarded. Changes to the Clean Water Act in the Energy Policy Act of 2005 exempted natural gas drillers from having to disclose the chemicals used in hydraulic fracturing, thus averting costly regulatory oversight. This came at the urging of then-Vice-President Dick Cheney, and the relevant passage in the Act has come to be known as the “Halliburton loophole,” since Cheney had a long-standing business association with Halliburton, and that company stood to benefit substantially from the exemption.
The last key technological component of modern fracking consisted of multi-well pad or cluster drilling—the drilling of up to 16 wells from one industrial platform. This enables operators to concentrate machines and material in one place so as to reduce costs and accelerate well approvals. Cluster drilling from one pad was not introduced until 2007.
In many respects, the industry’s newfound ability to access shale gas and tight oil pivots on these technological developments. But there is more to the story. Mitchell Energy’s focus on unconventional gas was partly motivated by the federal government’s removal of natural gas price controls and by new federal tax credits designed to promote the development of unconventional natural gas resources. In the late 1980s and early ’90s, limits to US conventional natural gas supplies were becoming apparent—limits that would lead to steeply rising gas prices in the early 2000s. The US federal government and some states began offering tax credits or severance tax abatements to companies developing tight gas, coalbed methane, or shale gas. Soaring oil prices were similarly instrumental to the development of the Bakken tight oil play. In retrospect, it’s clear that it was the bringing together of several technological innovations in the context of high oil and gas prices and changes in government regulations that made large-scale commercial exploitation of shale gas and tight oil reservoirs possible.
Figure 14. Schematic Diagram of a Horizontal Shale Gas Well. Multiple horizontal shale gas wells are often drilled from a common platform, with each well stimulated with multiple hydraulic fracture treatments.
Source: Image Copyright (c) The Analysis Group, 2011. Used with permission.
HOW TO FRACK A SHALE GAS (OR TIGHT OIL) WELL
Suppose you want to get in on the fracking game. Here’s a short instruction manual to get you going.
Start with a geological survey. You need to know where the gas or oil is, and you wi
ll probably wish to operate within one of the “plays” already identified by the industry (such as the Marcellus, Eagle Ford, or Bakken). But you need more than the general information that you can glean from the US Department of Energy and US Geological Survey websites—you need to know the location of “sweet spots” within these plays where production will be highest. You will be able to obtain that knowledge only by purchasing proprietary drilling data from other companies, and by drilling your own test wells. Recent technological innovations in 3-D seismic imaging will help immensely in enabling you to visualize exactly where the most prospective rock layers are.
Sooner or later you will need drilling leases—rights, purchased from landowners, to exploit subsurface mineral resources. Start with a search of land ownership records at county offices. Actual lease negotiations and signings may take place on doorsteps or kitchen tables in rural homes (as in the film Promised Land). You may want to load your boilerplate agreement with language that allows you to build roads, buildings, gates, drilling pads, and pipelines anywhere on the owner’s land; to interfere with farming, hunting, timber rights, conservation programs, and other land uses; to take millions of gallons of water from wells on the land; to leave the landowner liable for any damages caused to neighbors by your drilling practices; and to store wastewater and chemicals on the land. You’ll offer the property owner an up-front bonus payment per acre (from five hundred to several thousand dollars, depending on a variety of factors), plus royalties that promise a percentage of the value of oil or gas that’s produced. The lease will give you a three- to five-year deadline to drill. If a well is drilled, the lease stays in effect for as long as the well produces.
Snake Oil: How Fracking's False Promise of Plenty Imperils Our Future Page 4