The economics of fracking: Resources, reserves, and recovery efficiency – Part three

September 26th, 2014, Published in Articles: Energize


Part three of this article deals with the use of fracking resources in transport and other applications by countries which are already active in this field.

Parts 1 and 2 may be found here:

One lesser known use for natural gas – including liquefied natural gas (LNG) – is for transport. While not ideal for all types of transport, natural gas (either as compressed natural gas (CNG) or liquefied natural gas (LNF) can be used for mass transport (i.e. buses, and trucks, and even ships and trains) [36].  Should oil prices increase in future, the use of natural gas for transportation could increase [35]. Put another way, if shale gas were to be used for transportation instead of power generation – as a strategic commodity to keep essential transport systems running, then supplies in the USA and other countries with far smaller deposits, might indeed  then have reserves that would last for 50 or more years.

If shale gas has to be exploited in South Africa, then surely using it as a fuel for essential transport (i.e. buses, trains, and taxis) instead of power generation would make more economic sense [44, 49]. Any deposits found could then be exploited slowly, carefully, and with less need to make a short-term profit. In other words, without the short-term view that comes when on the drilling treadmill.

It would then be possible to first exploit existing deposits of coal bed methane (i.e. methane gas present with existing coal deposits) – which are near the existing infrastructure  of coal mines, and develop this into a resource that can be used for transport. Of course, exploiting any coal bed methane deposits would have to be done so as to properly process any waste water produced. While coal bed methane produces less waste water than exploiting shale gas, considerable amounts are still produced that can cause environmental problems. Thus, exploiting (or even exploring for ) coal bed methane deposits must not take place until proper environmental impact assessments have been done and strict regulations to prevent pollution are in place. Otherwise, worse pollution problems then with shale gas could easily arise: particularly in areas where water is scarce, and ground water aquifers are the only practical sources of water.

Fig. 1: Operator permit areas in South Africa for the investigation of possible shale gas.  Note the size covered by these permits is considerably larger than the Karoo as we know it, as the area involves the geological Karoo Basin, a much larger area.

Fig. 1: Operator permit areas in South Africa for the investigation of possible shale gas. Note the size covered by these permits is considerably larger than the Karoo as we know it, as the area involves the geological Karoo Basin, a much larger area.

Once distribution and logistical systems to use coal bed methane for transportation are in place, shale gas could then be added to it. Trying to do it the other way round – straight from any exploitable shale gas deposits that may be identified – would be more time consuming, as it would from seven to ten years before identified shale gas deposits could develop commercially [39].

Extracting coal bed methane from coal deposits would also reduce the risk of methane explosions during coal mining, and thus make these deposits safer to mine. While South Africa’s deposits of coal bed methane (a resource of 10 tcf [37])are far smaller than the much-talked off deposits of shale gas, they are far easier to exploit than shale gas, and are already being investigated by local coal firms [38].  Developing coal bed methane deposits first, and then adding any shale gas found later to its distribution network , would enable any deposits of shale gas to be exploited as a long-term project with better concern for the known environmental implications.

While it would need a strategic decision to reserve shale gas for transportation, and thus not make it available for power generation, it would surely make for better long term economic planning, as power plants need to be planned with a long-term period of at least 30 years (more likely 60 years).  In other words, it would be disastrous to assume power plants could be built on theoretical resources of shale gas, only to find the actual economically exploitable reserves do not make power generation a real option after ten years.

Poland, “once touted as the shale gas saviour of Europe”, has since “began to abandon plans to exploit the resource due to higher costs and poor well production”[13]. It would surely be  more practical long-term planning for South Africa to import natural gas for power generation from proven exploitable deposits of natural gas: especially those marine deposits that lie within our territorial limits. While gas imported from neighbouring countries with large provable economic reserves (i.e. Mozambique) would be more expensive [8], joint power generation ventures in those countries, such as those recently undertaken by Sasol, are surely an option.

The past 60 years

“When gold mining started in 1886, no one anticipated acid mine drainage in South Africa, but it is a major problem today and government is still trying to find a solution” [40].

Sixty years ago, gold mining was the key to a bright future. New mines were being planned, exciting projections made of potential income from the gold mines, and the economic growth that would turn South Africa into the largest economy in South Africa was just beginning. Now, however, the future “ain’t what it used to be”.  Instead of rosy projections of income from gold mines, we are now confronted with particularly nasty implications of more than sixty years of gold mining nobody thought possible: acid mine drainage. Acid water leaking from gold mines that no longer function will need billions of rand to remedy: simply because this wasn’t anticipated or provided for.

Gold mines were fine while they provided jobs and money. It was only after they shut down – often, many years after a large number of mines shut down – that water levels began to rise in disused mine shafts, and the metal sulfides in the rock (particularly iron pyrites, aptly named as “fool’s gold”) were oxidised into water-soluble sulphates and sulphuric acid. Acid mine drainage (and also acid rock drainage) can also occur from coal and other abandoned mines. Acid mine drainage now threatens the viability of  farms using polluted river water and thus our food security. The large number of crocodiles recently dying and dead in the Olifants river in the Kruger Park have been linked to, among other things, its declining water quality from increased acid mine drainage, and is a warning of the need to remedy this situation.

Only now are people beginning to realise that, like gold mining, the worst environmental effects from producing shale gas will begin long after the wells (and the companies that used them) have fallen into disuse.

The devil is in the detail

“If fracking is taken to refer to the entire process of unconventional gas drilling from start to finish, it is already guilty of some serious infractions” [34].

Like many things, the devil is in the detail: or how they are defined. If hydraulic fracking is defined as the act of cracking open the rock deep underground to create a single functioning well – the way most industries would like to define it – then fracking cannot damage ground acquifers, simply because the shale gas being fracked is too far below the acquifer to have an effect. But if you define fracking as “the entire process of unconventional gas drilling from start to finish”, as Chris Mooney does in his Scientific American article “The truth about fracking”, then a very different picture emerges. Three areas in this process can (or better put, have already) been shown to cause problems and thus “have the greatest potential to contaminate groundwater” [34].

Firstly, the ponds storing wastewater “can leak or overflow” with heavy rains, or the linings can tear. Secondly, the concrete casing that surrounds the steel gas pipe and is supposed to “prevent methane or chemically laden water from flowing up from below and seeping into the environs” [34] can crack, years or even decades after it was laid. And last but certainly not least, “new fissures opened by the fracking can connect to natural fissures or old wells” [34]. As many of the companies involved in drilling wells for shale gas are under considerable financial pressure, one wonders how carefully the cementing to seal the casing will be done by their subcontractors, and how well it will hold up years or even decades after the companies involved in exploiting the shale gas have gone bankrupt, walked away from shale gas, or simply moved into other, more profitable areas of energy. This is an important point, as “faulty cementing is the leading suspect in contamination” [34] of ground water by gas or used water contaminated with fracking fluids. Where the huge amounts of water needed to produce viable shale gas wells in an area profoundly short of water will come from is another matter entirely.

The next sixty years

“Nevertheless, the trend is very clear…:natural gas prices will almost certainly be increasing over the next 60 years, as would be expected given their low process today. In 2050 the high and low forecasts are, respectively, $18/MMBtu and $9,40/MMBtu.” [17].

If nothing else, one thing appears clear from most of the key references in this article that natural gas prices will be increasing over the next 60 years. Whether they will increase ever more steeply and unpredictably as sudden shortages and changing weather patterns become more common is arguable.

The main point is that cheap natural gas can no longer be assumed as a given for the next 30 years: despite optimistic projections from the US EIA asserting the contrary. This clearly has major implications for the economics of building new power plants, as nuclear and coal-powered plants now appear uneconomic when compared with current natural gas prices.
Another point is that we need to stop think of natural gas, oil and coal as if they will be available for ever. Contrary to optimistic projections of huge shale gas usage, the world’s supply of fossil fuels is finite. The current glut of natural gas is short-term, and when it has been burned it will be gone forever. Methane and other natural gases could also prove worse at causing weather changes and global warming than the traditional scapegoat, carbon dioxide.

Despite current deceptively low prices, fossil fuels are finite. Within our lifetime we will see instabilities and price spikes of fossil fuels emerge, and we can only guess what our children will see. Unless we begin to build an energy bridge to a future needing far less fossil fuels, our children will be faced with declining living standards and energy shortages that will steadily grow worse.

From known known to known unknown

“..There are known knowns; these are things that we know.  There are known unknowns; that is to say, there are things that we now know we don’t know.  But there are also unknown unknowns – there are things we do not know we don’t know”.(US Secretary of Defence Donald Rumsfeld, talking about the lack of evidence linking the government of Iraq with weapons of mass destruction in February 2002).

If you look at a graph showing daily prices of natural gas at the Henry Hub for the past ten years or longer, it is very difficult to make any sensible comments on the price changes, as they are so changeable and volatile. The closest resemblance the random price fluctuations show is to the passage of an earthquake, or, rather, the passage of several big earthquakes striking at random, interspersed with smaller earth tremors. These usually appear as a set of squiggles on a seismograph, the machine that records seismic disturbances.

Put another way, one thing is clear from a graph of the Henry Hub prices for more than  the past ten years. It certainly does not show a smooth, steady line or curve with gradual changes. Like an earthquakes, the changes are sudden, violent, and unexpected. All one can see is constant change: and the steady drop in prices that began in 2011 bottoming out in early 2012, and then beginning a jagged, uncertain trip upwards: with no indication of when the next earthquake will strike. So maybe it is better to stop regarding shale gas as a stable base for long- term energy planning. Instead of considering it as a predictable and reliable “known known” on which to base economies of the future, wouldn’t it be better to admit it could well have a far less predictable future, call it a “known unknown”, and demote it merely being part of the energy mix?

Like sound financial planning, the way ahead can probably be reduced to the old saying “Don’t put all your eggs in one basket”, particularly if that basket is natural gas or shale gas.  Yes, natural gas (and shale gas) are important elements of the energy mix, but the energy portfolio should be balanced and planned, and include practical amounts of renewable and nuclear energy. Gas is more suitable for providing peak load generation ( to cover sudden surges in demand of electricity), than base load generation, as a gas turbine can provide electricity to the grid within minutes. This especially important when the wind suddenly drops ( affecting wind turbine generation) and/or the sun is obscured by clouds (affecting photovoltaic generation), and the firm selling renewable energy to the national grid quickly has to make up the shortfall to ensure the electricity it is supplying can still be classified as despatchable.

Fig. 2: Coal production in the UK, 1860 – 2010.

Fig. 2: Coal production in the UK, 1860 – 2010.

Lessons from a small island

“In 1979, 130 million t of coal was being produced annually from 170 underground mines, but by 2010 the remaining mines produced only 17 million t. Following the breaking of the union’s power, British coal-dependent industries have turned to cheaper imported coal” [42].

Few people remember that Great Britain once had the largest coal-based economy in the world.  Coal mining drove the industrial revolution there, making Britain the most powerful country in the world for many years.  Between roughly 1860 (when the industry began to experience strong growth), and 1990 (when coal mining in Great Britain was in terminal decline), coal mining in Britain grew, flourished, and then declined and began to die [42]. Only near the very end were British coal reserves found to have been considerably overestimated [31].

By 2020, people will be beginning to forget about another British industry based on fossil fuels: North Sea Oil.  By then, British production of oil “is expected to fall to one-third of its peak”. By the end of 2010, 76% of British reserves of oil from the North Sea had already been recovered. And Norway, (who, together with Britain holds most of the North Sea oil reserves) had recovered 60% of its oil reserves “prior to January 2007” [43]. While production of gas from the North Sea fields as a whole continues to increase, “British gas production is in sharp decline [43].

In other words, by 2020 Great Britain will have practically exhausted its reserves of two sources of fossil fuels (coal and oil) upon which she depended for economic growth and prosperity. This small island will then be left with only renewable energy and the new nuclear power plants programme to provide for its energy needs, with oil and gas and coal needing to be imported. Put another way, the British experience shows that fossil fuels are finite, and it is folly to base a nations’ economy largely on them: be it shale gas in the USA or coal in South Africa. Maybe this is why even Saudi Arabia (known for its huge reserves and exports of oil) and Iran (known, with Qatar, for its huge reserves of natural gas, besides its oil exports), are, along with other countries in the Middle East like the United Arab Emirates, beginning to seriously consider investing in nuclear and renewable energy programmes, to prepare for the day when their fossil fuel reserves are increasingly difficult and expensive to exploit and export.


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