No more hope in Peak Oil Theory
By Mark J. Perry
Despite a growing body of empirical evidence to the contrary,
there is a small, fringe group of energy analysts who stubbornly
promote the theory that America’s shale oil and natural gas
revolution is somehow an unsustainable “hydrocarbon bubble” that is
on the verge of bursting. Comparisons are frequently made to the housing and
dot-com bubbles, although those comparisons have never seemed convincing, since
those were bubbles in asset prices (houses and stocks), which doesn’t seem
to necessarily apply to oil or gas prices, or the energy industry in
general.
The announcement yesterday from the Potential Gas Committee that America’s
supply of natural gas is actually 26% higher than previous estimates – and
enough for the next 110 years at current consumption rates - can
be added to the growing body of statistical evidence that runs
counter to the ”hydrocarbon bubble” theory of the “peak oil”
enthusiasts.
In a recent commentary, Forbes contributor David Blackmon, managing
director of Strategic Communications for FTI Consulting, addressed the
“hydrocarbon bubble” theory and two of its main proponents – David Hughes
and Art Berman. Mr. Blackmon poses the following question in the title of
article “Shale Oil and Natural Gas – Whose Bubble
is Really About to Burst?“, and he starts out by
pointing out that there are “thousands of practicing oil and gas
geologists, engineers and other professionals in the industry itself who, based
on hundreds of billions of dollars in investment in shale oil and natural gas
resources by their companies, obviously disagree with Hughes and Berman.”
Here’s more:
One way to understand the utterly fallacious nature of the position of Hughes and Berman is to review how capital is allocated within the companies who are drilling most of the oil and natural gas shale wells in the U.S. today:
· Most of these companies are large, multi-billion dollar corporations, whose portfolios of potential drilling projects include a variety of unconventional and conventional properties across the U.S. and internationally.
· Investors and Wall Street analysts grade these companies’ performance based on how well the companies maximize their returns to shareholders. These companies have every incentive to fund their most profitable projects first.
· The main factor in determining capital allocation within each company is each project’s anticipated rate of return on capital expenditures, i.e., each project must compete with every other potential project in the company’s portfolio in order to receive funding to be drilled.
· Rate of return estimates are conducted internally by highly educated and intelligent people, mostly engineers and geoscientists, whose livelihoods depend upon making accurate decisions regarding the profitability of their respective projects. These are highly motivated, very sophisticated people, not a bunch of rubes.
Now, if one believes the hyperbolic assertions made by Mr. Hughes and Mr.
Berman, one would assume that no “unconventional” drilling project would ever
be funded ahead of any “conventional” project under such a rational system of
determination. Yet each year, thousands of very smart, highly educated and
motivated professionals at these companies fund many thousands of
“unconventional” drilling projects ahead of other “conventional” projects in
their company portfolios, mainly based on the rate of return they expect to
receive on their capital investment.
So who’s crazy here? Two highly effective self-promoters who love to
emphasize their background as degreed geologists in order to attract media
attention, or thousands of very smart professionals who quietly work their
butts off behind the scenes to make sure their respective companies produce
maximum returns to their shareholders? If there is a “bubble” that’s about to
burst here, it is the nationwide campaign to demonize shale oil and natural
gas, as well as hydraulic fracturing.
No comments:
Post a Comment