Among thoughtful friends, it's always good and right to listen and hear an entirely different solution. I'm sure Mr. Adams knows what he's saying. A couple years ago I looked at thorium, and I was involved obliquely in the media circus of Three Mile Island, had the pleasure of speaking to the late Petr Beckmann. In many ways, I'm humbled and happy to have lived in an era of great men and profoundly clever women like the Russian hussy honored here.
In the original post, I mentioned that Americans consume 20 million barrels of oil a day, 7 or 8 billion barrels a year, depending on which war we're fighting where. That's not the problem. The problem is how to increase consumption, to encourage the liberty and prosperity of our surging population of penniless migrants and their soon-to-be ambitious descendants, who will multiply like rabbits. Whether coal-fired or nuclear (or both), we need to expand electric generation to power more homes, schools, factories, offices, hospitals, and water works. I've heard some truly psychotic counterproposals about "saving the planet" and consuming less. Solar, wind, Tesla, and Cash For Clunkers were a cheap opening gambit, billions in subsidies. High speed rail upped the price to hundreds of billions. Now they want to kill off petroleum, with TENS OF TRILLIONS of dollars of capital assets deployed, a gigantic network of reliable industrial installations and equipment used in exploration, production, pipelines, refineries, distributors, retailers, 99.9% of passenger road traffic, and a fleet of big rigs delivering food to grocery stores and restaurants, supplies to Home Depot, WalMart, and Victoria's Secret. Without liquid fuels, Amazon, FedEx, and all government operations screech to a halt.
It strikes me as cruel, in a John Galt sort of way, that U.S. voters might someday elect people stupid enough to outlaw internal combustion engines and compel their constituents to drive lithium firetraps that ignite if wrecked and have to be recharged every 200 miles, assuming that charging stations are available in Frostbite Falls and Petticoat Junction. The U.S. Dept. of Fairness might have to ration amperage, alternate day even/odd plate numbers, recharging only during off-peak hours, unless you're a privileged public servant with an Exempt tag. A "quick" jolt at Charg N' Go might take an hour or two, depending on battery health.
Liquid energy is compact, powerful, available everywhere, and only takes a few minutes to fill up. It liberates 35 million commercial vehicles to go anywhere and work all day -- sales people, plumbers, electricians, carpenters, welders, bulldozers, backhoes, road contractors, ready-mix trucks, front end loaders, dump trucks, tractors, harvesters, school buses, airport shuttles, taxis, limos, ambulances, armored cars, 18-wheelers, and railroad locomotives. Our military is not going to convert its MRAPs, helicopters, F-16s, or patrol boats to run on laptop batteries. Neither will scheduled airlines, fire services, power linemen, or cops.
The "green" transportation pipedream is indulged by people who believe that they can wave a magic wand and create wealth. Enormous, vastly capitalized, competitive industrial titans supply refined petroleum as cheaply as possible to keep you independent, rain or shine or sleet -- a sector that employs seven million skilled American workers, not including auto mechanics and auto parts stores who enable the poor to escape mass transit and maximize their privacy and pride, to relocate for a better job in a safer community anywhere that roads exist. No car, no freedom. All my vehicles have been high mileage 4WD that were serviced cheaply in big cities and dinky villages. The heft and power of an old GMC Sierra enables my daughter to navigate gravel roads, curvy two-lane highways, and city streets, rain or shine.
In a former life, I used to be somebody, ten years of experience in oil and gas exploration as the business manager of a consulting company. We worked for majors and big independents, interpreted seismic volumes measured in terabytes, picked drilling locations, and assessed projects worldwide. I read well logs, reservoir maps, sequence stratigraphy models, paleo and geochem lab reports, production history, etc, and wrote about reserves valuation. During the past few days, I composed the following to explain a few things about domestic U.S. oil and gas production. It took a while to articulate in plain language what's what and why. There are economic, political, and social ramifications to consider. We are resource impoverished, which explains why our military became an expensive, globally engaged World Cop.
U.S. PETROLEUM GEOLOGY
This is a map from 60 million years ago. There was a shallow continental waterway called The Great Basin that slowly filled with erosional sand and silt deposited in low spots. A meteor smashed into the Yucatan and changed the climate (the "K-T" Extinction). In the fullness of geologic time, tens of millions of years, tectonic pressures rearranged and lifted the Rockies higher. There was a great deal of water erosion, more sand and silt and meandering rivers.
Silt settled under coarser sand, and with millions of years of burial heat and pressure the silt became shale, some of it quite thick. The Great Basin is a layer cake with alterating layers of shale and sandstone. Shales have organic molecules that transform with "anoxic" (airless) heat and pressure to become kerogens, precursors of oil and/or natural gas. Buoyant oil migrates up into porous sandstone. A higher, younger shale trapped oil in the sandstone. Hydrocarbon generation is accelerated by igneous hot spots. Recoverable oil columns are determined by thickness of the sand(s), the organic content of the source shale(s), and the subsurface water level. It's not unusual for some water to be produced in an oil reservoir.
Conventional production of oil and gas consists of drilling vertically into saturated sandstone in a "fault block" or a nicely rounded "anticline" formed by elastic compression of the layer cake. Because oil and gas exist at great depth, buried under thousands of feet of rock and dirt that were deposited over millions of years, drilling into an oil reservoir the first time often results in a "gusher." In a natural gas field, there is tremendous danger of a blowout. In 2010, the Deepwater Horizon semi-submersible operating offshore in the Gulf of Mexico exploded and sank when they lost control of a high pressure gas-capped oil well. Hundreds of workers have been killed or maimed in drilling mishaps, quite a few every year to the present day. It is dangerous work, handling tons of threaded steel pipe sections and correctly balancing the pressure of downhole circulating "mud" to evacuate rock cuttings.
Most of the oil and gas plays shown on the Great Basin map were explored and drilled during the past 100 years. Some are kaput as a resource. Believe it or not, there was a spectacular "pinnacle reef" oil play near Detroit and abundant natural gas drilled in 10-acre spacing like a waffle, long before we had seismic surveys. The Southern California oilfield in Signal Hill was drilled so intensively that there used to be dozens of ancient pump jacks on Cherry Avenue, idle and rusting, relics of a dead play. Very large resources in California (Monterey and Santa Barbara) are off-limits by state law and Federal sequestration, never produced.
Cut to the present. The deposits of 60 million years ago haven't changed. There's a limited amount of conventional drilling that still makes sense, in Alberta, Kansas, Oklahoma, on the Continental Shelf, and emphatically in Deepwater Gulf of Mexico -- the largest conventional oil resource in play, produced by multibillion-dollar "floaters" held in a constant sea location through tides, waves, and storms by powerful GPS-controlled thrusters. Although difficult and expensive to exploit, there's considerable undrilled potential in the Deepwater Gulf, thick mature shales and thick sands flushed by the Mississippi River tens of millions of years ago. All the supermajors are involved, and there's an amazing network of pipelines on the Gulf seafloor that pump oil and gas to Houma and Houston. Depending on the economics, it's possible to deploy automated subsea iron to do long term production, so the giant floating skyscraper can be moved to another deepwater drilling project.
However, on dry land throughout the onshore Great Basin, there are lots of Mom and Pop drillers and oil leaseholders who own a few old wells that produce 20 or 30 barrels a day with "nodding donkey" pump jacks that fill a tank to be emptied into a truck once a month or so. Among the shrewd, entrepreneurial Texan drillers, there was a fellow who had a clever idea. He decided to drill a well and steer it horizontally, then push a metal "pig" full of bullets into the horizontal leg to perforate the casing and drain more oil, some of it oozing from shale.
Thus began the horizontal fracturing revolution.
With most of the saturated sandstone already exploited, one of the independents operating in the Denver Julesberg Basin reasoned that they could horizontally fracture their oily shales and a friable chalk layer. They followed up with high pressure water and sand to force larger cracks in the shale and hold the cracks open with chunky sand "proppant." All innovations in the oil business are shared by permit filings and enthusiastic gossip. The price of oil shot to $100 a barrel, a compelling incentive for dozens of small companies to frac. In Oklahoma City another idea was concocted, fracking to produce gas in the Barnett Shale under DFW.
Not much more to be said. There was a bidding war for shale acreage, despite falling prices for oil and gas. Hundreds of millions were invested, then billions raised from share offerings. Horizontal wells in the Bakken initially cost $10 million each, to produce $6 million of oil that wasn't separated effectively, diluted with volatile NGLs (natural gas liquids). North Dakota had no rail terminals, no pipelines to ship product to the Gulf Coast. Some of these economic problems were addressed by creative thinking, and money continued to flow into fracking. There was wall-to-wall hoopla in the Oil Patch press. Valuation firms made fat fees certifying billions of barrels of "proved" shale reserves, counting every acre leased as equally rich (!) Unskilled men tramped to North Dakota and were hired to drive water trucks, handle pipe, and risk their lives, paying $2000 a month to snore on a bunk in one of the "mancamps" that were put up as quickly and cheaply as possible. Prostitution and drugs became thriving enterprises. Sheriffs and Tribal cops worked overtime to fill overcrowded jails and hospitals. Sad ending for a lot of people, especially those fracking shale to produce gas in Oklahoma, Texas and Louisiana. The price of natural gas crashed, shale drillers went broke, shareholders revolted, tens of billions were written off, and there was a high profile executive suicide.
Three big shale plays became profitable -- Permian Basin and Eagle Ford Shale in Texas that produced oil, a stone's throw from refineries in Houston, plus the rich Marcellus Shale gas play in Pennsylvania, operated efficiently in close proximity to Washington DC, New York, and Boston, who were eager to build new "clean" gas-fired electric power plants. Horizontal drilling in the Niobrara Chalk raised expectations in Colorado and Wyoming, and the Dakota Express pipeline project will improve Bakken economics $8-$10 a barrel.
I'm skeptical about triumphant huzzahs, that America is energy self-sufficient. Government people report funny statistics, counting all grades of crude and NGLs as "Total Liquids" with a misleading conversion of gas as Oil Equivalent. We're producing more than we did ten years ago, but if you unpack the numbers, we upgrade tar from Canada, and much of our domestic production comes from Deepwater GOM and dreary Kern County in California. For a time I worked at a news organization. I had to put my hand up to say stop the presses, because they were about to publish exaggerated reserves that a shale operator plumped on the road to an initial public offering. Their goal was a sky high multiple, backed by institutional investors and Wall Street underwriters, everything predicated on being acquired by a supermajor who needed to book the exaggerated reserves. Exxon's acquisition of XTO inspired a $100 billion scramble for US shale acquisitions and joint ventures by Reliance (India), CNOOC (China), Total (France), BG Group (UK), Statoil (Norway), Royal Dutch Shell (NL-UK), BP (UK), Talisman (Canada), Mitsui (Japan), BHP (Australia), and US stalwarts Chevron and ConocoPhillips.
Bottom line. Forget about current Energy Dept stats, true, false or fudged. The future of shale fracking is no different than conventional production. Depletion is a one-way street. We're mining dry the high-priced onshore crumbs of a resource 60 million years in the making.
Private correspondence from a sharp colleague in 2012: "The unique aspect of newly booked reserves from fractured reservoir is how quickly they disappear from the books: 60% to 90% reduction in the first 12 months. So for CHK to just maintain a zero proven reserve growth, they need to drill more wells during that period. Wall Street doesn’t tend to hype a stock that isn’t showing growth. So in addition to replacement wells, CHK has to drill even more wells to show reserve growth. But by drilling those additional wells, they then have to drill more replacement wells for those rapidly depleting wells within the following year."
Check out Google Finance, set the chart to 10 years, and see what happened to CHK.
If you recall, I mentioned that I wrote financial articles about oil exploration and production. For three months in 2010, my weekly column appeared opposite Paul Krugman in an Abu Dhabi business magazine, posted online in English and translated into Arabic for the print edition. They paid me 35 cents a word, which made it worthwhile to sit in a coffee shop and scribble something in longhand, then type it up and send it off. Here's an example of my penmanship that describes how oil and gas deals are often -- uh -- negotiated. Consider that our 4th, 5th, and 7th Fleets are ushering supertankers past adversaries and pirates to deliver oil to Japan, Korea, and Germany, who have none, zero, totally dependent on imports, and to North America from West Africa and Arabia. We're a net oil importer.
EXXON'S $4 BILLION KOSMOS OFFER REJECTED
In October of 2009, I noted ExxonMobil's offer to buy privately-held Kosmos Energy's 24% interest in Ghana's Jubilee oil field. Based on Tullow maps and well data, I deduced that Exxon was using a medium term $100 per barrel price model to determine how much to bid for the Kosmos stake. No surprise, it matched oil forecasts by T. Boone Pickens, Goldman Sachs, and former CIBC World Markets chief economist Jeff Rubin.
Kosmos promptly accepted the Exxon bid, in a straightforward move to monetize their Jubilee asset. They were out of pocket less than $1 billion funded by Warburg Pincus and Blackstone Capital Partners. Exxon's $4 billion offer would give them a $3 billion profit and zero their risk of development and doing business in Ghana. Kosmos previously reduced their risk by farming out stakes to Anadarko and Tullow, who did the actual work of drilling and discovery. Clever little Dallas-based Kosmos had achieved what all E&P "minnows" hope to do -- get a license, bring in experienced operators, then flip it to a supermajor.
Except the wheels fell off and Exxon's offer died.
Who, why, and what killed the acquisition is a convoluted story. It starts at a racetrack in Dallas involving Texas politicians, a Federal class-action settlement, and a silly "monte carlo" statistical reserves head fake that propelled attorney James C. Musselman from obscurity to VIP status at a White House state dinner for Ghana's President John Agyekum Kufour.
Musselman got his start in the oil business as an investor in Triton Energy. He became its CEO in 1998 when Tom Hicks, owner of the Texas Rangers baseball team and chairman of private equity firm Hicks Muse Tate & Furst bought a big speculative stake in troubled Triton Energy. Musselman's job was to pump up valuation and sell the company, which he succeeded in doing in 2001, after reporting an operating loss of $383 million. Hess paid a 50% premium to Triton shareholders to acquire the Ceiba field in Equatorial Guinea. Musselman and his team were deemed geniuses and briefly worked for Hess, until Hess had to declare a $530 million impairment charge and write down 70% of the Triton reserves they paid $3 billion to own.
But that's not how it played in Ghana, nor in Dallas where Musselman and his ex-Triton team founded a new company, Kosmos Energy, in 2003. They were touted as West Africa experts with a new project negotiated by Craig S. Glick, who left Hunt Oil with insider knowledge of the West Cape Three Points block in Ghana. Hunt acquired 2D seismic data totalling 2,225 km and 264 square kilometres of 3D. They drilled and logged two deepwater wells. Those wells were immediately east of the future Jubilee discovery. When Hunt Oil quit Ghana in 2001, the story gets a little bizarre, clogged in multiple layers of state secrets.
Before he became President of the United States, Gov. George W. Bush was co-owner of the Texas Rangers, which he sold to Hicks. After he left the White House, Bush bought a house in the exclusive Preston Hollow neighborhood of Dallas, down the street from Musselman's $6 million mansion. It seems likely that they knew each other in 2003, when Bush met Ghanaian President John Agyekum Kufour in Dakar and urged him to do business with a US partner.
Two of Kufour's trusted associates laid the groundwork for a deal with Kosmos. Dr. Kwame Barwuah Edusei, a medical doctor practicing in Washington DC, and George Owusu, a self-styled Ghanaian oil broker living in Houston, formed a company called E-O, rather hilariously registered at a chicken farm near Accra. Kosmos and E-O entered into a written agreement signed by Edusei for E-O and Glick for Kosmos, covering future exploration, production and other revenue: Kosmos 86.5%, Ghana National Petroleum Company 10%, E-O 3.5%. The agreement stated that Kosmos would carry E-O and additionally pay them $250,000 upfront. Kufour appointed Edusei ambassador to Switzerland in August 2004 (to open a numbered account?) and later appointed him Ghana’s ambassador to the White House. Owusu became Kosmos Energy's Ghana representative. Owusu's Kosmos salary, perks and other graft may have totalled $2 million before he ran afoul of anti-corruption due diligence by Anadarko.
President Kufour, after serving two four-year terms, had to step down in 2009. He and his cronies did everything possible to grease the wheels for Kosmos, Anadarko, and Tullow, signing off on low royalties, 100% off-loading for export, and token involvement of GNPC. President George Bush and First Lady Laura Bush made a 3-day goodwill visit to Ghana in February 2008, meeting all 30 tribal chiefs, promising US development aid, and stumping for Kufour's New Patriotic Party, hoping to upstage and deflate perennial opposition presidential candidate John Atta Mills. In September 2008 there was a gala White House state dinner to honor President Kufour and Kosmos boss Jim Musselman. In Ghana, NPP newspapers and radio stations celebrated their fabulous new oil wealth, thanks to Kufour and Kosmos.
All for naught. Social democrat and former national tax commissioner John Atta Mills was elected president of Ghana by a razor-thin majority, after an odd ballot re-run in a remote rural constituency. His first act in office was to appoint a special advisor on energy policy, Tsatsu Tsikata, long-serving patriarch of GNPC who was put in prison and tried for "causing financial loss to the state" when Kufour came to power in 2000. His trial lasted eight years and Tsikata was pronounced guilty, then pardoned when Mills won the 2009 presidential runoff.
Tsikata flew to Houston and visited Anadarko to pick up their Foreign Corrupt Practices file on E-O and Kosmos Ghana. Then he flew to New York and retained Morgan Stanley as financial advisors. Next on the agenda was a $10 billion line of credit from China. George Owusu's and E-O's assets were seized and Kosmos put under investigation. In 2010, Tsikata flew to China six times, negotiating with CNOOC.
When Kosmos Energy filed a request to sell its interest in Jubilee to Exxon, the new Ghana government's reaction was slow and comical. In due course, the Energy Ministry said, they would vet ExxonMobil and consider their suitability to partner a Ghanaian oil company. But we intend to produce Jubilee gas first, before oil production, because our country needs more electric generation, and we will be working with expert government engineers from Trinidad and Tobago (!) Your $4 billion Exxon deal is imaginary and illegal.
The only buyer Kosmos Energy could talk to was Tsatsu Tsikata.
One more item that I didn't write about, because it was exasperatingly tawdry. I had a big file of oil and gas frauds, involving billions bilked from investors in Canada, England, the U.S., and from China's state-owned flagships. A friend talked me out of publishing an article to shame the guilty, because I might be sued for defamation. The case of SEC v Gurgainers was typical of small scale shenanigans, and shows how common it is for pipsqueak oil and gas promoters to fail with other people's money.
SECURITIES AND EXCHANGE COMMISSION,
STAR EXPLORATION, INC.
JAMES T. GURGAINERS,
STAR GEORGETOWN 1 JOINT VENTURE
STAR MINERAL ROYALTY 1-A, LP
STAR MINERAL ROYALTY 1-B, LP
STAR DISCOVERY, LP
STAR HAMILTON 2 JOINT VENTURE
LAGNIAPPE OIL & GAS LEASES, LLC
STAR EXPLORATION LEASING, LLC
DISCOVERY DRILLING, LLC
DISCOVERY RIGS, LLC
TERRA FERMA OPERATING, LLC
STAR FINANCIAL INTERNATIONAL, LLP
1 AP.COM, INC.,
STATUS REPORT BY THE RECEIVER
$5,227 recovered from the bank accounts of the receivership entities
$5,802 recovered from an insurance company as a return of unearned premium
$35,000 recovered from the sale of James Gurgainers house in Alexandria, Louisiana
(mortgage payments Mr. Gurgainers made on the house using investor funds)
$15,000 recovered from the sale of a 2006 Chevrolet truck
$10,000 recovered from the sale of two Sea Doos seized from Mr. Gurgainers house
(the Sea Doos were purchased with investor funds)
$12,729 recovered from the United States Treasury as a tax refund
With limited resources in the receivership estate, the Receiver has made protection of the
drilling rig, which is the most significant asset in the receivership estate, his top priority. As a
result, to date the Receiver used $30,746 of the monies recovered to pay for insurance on the
drilling rig and $5,000 of the monies recovered to pay for security of the rig.
You know what's worse? W&T Offshore was one of the very best, most diligent, careful and successful operators using jack-up rigs in shallow water near the Gulf coast. A contractor on one of their rigs saw a little accidental spill of 10 barrels while drilling. He filed suit and threw W&T into the jaws of regulators, because "whistleblowers" get paid big money in civil suits, often millions, depending on how deep the victim's pockets are. It crippled W&T for a minor incident that a busy drilling crew failed to report instantly to the Feds. They had other things to do, with a couple thousand feet of pipe in a high pressure formation that kicked twice.
Something else to think about. The world didn't begin 60 million years ago, nor was North America always where we are accustomed to locating it on a world map. It was part of an equatorial supercontinent, joined with Europe, Asia, South America, and Africa -- one giant blob called "Gondwana." When I moved to Missouri, we pushed dirt around to build a house and discovered a snow white sandstone layer -- beach sand that was 400 million years old. Sea levels have changed many times in Earth's geologic history, and shales were repeatedly buried and cooked. There's a shale in Australia that's three billion years old. I mention it to conclude that our best bet for oil in the future is ANWR and coastal California. There's not much future in fracking progressively thinner, less productive Great Basin shales.
I wouldn't be shocked if the U.S. decided it would be easier to invade Venezuela than risk holy hell in groovy Monterey or happy smiley Santa Barbara. Sad situation. The U.S. was the world's #1 conventional oil producer before and after World War II, enabled us to build tens of thousands of ships and aircraft, to mobilize and transport millions of U.S. troops around the world, equipped with heavy weapons, fuel, and food. In 2003, we had to ask Germany and Japan to help pay for the Iraq War. America had joined the ranks of "oil beggars."
There's an old rig offshore Huntington Beach and, believe it or not, an onshore rig covered in tin to disguise it, in Beverly Hills. Together they produce 500 barrels a day, with a 94% "water cut," producing more formation water than oil. New horizontal shale wells in Texas share the same fate -- except they cost more and decline a lot faster than conventional straight holes. Ain't nobody drilling shale to frack it anywhere on this map of known global oil.