Tuesday, May 08, 2012

Shale Gas: The View from Russia

The official shale gas story goes something like this: recent technological breakthroughs by US energy companies have made it possible to tap an abundant but previously inaccessible source of clean, environmentally friendly natural gas. This has enabled the US to become the world leader in natural gas production, overtaking Russia, and getting ready to end Russia's gas monopoly in Europe. Moreover, this new shale gas is found in many parts of the world, and will, in due course, enable the majority of the world's countries to achieve independence from traditional gas producers. Consequently, the ability of those countries with the largest natural gas reserves—Russia and Iran—to control the market for natural gas will be reduced, along with their overall geopolitical influence.

If this were the case, then we should expect the Kremlin, along with Gazprom, to be quaking in their boots. But are they?

Here is what Gazprom's chairman, Alexei Miller, recently told Süddeutsche Zeitung: “Shale gas is a well-organized global PR-campaign. There are many of them: global cooling, biofuels.” He pointed out that the technology for producing gas from shale is many decades old, and suggested the US turned to it out of desperation. He dismissed it as an energy alternative for Europe. Is this just the other side's propaganda, or could Miller be simply stating the obvious? Let's explore. I will base my exploration on Russian sources, which is why all the numbers are in metric units. If you want to convert to Imperial, 1 m3 = 35 cubic feet, 1 km2 = .38 square miles, 1 tonne = 1.1 short tons).

The best-developed shale gas basin is Barnett in Texas, responsible for 70% of all shale gas produced to date. By “developed” I mean drilled and drilled and drilled, and then drilled some more: just in 2006 there were about as many wells drilled into Barnett shale as are currently producing in all of Russia. This is because the average Barnett well yields only around 6.35 million m3 of gas, over its entire lifetime, which corresponds to the average monthly yield of a typical Russian well that continues to produce over a 15-20 year period, meaning that the yield of a typical shale gas well is at least 200 times smaller. This hectic activity cannot stop once a well has been drilled: in order to continue yielding even these meager quantities, the wells have to be regularly subjected to hydraulic fracturing, or "fracked": to produce each thousand m3 of gas, 100 kg of sand and 2 tonnes of water, combined with a proprietary chemical cocktail, have to be pumped into the well at high pressure. Half the water comes back up and has to be processed to remove the chemicals. Yearly fracking requirements for the Barnett basin run around 7.1 million tonnes of sand and 47.2 million tonnes of water, but the real numbers are probably lower, as many wells spend much of the time standing idle.

In spite of the frantic drilling/fracking activity, this is all small potatoes by Russian standards. Russia's proven reserves of natural gas amount to 43.3 trillion m3, which is about a third of the world's total. At current consumption rates, that's enough to last 72 years. Russian gas production is constrained by demand, not by supply; it is currently down simply because Eurozone is in the midst of an economic crisis. Meanwhile, US production has surged ahead, for no adequately explored reason, crashing the price and making much of it unprofitable.

Let's compare: Gazprom's price at the wellhead runs from US$3 to $50 per thousand m3, depending on the region. Compare that to shale gas in the US, which runs from $80 to $320 per thousand m3. At this price, the US cannot afford to sell shale gas on the European market. Moreover, the overall volume of shale gas being produced in the US, even given the feverish drilling rate of the past couple of years, if cleaned up, liquified, and shipped to Europe in LNG tankers, would not be enough to book up just the LNG terminal in Gdańsk, Poland, which is currently standing idle. It seems that Gazprom has little to worry about.

The US, on the other hand, does have plenty to worry about. There has been much talk already about groundwater pollution and other forms of environmental destruction that accompanies the production of shale gas, so I will not address these here. Instead, I will focus on two aspects that are just as important but have received scarcely any attention.

First, what is shale gas? Ask this question, and you will be told: “Shut up, it's methane.” But is it really? The composition of shale gas is something of a state secret in the US, but information about the gas produced from the nine Polish shale gas test projects did leak out, and it's not pretty: Polish shale gas turned out to be so high in nitrogen that it does not even burn. Technology exists to clean up gas that is, say, 6% nitrogen, but Polish shale gas is closer to 50% nitrogen, and, given high production costs, low yields, rapid depletion and low wellhead pressure, cleaning it up to bring it up to spec (which is 1% nitrogen) would most likely result in a net waste of energy.

Even if shale gas is low enough in nitrogen to burn, the problems do not end there. It may also contain hydrogen sulfide, which is toxic and corrosive and has to be removed before the gas can be stored or injected into a pipeline. It probably contains toluene and other organic solvents—ingredients in the fracking cocktails—which are carcinogenic. Lastly, it may be radioactive. All clays are mildly radioactive, and shale is a sort of heat-treated clay. While Barnett shale is not particularly radioactive, Marcellus shale, which has recently been the focus of frantic drilling activity, is. Thanks to Marcellus shale gas, radioactive radon gas is being delivered directly to your kitchen, via the burners of your stove, or to a power plant smokestack upwind from where you live. This is expected to result in increased lung cancer rates in the coming years.

Second, why is shale gas being produced at all? Natural gas prices have fallen through the floor, and are currently around $2 per thousand cubic feet. This works out to around $70 per thousand m3. If shale gas costs from $80 to $320 per thousand m3 to produce, it is unclear how one might make any money with it.

But perhaps making money with it is not the point. What if shale gas is just a PR campaign (with horrific environmental side effects)? Going back to what Alexei Miller said, what if the entire point of the exercise was to increase the capitalization of shale gas exploration and production companies? The number one company in shale gas is Chesapeake Energy, the owner of the Barnett basin and a major player in the Marcellus basin. This company almost went bankrupt in 2009, but then managed to claw its way back to profitability in 2010 and 2011 by drilling, and drilling, and drilling, and then drilling some more. Sixty percent of their revenue is from drilling operations. And now there is a scandal involving Chesapeake Energy's (former?) chairman, Aubrey K. McClendon, who apparently awarded himself a stake in each well his company drilled, used them as collateral for billions in loans, and used the loans to bet that natural gas prices will go up (they haven't). In the meantime, natural gas drilling rig count has dropped to a ten-year low. Given that shale gas wells deplete very quickly, it looks like the shale gas boom is over.

But now that it's over, what was it, exactly? It appears to have been something like the dot-com bubble: companies with no conceivable way of turning a profit using hype to attract investment and drive up their valuations. Since 2008, various kinds of hype-based market manipulations have become the staple of economic life in the US, and so this is nothing new or different.

One interesting question is, What sort of bubble will the US attempt to blow next, if any? There is the Facebook IPO coming up. Facebook is a ridiculous time-waster and, as such, seems a bit overpriced. Are we going to attempt blowing up another dot-com bubble? Another round of subprime mortgages does not seem to be in the works. What's a bubble boy to do? If there are no more bubbles to blow, then it's back to just plain printing money.

So this whole shale gas thing didn't work out as planned, did it? But could it have? Had it turned out to be much better in every way, could it have swung geopolitical influence away from Russia and Iran and back toward the US? Alas, no.

You see, there is no such thing as a global natural gas market. Yes, there are some LNG tankers sailing about, but that is very much a point-to-point trade. There is a closed North American market, a European market, and another market in the Asia-Pacific region. These markets do not interact. The North American market and the European market could have potentially shared just one producer: Qatar. Qatar once wanted to export LNG to the US, but then decided to export it to Europe instead, generating less of a loss, because European gas prices are substantially higher. And the reason Qatar is dumping natural gas in Europe is because it has gas to dump: its northern gas field is a very “wet” field, with a substantial percentage of natural gas condensate. Qatar's OPEC quota is 36-37 million tonnes of oil per year, but natural gas condensate is not considered to be oil and is not covered by OPEC quotas. Exploiting the condensate loophole allows Qatar to export 65.7 million tonnes: 77% over quota. The LNG is just concomitant production, and Qatar can afford to export LNG to Europe at a loss. This is a juicy bit of trivia, but really something of a footnote: an exception that proves the general case: there is no global natural gas market.

There is still, however, a global American disinformation and PR hype market, although this too is changing. The view from Russia is that it is pretty clear what this was all along: American propaganda and financial shenanigns. Nothing to see here, people, keep moving.


Allan S said...

Interesting article, though I just skimmed it before going to work. Isn't shale gas/oil, (and the much vaunted tar sands here in Canada), too energy intensive to mine effectively? ie: at least twice as much energy required to extract it than is available?

John said...

Another great article.

However, I would have to convinced that, even before nitrogen clean-up, the US shale gas process actually nets energy.

(I'm looking forward to the shale oil follow-up article.)

John Puma

Unknown said...

RE: "Nothing to see here..."

If we read between the lines, theirs not yours, we might see that shale gas provides another mechanism for the Anglo-American powers to temporarily extend and exploit the current paradigm - which is failing.

So there is something to see - and it's a big red sign that says buckle your seat belt - turbulence ahead.

Andy Brown said...

The gas bubble has nearly run its course, I agree. If I had to predict where efforts to inflate the next bubble would be it would be in the US's massive college and education system. Higher education is already a vast, frighteningly over-inflated segment of the economy with enormous sums sloshing around in it. It has all the trademarks of a classic bubble (for instance, it's a special case, transcending mundane limits of supply and demand; it can grow forever, etc.) - and it is clearly attracting interest from government and private enterprise as a way of not only pretending to do something about unemployment, but also funneling more money to cronies, and drumming up investment "opportunities". As the codgers say, "mark my words . . . "

Unknown said...

Very interesting. It is the first time I read about the Nitrogen content in Poland. Do you have a source for that information? It just kills any hopes of shale gas in Europe.

Dmitry Orlov said...


Here's a source:


Horrible machine translation of the relevant paragraph, cleaned up slightly:

The Polish national gas company in the first quarter of 2010 announced the beginning of a broad program of exploration drilling on several shale resources. To drill to a depth of 3-4 km, after the derrick building, even in a difficult context, you need one or two months. Drilling results were not reported during a year and a half, only in the 4th quarter of 2011 was it reported that the results of drilling in the basin Podlyashski within 100 km from Warsaw "Molodecheno-1" were unsatisfactory. What is the cause of unsatisfactory results? No answer, and only from our foreign colleagues, "in secret", we are told that in the inflow of gas received at the well, there is only about 20% methane. It is not natural gas in the usual sense. This is a secret, because it means that all the resources of the basin Podlyashski, which appear as high-potential, do not actually exist, they need to be deleted from the estimates, and they do not want to do so. So many things need to be deleted that of the giant shale gas resources there may remain only horns and hoofs.

DeVaul said...

Interesting info about nitrogen content and the difference between normal natural gas and the new shale gas. I never knew there was a difference other than the method of extracting it, which is insane since it poisons the groundwater. I'm pretty sure most shale gas fields are woefully insufficient.

My comment under the eBook article above about the Marcellus Shale Field was actually meant to go here, but Dmitry switched the position of the articles while I was still typing my comment, so I disclaim any and all responsibility for my misplaced comment. There.

I also am glad that this comment forum is back since the reddit thing was very confusing to me. I had never actually used or heard of it before. I still don't know what it is, other than a place to use foul language and childish arguements.

John D. Wheeler said...

Greetings from the heart of the Marcellus region. I have mainly profited from the mania in having to pay less for natural gas. Prices that the gas companies pay to lease the land have definitely peaked and are going back down. I think this means we have reached an inflection point: production is still increasing, but at a decreasing rate. In other words, we're off the exponential part and starting the parabolic part of the curve.

EROEI is still definitely positive, but that doesn't include any environmental cleanup. People around here are already talking about building rainwater catchment systems so as not to be dependent on groundwater.

Shale gas is a "wet" gas. It must be processed before being used. Many of the byproducts are things like propane and butane, which provide energy on their own to add into the equation. Also, the standard contracts only pay on the methane, so the gas companies are getting the rest kind of free.

There is a huge flurry of drilling in the Western Pennsylvania area, but most of it is just to get a marginally productive well in place so the gas companies have the option of renewing indefinitely. Some of my friends are getting just a few hundred dollars a year from Marcellus wells on their property, because they had leases from the 1930s that have been held open in such a manner.

I don't think this is like the dot com bubble, because there is something real behind it. All these companies would be immensely profitable had natural gas prices stayed where they were when the drilling began. This seems more a typical boom/bust cycle like the gold rushes - and those got overhyped, too.

It still amazes me how most people never learn.

AMT said...

Dmitry, with your permission I'll publish a Spanish translation of your very interesting post in my blog (of course, crediting the original source).

Dmitry Orlov said...


A Spanish translation would be welcome.

Anton said...

IMHO, "they" (WS and related political interests) are driving NG prices down right now to simply "re-poses" the production, transportation and in many case use of NG (local utilities, etc.). There is a very high likelihood that the NG will be the next oil for the world. The difference will be that there are far more abundant reserves of NG, and they are concentrated in the parts of the world that are largely not under the control of WS and their agents (aka US, UK, etc.). In fact, large portion of the reserves are controlled by hostile to Anglo-American interests, i.e. Russia, Iran, etc. IMHO, this is a part of a very BIG geo-political game, in which the stakes are stacked up against A-A interests. If you add the economic and political disasters of A-A system in the recent decade, it is clear that the "re-possession" of the greatest energy-producing fossil fuel must occur ASAP if they want to survive. And of course, "they" are not going to pay the market price for it. Their usual modus operandi is to drive the price down, break the back of real business, and after that buy those businesses at a fire sale price. This is of course, not limited to the US alone. However, the rest of the world, which appreciated the potential of NG for the future MUCH earlier that the US, is not so keen on falling for it. Thus, the stable performance of the world leading NG-related business and industries. To sum up, the current situation with NG in US (contango) is a purely artificial and a part of large geo-/political game. IMHO, after a short while NG prices will recover and, eventually, the NG will become the next oil. The humanity will stand to benefit from this change as the gas is far more abundant, cheaper and cleaner. Hopefully, there will be enough of it to last for the next 200-300 years until human ingenuity will produce the next technological breakthrough (safer nuclear, Tesla electricity, cold fusions, who knows). With Respect, Alex

AMT said...

The Spanish translation can be reached at http://crashoil.blogspot.com.es/2012/05/gas-de-esquisto-la-perspectiva-desde.html. It has already generated a lot of reaction, as there is much fracking noise now in Spain (and not only because of falling banks).

Thanks Dmitry for your work. Regards.

Karl K said...

Thanks for this article. As a resident of NY with leases all around me, I take comfort that this nightmare threat might soon be ending. Hopefully with a McClendon "perp walk" in front of the cameras. But, with the track record of prosecution for financial fraud being what it is, I won't hold my breath for any prosecutions. I will be happy if they don't "frack" my neighborhood.

Omega Centauri said...

Thomas said:
Mine is more of a question. If we smooth out the boom/bust cycle, doesn't the presense of producable shale gas cap the market equilibrium price of NG? As such it certainly is going to be important. Of course many investors will be burned by the boom-bust cycle -including those investing on the consumption side under the expectation that prices will remain low. We also have wet-gas production to factor in going forward. A certain, and apparently nontrivial supply of shale-gas as the byproduct of the production of natural-gas liquids seems baked into the cake. Is there enough incidental NG from wet gas development to keep the price low? Or will we see a full fledged boom-bust-boom-bust cycle?

Jayhawk said...

Andy Brown, I don't think so. The higher education bubble is showing strain already, with student revolts and the debt already becoming unsustainable.

Look at Facebook's IPO and a new generation of investors ready to jump on board and, incredibly enough, I suspect we are beginning to blow another Internet bubble. The idea that Facebook will bring in $11.5 billion is utterly absurd, but no one seems to question the value of that.

TDP said...

I'm a long time reader of ClubOrlov, but have never commented. Today's a first! Regarding bubbles - here in Minnesota Healthcare is 70% of the state's economy, with more to come. It concerns me very much to have such a high percentage focused in one sector. When will that pop?

Anonymous said...

In Moscow region now (may 2012) price 1000 m cubic is 137 dollars, and you can pay nearly 12 000 $ to GAZPROM for pipes and another eqvipment. Is it eqspensive for Americans ?

David Taylor said...


Excellent article though it is - and I take your word for the figures quoted, acknowledging your honesty - another equally anti-fracking acquaintance cannot use any of your claims as you provided no sources.

What can you say to reassure him and others like-minded?


Non credete a una parola di quello che scrivo said...

Hi Dmitri,
I've translated this article for the italian public.
Sorry, I did'n ask your permission.
I hope it will be no problema.



Ozymandius said...

@ David Taylor

Try this link. Need to delve deep but you will get the idea.

Thermatic maps - European Gas Atlas

dominik said...

If drilling economics were so disadvantageous, how come companies like CHK continue to expand drilling AND remain profitable. 1Q12 results were up YOY. The data above suggests drilling is actuallly loss making. Marginal unit profits might be declining, but still seem to be happy to hear your thoughts on this

Dmitry Orlov said...

Here is a very good write-up on the subject from Nicole Foss. She points out the complete disconnect between product and profit. The shale gas industry burns investor money.

KateLovesReading said...

This was a GREAT article on this most hideous industry, or fake industry (the frickin' frackin', as my sister calls it, as she calls Facebook, yeah, fools and their faces, heh heh!); anyway, of course I loved "what is a bubble boy to do?" and the usual hilarious and witty words.