Drilling Deeper

This week the Post Carbon Institute (PCI) released their newest report "Drilling Deeper: A Reality Check on U.S. Government Forecasts for a Lasting Tight Oil & Shale Gas Boom

They write: "Over the short term, U.S. production of both shale gas and tight oil is projected to be robust-but a thorough review of production data from the major plays indicates that this will not be sustainable in the long term. These findings have clear implications for medium and long term supply, and hence current domestic and foreign policy discussions, which generally assume decades of U.S. oil and gas abundance."

That's not a message that sits well with industry group Energy in Depth (EID), and they put together a hurried critical response:

I'll leave it to the Post Carbon Institute and lead report author, David Hughes, to provide a technical data-driven response. But you may recall that I had so much fun responding to EID when they attacked FiveThirtyEight journalist Ben Casselman - that I just couldn't help examining a few lines from EID's latest:

"David Hughes, a Canadian geoscientist and a fellow of the anti-fracking Post Carbon Institute, has emerged as one of the media’s favorite proponents of “Peak Oil,” the debunked theory that oil production will soon be in permanent decline. Never mind, of course, that there are more proven oil reserves today than there were decades ago, when “Peak Oil” advocates were saying the exact same thing as they are today."

Notice here two tactics commonly used by Peak Oil misinformers. First, how casually they throw out the label "anti-fracking." This isn't the first time EID has pulled this move. They did the same thing to Ben Casselman, and I called them out then as well. It probably is fair to say that PCI is in fact anti-fracking, but being anti-fracking on environmental grounds and questioning the future production and financial sustainability of fracking aren't the same thing. You can't just throw a blanket "anti-fracking" label on anyone who questions future shale production. One is about environmental concerns; the other is about data relating to oil/gas production and financial health of shale drillers.

"Hughes is arguing, in effect, that the hundreds of thousands of jobs created, the shrinking deficit of the U.S. trade balance, and the significant reduction of greenhouse gas emissions that are attributable to unconventional oil and gas development will be short-lived."

One of the lessons I try to teach people about energy is to never, ever, believe the people who claim to have the easy answers. The people who claim something is either 100% good or 100% bad. Nothing is that way. Everything is a mix of both. Energy policy is about one thing = tradeoffs. 

There are absolutely many positive benefits of the shale boom. But you can't use a list of benefits as an excuse to pretend that the downsides don't exist. And one can't suggest that Hughes is some cartoonish villain environmentalist looking to take away all your shale goodies "just because." Hughes is actually saying that these great benefits are going to wane, on their own, sooner than we think. And that we'd be wise to prepare for that.

"These gloomy predictions, of course, are at odds not only with predictions from the U.S. Energy Information Administration (EIA) but also from the International Energy Agency, the leadership of the International Energy Forum, notable scholars and experts – and, in fact, almost anyone with credibility in the energy sector."

EID clearly missed the part where Mason Inman, just a few days ago, obtained the EIA's unpublished long-term forecasts for individual tight oil plays. Inman writes: "In their 2014 Annual Energy Outlook (AEO), EIA forecast that tight oil production will continue rising for only a few more years, then stay on a plateau for a few years, and finally enter a slow decline. If correct, this would mean the U.S. oil boom would soon end—or, it would mean the transition of tight oil production, from a boom phase to a mature phase."

That's what's so funny about all of this. US tight oil peaking in production and declining isn't some wild-eyed fantasy theory. Production of anything eventually reaches a peak and declines. That's not at all controversial. And the entire US tight oil "debate" between the pessimists and optimists really only concerns about a 10-15 year window starting in 2015. Whether you want to believe the peak in tight oil is coming in 2016 or 2025, everyone agrees that it's coming.

But industry groups like EID are so invested in maintaining industry hype AT ALL COSTS, that they can't even acknowledge the obvious that everyone in the room already knows.

"Is shale’s future not as bright as it looks? Has Hughes finally proven, after many failed attempts, that all the actual experts are wrong? Will all the leading authorities in the industry be revising their predictions in the light of his conclusions?"

Here, of course, EID's position would be much stronger if they actually referenced Hughes' previous works. Going point by point to show his claimed "failed attempts." They don't. 

Notice then the use of "actual experts" - this again is how the piece consistently tries to convince the reader that Hughes isn't an actual expert. Who are the "real" experts? The people that all agree with EID of course.

The last line is gold: "Will all the leading authorities in the industry be revising their predictions in the light of his conclusions?"

Unmentioned by EID is that this is EXACTLY what happened just a few months ago:

Hughes wrote a report on the Monterey Shale, then the EIA slashed the estimates by 96%. (By the way, EID had a critical response for that too if you're wondering)

"In fact, technological advances have caused a dramatic increase in the estimate of recoverable oil and gas across the United States. Last year, for example, the U.S. Geological Survey (USGS) doubled its 2008 assessment for technically recoverable oil in the Bakken and Three Forks formations of North Dakota and Montana. In 1995, the USGS estimated that the Bakken only contained about 150 million barrels of recoverable oil. By July of this year, North Dakota had produced more than 150 million barrels of oil in 2014 alone."

Here's the always classic "reserves vs rates switch" as I explained in my article "In Search of Oil Realism" - it's an attempt by the author to shift the debate to the topic of "running out of oil" - which has nothing to do with Peak Oil. Peak Oil is the maximum rate of daily oil production. It's a rate, or production over time. "How much is there" has nothing to do with it. But if an author can throw some large reserve numbers at an audience, they hope to fool them and sidestep having the conversation about rates altogether. Continued growth in oil reserves and continued growth in the daily rate of production are related, but different topics.

"Just five days ago, the Manhattan Institute’s Mark Mills explained in a Wall Street Journal op-ed: “Shale production is getting more efficient, which means that profits are possible at prices even lower than today. Smart drilling techniques—horizontal drilling, hydraulic fracturing and information technologies that accurately locate where to place rigs and enable precise steering of the drill through meandering horizontal hydrocarbon-rich shales—are far more productive than when the boom started.”"

Here it's worth mentioning that just yesterday Chris Martenson penned a great piece that absolutely destroys Mark Mills' WSJ op-ed:

"It is important not to get trapped by ideological assumptions of static technology, especially in an industry like oil and gas, where innovators have proved over and over – in fields from North Dakota to West Texas – that the recoverability of resources increases over time and will for the foreseeable future."

If this line looks familiar, it should. It's lifted word-for-word from EID's response to Ben Casselman. At that time I wrote, "Just like it's important not to assume the inevitability of fairy tale future technology that doesn't exist yet."

Back in "In Search of Oil Realism", I had this to say: "Standing on a box, waving a flag, while repeatedly yelling "technology", "innovation", and "petropreneurship" - isn't serious data-driven evidence for those arguments. Everyone agrees that technology improves over time. However, there's plenty of disagreement on the speed of that improvement and that the innovations will always magically occur right when we need them too."

In the end, our energy challenges aren't a question of one person's faith over another person's faith. They are questions of probability and risk. These are the questions policymakers and investors need to ask themselves. What's the probability of EID being right? What's the risk if they're wrong? What's the probability of Hughes being right? What's the risk if he's wrong?

Examine the data each side uses to support their claims, soberly consider risk, and then proceed cautiously.