The fundamental misunderstandings of the energy business run so lamentably deep it is enough to make one bawl. Ignorance by itself isn’t that lamentable – I don’t understand string theory, but string theory doesn’t fuel my car, heat my house, or determine the fate of the world’s economies It’s not that we should expect, say, Kardashian fans to understand the concept of propane; it’s more that people who should know better are fed streams of disinformation by hilariously vested interests, and those views shape energy policies.
That in turn affects everyone including the Kardashians and their groupies, even if (as Principal Skinner once put it) they furrow their brows in a vain attempt to comprehend the situation.
The energy information flow is as poorly structured and unhelpful as a tourist information booth run by economists or the Hell’s Angels. The former aspect is represented by hopelessly dull statistics that everyone ignores, published regularly by energy information sites like the EIA or the IEA (not to be confused with the AEI or IAE – see, it’s hopeless).
The sites do have a wealth of historical information that is overwhelming and boring, and an equally large selection of forecasts, which are malleable and exciting, because they can be used to browbeat the general population and soften them up for whatever red-hot poker the economists are looking to jam into an orifice (so to speak).
Boring as they may be, these are the main source of raw energy information outside of press releases, which have their own credibility challenges. Despite the limitations, the general public has little else to work with.
On the other hand are information sources more closely resembling the Hell’s Angels, who provide a “service” for customers that is ruthlessly effective. The global eminences that make big decisions have a far different information stream that is spoon fed to them by barely legal enterprises that comprehensively understand (and help create) the rules of the game, and who exploit them mercilessly. These are the denizens of Wall Street, who have the ear of the world’s elite like no other.
Utilizing armies of analysts and expensive information sources, Wall Street firms create finely crafted documents that advance understanding in a strategic (as opposed to scientific) way. Research reports are handed out to the chosen few that are on the sacredly secret (but somehow widely known) Great List of those Who Might Somehow Provide Fees. One can get on the list by successfully answering a few simple questions: Do you have the wherewithal to fill a swimming pool with money, or do you have influence with someone who can? If so, welcome, friend.
These reports, and other customized ones, are handed to those in power for specific purposes (i.e., fees). The source of the information is largely the “evidence” of corporate IR departments, who inventively come up with endless slides showing that, for example, by some miracle of perfect causation, every single fee-paying client drills wells that exceed type curves. But I digress. The point is that the research reports reflect various needs and portfolios of the investment banks, not necessarily the pinnacle of knowledge we might hope for.
We in the general audience therefore find ourselves on the receiving end of proclamations from US presidents and the like that the US has “100 years of natural gas” or “$30 trillion worth of oil, gas, and shale reserves,” and if you follow those message threads back to some cubicle on Wall Street you will find a huddled, bonus-starved soul who will provide sound bites like those above, but be unable to predict the price of oil for next year.
How does this imbecility happen? Here’s an example of a current legend in the oil patch: the Marcellus natural gas region. This large field has driven executives and bureaucrats into ecstasy, forecasting a hundred years of gas supplies, or (like was dissected a few weeks ago) implying like Range Resources that they have “thousands” of wells in the Marcellus capable of delivering more than 30 million cubic feet per day, a sum equal to 70 percent of the US’s entire production if it were possible.
It’s all nonsense based on the story lines that stock analysts insist on perpetuating. We know why; promising phantasmagorical production possibilities helps stock prices, and the wild claims are (almost) never held to account.
With respect to the Marcellus, it’s worth a second to test the “100 years of gas” hypothesis. First, recall that the Marcellus is considered to be the lynchpin of US natural gas supplies for many decades to come, an area that will flood the US with gas and keep prices down, provide feedstock for exports, and power the US to a greener future. Here is one analysis that estimates the Marcellus (and nearby Utica) can provide 800 trillion cubic feet of natural gas at a break even price of less than $3/mmbtu.
These numbers imply a massive reservoir that would stretch for hundreds of miles. And it is. But it’s not that straightforward. The Marcellus is producing a lot of gas, about 6 Tcf in 2015 but the gas is coming from a few sweet spots that clearly are only a fraction of the entire field.
Here is a map showing Marcellus drilling to 2010:
Now, here is a map showing drilling to 2015:
Anyone get the sneaking suspicion that the Marcellus is not exactly homogenous?
There are obviously sweet spots in the Marcellus, as with any reservoir, and it should also be obvious that the best regions are being drilled first. It is also worth noting that this field is now being developed by 2 and 3 mile-laterals, meaning the best zones are being shredded at an alarming rate.
Imagine what the field will look like in another 10-15 years, never mind 50 or a hundred. And yet this is the lynchpin of “100 years of natural gas supplies”, because that is a myth that is propagated by the capital markets industry to show how much money public natural gas producers are going to make.
The example of Range Resources above illustrates the problem. Range Resources needs capital. Range Resources goes to Wall Street to get it. Wall Street underwrites their securities, and then Wall Street writes optimistic reports based on aggressive-but-technically-we’re-not-lying-it’s-our-opinion management projections.
Wall Street has several other irons in the fire beyond mucking in capital markets; the firms also peddle information and expertise to governments. The messaging they give to governments is hardly likely to contradict the research reports they put out, and therefore we wind up with bombastic and irresponsible corporate projections that form the basis for statements that find their way into the mouths of the establishment.
It’s a weird and dangerous circle, although the danger is largely blunted by the fact that unforeseen world events will render useless any projections beyond a few months. But what else is new.
The truly sad part is that the public has a deeply flawed understanding of the capacity of the energy industry to keep them awash in cheap energy. We have handed the responsibility for explaining it clearly to vested interests that also are not shy about using it to their advantage. Someday when a real supply crunch hits, we will sorely regret that decision.
Read more insightful analysis from Terry Etam here