On January 23, 2012, Chesapeake Energy announced that it would curtail drilling in shale gas plays in the United States. Subsequently, other operators have followed suit. While the outcome of this announcement is unclear, it is a signal that the industry is in distress. One can argue that this distress stems from a lack of discipline as market price began to decline.

After gas prices collapsed in mid-2008, U.S. operators continued to drill as if price did not matter. Many reasons were given to justify the economics of ongoing activity including to hold acreage by production, to fulfill contract obligations to build new pipelines, and since well economics remained favorable at lower prices because of forward hedging. Now, with gas prices below $2.50 per thousand cubic feet (mcf), an adjustment in producer behavior is overdue. Despite statements that shale gas is a profitable venture at low gas prices, it is now clear that the reality has imposed limits on these claims.

Also on January 23, the Energy Information Administration (EIA) released its Annual Energy Outlook 2012 (early release overview). It projects that gas supply will exceed consumption and the U.S. will become a net exporter by 2021. The agency also forecasts gas prices to remain below $5.00 per thousand cubic feet (mcf) until 2022.

In his State of the Union address on January 25, the President stated that the United States has 100 years of natural gas supply. While these events are not related, they reflect the dominant view among analysts that shale gas has fundamentally changed supply and price for the foreseeable future. The purpose of this analysis is to show that there may be an alternate perspective.

During the past seven years, TheOilDrum.com has hosted analysis and discussion surrounding the possibility and implications of a near term peak in global oil production and importance of energy to society in general. Out of the ~8,500 articles posted here (all searchable by keyword in upper left), the list below comprises what each author considered some of their most relevant content.

Oil, Food, Water: Is Everything Past Its Peak?

An unprecedented crisis faced America. Oil production was going to peak in just three to five years, resulting in foreign oil addiction and economic calamity. The scientist responsible for slapping the nation into consciousness implored industry and government to act: "The smug complacency that habitually blinds the American public must be torn," wrote David White, chief geologist of the U.S. Geological Survey. It was 1920.

More than 90 years later, tempers still flare over the prospect of global "peak oil." Last week a commentary in the prestigious journal Nature argued, "oil's tipping point has passed." It's the most recent high-profile salvo about whether, or how soon, the petroleum extraction that drives the global economy will reach a plateau and then, inevitably, decline.

The current boom in drilling for ‘unconventional’ gas has helped raise US production to levels not seen since the early 1970′s. This has been an incredible boon to consumers and has kept spot prices contained below $5 per million BTU for the past year, recently dropping below $3/mmbtu. Unfortunately, this price is below the cost of production for many of these new wells. When the flood of investment currently pouring into natural gas drilling operations dries up, the inevitable bust will be as scary as the boom was exciting.

In the last post on Russian oil production, I discussed the amounts of oil produced from Western Siberia, the region with the highest current production, which in its prime contained the second largest producing oilfield in the world at Samotlor. Those fields are now in decline, and while modern technology is seeking to retain as much production as possible, Russian investment is moving further East to the region known as Eastern Siberia. It is not the most hospitable of places, even when compared with Western Siberia.

The cold is staggering, even for Siberia: winter temperatures can fall to minus 70 degrees Fahrenheit, the point at which all outside work is banned. The nearest human settlement is 250 miles away, and the forests are full of bears, wolves and elk. . . . Workers shivered in winter and in summer were tormented by midges so vicious they have been known to kill cows.

Depending on who it is you consult, Eastern Siberia can either include, or not, some of the northern part of the Western Siberia Basin:

There are many unintended consequences as fuel supplies become more scarce and expensive. (With a h/t to Rune Likvern), I see that those Greeks who are being starved of affordable fuel are starting to chop trees down for warmth and income. This sort of desperation has devastated the countryside all over Albania, Africa, and Asia, and it is extremely difficult to stop the practice from spreading or to recover from it. The world expects that fuel must be available at an affordable price, and one of the ongoing questions is whether it will continue to be.

In that regard, BP has just released its Annual Energy Outlook 2030, examining how the world energy supply, and mix, will change in the years up to 2030. The booklet is an update from the study released last year, and reviewed at the time. This year the introductory speech by Bob Dudley focused on energy demand in China and India, Middle East exports, and transport fuel demand. BP sees overall energy demand growing some 40% over the next two decades, with virtually all growth coming from the developing countries. More than half will come from China and India alone. And of that energy, they anticipate that the supply will break out as follows:

Who hasn’t enjoyed heat from the sun? Doing so represents a direct energetic transfer—via radiation—from the sun’s hot surface to your skin. One square meter can catch about 1000 W, which is comparable to the output of a portable space heater. A dark surface can capture the energy at nearly 100% efficiency, beating (heating?) the pants off of solar photovoltaic (PV) capture efficiency, for instance. We have already seen that solar PV qualifies as a super-abundant resource, requiring panels covering only about 0.5% of land to meet our entire energy demand (still huge, granted). So direct thermal energy from the sun, gathered more efficiently than what PV can do, is automatically in the abundant club. Let’s evaluate some of the practical issues surrounding solar thermal: either for home heating or for the production of electricity.

Time marches on, and as I noted in an earlier post, the declining fortunes of the Romashkino and other oilfields in the Volga-Urals Basin led into the development of the fields of Western Siberia, where even some forty years after it was discovered, just over 60% of Russian crude is still being produced today.

Back in 2007, production was at 70% of total Russian crude oil production with a daily production of 7 mbd., so changes in the mix already were occurring. At its peak in 1980, Samotlor, the largest field in the region, was producing at 3.4 mbd, out of a Soviet production of 12.5 mbd. Samotlor is thus ranked 7th in the world in terms of original oil reserves, and as a comment on the times, it still ranks 6th in the world in terms of daily production even while production has fallen to 750 kbd. Initial reserves stood at 27 billion barrels of oil, though this was not initially evident when the field was discovered in 1965. Water cut has increasingly taken its toll of the field, and now runs at around 90%.

This is a guest post by David Hughes, a geoscientist, president of a consultancy dedicated to research on energy and sustainability issues, and a fellow of Post Carbon Institute, on whose website this article first appeared.

Natural gas prices have declined to below $3.00/mcf, levels not seen for years, yet the EIA posted the highest gas production ever in October, 2011. U.S. gas production is growing despite annual well completion rates that are half that at the peak of the drilling boom in 2008, when gas price topped $12.00/mcf. Proponents of shale gas as a “game changer” suggest that, despite the well-known high decline rates of shale gas wells, their productivity is sufficient to grow production with far fewer wells at historically low prices. Others, such as Arthur Berman, claim that shale gas plays require much higher prices to be economic. The answer may lie in the gas produced in association with oil drilling, which is near all time historical highs.

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