Transcript KAROO SHALE GAS GAME CHANGER or GAME OVER? are South Africa’s shale gas hopes built on a house of cards?

KAROO SHALE GAS
GAME CHANGER or GAME OVER?
are South Africa’s shale gas hopes built on a house of cards?
I AM NOT A SCIENTIST ENGINEER, ECONOMIST, OR LAWYER
KICK-OFF POINT, OBJECTIVE & FOCUS TODAY
Global Decisions are being made and energy policy being formed on a foundation of
hype, speculation and desperation
Leaders … are convinced technology … US .. answer to energy, jobs, revenue and
Co2 problems - (for those who believe in such a thing as climate change)
I’ll spend time touring the US with you. Why? Because it’s stats, promises and hype
from US shale gas promoters that have covered our leaders eye’s with wool
I intend to inform South Africa’s leaders via this medium – or in court if we have to
And I present to you the same caveat with which I greeted you last year
LET’S GET STARTED
UNEQUIVOCALLY PRESIDENT BARACK OBAMA
JANUARY 25TH 2012
‘We have a supply of natural gas that can last America nearly 100
years, and my administration will take every possible action to
safely develop this energy.’
BULLISH: ANC SECRETARY GENERAL
GWEDE MANTASHE
ANC tired of talking - OLEBOGENG MOLATLHWA | Times Live 23 July, 2013
The government will forge ahead with contentious projects that it
claims will kick-start the stuttering economy - even if it is taken to
court.
MISINFORMED: SOUTH AFRICA –
PROF BRIAN KANTOR
Chief economist & strategist – Investec Bank SA
Were this potential output of natural gas, estimated as recoverable by the US
EIA, to be captured from the Karoo shale it would be very large potatoes indeed.
It would be the equivalent to about 400 years of SA consumption of oil at current
rates: 365*550 00 = 202.575m per annum; (83000mb/202.575mbpa) = 402
years
DITHERING US EIA AUGUST 25 2011
NOT EVEN 2 MONTHS AFTER PROF. KANTOR’S 402 YEAR ASSERTION FOR SA
Estimate of Marcellus reserves reduced from 410 tcf to 84 tcf
Estimated 2 tcf in 2002
TOWING THE LINE
SA DEPARTMENT OF TRADE & INDUSTRY
MINISTER ROB DAVIES – CAPE TOWN, AUGUST 22 ND - CABINET
Government could authorise shale gas exploration before next
year's elections. [June 2014]
"We want to move before the end of this administration.”
SO WHO IS BEHIND THIS MISINFORMATION?
AND WHY?
THE SHALE GAS PROMOTERS
Aubrey McClendon (ex)CEO – Chesapeake Energy
T. Boone Pickens – Oil and gas billionaire and NGV proponent
Dan Yergin – Chairman IHS CERA (consultants to oil and gas)
Terry Engelder – PhD – Penn State University
Rex Tillerson – CEO Exxon
Tony Hayward (ex)CEO BP
Professors Timothy Considine and Robert Watson – Penn State
CAN IT BE TRUE? ARE THESE PEOPLE GUIDING ENERGY POLICY IN SA?
HAVE THEY MADE ANY REAL EFFORT TO INTERROGATE CHESAPEAKE / ENGEL DER / EIA FIGURES?
Brian Dames, CEO of ESKOM – “as Eskom we believe fracking must be done”
Professor Philip Lloyd – Cape Peninsula Institute of Technology “100 000’s of jobs”
Professor Tony Leiman – University of CT - “Karoo could be the next North Dakota”
Professor Andrew Keeton – Rhodes University – “No fracking in exploration”
Professor Brian Kantor – “402 years”
Minister Dipuo Peters “Gift from God” “Marcellus a town in PA”
Minister Rob Davies – “Game changer – multiples of 100tcf (Mozambique)”
Deputy President Gwede Mantashe “ANC tired of talking”
Commissioner Arnold (Mike) Muller NPC “Agriculture pollutes more than fracking”
Ivo Vegter – Opinonista – “Risk of pollution small and easily manageable”
Bonang Mohale – Country Chairman Shell SA – “We will leave the Karoo better than we found it”
Jan-Willem Eggink – Manager Shell Upstream SA – “We want to make an ecological example of the Karoo”
Images courtesy of Ivo Vegter Blog, Green rennaisance, RoyalDutch PLC.com
AUBREY McCLENDON [EX] CEO CHESAPEAKE ENERGY
US HOUSE SELECT COMMITTEE JULY 30 2008
‘…one message…America…beginning…great natural gas
boom…solve…energy crisis…generate electricity, make chemicals,
plastics, fertilizers…heat homes…fuel millions of cars and trucks
for decades to come.’
PROFESSORS CONSIDINE & WATSON
PENN STATE UNIVERSITY
Their report – An Emerging Giant: Prospects and Economic Impacts of
Developing the Marcellus Shale Natural Gas Play. 2009. (The Penn State
Report)
‘While reserve estimates…somewhat uncertain at this early stage,
estimates of recoverable reserves of at least 489 trillion cubic feet seem
increasingly reasonable’
The report also predicted $35 billion in added value and almost 175 000
jobs in 2020.
In September 2013, PA recorded its worst employment year since 2010.
What’s happening?
DAN YERGIN – AN INDUSTRY ADVOCATE
PULITZER PRIZE WINNER, FORMER HARVARD PROFESSOR AND CHAIRMAN OF IHS CERA
As environmental concerns increasingly threatened multi-billion
dollar investments the need for a credible industry advocate
became vital. Dan Yergin is that man.
He promotes the ‘shale gale’ as “simply the most significant energy
innovation so far this century.”
DAN YERGIN
PULITZER PRIZE WINNER, FORMER HARVARD PROFESSOR AND CHAIRMAN OF IHS CERA
April 2, 2011 – Wall Street Journal article – ‘Stepping on the gas.’
Estimates…entire natgas resource base taking shale gas into
account as high as 2500 tcf with a further 500 tcf in Canada –
amounts to more than a 100 year supply of natural gas
IHS CERA consults to some of the biggest energy companies
(EXXONMobil rumored to be a client)
DAN YERGIN AND CERA IN CONTEXT
CERA’s June 2007 forecast that World oil production capacity will
reach 112 mmb/d by 2017 – extrapolates to 107 mmb/d up from
about 87 mmb/d.
Cambridge Energy Research Associates predicts world oil and
natural gas liquids capacity could increase by as much as 25% by
2015. Says: Robert W Esser, director of CERA; “Peak Oil theory is
garbage as far as we’re concerned.”
ASPO labeled CERA’s figures ‘a vision in search of reality’ and
offered CERA a public wager of $100 000 to prove that there would
be an addition of 20 million barrels a day within a decade
AUBREY McCLENDON [EX] CEO CHESAPEAKE ENERGY
US HOUSE SELECT COMMITTEE JULY 30 2008
‘What I am expert in doing is telling you that I believe we can
increase the supply of natural gas … by at least 5 percent per
year.’
McCLENDON’S 2008 CLAIM IN PERSPECTIVE
In 2008 US consumption = 63 bcf/d of which 9 bcf/d imported
5% increase year on year implies a 63% rise to 87.96 b/cfd by
2018
Early 2013 – (after 5 years) US lower 48 production plateaued at
62 bcf/d – no indication that another 25bcf/d is possible by 2018.
TERRY ENGELDER PhD PENN STATE UNIVERSITY
FORT WORTH BASIN OIL AND GAS JOURNAL - AUGUST 2009
Using the power-law rate decline of Chesapeake, an EUR for the
Marcellus may be calculated…assuming…70% of the sections in
each county…decline…proceed for 50 years…’
This calculation yields a 50% probability that the Marcellus will
ultimately yield 489 tcf
AUBREY McCLENDON [EX] CEO CHESAPEAKE ENERGY
CBS NEWS ‘60 MINUTES’ NOVEMBER 14 2010
‘In the last few years we have discovered the equivalent of two
Saudi Arabia’s of oil in the form of natural gas in the United States.
Not one, but two’
Talk show host Stahl “We have twice as much natural gas in this
country, is that what you are saying, than they have oil in Saudi
Arabia?”
McClendon “I am trying very clearly to say exactly that.”
McCLENDON’S 2010 CLAIM IN PERSPECTIVE
In 2011 BP Statistical review Saudi Arabia 264.5 billion barrels
proven oil reserves at end 2010. Equivalent of 1587 tcf nat gas.
X 2 = 3174 tcf or enough to power the US at its current rate of
consumption for approx. 125 years.
T. BOONE PICKENS
ARCHITECT OF THE PICKENS PLAN
Pickens Plan TV adverts – break stranglehold of
foreign oil
Actually the Natural Gas Vehicle Act
filled with – tax credits, grants, requires 50% of all new
federal Government vehicles to be on gas by Dec 2014
Major shareholder in Clean Energy Fuels Corp.
Famous quote on CNBC April 2011 talking about
America’s Natural gas Endowment:
You’re there. You’re there. I say you’re going to recover
4000 trillion [tcf]. Which is 700 million barrels.
ARE WE DEVELOPING A PICTURE OF WHY
PRESIDENT OBAMA THINKS HE’S GOT MORE
THAN A 100 YEARS OF NATURAL GAS?
And if President Obama thinks he’s got 100 years and the same
people that told him that, tell President Zuma’s desperate
government, that SA is sitting on top of a 400 year treasure trove,
who is anyone in SA to argue?
Sooner or later, leaders are going to have to backtrack – I’m
intrigued to see how they break the news ….
HOW DID IT PAN OUT FOR THE BIG GUYS?
Between 2006 and 2011, CHK sold whole or partial shale play
interests for $17.9 billion.
5 buyers were foreign – Total, BP, Statoil, BHP Billiton
BHP took a $2.84 billion write down
BP took a $2.1 billion write down,
and now (October 2013) Shell is selling up in Colorado and Texas
THE SEC TELLS US:
These four companies had $53 billion more in expenses than
earnings
They had $43 billion in ceiling test impairment write downs, an
amount that represents 53% of their cash earned from operations
Graphic courtesy of Labyrinth Consulting, Houston TX – Art Berman
389
400
Barnett
Barnett*
350
300
250
Haynesville
Industry / EIA forecasts vs. Bill
Powers / Berman/ Pittinger, et al –
note ttl value of shale gas assets is
less than the 2011 Marcellus figure
Haynesville*
Fayettville
Fayetteville*
Marcellus
Marcellus*
Woodford
Woodford*
200
Eagle Ford
Eagle*
Minor & Emerging
150
132
Minor*
Lewis
Lewis*
100
Avalon Bone/Spring
Avalon*
Other emerging
50
Other emerging*
Ttl Powers et al
0
Ttl Opt
*generally available industry & EIA forecasts
WHAT IS THE FOUNDATION OF THE
MISINFORMATION?
Over estimation of resources by the shale gas promoters
HOW?
Take the sweetest spot in each play
Use the very best recovery and longevity figures achieved
Multiply by the size of the play
Work on a point-forward basis
Flip leases instead of drilling for gas
MARCELLUS PRODUCTION GREW IN 2011/2012 DESPITE
LOW GAS PRICES – WHY?
The early Marcellus players needed to drill to hold acreage (HBP)
and show the investment community growth
Range Resources, Cabot Oil & Gas and Chesapeake far outspent
their cash flows to grow their production
Drilling programs were funded by taking on debt, forming joint
ventures, selling assets and issuing additional shares
Chesapeake mid 2012 forced to sell assets into a weak market and
increase debt load to $13 billion dollars. May 2012 took out a $4
billion bridge loan from a Goldman-Sachs led syndicate
WHAT ABOUT PRODUCTION CLAIMS?
LETS LOOK AT TWO EXAMPLES:
Fayettville. Chesapeake. EUR up from 2.4 bcf to 2.6 bcf.
Sold Fayettville assets to BHP Feb 2011 for $4.5 billion
January 2005 to July 2012 4258 wells comp. in Fayettville shale.
Of these, 1116 (26%) have produced >1 bcf
86 (2%) have produced >2 bcf
Average cum prod. Per well over 887 wells for Chesapeake/BHP in
Fayettville = 719 mmcf. – that’s 72.35% in the wrong direction.
Less than 18 months after acquiring CHK’s Fayettville assets BHP wrote
off $2.84 billion – more than a 50% reduction from the purchase price.
SECOND EXAMPLE – OVERSTATED PRODUCTION
Fayettville. Southwestern Energy. EUR up from 2.2 bcf ‘09 to 2.4
bcf. ‘10
Arkansas Oil & Gas Comm (AOGC) SW drilled 2625 wells between
2005 and 2012 – average production of 804 mmcf.
SHELL SA: ‘UP TO 32 WELLS
PER PAD TO MINIMISE
FOOTPRINT
HOW DOES THIS IMPACT ON YIELD?
Break-even 6-month
cumulative 38 000 boe
39.372
5 wells 200'
Well 6
Well 5
Well 4
Well 3
Well 2
Well 1
6 wells 50'-250'
3 wells 45'0-650'
0
10
20
30
40
50
RIG COUNTS DOWN ACROSS THE US. IF THESE
PLAYS ARE SO GREAT WHY IS EVERYONE
BAILING OUT?
163 rigs
down in
2013
Graphic courtesy of Labyrinth Consulting, Houston TX – Art Berman
CAN THE EIA FIGURES EVER BE TRUSTED?
OR IS SOUTH AFRICA’S ENERGY POLICY ON SHALE GAS IN THE HANDS OF A US CONSULTANCY?
EIA is the nations’s [US] and therefore global source of energy
information yet;
EIA has consistently overestimated potential of shale gas
Failed to accurately estimate and shown inability to perform independent
analysis that has led to bad policy and bad investment decisions
2011 EIA report ‘US Shale Gas & Oil Plays’ prepared by Intek (private
consulting firm)
Instead of collecting real data on wells to determine decline curves and
EUR, Intek simply cut and paste out of industry docs, including the 2008
Investor and Analyst meeting of Chesapeake
O&G APPROACH IS ‘TRUST US’ BUT THEIR
PERFORMANCE SAYS THAT WE SHOULD NOT
At the same time that RoyalDutch Shell is pushing shale gas in
South Africa, the company is withdrawing from shale gas assets in
Colorado and Texas. (Right now) Why?
ECONOMIC CORE AREA BY COUNTY & ESTIMATE FOR FINAL NUMBER
OF EAGLE FORD WELLS BASED ON WELL SPACING ASSUMPTION
Commercial area = 17% of ttl drilled play area; 29% of wells drilled are potentially
commercial. Capital destruction due to failure to identify core areas ahead of leasing
and drilling.
Additional wells to be drilled 10,700 – 15,100 before ramp down of activity
Most likely case: 5.5 years of drilling will fully develop the play
Graphic courtesy of Labyrinth Consulting, Houston TX – Art Berman
POINT FORWARD? OR MANIPULATION?
What costs are typically excluded from point forward?
entry costs – surveys and finding
land costs 640 acres to a square mile $1k - $20k range
admin, utlities, support staff, interest expense
Typical reference to ‘non-cash items’ because they are in a
previous Q.
Does a serious investor look for break-even on point-forward?
Would you invest in a business that brushes these costs under the
rug? Consider the risk here especially when reserves and yields
are well overstated.
LET’S DO SIMPLE MATH /LOGIC
So, if we can buy LNG for $10-$15 per Mcf, why would we commit billions to
pipeline, road, medical, law enforcement and legal costs and risk our agriculture,
tourism, water, environment to try and extract gas from tight, unyielding shale
that depletes so rapidly?
Why would we bank on a resource that may only be ready in 2025 when by 2025
we better be a long long way towards renewables?
Energy Independence? No. For how long and at what cost?
Price? No. If the global price goes up the mining companies will charge the
same price for Karoo gas – if we can’t afford it they’ll sell it to China
Jobs? No. Have we forgotten the facts of declining US shale plays?
Cleaner burning? No. Even if this were true (having regard for the fugitive
emissions and uncounted EROEI emissions and costs) - our coal would just be
burned somewhere else – it remains a global problem
A GAME CHANGER FOR SOUTH AFRICA?
Perhaps, but there are two teams in every game – a winner and a loser.
The promises of RoyalDutch Shell, et al now picked up and echoed by the SA
government and those few who will make a lot of money are a fantasy that ignores
the decades required for such massive equipment change, infrastructure
development and the costs associated therewith.
Fracking. Proudly promoted in South Africa by Royal Dutch Shell and the ANC?
I intend to continue my stand against shale promoters who gamble with South
Africa’s future to promote their own.
THANKS FOR YOUR ATTENTION
THIS SLIDE PRESENTATION IS AVAILABLE FROM THE
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