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Fracking economics

Fracking economics spells bad news for Britain

The popular narrative put out by the fracking industry (or at least that part of it that makes money selling worthless paper to fools) is that technological developments caused a dramatic fall in the cost of fracking to the point that even with oil prices (which gas prices follow) below $50 per barrel shale oil and gas could be recovered profitably.

It is no doubt this propaganda that has informed the UK Tory party decision to gamble Britain’s future on an all or nothing dash for shale gas.

However, there is good reason to be cautious.  The impact of technology on fracking has been wildly overstated.  In fact, almost all of the cost reductions came from a fire-sale type of response to the 2014 fall in oil prices that saw a serious decline in activity coupled to massive layoffs.  The cost of skilled labour and supplies plummeted, allowing the relatively few remaining frackers to lower the cost of doing business.

When it looked like the price of oil was going to drop below $30 per barrel, analysts in the USA feared that the fracking industry was doomed.  However, following the Russia-OPEC deal to limit oil production, prices have returned to $50 – a level that allows profitable fracking in the most advantageous of the US shale plays, such as the Permian basin.  However, the new drilling came at a cost.  As we reported in February, fracking is only cheap so long as we don’t actually do it:

“Denver-based Lilis Energy… recently hired a contractor to drill two wells at a cost of $13,900 per day per rig. Two months later, CEO Avi Mirman said Lilis couldn’t contract a rig for less than $16,000 a day…

“When Lilis solicited bids to frack wells recently, quotes rolled in at about $2.2 million. When it came time to execute two months later, the cost had surged nearly 50 percent to $3.2 million.”

A month later, Christopher M. Matthews and Erin Ailworth at the Wall Street Journal were reporting that:

“The market for sand—a key ingredient in fracking—is surging once again as U.S. oil production rebounds, and the rising price of the tiny grains threatens to cut into energy companies’ profits.”

According to the report, the price of a ton of sand had been driven up from $15 in 2016 to $40 in March 2017:

“Some predict that demand for sand may outstrip supply by next year, creating a shortage that could linger for most of 2018. Tudor, Pickering, Holt & Co. estimates the sector will need 120 million tons of sand by next year, more than double the demand in 2014 at the height of the U.S. drilling boom.”

Nor is sand the only fracking commodity that is in short supply.  In September 2016, Katherine Tweed at Green Tech Media was raising concerns about water scarcity:

“Eventually… the use of available water for fracking could reach a tipping point that would put even more pressure on gas companies. In some water-stressed areas in the U.S., fracking can use up to half of local water supplies, which often pits the energy industry against agriculture.”

These rising costs, however, pale into insignificance when compared to the rising cost of skilled labour.  As Joe Carroll  and David Wethe at Bloomberg report:

“A [fracking] crew typically consists of 25 to 30 workers who operate a huge array of powerful truck-mounted pumps, storage tanks for fluids and sand, hoses, gauges and safety gear. Fracking, which involves pumping tons of water, sand and chemicals into a well to smash open the surrounding oil- and gas-soaked rock, is the most expensive part of drilling a well, usually accounting for about 70 percent of the total cost.

“Now, with the price of oil settling at around $50 a barrel, shale drillers are once again gearing up in areas such as the Permian Basin, where break-even costs are as low as $30 a barrel. The result: rising competition for workers and equipment, which means higher costs. Fracking companies are now charging 60 percent to 70 percent more than a year ago as explorers engage in bidding wars to lock up crews.”

If this is bad news for US energy companies, it spells disaster for anyone in UK who is still foolish enough to gamble on fracking.  The geology and social geography of the British Isles mean that it is highly unlikely that profitable gas can be recovered at today’s prices when – at least in theory – British frackers still have access to a portion of the supplies and labour required to do the job.  But prices any higher than they are today would see big increases in US fracking to the point that any spare capacity would be rapidly depleted by a US industry that is well placed to out-compete anyone on this side of the Atlantic.

In the absence of a developed domestic fracking industry with its own pool of skilled labour and specialist supplies, Tory energy policy is simply not grounded in reality.  For the UK, there is no goldilocks zone in which fracking can be done profitably.  Too low a price and companies will not be profitable; but too high a price and companies will not be able to secure the labour and materials to do the job.  Either way, in the absence of a sane energy policy, Britain is more or less screwed.

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