The following interview with David Fridley [1] was carried out in Berkeley, on February 4, 2014 by Patrick Renz and Frauke Heidemann. The main focus of the interview was on U.S. and Chinese shale gas production and renewables. All footnotes are remarks by Patrick Renz and Frauke Heidemann, aimed at giving some additional background knowledge and especially giving the links to the cited documents so that the reader can follow up on these issues easily.
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. U.S. and Chinese Shale Gas Production
Regarding the current enthusiasm about shale gas we are just putting ourselves in a position where we are going to be shocked when that decline rate starts kicking in. Once you stop increasing the number of wells drilled, the decline rate is frightening. We have already seen gas output in the U.S. being flat for two years. And so except for the Marcellus, which is still increasing as it is a young play, Barnett and Haynesville and all those have already peaked and plateaued or even started to decline. [2] The idea that we have this massive future out there of forever cheap gas is ridiculous. There is another guy named Arthur Berman, he is a geologist in the gas sector in Texas, who has also done a lot of detailed investigations of both wells data and the financials of gas companies who are producing shale gas. [3] What he found from the information submitted to the Security and Exchange Commission on Wall Street [4] is that the full cost of a cubic foot from shale gas is on the order of 8 to 9 dollars. It would be cheaper in Marcellus, it would be a little more expensive somewhere else. The total revenues of the shale gas industry last year are not even covering the costs of drilling that next round of wells. It clearly is an unsustainable land play that has also allowed Wall Street to profit enormously. Wall Street basically is the intermediary for the takeovers of the smaller companies by the larger ones, like buying out Chesapeake or all those other producer shares or acreages. This is one side of it. Without question this has been an enormous boom for the U.S. Every additional amount that we produce we are subsequently not importing. But we are also finding that once you make gas cheap, people start using more of it and all of a sudden you end up with a very cold winter like this year and the gas supply is not there in the North – at the end of the pipeline – with the price skyrocketing.
As a result, we are now having the lowest levels of inventory that we had in more than a decade. This infinite plentitude has limits. What happens in D.C. right now, which the Chinese are also prone to, is this fixation on a number called resources or reserves. Even Obama said in a speech that we have 100 years of natural gas. [5] It’s appealing and the Chinese do the same thing. They say they have 500 years of coal, but don’t understand that a resource is not a reserve and a reserve is not production. [6] So what matters to human society and to our well-being is not stock or material we have, it is the flow that is generated of those materials. By not distinguishing the difference between the stock and the flow you get this sense of security that just is not there. What matters to the world is the amount of flow. It is like you had $1 billion at the bank. If the ATM lets you take out $100 a day, are you really a billionaire? You have a big stock of money but the flow is quite miniscule. It is the same thing with shale gas or tight oil. The number of molecules in the earth of these fossil fuels is nearly inexhaustible. They are inexhaustible because it would take more energy to get them out than they contain. But you can’t always mobilize the amount you need and the volume you need at the time you need and so forth and so on. We have entered into a fairly dangerous period of about five years, where we are congratulating ourselves on our great fortune of having all these additional tight resources that are simply not going to be there in ten years time. I will show you an example. When we did a study for China, we modeled China’s shale output using U.S. parameters. In other words: the initial production rate from the Barnett and the initial decline rate from the Barnett. The most mature basins in the U.S. and still, even with no technical issues, you end up with curves showing that even if you can double the number of wells every single year, there is no constraint on drilling equipment, no constraint on technology, no constraint on water – because this also includes all of China’s shale basins including Xinjiang – and yet typically from the resource to reserves, China gets about 10%. We get about 10% too. So if you look at that curve starting from this year to 2021, it is 56 billion cubic meters and then it drops away again. China now produces about 90 billion cubic meters of conventional gas. Shale would be very useful for China, not because of what you hear in Washington, what you saw in Scientific American last week [7] or what you hear from Richard Muller down on campus, [8] that it is somehow going to displace all this coal in China. It will be useful because it reduces their need for pipeline and LNG imports. That is the real benefit to me of China being able to fully commercialize shale gas technology. In my view this profile is the more reasonable one. China’s own estimates of the resource base is about 15-20 tcm. This is the lower end of it and that is the lower option of resource to reserve ratio. I automatically exclude most of what is out in Xinjiang. They simply don’t have the water to undertake any kind of massive fracking operation and it is not like Sichuan, which is flat like North Dakota, where you can just frack every 320 acres and do it everywhere. You should look at a Google map of West Texas and you see it is flat and there is well pad, after well pad, after well pad. You can’t do that in China.
When you talk to experts from China, how is the assessment of the start of the shale gas production? It seems so far the National Oil Companies are not that willing to start developing shale gas in China. They seem more focused on conventional production.
In my experience, China never wants to be left out of a technology development, particularly if they are not the ones who developed it. You have a similar debate in the power sector for example, where people on the climate side will argue we have to do carbon sequestration using Integrated Gasification Combined Cycle (IGCC) technology [9] for the power sector, which is if you are going to do carbon sequestration the best way to do it pre combustion. But they don’t have license and technology patents on most of the technology used in the IGCC and in carbon sequestration, so they are dabbling in it and have little pilots. They have quite a few and they cooperate with the U.S. but the people in the power sector themselves say no. The ultra-super critical power plants technology, [10] which is almost fully domesticated in China, achieves 46-48% efficiency on generation, and is seen as more effective at reducing the growth of carbon emission than using IGCC and the sequestering part of it. A combined cycle power plant could reach 45-48% efficiency, but once you glam a carbon sequestration module on an IGCC cycle, then the efficiency of the power generation drops to the equivalent of about 25%. This is because you have to use so much of the energy produced by the plant to run the sequestration part of it, that in the end you end up having to build more power plants and mining more coal to offset the loss to society, if the electricity is not being used to run the sequestration.
Thereby both sides have a point, except that when it comes to technology and technology commercialization, the ultra-super critical people are dominating. Indeed, China’s own role-out in the power system, which has been quite impressive so far with shutting down the worst stuff and moving up into super-critical and ultra-super critical, that delivers more carbon impact than trying to roll out IGCC, is expensive, unproven and no one else has it commercially running. Nevertheless, China wants to be part of it. It is the same with hydraulic fracturing. China can do it but they can only do a few stages, not the whole multistage fracturing that is common here. They genuinely don’t have the geology for it either, they lack smart drilling rigs and they don’t have the management and the density to drill four wells off a single pad, as they are doing in North Dakota. Subsequently, there is a lot of elements of improving fracking that their own industry like Sinopec or China National Petroleum Corp. (CNPC) would benefit from. But it may not be all oriented towards shale gas. 40% of China’s conventional gas resources is tight gas and they are already doing fracturing for that. To give an example, tight gas is the gas that supplies Beijing. Shell for example has worked with them on this. Mastering those techniques of horizontal drilling and hydraulic fracturing has more applications than just putting it all into shale development. China considers tight gas conventional, in this country it is considered unconventional. China does however distinguish shale gas from other gases as a resource. The oil companies themselves are not that enthusiastic about putting all this expense, time and money into shale. A single well there – without development, production, cleaning, transportation and all that – costs as much as the gas delivered from Turkmenistan to Xinjiang. At this stage, this gas is not a good substitute as a less expensive domestic form to a more expensive foreign form. The oil companies are not that thrilled about it. They have a lot of conventional tight gas to exploit cheaper than those shale deposits and they have coalbed methane (CBM), which has been kind of retarded in its development due to a monopoly situation the government put over it. However, then they brought in CNPC and have created fairly aggressive targets. Another argument among oil companies is, that it would be cheaper to go after the CBM instead of shale gas. There are also a lot of questions about management issues, especially regarding land ownership. Furthermore, in China the risk is that the enthusiasm about shale gas development is faster than the environmental regulations for it. The Ministry of Environmental Protection (MEP) is in charge with developing environmental regulations for shale gas development but they will be several years off and meanwhile they are drilling, producing dirty water and so on. Tight oil does not have much future in China, so on the conventional crude oil side they are stuck on imports. On the gas side, there is some potential: CBM and shale gas. Neither can be produced in the volume and in the time frame needed to do much except offset imports. To me that is the greatest security benefit of it: it simply adds to domestic supply and can potentially reduce import dependence but certainly not on the oil side, only on the gas side. And gas is already such a small proportion of their energy mix. Overall on the margin any kind of gas interruption from Turkmenistan or LNG market problems would hurt but it would not be devastating.
When we spoke to an Economist from the Energy Information Administration, he brought up the issue of water. He told us that for China the problem is not water, you find ways to get the water where you need it. He said the issue is more how to clean the water afterwards. How do you see that?
17% of the electricity used in the entire state of California is to deliver water to people’s tabs. That includes the canals that send the water south. The pumps that send the water off the mountains into L.A. use 10% of the electricity in this state. One cubic meter of water weighs one ton. And moving one ton one kilometer is a physics problem of how much it would take. One thing about economists is they don’t quite understand that money is essentially infinite. There is no limits on money, our government demonstrated that by printing at least $6 or 7 trillion out of nowhere in the last few years. But energy and resources are finite. There is a different concept that I prefer to use to look at these kinds of questions and that is not whether or not they can make it economic. It is energy return on energy invested, the ratio between the amount of energy that is required to actually extract a unit of energy and the amount of energy contained in that unit that you extracted. Generally speaking, if that ratio is 1:1, you don’t do it. It is like you are a farmer who grows only enough food to feed yourself and to save seed for next years crop. That is not a successful venture.
It is even less successful, if you get less energy out than you put in. Once you start summing up the transportation of millions of tons of water over distances for fracking – I am bringing it up again because China’s shale plays are generally much deeper than the U.S.’s and the question is, if cleaning it would use more energy than you are getting out of the gas that you are producing from the ground. If you are, than it is an irrational choice to do it. We have ways to hide that irrationality through fiscal policy and we do it all the time. About 23% of the oil produced in the U.S. are from stripper wells and those are the little nodding donkey things you see. They may produce by definition less than 10 barrels per day but the energy required to build and run them, to maintain them and to decommission them is more than contained in the oil they produce. [11] So why do we do it, as it is irrational? Because we have this thing called the Oil Depletion Allowance [12] where we subsidize people monetarily for using more energy than the value of the energy that they are getting out. Because as a society we value liquid fuels more than we value solid fuels or gaseous fuels. We are willing to subsidize the production of a liquid fuel by providing coal-based electricity to run the motors. We do the same thing with ethanol. Ethanol energetically is irrational. But it is made financially profitable certainly for many years by the blending subsidies that we provided.
I am a little skeptical of saying that China will just bring the water out to Western China to exploit Xinjiang. It is true that there is ground water in many places. But we already have a situation, an example is Inner Mongolia, where they built this coal liquefaction plant and the lack of water in Inner Mongolia is quite pronounced. [13] They ended up building a 35 mile pipeline to bring water in to the plant because it requires about 10 to 12 tons of water to produce 1 ton of liquid output from a liquefaction plant. They planned the pilot at 1 million tons and the pilot was going to be expanded to 5 million tons and then to 20 million tons but the government has pretty much put a moratorium on that because of the water situation. Northern China is extremely water stressed and critically water short. And certainly regarding surface water availability I noticed that the Ministry of Environmental Protection just a few weeks ago said that 24% of China’s surface water are unsuitable for any use at all. The water issue deserves a little bit more of an in-depth look.
What do say to the argument that coal uses about the same amount of water or even more water than shale gas?
Coal is very water intensive but less coal production than thermo power plants. The water use in thermo power plants is the single largest use of water in this country, industrial water use not agricultural. I am almost certain that this is the same case in China. The Woodrow Wilson Center’s China Environment Forum and Jennifer Turner [14] – Mrs. Water – are developing a research program jointly with us on the Energy-Water nexus and we are looking to Jennifer to help identify the water experts in China as we already have the energy side down. It is a two-year project and we are looking at the water implications of China’s energy development and overall development plans. There is no doubt regarding the water use, except that the shale production is not backing out coal. Even if production would be at the highest estimate, it would only be equivalent to 10% of coal production today. That is not a massive backing out of coal use, it is not a climate changer. To say that it is one for one to close down a coal fired power plant is naïve. So I don’t think it is a water saver by fracking as opposed to using coal. Even if you used fracked gas to generate power you still need to use water for the cooling tower. You have got the double use of water – having it contaminated from the fracking itself and used within the power generation if that is what it is used for. It is however important to keep in mind that China does not devote most of its gas today to power generation, it is mainly for industrial and commercial use. Every fossil fuel has a water footprint, but claiming that coal is somehow worse is avoiding trying to understand what potential role shale gas might play in China.
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. Renewables
If you say that ethanol is irrational, how do you assess any investment in wind and solar energy, given how much output comes from it?
Currently, using the same metric, for a typical Vesta windmill, a mega watt size in the North Sea off Germany, returns close to 30 times the energy than is used to manufacture, maintain and decommission that windmill. That is a very positive return. It is on par with something like natural gas or coal and it is higher than coal in China, in terms of energy return on energy investment. Solar is more of a mixed bag. Currently if you look from a single technology point of view like photovoltaic (PV) panels or something like that, it may return 10 times the amount of energy used to produce the PV panel, install it including the additional inverters and such equipment. There is a recent study on the Spanish solar system, which pretty much collapsed, where they didn’t do it bottom-up but looked at all the contracts that were entered into for purchase, land, water and rents, were they found that the return is lower than 10, maybe 5 or 4. To me if you are going to make your energy choice, don’t use money. Use a physical measure. The problem with solar and wind is intermittency. And the problem with intermittency is that we have no way to store energy. Battery technology is enormously limited and so in absence of a way to store it, we have to think of alternatives.
Currently however, anywhere in industrialized economies, we expect energy to be delivered. We let the supply follow our demand. In a renewable world we have to think about having our demand follow our supply. In other words: if you get up at 3 o’clock in the morning and flip a switch, there just may not be juice for you then. People don’t examine the assumptions they are using when they are thinking about these questions. The assumptions most people use is that the world in the future must be exactly like the world today, where we have infinite consumption and an economy that must grow exponentially every single year. The economic measure that we use is a measure of consumption. So basically we are setting ourselves up to fail by creating ourselves an economic system that must grow exponentially forever. You know what happens if that number hits 0 or -1 in a world of finite resources. People intellectually can somewhat say that makes sense, but emotionally they can’t handle it. I was at a conference in Napa and I said if you go to any scientist around here and ask if anything can grow exponentially forever, then they say of course not, it is absurd, the universe is not that old. But if you ask whether the economy can grow exponentially forever, they say it has to. We don’t seem to fully grasp the contradiction between what we grasp in the world of mathematics and physics and what we desire in terms of this system we have created around ourselves.
In Germany we have short distances, getting the electricity to our homes is not that big a challenge, while in China many wind mills are in provinces far away from the main consumers. Do you see this as an additional problem for China?
Right now in aggregate the transmission distribution losses in China are on the order of 7 to 8 %, it can be much higher if it is to a remote area, it can be much less if it is just distribution within a city. Their strategy is twofold: they have this smart grid plan that is very different from our smart grid plan, which is really to implement high voltage direct current AVDC lines connecting the intermittent sites like solar in Xinghai or wind in Inner Mongolia with the hydro resources of Southwest China, to use Southwest China essentially the way Germany uses Norway or Denmark uses Norway. [15] The Norwegian reservoirs are the battery that offset the intermittency of Danish and German wind and so when you have surplus it gets stored behind there and it is released and sent back from Norway when needed. That is essentially the simplified way China deals with these renewable resources, integrated into a national grid. However, they are doing it very traditionally.
They are doing it traditionally the same way we are doing it, which is big, integrated, centralized, complex, expensive and vulnerable. There are two big schools of thought about how to approach a renewable energy future. One is big, integrated, centralized, complex, expensive and vulnerable, where we have grids starting in Wyoming that run to Texas, that connect to Florida. Far beyond the technical level that we achieved today. Then there are those arguing we should rethink all of this to a system where a locality may rely on local production and distribution of the kinds of resources that it has available. For example, in coastal California wind and solar are abundant. There is no reason that we could not have city-driven utility, city-sized grids that just provide for local use and tie in with household systems, create islanding, have perhaps fuel-cell backups. There are many options of creating a grid to provide electricity. That is however not sexy to engineers and companies who want to build big, own assets, attract investors and receive big returns. So even though we have introduced the idea of distributed generation to China, there is a project going on, where they are going for big, centralized, complex, expensive and vulnerable. The politics of power generation in China is fascinating. State Grid is powerful, [16] and State Grid often times gets what it wants. But they are not the people who are responsible for the proliferation of solar water heating on buildings in China. China has more installed solar water heating than anywhere else in the world combined, which is an impressive achievement. Now we are working with China on how net 0 energy buildings could be rolled out, but that is the Ministry of Housing and Urban-Rural Development (MOHURD), not State Grid. You can be sure that one of the first obstacles will be that when you have embedded solar panels on the side of the building, State Grid is going to complain about the stability of the grid and such these transmission issues.
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Thank you very much for the interview.
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[1] More about David Fridley at: http://china.lbl.gov/staff/david-fridley.
[2] A discussion on decline rates is available at: http://www.forbes.com/sites/michaellynch/2013/09/02/shale-gas-production-and-high-decline-rates.
[3] More on the work of Arthur Berman at: http://www.almexperts.com/expertsbio/Arthur-E-Berman-Director-Labyrinth-Consulting-Services-Inc/15993.
[4] http://www.sec.gov/News/PressRelease/Detail/PressRelease/1365171484002 – .UzQlB14WmWE.
[5] U.S. President Barack Obama also mentioned natural gas during his recent State of the Union on January 28, 2014: http://www.whitehouse.gov/the-press-office/2014/01/28/president-barack-obamas-state-union-address.
[6] The U.S. Energy Information Administration offers a definition of the different concepts on their website: http://www.eia.gov/tools/glossary/index.cfm?id=R.
[7] The potential of shale gas for China has been in Scientific American on January 27 by David Biello: http://www.scientificamerican.com/article/can-fracking-clean-chinas-air-and-slow-climate-change.
[8] More on Richard Muller and his work on Chinese shale at: www.chinashalefund.com.
[9] An overview over this technology is provided by the MIT: http://sequestration.mit.edu/pdf/LFEE_2005-002_WP.pdf.
[10] The World Coal Association is furthermore providing an overview over the efficiencies of the different coal combustion technologies: http://www.worldcoal.org/coal-the-environment/coal-use-the-environment/improving-efficiencies.
[11] More on the production capacity of stripper wells: http://www.netl.doe.gov/research/oil-and-gas/stripper-wells.
[12] http://www.irs.gov/publications/p535/ch09.html.
[13] http://www.circleofblue.org/waternews/2011/world/water-needs-curtail-chinas-coal-gasification-for-fuel-yet-conversion-to-chemicals-pushes-ahead.
[14] More on the work of Jennifer Turner and the Circle of Blue at: http://www.wilsoncenter.org/staff/jennifer-l-turner and http://www.circleofblue.org/waternews.
[15] http://jointdeclaration.org/motivation/norsk-norges-indirekte-lagring.
[16] More on the largest state-owned electric utilities company State Grid: http://www.sgcc.com.cn/ywlm/index.shtml.
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