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The combination of hydraulic fracturing and horizontal directional
drilling technologies in the 1990s led to a boon in natural gas and oil
production from US shale oil and gas fields - one that continues today.
Heavy production in the Permian and other shale fields like the Eagle Ford
and the Marcellus has transformed the United States from a net oil and gas
importer to a net exporter (exports > imports) within a decade. The US
became a net petroleum products exporter in 2011 and a net natural gas exporter
in 2017, states
the Energy Information Administration (EIA).
As the graph below from the EIA shows, US energy exports bumped along for
50 years, between 1950 and 2000, but after 2000, exports of crude oil,
natural gas and petroleum products take a sharp upward turn after 2010, the
start of the so-called “shale revolution.” Oil exports really accelerated
after 2015 when Congress lifted the 40-year ban on shipping oil abroad,
tripling between 2016 and 2017 and hitting a record 3 million barrels a day
in June 2018.
 
None of this is news. Big Oil and US politicians whose constituencies are
beholden to oil and gas jobs/ tax revenue also point to the fact that this
“energy renaissance” has come with a bonus: a significant reduction to
greenhouse gas emissions, as the continued frenzy of shale drilling has
pushed down the price of natural gas and incentivized utilities to switch from
high-emissions coal-powered power plants to natural gas-fired plants.
We can’t argue with that. Carbon-dioxide emissions from electricity
generation fell last year to their lowest level since 1987, the
EIA reported this week. Much of that reduction is due to the switch from
coal to natural gas.
NG: Not all it’s fracked up to be
A report released earlier this year by London-based IHS Markit appears
almost breathless in its support for the US natural gas industry, written
during the 10-year anniversary of the unconventional (shale) gas revolution
that has upended world energy markets.
According to the
report, natural gas production in the US rose by over 40% between 2007
and 2017, pushing natural gas prices down by more than two-thirds. 1,250
trillion cubic feet of NG is now economic below $4 per MMBtu (Henry Hub
pricing), compared to 900 trillion cubic feet in 2010.
Not only has shale gas turned Pennsylvania and New York from energy
importers into exporters, there is seemingly much more to come. By 2040, IHS
Markit expects natural gas will account for nearly half of all electricity
generated in the United States. Right now NG represents 29% of US energy
consumption, compared to 39% for petroleum and 14% for coal.
“U.S. power markets and the economy overall would look significantly
different had the shale revolution not taken place,” states Sam Andrus,
executive director, IHS Markit and co-author of the report. “The new outlook
for natural gas cost and availability has created new possibilities for
progress toward national goals of energy efficiency, cost efficiency,
environmental protection and energy security. In short, the Shale Gale put a
powerful new wind at America’s back.”
The Shale Gale. Catchy phrase. Clearly Mr. Andrus doesn’t know about “The
Red Queen Syndrome”, referring to the character in Lewis Carroll’s
children’s story ‘Through the Looking Glass’. Just as Alice in the story
couldn’t keep up with the Red Queen - running faster and faster but staying
in the same place - shale wells are very productive in their first year but
deplete rapidly after that. A year after coming on-stream production can drop
20 to 40% from its original level. Drillers have to keep drilling faster just
to keep pumping the same amount of oil as before, due to the rapid depletion
rate. Within one or two years the well is done, capped and the drillers move
on to the next one.
Here’s James Howard Kunstler, author of ‘The Long Emergency’ and his take
on the situation:
“In order to keep production up, the number of wells will have to
continue increasing at a faster rate than previously. This is referred to as
"the Red Queen syndrome" which alludes to the character in Alice in
Wonderland who famously declared that she had to run faster and faster just
to stay where she is.”
Here’s something else, it’s a piece from an interview with energy expert
Bill Powers:
“My thesis is that the importance of shale gas has been grossly
overstated; the U.S. has nowhere close to a 100-year supply. This myth has
been perpetuated by self-interested industry, media and politicians. Their
mantra is that exploiting shale gas resources will promote untold economic
growth, new jobs and lead us toward energy independence.
In the book, I take a very hard look at the facts. And I conclude that
the U.S. has between a five- to seven-year supply of shale gas, and not 100
years. That is far lower than the rosy estimates put out by the U.S. Energy
Information Administration and others. In the real world, many companies are
taking write-downs of their reserves.” Bill Powers, author of
‘Cold, Hungry and in the Dark: Exploding the Natural Gas Supply Myth’ in an
Energy Report interview
According to the EIA, “peak
tight oil” could come as early as 2022. And that’s assuming no
supply risks. But as oil industry watchers know, the United States is having
trouble keeping up with all the shale oil and gas being pumped through its formations.
A lack of infrastructure (pipelines and railroads) has kept a lid
on MidWest oil prices, and a shortage of manpower and oilfield
services is limiting production growth.
When shale gas producers have a gas glut, they simply flare it - not good
for the environment, as we’ll discuss shortly.
Then there’s the adverse environmental effects of fracking. As use of this
technology has increased worries are growing about fracking’s impact on our
fresh water supply; it’s easy to see why:
• Fracking just one well can use 2 to 8 million gallons of water with the
major components being water (90%), sand or proppants (8-9.5%), and chemicals
(0.5-2%). One 4-million-gallon fracturing operation would use from 80 to 330
tons of chemicals and each well will be fracked numerous times. Many of these
chemicals have been linked to cancer, developmental defects, hormone
disruption, and other conditions.
• Cracked wells and rock movement frequently leak fracking fluid and gases
into nearby groundwater supplies. Fracturing fluid leak-off (loss of
fracturing fluid from the fracture channel into the surrounding permeable
rock) can exceed 70% of injected volume.
• Methane concentrations are 17 times higher in drinking-water wells near
fracturing sites than in normal wells. Hydraulic fracturing increases the
permeability of shale beds, creating new flow paths and enhancing natural
flow paths for gas leakage into aquifers.
Fracking has also caused benzene poisoning among pregnant native women in
north-eastern British Columbia - natural gas country - and is known to cause
earthquakes.
LNG is often touted as the holy grail of clean resource development.
British Columbia is staking its economic future on foreign companies coming
to frack natural gas from the tight Montney gas play in northeastern BC.
Selling LNG to China and India will help them to make the switch from coal to
LNG, thus saving the planet. Or so the argument goes. But LNG uses a lot of
energy. To turn it into liquid form, the gas must be cooled to 163 degrees below
zero. To do that requires a great deal of power, with massive compression
units running 24/7. Where does that power come from? In most cases, the same
fracked natural gas is used to run the compression units, which pretty much
defeats the purpose of LNG as “clean”.
But this is the direction the industry is going. According to a new study
by Wood Mackenzie, LNG
will be the biggest source of carbon emission growth by 2025 - due
to strong demand from Asian buyers.
For more read our LNG:
Another environmental disaster coming to BC
Methane: NG’s dirty secret
Let’s take a harder look at the claim that natural gas has been
responsible for lowering America’s greenhouse gas emissions over the past
decade since shale gas fracking began in earnest.
The report ‘Leveraging Natural Gas to Reduce Greenhouse Gas Emissions’, by
the Center for Climate and Energy Solutions (CCES) acknowledges that
switching from coal to natural gas in the US has contributed to a decline in
greenhouse gas emissions. However, the report also notes that natural gas is
mostly methane (CH4), a potent greenhouse gas that is over 25 times more
efficient than carbon dioxide at trapping heat in the atmosphere over a
100-year period. (the Intergovernmental Panel on Climate Change (IPCC) says
methane is 86 times more damaging than CO2 over a 20-year period)
Excerpts
from the CCES report:
The direct release of methane during production, transmission, and
distribution may offset some of the potential climate benefits of its
expanded use across the economy.
Substitution of natural gas for other fossil fuels cannot be the sole
basis for long-term U.S. efforts to address climate change because natural
gas is a fossil fuel and its combustion emits greenhouse gases. To avoid
dangerous climate change, greater reductions will be necessary than natural
gas alone can provide.
It’s also become apparent that NG alone can’t take credit for the
reduction in greenhouse gases in the United States. According to the EIA, the
strongest driver of the reduction in GHGs is neither the shift from coal to
natural gas nor the rise in renewable power. Instead, over
half the half the decline occurred due to a decline in the industrial demand
for electricity - owing to a move away from energy-intensive industries.
Examples of these would be the manufacture of metals, chemicals, paper,
petroleum and coal products versus cleaner industries like transportation
equipment manufacturing, according to the EIA’s 2017 ‘Manufacturing and
Energy Consumption Survey’.
As proof, Forbes quotes a senior energy and environmental analyst saying
that if decreased electricity demand from industry hadn’t occurred, US power
emissions would have been 654 million tonnes last year - more than the 645
million tonnes that the power sector saved by shifting to natural gas and
renewables. In other words, the increase in power sector emissions - largely
driven by natural gas - offset the reduction in GHGs from switching to
cleaner fuels, when decreased industrial demand is stripped out of the
equation.
Carbon
Brief puts another angle on the GHG reductions. It names three factors as
responsible: increase in gas electricity generation (displacing high-carbon
coal), wind generation, and reduction in industrial energy use as noted
above.
Other important factors include reduced miles driven, increased
vehicle fuel economy and lower emissions from air travel via reductions in
CO2 per passenger mile. Solar power accounts for a small, but growing part of
emissions reductions, representing 3% of the reduction in 2016.
To determine the emissions impact of natural gas, one really has to
differentiate between short-term and long-term. Short-term, methane emissions
are bad, about 20 times more powerful per ton than CO2, but they dissipate
relatively quickly. Long-term, CO2 is worse. From Carbon Brief:
If you care about avoiding warming later in the century (as the United
Nations does with its 2°C warming by 2100 target), there is relatively little
problem with short-term methane emissions, as long as they are phased out in
the next few decades. If you care about short-term changes, however, methane
is a much bigger deal.
As for how much methane leaks from the whole supply chain of natural gas
production, the official figure from the EPA is only around 1.5% of total
production, but an article
by Yale University quotes a paper published in the journal ‘Science’
in 2014. The author “found that overall emissions were likely between 25 and
75 percent higher than reported by EPA, suggesting that actual natural gas
leakage rates are probably somewhere between 2 and 4 percent of gas
production.” Researchers have found leakages up to 10% in individual
fields. Another
source says fugitive methane emissions run from 1% to 9% of total
life cycle emissions. In order for natural gas power plants to be cleaner
than coal, methane emissions over the plant’s life cycle must be kept
below 3.2%, according to one study.
Reuters
said in July.
Most methane leaks come from flaring excess NG instead of putting it into
a pipeline. Think methane emissions are no big deal, just a cost of doing
business? The journal ‘Nature’ earlier this year published a study saying
that the oil and gas industry emits some 13 million tonnes of methane a year,
which is 60% higher than the EPA’s estimate.
As for the government’s take on methane, it’s not, shall we say, on the
side of the planet. Last year the Trump Administration stopped a regulation
put in place by Obama’s team requiring drillers on federal land to curb
methane leaks. In September 2018, “the Interior Department snuffed out new
rules aimed at lowering the oil and gas industry’s methane emissions,” Grist
reported. The relaxation of fugitive methane emissions could easily make
natural gas even dirtier than coal:
Trump’s own EPA estimates that its rule rollback will result in the
emission of an additional 484,000 tons of methane, volatile organic
compounds, and other hazardous pollutants over the next five years.
Meanwhile, the death of Interior’s methane rule will add another half-million
tons of pollutants to the air. In the process, it will erode the pillars of
the once-vaunted natural gas bridge.
Clean coal? No such thing
What about clean coal? Is it possible to re-tool the US coal industry into
a powerhouse for the production of non-polluting coal while saving thousands
of coal jobs that are threatening to get axed as demand for coal continues to
wane? The answer is not promising, despite “beautiful clean coal” being part
of Trump’s legislative agenda to bring back jobs to the ailing industry.
The term refers to coal plants that capture CO2 from smokestacks and bury
it underground. It has also been used to describe plants that emit less
carbon than older ones. But they still pollute the air, just less so. Among
the noxious stuff coming out of these stacks are carbon dioxide, mercury,
sulfur dioxide, arsenic and particulate matter - all of which are harmful to
human health.
And coal-mining itself is very carbon-intensive, in terms of the surface
and underground equipment needed, much of it run with diesel fuel.
The
New York Times reported that while carbon capture could be useful in
limiting emissions not just from coal plants but steel and cement plants, the
problem is companies don’t have any incentive to install the necessary
equipment (like scrubbers) without stricter rules or a carbon price - both of
which the Trump Administration opposes.
The only clean-coal plant to get up and running is NRG Energy’s Petra Nova
in Texas, which has a carbon-capture system added to it, Bloomberg
reports, thanks to a $190-million grant from the Obama Administration.
Southern Co. abandoned the clean-coal section of its Kemper plant in
Mississippi, due to cost over-runs and problems building heat-resistant
structures.
The plants are so expensive to build it could take up to 20 years to pay
back the debt, but investing in a dying industry where coal may be hard to
come by hardly makes economic sense. Overseas, clean coal projects are
finding it tough to get financing, as banks prefer to support cleaner-energy
projects.
It’s time for the United States to forget about clean coal, dirty coal, or
any other kind of coal. That ship has sailed and it ain’t coming
back. The charts below say it all.
Going nuclear
The global demand for electricity is expected to increase by 76% by 2030,
and while everyone knows about the electric vehicle “revolution”, what is not
often talked about is how will all that extra power be generated. Much of it
will have to come from nuclear.
Politicians and business leaders have realized that no longer can we
continue to pursue an energy matrix driven by fossil fuels (oil, natural gas
and coal), while at the same time protecting the environment. Stopping the
warming to the point when feedback loops like disappearing sea ice/warming
ocean water, or melting permafrost and the escape of methane, push us past
the point of no return (generally considered to be an increase of 2 degrees
C) has become something of a religion for environmentalists.
There are two routes to slowing global warming: conserving energy and
changing the energy mix from fossil fuels to renewable energy sources and
nuclear, which don’t add to greenhouse gases already present in the
atmosphere. The electrification of the global transportation system dovetails
with this way forward.
In 2017 73.5 million cars were produced worldwide. If half of those
vehicles sold are electric, that’s 37 million electric vehicles (EVs), all
demanding power from the electricity grid. BP says 300 million EV’s will be
part of the global vehicle fleet by 2040, Morgan Stanley says 1 billion EV’s
on the road by 2047. How on Earth are we going to produce all that
electricity, without using fossil fuels? How many tonnes of coal would we
have to burn? How many rivers would we need to dam? How much natural gas
would we need to find and frack, along with the fresh water that becomes
polluted from the process?
Renewables are great, and pretty cool, but how many acres of solar panels
would we have to lay down to capture enough sunlight to continuously power up
to a billion EVs? How many noisy, ugly, bird-murdering wind farms would we
have to build? The intermittency factor of renewables is obviously a major
impediment to using it as base-load power, despite the price per kWh for wind
and solar dropping.
Of course, we already have a clean energy source, that has become somewhat
sullied after the Fukushima disaster in 2011. Despite the incident at the
nuclear power complex following the Japanese earthquake/tsunami, and a few
radiation escapes that can be counted on one hand since nuclear power plants
started in the 1950s, nuclear remains our cheapest, safest, and most
energy-efficient source of power generation.
Here are the reasons why:
· One pound of yellowcake (U3O8 - the final
product of the uranium milling process) has the energy equivalence of 35 barrels
of oil. One 7-gram uranium fuel pellet has an energy to electricity
equivalent of 17,000 cubic feet of natural gas, 564 liters of oil or 1,780
pounds of coal.
· Nuclear power’s life-cycle emissions range
from 2 to 59 gram-equivalents of carbon dioxide per kilowatt-hour. Only
hydropower's range ranked lower at 2 to 48 grams of carbon
dioxide-equivalents per kilowatt-hour. Wind came in at 7 to 124 grams and
solar photovoltaic at 13 to 731 grams. Emissions from natural gas fired
plants ranged from 389 to 511 grams. Coal produces 790 to 1,182 grams of
carbon dioxide equivalents per kilowatt hour.
· Nuclear energy is the only proven
technology that can deliver baseload electricity on a large scale, 24 hours a
day, 7 days a week, regardless-of-the-weather, without producing carbon
dioxide emissions. Nuclear power plants emit no carbon pollution; no carbon
monoxide, no sulfur oxides and no nitrogen oxides into the atmosphere.
· Natural gas accounts for 80% of the cost to
produce power from an NG power plant. Uranium accounts for 5-10% of the price
of nuclear energy
· In terms of power production costs, when
comparing nuclear to gas, nuclear to coal or nuclear to hydro, only coal is
cheaper.
· Nuclear energy is reliable. Nuclear power
plants do not depend on weather conditions to produce electricity nor do they
need costly electricity storage options.
· One ton of uranium produces more energy
than several million tons of coal and oil. Fuel transportation costs are less
and there is less impact on our environment from mining or fracking shale
gas.
· Nuclear power plants require very little
space and can be situated close to where their power output is needed.
For more read The
Civil Nuclear Energy Renaissance and Nuclear
Power, It’s No Contest
Uranium supply and demand
Where uranium is mined
More than two-thirds of uranium comes from Canada, Australia and
Kazakhstan, a former Soviet republic. The largest proportion comes from
Kazakhstan, followed by Canada, Australia and Niger, according to the World
Nuclear Association.
The top uranium mining companies are, in descending
order, Kazatomprom, Cameco, Orano (formerly Areva) and
Uranium One.
Recall that Uranium One and its relationship to the Clinton Foundation
have been in Republican cross-hairs since 2013, when the Canadian company
with a mine in the Powder Basin of Wyoming, was partially taken over
by Rosatom, the Russian state-owned uranium mining company. Rosatom now
owns 51%.
The controversy is over whether Hillary Clinton, then Secretary of State,
was aware of, or presided over, a flow of cash that was funnelled into the
Clinton Foundation at the time of Rosatom’s purchase of a majority
stake in Uranium One. Former US President Bill Clinton also reportedly
received half a million dollars for a speech he gave in Moscow, from a
Russian bank with links to the Kremlin that was promoting Uranium One stock,
according to a New
York Times story:
Whether the donations played any role in the approval of the uranium
deal is unknown. But the episode underscores the special ethical challenges
presented by the Clinton Foundation, headed by a former president who relied
heavily on foreign cash to accumulate $250 million in assets even as his wife
helped steer American foreign policy as secretary of state, presiding over
decisions with the potential to benefit the foundation’s donors.
Demand for uranium, the nuclear fuel, is directly tied to the need for
nuclear power, which is growing exponentially especially in Asia due to the
problems with air pollution from coal-fired power plants.
There are currently 452 operating nuclear reactors and 56 new ones under
construction globally. According to the World Nuclear Association, China with
its appalling air pollution is the leader with 17 new reactors under
construction and 184 planned or proposed. Up until recently Japan was out of
the nuclear mix, with all but a handful of nuclear reactors shut down for
safety checks following damage to the Fukushima Daiichi plant during the 2011
earthquake/ tsunami. But Japan which has no oil and gas of its own and
depends heavily on nuclear, now has 9 reactors back in operation - a tripling
from 2017 - and aims for nuclear to represent just under a quarter of its
power mix by 2050. Japan’s Abe Administration is pro-nuclear. Russia is
building 9 new reactors and India is constructing 7.
According to nuclear consultant UxC, this means the global capacity
for nuclear power is expected to grow by 27% between 2015 and 2030. And that
means a whole lot more uranium. How much? UxC estimates annual
uranium demand will spike by nearly 60%, from the current 190 million pounds
of U3O8 to 300 million pounds by 2030.
But there’s a problem. Uranium supply has been steadily dropping since
2016. That year total mined supply was around 163 million pounds, in 2017 it
was 154 million, and this year it’s estimated to be under 135 million. With
current U3O8 demand at 192 million pounds, that leaves a shortfall of at
least 57 million pounds.
For more on the uranium market, read our Why
the uranium price must go up
How are we going to fill the 57 million-pound uranium shortfall? Some of
it could be met with secondary supply ie. uranium that is stockpiled by
governments and utilities for strategic reasons. However, much of this supply
is locked up and not available for the market. It’s not “mobile”, meaning it
cannot be counted on to add to primary mined supply.
A bear market in uranium since 2012 has dropped the price to a point where
uranium is no longer profitable to mine for most producers. Hence the
shutdowns of major uranium mines like McArthur River, Langer Heinrich, and
curtailment of production from Kazatomprom.
On top of that, big funds are emerging to buy uranium from the spot
market. Top producers like Cameco are also buying from spot in order to keep
fulfilling its long-term contracts despite cutting production. In the next
seven years three-quarters of uranium contracts will
expire. Recontracting will have to take place before then, or
before all the uranium in the spot market disappears. Utilities need to
re-sign long-term contracts to ensure their uncovered demands are met, and as
shown above, uncovered demand is increasing. The shift in the spot market is key;
with so much buying going to come into the spot market, it’s only a matter of
time before the price responds in kind.
Skyharbour Resources
The uranium bear market of the last seven years has decimated share
prices, meaning very attractive entry points. Saskatchewan’s Athabasca Basin
hosts the world’s highest-grade uranium jurisdiction, where the largest
uranium mine (McArthur River) is, along with Cameco’s Cigar Lake Mine, and
some very notable recent high-grade discoveries including Fission Uranium’s Patterson
Lake South/Triple R, Rio Tinto’s Roughrider deposit and NexGen Energy’s high
grade Arrow deposit.
A lot of exploration is happening around the Basin, and one of the best
companies to have amassed a large, prospective land position
is Skyharbour Resources (TSX-V:SYH).
Skyharbour acquired its flagship Moore Project through an option
agreement with Denison Mines back in 2016. Moore hosts the Maverick Zone,
where historical drill results feature 4.03% equivalent U3O8 over 10 meters,
including 20% eU3O8 over 1.4m starting at a depth of 265m, as well as 5.14%
U3O8 over 6.2m. Recent drilling by Skyharbour returned 21% U3O8
over 1.5m, at a depth of 265m.
Skyharbour’s current drill program at Moore is aimed at testing new
“basement” targets at the Maverick corridor. Since mid-2000, the focus at
Moore has been on the 4-kilometer Maverick structural corridor where pods of
high-grade unconformity-type uranium mineralization has been intersected.
During the winter and summer of 2017, just under 10,000 meters of drilling
was completed. Highlights included 20.8% U3O8 over 1.5m, 9.12% U3O8 over
1.4m, and 2.23% over 9.3m U3O8, all at between 250 and 275m depth. About half
of the 4-km corridor has been drill-tested.
Skyharbour also owns 100% interests in the Falcon
Point, Yurchison and Mann Lake uranium projects on the east side of
the Basin.
While Skyharbour is a top-tier uranium explorer, with the
expertise to back that up, the company is also a prospect generator, meaning
its strategy is to ink option agreements on its secondary properties thus
allowing other companies to come in and incur exploration expenditures in
return for earning stakes on those properties.
I’ve got surging global demand for electricity (an increase of 76% by
2030), including the move from gas/diesel-powered vehicles to EVs, and the
switch from fossil fuel-powered electricity to nuclear power on my mind. I’m
also thinking about ways to play the coming uranium bull market, and I see
investing in junior uranium companies as historically offering the most
leverage to a rising commodity price. Which is why I have SYH and its current
exploration program on my radar.
Legal Notice / Disclaimer
This document is not and should not
be construed as an offer to sell or the solicitation of an offer to purchase
or subscribe for any investment.
Richard Mills has based this
document on information obtained from sources he believes to be reliable but
which has not been independently verified.
Richard Mills makes no guarantee,
representation or warranty and accepts no responsibility or liability as to
its accuracy or completeness. Expressions of opinion are those of Richard
Mills only and are subject to change without notice. Richard Mills assumes no
warranty, liability or guarantee for the current relevance, correctness or
completeness of any information provided within this Report and will not be
held liable for the consequence of reliance upon any opinion or statement
contained herein or any omission.
Furthermore, I, Richard Mills,
assume no liability for any direct or indirect loss or damage or, in
particular, for lost profit, which you may incur as a result of the use and
existence of the information provided within this Report.
Richard owns shares of Skyharbour Resources (TSX.V:SYH). SYH is
an advertiser on his site aheadoftheherd.com
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