Kate Mackenzie

Kate is FT AV’s Asia Correspondent. She joined FT Alphaville in mid-2011 after carrying out various roles in the FT’s London office since 2005: interactive editor, companies reporter, and founding editor of the FT’s Energy Source blog.

Kate Mackenzie

- Abu Dhabi eyes BP stake purchase - FT

- Kerry, Lieberman circulate climate plan focused on power plants - The Hill

- Cause of Alberta oil sands well blowout unclear - The Chronicle Herald

- Kazakh duty ruling rewrites oil terms - FT

- European groups spend 800m on carbon credits - FT

- Nigeria’s ‘insolvent’ state oil company needs $6.6bn - AP

- The 4th spill bill: $99.7m - Houston Chronicle

Kate Mackenzie

Say what you like about biofuels; they are certainly big. Growth in biofuels supply in 2011 will be 211,000 barrels per day, according to the IEA — a similar increase as is expected from Brazilian crude oil, which is expected to show the first significant yields from its massive deepwater pre-salt reserves next year.

Even against former Soviet Union production growth, it’s rather strong:

Of course, with non-Opec conventional crude production in overall decline, it’s perhaps not too hard to stand out in this field.

But in a move that will clarify the role of biofuels in non-Opec supply, the IEA is now reporting biofuels production separately to crude oil in its production statistics for the US and Brazil.

This, the agency says, will affect about 1.1m barrels per day of output, based on 2009 production levels.

Kate Mackenzie

Even a growing world economy isn’t enough to keep oil demand rising at ever-increasing rates, it seems.

The International Energy Agency, in its latest oil market report, predicts that the increase in oil demand will slow next year to a 1.3m barrel/day increase, from a 1.8m b/d rise in 2010.

The agency, which warned several times last year of a “supply crunch” due to falling investment in upstream production, is much more sanguine these days on the supply-demand balance.

Its new report notes some supply concerns, particularly around Iran, but says that investment in upstream production seems to be stable. “Whisper it quietly, but we might, just might, be in for some market stability for a while longer,” it says of its 2011 forecasts.

This decreasing rate of demand between 2009-10 and 2010-11 comes despite forecast on a rising rate of GDP growth; from 4.1 per cent in 2010 to 4.3 per cent in 2011. As the agency writes:

Despite economic recovery, oil demand growth slows to 1.3 mb/d next year from 1.8 mb/d in 2010, amid a continued structural shift away from oil in the OECD and the dual impact of improving end‐use efficiency and gradual phase‐down of economic stimulus in the non‐OECD.

Kate Mackenzie

BP share price 5-day chart

BP announced a few hours ago it had successfully placed a new capping stack over the lower marine riser pipe (LMRP) of its gushing Gulf of Mexico well, Macondo.

Investors, who have in the past week rewarded the company’s improved oil capture and new cap plans, are impressed, with shares more than 2.5 per cent higher in early morning trade.

Oil continues to flow from the well at pixel time (see image below right). Although the caps have been placed, their valves have not been sealed. BP will attempt to close them today, as a way to test the integrity of the entire well.

As the FT noted earlier this week, BP’s second-quarter results presentation on July 27 will be a pivotal point for the company.

But another sort of test is due sooner. BP’s statement says a “well integrity test” will begin today, now that the new cap stack is fitted. And closing the cap is actually part of it:

For the duration of the test, which will be a minimum of 6 hours and could extend up to 48 hours, the three ram capping stack will be closed and all sub-sea containment systems (namely, the Q4000 and Helix Producer) will be temporarily suspended, effectively shutting in the well. It is expected, although cannot be assured, that no oil will be released to the ocean for the duration of the test. This will not however be an indication that flow from the wellbore has been permanently stopped.

What are they testing? Well pressure, according to the latest briefing from BP’s Doug Suttles:

“…the purposes of the integrity test is to determine if we believe we have the flow contained within the casing of the well. So in this particular case, if we see high pressures it’s a good sign. It actually means that the flow and the oil is fully contained in the existing well.

And if not?

“If we see low pressures, then that would indicate that potentially oil is escaping out of the casing at some point. So in this particular test what we’re hoping to see is full shut in pressures. Which would indicate that the casing’s intact.”

So there is a hint that if the new cap might remain successfully closed for some time (though BP does reiterate that the relief wells “remain the sole means to permanently seal and isolate the well”).

However an anonymous technician quoted by the New York Times believes that keeping the cap sealed will probably be too risky; even if the pressure tests indicate good wellbore integrity:

“Do I want to make that bet that there’s sufficient inherent strength in that well path to keep that well contained?” said the technician, who spoke on the condition of anonymity because he was not authorized to comment on the work. “Why would we take that chance?”

Either way, BP says that if the cap cannot remain closed, it will simply resume its various efforts to improve the collection of the oil and gas spewing from the well.

Related links:

The Oil Drum latest discussion thread
BP’s Kent Wells’ technical briefing video – installing the 3 ram capping stack

Kate Mackenzie

- Energy transitions, now and then

- Thunder Horse: A symbol of BP’s hubris

- BP’s critical week

- The case against the new well cap

- Six lessons from the BP oil spill

Kate Mackenzie

- BP investors look to bypass claims ruling - FT

- Obama renews ban on deepwater drilling - FT

- BP shares show faith in new well cap - FT

- Energy volatility spells headache for hedge funds - FT

- South Korean industries to invest $18.5bn in clean energy projects – Bloomberg

- Mitsui says ‘no’ to spill clean-up bill – UpstreamOnline

Kate Mackenzie

How safe are the shale gas wells that are springing up around parts of the United States? And how well will they pay off for the increasingly large investments that are going into them?

Late last month I spoke to Terry Engelder, professor of geosciences at Pennsylvania State University and an expert in shale formations about these rather controversial aspects of shale gas, and more.

As with many topics in the energy world, shale gas elicits rather polarised opinions. There are those who say it will neatly reduce emissions and solve energy security problems in one fell swoop. Others believe that some issues around pollution and yield have not yet been resolved.

We felt that Engelder would provide a more nuanced view across all these issues. While he is a big believer in the benefits of shale gas, he doesn’t work for the industry and has been critical of both shale gas supporters and detractors for claims made over safety.

Here are a few excerpts; the full interview is below.

On pollution:

It’s very clear that the industry should make every effort to protect these [fracking] fluids getting into surface waters or ground waters. A policy of zero tolerance is very important when it comes to the mixing of these chemicals, or at least the fluids with the biosphere. At the same time, this industry is one that’s very complex, there are a lot of risks, and the work toward zero tolerance is very important, [but] I don’t think it will ever be achieved.

On groundwater contamination:

There are a number of factors that make this unlikely, and one of these is density stratification… If this density stratification were commonly upset in the earth, a lot of fresh groundwater would become salty. The fact that people using water wells for drinking water do not report their wells becoming salty is a testimony to the stability of the earth’s density stratification.

Why he doesn’t believe federal regulation is better:

The individual states, there’s a great difference between Texas and Pennsylvania. Texas is flat hot and dry, Pennsylvania’s hilly, has lots of streams, and it rains a lot. At the federal level, to try and get a set of laws that can deal with these differences is a nonsense.

On the question of the safety and disclosure of used:

To the best of my knowledge there have to be chemical data sheets at every drill site, of the generic chemicals, available….

One of the things that’s still an unknown factor is what happens when you mix two or three or four of these chemicals together; do they react to form something that we’re not aware of?

On decline curves:

There’s one school that claims these wells reach a state of linear decline, they decrease production more rapidly than industry expects. I haven’t seen any evidence of that… A lot of the capital markets people would be very disappointed if it is linear.

————

FT: Tell us about your background – you’re something of a pioneer in shale gas?

TE: I was one of the very first to appreciate and fully articulate the value of gas shale to America through a press release that evaluated Marcellus for technically recoverable gas through a technology that was developed in the Barnett Shale of Texas. I get credit for understanding the magnitude of the potential for gas shale, and how much there was available in America.

The technology necessary to capture gas from these tight gas shales was worked out over a 15 year period by a company called Mitchell in Texas. This was a rather profound set of tests and experiments over a long period of time. The man who really gets credit for developing this gas shale technology is George Mitchell who persisted with gas wells in the Barnett, until they became economic.

My research involved mapping and understanding the origin of fractures (joints) in gas shale. Gas shale has such a low permeability that gas does not flow economically unless it contains high-permeability fractures, either natural or man-made. My major contribution as a scientist was to show industry just how extensively gas shales contained natural high permeability pathways in the form of fractures that were caused to grow by high fluid pressure.

FT: The film ‘Gasland’ has attracted a lot of attention. How safe do you think the hydro-fracking used for shale gas wells is?

TE: As I mentioned, gas shale is so impermeable the fractures are a necessary component of gas recovery. Opening natural fractures in the gas shale required fluids with additives that assure continual gas flow. It is the fluid containing these additives that have concerned the public.

It’s very clear that the industry should make every effort to protect these fluids getting into surface waters or ground waters. A policy of zero tolerance is very important when it comes to the mixing of these chemicals, or at least the fluids with the biosphere. At the same time, this industry is one that’s very complex, there are a lot of risks, and the work toward zero tolerance is very important, [but] I don’t think it will ever be achieved. It’s very clear that there are some issues that involve what happens to these chemicals as they are mixed together. These sorts of things need to be looked at.

At any rate the industry understands the need for zero tolerance when it comes to spills, when it comes to handling these materials on the surface. I have to make a distinction between surface fluids and those used deep below the surface. A lot of people are concerned that fluids not recovered from the Marcellus will eventually contaminate ground water.

There are a number of factors that make this unlikely, and one of these is density stratification. As you go deeper underground, the water becomes more saline. So the earth’s groundwater becomes stratified by density, with freshwater found near the surface because it is the least dense.

If this density stratification were commonly upset in the earth, a lot of fresh groundwater would become salty. The fact that people using water wells for drinking water do not report their wells becoming salty is a testimony to the stability of the earth’s density stratification.

In order for Marcellus fracture fluids to invade freshwater, the long-term density stratification must necessarily be interrupted. This is not observed.

However one third of these fluids flow back up the drillpipe.

The industry has to deal with those flow-back fluids in a way that separates them from either groundwater or surface water. What the industry has done in Pennsylvania is take those fluids, mix them with freshwater, and inject them down into a well for a second stage of fracturing. So they’re re-using the fluids.

Suppose each stage requires a million gallons. 300,000 gallons flow back, and that is diluted with a fresh 700,000 gallons before being injected a second time. Dilution of flow-back fluid might happen 10 times in treating one horizontal well.

[The final] 300,000 gallons will then be transported to the next well. So you’re looking at something that is sustainable with very little of water left at the surface that must be disposed of.

The old way was to dispose of the flow-back fluids in other wells or treat all of the flowback and dispose of it on the surface. Neither disposal technique is practical in Pennsylvania. So the operators have gone to recycling flowback in the way I’ve just described.

So handling flow-back water at the surface, there will be a zero tolerance policy put in place with the understanding that the industry is so complex that zero tolerance will never be achieved, there will always be a risk.

All states require the disposal of this fluid.

In some instances this water is cleaned up at the surface, it’s very costly and time-consuming to do this.

FT: Do you think there should be more regulation?

TE: There are state regulations in place but some argue that these are insufficient. Others say that excessive regulations will prevent economic development. There is a middle ground. Everyone is trying to converge to that. We’re not there yet. One reason is that people feel there still is not enough inspectors in Pennsylvania to get this under control. Pennsylvania was able to hire something like 64 inspectors last year. Someone made the comment that ‘Gaslands’ made the Pennsylvania Department of Environmental Protection appear like a lackey to industry, which it’s not. It is true that the regulators in America at the state level are working very hard to get to that zero tolerance, zero accidents, industry.

Whether they get to the middle ground or not really depends on the state of the industry. The gas industry really is a complex industry that needs a lot of help getting to that stage of no spills, no leaks into the atmosphere, into the ground.

FT: How is it complex? Is that because there are so many players?

TE: The complexity involves the natural geological variation of the rock itself. And within that, industry has to experiment to take advantage of what’s available geologically. There’s not a particular set of rules for what one does. It’s quite an experimental industry.

The industry is also complex.

For example in hydro fracking, there are a number of companies that do it, and each of them has their own set of rules for how they do it. And probably some are more effective than others at getting it right. Gas producers, particularly in gas shales, I would think there are something like 100, 200 different companies. The companies have different skillsets and different levels of experience.

So there’s a natural complexity and an industry complexity. So if you imagine a matrix of possible outcomes, it’s a huge huge matrix.

FT: So it’s particularly difficult to regulate in a prescriptive way?

TE: Yes it is.

The individual states, there’s a great difference between Texas and Pennsylvania. Texas is flat hot and dry, Pennsylvania’s hilly, has lots of streams, and it rains a lot. At the federal level, to try and get a set of laws that can deal with these differences is a nonsense. And the regulation is something that should be left to the state. And in fact that’s what we have now. Ultimately the local conditions will dictate what the best practices are.

FT: What do you think is needed now?

TE: The silver lining of the Gulf accident is that each of the operators is looking at that and thinking, gosh that could be us. Industry was moving carelessly in the GOM; the same thing could be happening in the gas shale. You might call that self-regulation. Self-regulation is important in itself but it is not adequate. You realize that in Pennsylvania, the DEP as recently as Spring 2008 did not have a strategy for dealing with gas production from the Marcellus. So, since the spring 2008, they have been learning how to do it, and how to do it right. People of New York have said we’ve got to stop this until we know we can do it right. What New York has done is equivalent to telling a brain surgeon ‘you can’t practice until you in the brain of a live person’. The analogy holds for the gas industry; progress is not made without practice. Industry has to experiment. Industry has to learn what went wrong to get it right next time. The industry evolves that way and writing reports is not going to replace the experience of doing this.

New York of course may take the attitude that Pennsylvania will make the mistakes and New York can learn from Pennsylvania’s experience. That is true but someone had to take the lead.

FT: But should it be more controlled?

TE: But what you’re doing is attacking at the heart of free enterprise. There are a lot of countries where the single gas company or single oil company is nationalised and that’s not the way America works. I would defend the system of free enterprise here. I think it is true — in Pennsylvania if 100 regulators are inadequate to do the job, let’s get 200 regulators to ensure that all the companies are doing it right. I think the problem right now is inadequate inspection under present regulations and not more regulation.

Another thing that’s happening is the big companies are developing an interest. At the same time it’s not clear to me that they’re any better at this than the small companies that have been doing it from the beginning.

FT: Where do you think the sorts of problems reported by some people living near shale gas wells come from?

TE: Methane is present naturally in the state of Pennsylvania. Drillers have intercepted pockets of methane, and it has flowed up into the water and people are experiencing more methane than usual. These things are very real in the way that they affect people. To the best of my knowledge, drinking water that has methane is it has not affected the health of anyone. The spurious events are often associated with people who have or at least claim to have really odd things in their groundwater. For example there was someone in western Pennsylvania who claimed to have had water that was suddenly laced with arsenic. i can’t for the life of me imagine how the gas industry might have caused that. This was an area that had an old coal mine; the arsenic might have been a product of an inadequate cleanup.

Two things are very credible: one is the methane. The other is that when surface casing put into the ground, one needs to drill through overburdened till or soil, and that can cloud up drinking water. The only thing I can say in response to that is sometimes when it rains, I get cloudy water in my well.

FT: There is some criticism of the data available from shale pays. Is there an issue with the initial production rates from wells?

TE: Pennsylvania suffers from a law that keeps initial production rates proprietary . We’ve heard reports of marvellous wells, 10 million cubic feet a day. The problem with that is they’re not balanced by reports of wells that don’t work. What’s very important is the ratio of these marvellous wells to wells that don’t flow very well. So I think that in Pennsylvania I certainly would like to see a change in the law so that it conforms to some of the other states, Texas for example, where rates are disclosed after six months.

Louisiana, Oklahoma, Texas all have rules that put the production data in the public domain, relatively rapidly.

FT: Is there adequate disclosure of hydro-fracking chemicals?

TE: The entire list of generic chemicals that are used in fracking are well known. To the best of my knowledge there have to be chemical data sheets at every drill site, of the generic chemicals, available. You can go to the Pennsylvania Department of Environmental Protection and download this list of chemicals.

One of the things that’s still an unknown factor is what happens when you mix two or three or four of these chemicals together; do they react to form something that we’re not aware of? And that’s not well understood right now. And the Department of Environmental Protection in Pennsylvania has told me that they are looking into these issues. I think you’ll see the ind itself will mount more of a larger effort to see what happens when these chemicals are put together in a solution that goes down the wellbore. But in terms of what is put into the fracturing fluid, that is revealed.

What about overall decline rates of gas produced from the wells?

TE: The decline curves tend to follow a mathematical formula, that some people characterise as a power-law rate decline – I’ve done that – and others as a hypberbolic decline curve. One can apply these curves to five – 10 years to make inferences about how these wells will grow. [More on the curves here - (PDF).]

One of the interesting arguments that have occurred is over the shape of these decline curves. There’s one school that claims these wells reach a state of linear decline, they decrease production more rapidly than industry expects. I haven’t seen any evidence of that. I think there are a lot of experts that haven’t seen that either. In terms of the capital expenditure, it’s fairly specific, the bet is that a power-law rate decline is one that will apply.

A lot of the capital markets people would be very disappointed if it is linear.

Kate Mackenzie

Lloyds of London, the insurance market, is becoming rather worried indeed about the future of energy:

“A supply crunch appears likely around 2013… given recent price experience, a spike in excess of $200 per barrel is not infeasible.”

This is from Professor Paul Stevens at UK policy thinktank, Chatham House, in a paper published in conjunction with Lloyds.

Most predictions of supply-side problems choose either the ‘supply crunch’ or the ‘peak oil’ camp — often due to the sometimes arbitrary distinction between those of an economic and those of a geological bent. This paper, however, says that both are risks.

The above quote talks about a crunch resulting from investment shortfall. But that doesn’t necessarily mean it will go away, as this stark juxtaposition shows:

Of course there are all sorts of other factors — Iraq and unconventional liquids production to name a couple — but those alternatives have their own problems and uncertainties; and with conventional non-Opec oil production already beginning to decline, an imminent shortfall in Middle Eastern oil production and a quick jump to $200/barrel is not a happy thought, if one believes that oil prices are important to the world economy.

Kate Mackenzie

The IPCC has apparently told scientists who will contribute to its next assessment report (AR5) to be wary of media queries and to contact the secretariat’s media team if approached. One scientist who will be contributing to the next IPCC report, Edward Carr, was not impressed, saying: “This “bunker mentality” will do nothing for the public image of the IPCC.”

Andrew Revkin at the New York Times’ DotEarth blog emailed IPCC chairman Rajenda Pachauri about the letter; Pachauri’s reply appears to confirm that it is the prospect of contributing scientists speaking on behalf of the IPCC that he is concerned about. Other comments about their work, it seems, are less of an issue.

Carr and Revkin are both of the view that the letter was a somewhat misguided effort, rather than a nefarious attempt to hide from the media. Both make the point that openness is the only way to rebuke the criticisms of the IPCC’s processes.

One can appreciate the difficult line the IPCC is trying to walk, however.

By Neil Hume

The price action in Falkland Oil & Gas on Monday morning, following news that it had found no hydrocarbons at its Toroa exploration well south of the Islas Malvinas:

So that’s Dusters TWO (FOGL and Desire Petroleum), Gushers ONE (Rockhopper Exploration) in the Falklands Oil drilling campaign, for which £250m was raised via the London stock exchange.

The Ocean Guardian drilling rig now returns to Rockhopper’s Ernest and Sea Lion prospects in the North Falklands basin, where the geological conditions are very different, we are told. The rig should arrive by July 20.

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