This article from Peak Prosperity Newsletter is about US natural gas exports, but the ideas are just as relevant for BC.

Bad Idea: Exporting Natural Gas

This crazy idea comes to us courtesy of a report saying that exporting NG from the U.S. would be beneficial overall.

Here’s the news:

Report Bolsters the Case for Large U.S. Natural Gas Exports

Dec 5, 2012

HOUSTON — In a finding that could help create a new industry of natural gas exports in the United States, a government study released on Wednesday concluded that the national economic benefits of significant natural gas exports far outweighed the potential for higher energy prices for consumers and industrial users of the fuel.

The study prepared by NERA Economic Consulting for the Energy Department, said that domestic prices would not rise sharply as a result of exports and that export revenue would generally help most Americans.

Energy companies have proposed more than a dozen projects to export gas in liquefied form to Europe and Asia, where the fuel is typically three to four times more expensive than in the United States. The Obama administration has been cautious on whether to embrace large exports of gas out of concern that consumers who rely on gas for heating and cooking could see their utility prices rise. Higher exports could also raise costs to manufacturers that now benefit from the nation’s glut of cheap gas, like chemical and fertilizer manufacturers.

But the huge gas export terminals, which cost billions of dollars to set up, would also generate thousands of construction jobs, spur further development of natural gas fields and generate lucrative export earnings.

There are three ways that this study just utterly misses the mark.

The first concerns the idea that when NG is liquefied it takes an enormous amount of energy to do so.  Typically it will take 25% of the embodied energy in the NG to convert it from a gas to a liquid ready for export.

So if we had 100 units of NG to work with, we actually only export 75 units of energy.  I am sure this makes economic sense, but it makes absolutely zero energy sense.  Instead, those 25 units of work should be put to use building out the decaying U.S. energy infrastructure, not lost to a cooling process.

Remember, you only get to use the energy in fossil fuels once.  You can move rocks, build solar panels, improve water treatment plants, or anything else you wish.  But once you’ve use it to convert a gas to a liquid, well, that’s what you’ve done and nothing more.

The second problem I have with this analysis is that by focusing just on prices it misses the mark.  Anything that “spurs further development of gas fields” is simply depleting this valuable resource that much faster.  What about the future?  What about the discussion of how we should use this valuable stuff?  Where do we want to be in 25 years in terms of infrastructure and energy use?

None of that was considered, only that it might be economically useful to extract and export the stuff as fast as possible, and this brings me to the third point.  There just isn’t as much NG as is excitedly claimed.  Certainly there is not so much that we can pretend as if it were infinite.

Consider this:  The oldest shale gas play in the U.S. is the Barnett in Texas  We have nearly a decade of data from that very significant shale play.  We all know that these wells deplete very rapidly, but it seems as if the press can only wrap its head around overall production increases across all plays, not the dynamics that are at work within the fields.

Art Berman has studied these shale plays very extensively at the level of individual producing wells, and he has produced this very important graph showing what happens when you stop drilling.  This data is not from the whole entire Barnett play, but it does cover 9,000 producing wells and shows us what happens when the drilling stops:

(Source)

That’s pretty dramatic, and it is the best data we’ve got on how the shale plays actually work.  The danger is that far too many data sources have linearly extrapolated recent increases in NG production far into the future.  For recent production increases to continue, two things have to be true.  More new wells have to be completed each year than in the prior year (to account for declines in wells drilled the year before that), and there has to be sufficient capital to fund an increasing number of wells.

Now, let’s get back to that report about exporting NG.  Liquid natural gas (LNG) terminals cost many billions of dollars and have a multi-decade life span.  For the report to claim that such export terminals would not raise prices for U.S. customers of NG implies an assumption that we’ll have vast excess spare capacity for the entire lifespan of the LNG terminals – decades, in other words.

Now, here’s the thing…over the past couple of years we’ve seen a very dramatic drop off in NG drilling activity, mainly because it costs more to drill and complete a well than one will get back with NG at current prices.  That is, drilling and producing NG has been a certified money loser for a few years, and predictably, those involved in NG production have dramatically curtailed their efforts.  Guess what follows next?  Less production and higher prices.

Here’s a chart for you to consider:

The rig count dedicated to NG production has dropped by 70% from its peak, and that is going to impact future production as sure as night follows day.  Doubly, and especially so given the dynamic illustrated in the Barnett graph above.

Mitigating this somewhat is that all of the NG rigs that are no longer drilling for NG are now chasing the far more lucrative and still profitable shale oil plays, which have some associated NG in their production stream.  So that NG is added to the mix, and it helps blunt the drop-off some.

And countering that is the deplorable practice of just burning off, or flaring, unwanted NG from some drilling operations, particularly those in North Dakota, where there’s no means of transporting the NG from the wells to a market.  A recent night satellite image captured this pretty dramatically:

Nearly all of the light in the green circle is NG gas flaring.  Talk about burning our future up!  Nothing at all was produced by that burning except light and heat.  What an extraordinary waste.

The bottom line here is this:  Any report that concludes it is a good thing to export our NG to other markets has not really considered U.S. consumers, the energy portion of the equation, or the future.  It’s just a bad idea.

~ Chris Martenson

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