Natural-Shale Gas Revolution Spreads to Israel

The natural-shale gas boom spreads to Israel.

Reports the Financial Times (hat tip Carpe Diem’s Professor Mark Perry)

With reserves of almost 10 trillion cubic feet of natural gas, the Tamar field is a hugely valuable asset for the Israeli economy. Discovered in January 2009, it was the biggest gas find in the world that year, and by far the biggest ever made in Israeli waters. But the record held for barely two years. In December 2010, Tamar was dwarfed by the discovery of the Leviathan gasfield some 20 miles farther east – the largest deepwater gas reservoir found anywhere in the world over the past decade. The two fields, together with a string of smaller discoveries, will cover Israel’s domestic demand for gas for at least the next 25 years, and still leave hundreds of billions of cubic feet for sale abroad. The government take from the gasfields alone is forecast to reach at least $140bn over the next three decades – a staggering sum for a relatively small economy such as Israel’s.

It’s not just in Israel but as I previously pointed out the Natural-Shale gas revolution will become a world wide phenomenon.

And we are seeing some evidence of such progress. Again the FT,

Experts are convinced that Tamar and Leviathan will not be the last big Israeli discoveries. They point to the US Geological Survey, which estimates that the subsea area that runs from Egypt all the way north to Turkey, also known as the Levantine Basin, contains more than 120 trillion cubic feet of natural gas. Israeli waters account for some 40 per cent of the total. Should these estimates be confirmed through discoveries in the years ahead, Israel’s natural gas reserves would count among the 25 largest in the world, on a par with the proven reserves of Libya and ahead of those of India and The Netherlands.

Earlier Israel seems to have been devoid of energy resources.

For decades a barren energy island, forced to import every drop of fuel, Israel today stands on the cusp of an economic revolution, fuelled by the vast riches that lie below its waters.

left chart from Financial Times, right chart from Financial Post

But thanks to human ingenuity, massive advances in technology have transformed what was once resources of little economic value to become abundant highly economically valuable commodities.

Hopefully Israel’s newly discovered energy resources will serve as blessings than a (resource) curse. But this will depend on how the domestic and geopolitical trends in Israel and the Middle East will evolve.

Cartoon of the Day: Wind Power: All the Pain for Zero Gain

From Watts up with That (hat tip Professor Mark Perry)

Saber Rattling over Iran is only Part of the Big Oil Price Story

Dr. Ed Yardeni writes at his blog,

Despite Iran’s saber rattling, the price of oil hasn’t soared. The price of a barrel of Brent has been hovering around $110 since last summer. That’s even after President Barack Obama signed a bill imposing tougher sanctions on Iran at the end of last year. The price didn’t go up after the Iranians publicly threatened to close the Strait of Hormuz and warned Saudi Arabia not to fill any expected gap in oil demand when the world stops buying Iranian crude. According to a report in today’s Al Arabiya News, Iranian boats with men armed with machine guns on board were recently sent to the waters near the Saudi oil-production areas. Yet the price of oil hasn’t budged much from $110. Spain’s foreign minister said on Monday that Saudi Arabia has promised that it will make up for supplies of oil lost as a result of EU sanctions on Iran, and will do so at the same price.

If it weren’t for all the saber rattling, the price of oil would probably be falling.

Saber rattling over Iran represents only a fragment of the big picture. In other words, the Iran controversy does not capture the major elements of oil politics which drives oil prices.

In examining the political structure of major oil producing economies, we find that there is a watershed level for these welfare states to survive, for instance Saudi Arabia requires some $88 per barrel to buy off their people, Iran some $ 80 per barrel and etc…

In short, anytime oil prices go below these threshold levels, you can expect the “Arab Spring” revolts to make a rip-roarin’ comeback.

So as with the politics of subsidized renewable energy. Aside from environmental concerns, alternative energy requires elevated oil prices to remain an “attractive” alternative.

As this article from Scientific American says,

Today renewable technologies such as wind and solar are close to being competitive with fossil fuels. But we can say good-bye to that prospect if oil prices decline to $60 to $70 a barrel, which could easily happen in a recession, as we witnessed in October.

This means that many entrenched political groups (and their business allies or associates) are dependent on high oil prices.

From the above we come to the following conclusion

-Free markets don’t drive oil prices. Or that oil prices are greatly influenced by the political setting of mainly the oil producers (not on Iran alone).

-To maintain or preserve the current political environment, particularly welfare states of oil producing nations and the promotion of green energy, political measures would need to be resorted to in order to bring about the required oil threshold levels.

Such political measures will possibly include saber rattling (brinkmanship) politics, various market interventions by governments (to restrict supplies) as the Keystone Pipeline Controversy [also remember that 80% of oil reserves are held by governments or National Oil companies, so supply is very much sensitive to actions of political leaders since they control a significant majority of world's reserves], and importantly for global central banks to ramp up on money supply.

As you can see plainly looking at barrels consumed and barrels produced alone is grossly an insufficient way to study and assess oil economics. That’s because politics has an immense influence on how oil prices are being shaped.

Why Shale Gas is the Future of Energy

So argues the ever stimulating author Matt Ridley

A chap called George Mitchell turned the gas industry on its head. Using just the right combination of horizontal drilling and hydraulic fracturing (fracking) – both well established technologies -- he worked out how to get gas out of shale where most of it is, rather than just out of (conventional) porous rocks, where it sometimes pools. The Barnett shale in Texas, where Mitchell worked, turned into one of the biggest gas reserves in America. Then the Haynesville shale in Louisiana dwarfed it. The Marcellus shale mainly in Pennsylvania then trumped that with a barely believable 500 trillion cubic feet of gas, as big as any oil field ever found, on the doorstep of the biggest market in the world.

The impact of shale gas in America is already huge. Gas prices have decoupled from oil prices and are half what they are in Europe. Chemical companies, which use gas as a feedstock, are rushing back from the Persian Gulf to the Gulf of Mexico. Cities are converting their bus fleets to gas. Coal projects are being shelved; nuclear ones abandoned.

Rural Pennsylvania is being transformed by the royalties that shale gas pays (Lancashire take note). Drive around the hills near Pittsburgh and you see new fences, repainted barns and – in the local towns – thriving car dealerships and upmarket shops. The one thing you barely see is gas rigs. The one I visited was hidden in a hollow in the woods, invisible till I came round the last corner where a flock of wild turkeys was crossing the road. Drilling rigs are on site for about five weeks, fracking trucks a few weeks after that, and when they are gone all that is left is a “Christmas tree” wellhead and a few small storage tanks.

The International Energy Agency reckons there is quarter of a millennium’s worth of cheap shale gas in the world. A company called Cuadrilla drilled a hole in Blackpool, hoping to find a few trillion cubic feet of gas. Last month it announced 200 trillion cubic feet, nearly half the size of the giant Marcellus field. That’s enough to keep the entire British economy going for many decades. And it’s just the first field to have been drilled.

Read the rest here

Natural Gas prics shown in the 3 year chart above from stockcharts.com appears to have indeed decoupled from Oil (WTIC)

I would even suppose that the current prices of oil have also been affected by conversions or the expanded use of natural gas.

Shale gas is not only abundant and economically feasible but also environmental friendly and importantly representative of market’s preference as energy alternative over the favorites of politicians: renewables

Professor Mark Perry adds,

The chart above is from the Energy Information Administration and illustrates graphically the significant increases in natural gas production in recent years from increased drilling activity in the Marcellus Shale region of Pennsylvania. In only about a three-year period, natural gas production in the northeast United States has tripled from 1.5 billion cubic feet per day in July 2008 to more than 4.5 billion cubic feet per day by July 2011, with almost all of the increase coming from new drilling in Pennsylvania. The shale gas revolution in Pennsylvania has been responsible for America going from the ninth largest producer in the world ten year ago to the No. 1 producer in the world starting last year.

I would guess that the shale gas revolution will be a worldwide phenomenon which should wean away our dependence on oil. The net effect outside manipulation of money by governments should be to materially bring down or lower prices of energy.

On an investment perspective, prices of listed shale gas companies may reflect on such sanguine dynamic overtime.

In Spain, Pop Goes The Magic 'Green' Bubble

ONE of the likely casualty from the Greece led PIIGS debt crisis seems to be "Green" energy.

From Businessweek,

``Spain is lancing an 18 billion-euro ($24 billion) investment bubble in solar energy that has boosted public liabilities, choking off new projects as it works to cut power prices and insulate itself from Greece’s debt crisis...

"Spain is battling on several fronts to revive its economy and convince government bondholders it can avoid getting dragged into a Greek-style debt spiral after Standard & Poor’s cut its credit rating April 28. Solar-plant owners including General Electric Co. earn about 12 times what’s paid for power from fossil fuels. Most of that is a subsidy charged to customers

``Prime Minister Jose Luis Rodriguez Zapatero’s government last cut solar rates in 2008, hitting plants not built at the time. Now it’s weighing reductions for the thousands of installations already making power from the sun, wind and biomass.

‘Excessive Subsidy’

“This is necessary,” said Leon Benelbas, chairman of Atlas Capital Close Brothers investment bank in Madrid. “It’s an excessive subsidy at a time Spain has to gain competitiveness, and the cost of energy is a determining factor.”

``Spain’s fixed-price system for renewable power, which attracted more investment in solar panels in 2008 than the rest of the world put together, boosts the state’s liabilities even though they don’t show up on its balance sheet.

``That’s because the Spanish system delays payments by consumers for part of their electric bills for years. The government guarantees repayment to power suppliers such as Endesa SA and Gas Natural SDG SA. The cost of those unpaid bills rose last year by about 4 billion euros to 16 billion euros.

``Spain intends to revise the clean-energy rates down “to avoid damaging the competitiveness of industry,” Sebastian told the Spanish parliament yesterday."

This only shows that industries that cannot stand on its two feet, that can't compete, but survives mainly on government mandates and subsidies (or crutches), will be subjected to politics and this includes suffering from cuts in spending or support when austerity is required, especially in response to a crisis.

And the impracticality or non-feasibility would be eventually revealed from such retrenchment. In short, "the emperor has no clothes!"

Yet, "green energy" hasn't been proven to be a net positive contributor to the economy.

George Will comments on a study by Professor Calzada on Spain's alternative energy programs,

``Calzada says Spain's torrential spending -- no other nation has so aggressively supported production of electricity from renewable sources -- on wind farms and other forms of alternative energy has indeed created jobs. But Calzada's report concludes that they often are temporary and have received $752,000 to $800,000 each in subsidies -- wind industry jobs cost even more, $1.4 million each. And each new job entails the loss of 2.2 other jobs that are either lost or not created in other industries because of the political allocation -- sub-optimum in terms of economic efficiency -- of capital. (European media regularly report "eco-corruption" leaving a "footprint of sleaze" -- gaming the subsidy systems, profiteering from land sales for wind farms, etc.) Calzada says the creation of jobs in alternative energy has subtracted about 110,000 jobs elsewhere in Spain's economy."

Overall, like typical bubbles, resources spent on these government pet projects only means waste.

Natural Gas: Alternative Energy Of The Future

The Economist has this nice article about natural gas.

The article goes to show that the world isn't running out of energy. It's just a matter of markets aided by technology, adapting to the current conditions.

Here's an excerpt, (all bold highlights mine)

``The source of America’s transformation lies in the Barnett Shale, an underground geological structure near Fort Worth, Texas. It was there that a small firm of wildcat drillers, Mitchell Energy, pioneered the application of two oilfield techniques, hydraulic fracturing (“fracing”, pronounced “fracking”) and horizontal drilling, to release natural gas trapped in hardy shale-rock formations. Fracing involves blasting a cocktail of chemicals and other materials into the rock to shatter it into thousands of pieces, creating cracks that allow the gas to seep to the well for extraction. A “proppant”, such as sand, stops the gas from escaping. Horizontal drilling allows the drill bit to penetrate the earth vertically before moving sideways for hundreds or thousands of metres.

``These techniques have unlocked vast tracts of gas-bearing shale in America. Geologists had always known of it, and Mitchell had been working on exploiting it since the early 1990s. But only as prices surged in recent years did such drilling become commercially viable. Since then, economies of scale and improvements in techniques have halved the production costs of shale gas, making it cheaper even than some conventional sources.
More from the Economist,

``The Barnett Shale alone accounts for 7% of American gas supplies. Shale and other reservoirs once considered unexploitable (coal-bed methane and “tight gas”) now meet half the country’s demand. New shale prospects are sprinkled across North America, from Texas to British Columbia. One authority says supplies will last 100 years; many think that is conservative. In 2008 Russia was the world’s biggest gas producer; last year, with output of more than 600 billion cubic metres, America probably overhauled it. North American gas prices have slumped from more than $13 per million British thermal units in mid-2008 to less than $5. The “unconventional”—tricky and expensive, in the language of the oil industry—has become conventional.

``The availability of abundant reserves in North America contrasts with the narrowing of Western firms’ oil opportunities elsewhere in recent years. Politics was largely to blame, as surging commodity prices emboldened resource-rich countries such as Russia and Venezuela to restrict foreign access to their hydrocarbons. “Everyone would like to find more oil,” says Richard Herbert, an executive at Talisman Energy, a Canadian firm using a conventional North Sea oil business to finance heavy investment in North American shale. “The problem is, where do you go? It’s either in deep water or in countries that aren’t accessible.” This is forcing big oil companies to get gassier."

Read the rest here

My comments:

As we have repeatedly said, politics has been the fundamental reason for the elevated prices in oil, caused mainly by geological restrictions or limited access (mentioned by the article) combined with artificial demand from inflationism and or policies, such as subsidies (not mentioned in the article).

Nevertheless, because people adjust to the circumstances they are faced with, such as the pain of higher prices and political constrains, the perpetual desire to satisfy human needs makes possible for ingenuity to pave way for innovative technology which would allow for more access to supplies or substitution.

In the case of natural gas, since there is a recognition, out of the existing technologies, of the abundance of reserves, higher oil prices will likely compel producers to compete to convert erstwhile uneconomical resources into utilizable reserves, ergo "forcing big oil companies to get gassier" as the article mentioned.

And if successful, which I am optimistic of, this will have a spillover effect to the midstream (processing, storage, marketing and transportation) and the downstream (retail outlets, derivative products, etc...). In other words, part of the transformation would likely see global transportation evolve to natural gas as default fuel.

So in the future, we should expect natural gas to also play a big role in the transition to diversify energy sources.

The following chart caught my eye. If the technology to access shale oil becomes universally commercial, guess where the bulk of reserves are?

In Asia Pacific!

Alternative Energy: Geothermal Versus Coal

The debate on which alternative energy would be the most feasible should likewise apply to the Philippines, which has one of the world's largest geothermal reserves.

Read the rest of the article here from Scientific American

Additional Comment: If market forces are allowed to prevail then coal and geothermal would likely dominate the Philippine energy landscape. Hence, the ruckus over reviving the Bataan Nuclear Power Plant won't be required.

Tidal Power As Alternative Energy

Biofuels, Wind or solar power are the popularly known alternative energy.

What is least known is the recent commercialization of tidal power or tidal energy-(wikipedia) “form of hydropower that converts the energy of tides into electricity or other useful forms of power.”

A schematic of how tidal power runs looks like this…

from technologystudent.com

What we’d like to emphasis is-innovation is a natural product of the markets- where rising energy prices has opened the avenues for (substitutes) alternative energy sourced from mother earth.

You can read about the entire article of the first commercial tidal power system in Northern Island here.

courtesy of technologyreview

A short excerpt…

``The world's first commercial tidal-power system has been connected to the National Grid in Northern Ireland. Built by the British tidal-energy company Marine Current Technologies (MCT), the 1.2-megawatt system consists of two submerged turbines that are harvesting energy from Strangford Lough's tidal currents. The company expects that once the system, called SeaGen, is fully operational, it will be able to provide electricity to approximately one thousand homes.

``The system is currently being tested and has briefly generated 150 kilowatts of power into the grid. But it has also damaged one of its rotors due to a failure in the control system when the rotor began turning too fast. Although the problem was a minor setback, the unit is not expected to start running continuously and at full capacity until November, says Peter Fraenkel, the technical director at MCT.

``The technology works like a wind turbine, but instead of wind, the turbines are driven by the flow of tidal currents. It offers a significant advantage over wind because currents are predictable, says James Taylor, the general manager of environmental planning and monitoring at Nova Scotia Power, a company that also has plans for a one-megawatt tidal-power project. "Wind is intermittent and, because of that, is much more difficult and expensive to integrate in a power system," he says.