| December 16, 2013 | | | | |  | | | 2014: Innovate or Rot | | | - Another year, the same quandary… Hrm... which will prevail: rot or innovation? A closer look...
- Then knock, knock… Who's there?... It's China, we're looking for your best oilmen...
- Plus, Byron King on the North American 'shale galev'… U.S. drilling technology and know-how… and why the Chinese are planning to cash in on it…
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 We begin today with a familiar quandary...
A year ago as we moved into "forecast season," we were already marveling at a stark contrast. On the one hand, we have the fetid rot in government and fraud in the financial system… on the other, the staggering entrepreneurial potential lying in wait due to an explosion in computing power and rampant technological innovation.
The problems from the 2008 crisis still hang over the United States economy like the sword of Damocles. Yet we still can't deny how the "shale gale" of U.S. energy production has revived dusty Texas towns and hollowed-out Rust Belt cities.
For months, we've been thrashing our way through this glaring contradiction. We hosted our 2013 investment symposium in Vancouver around the theme. "A Tale of Two Americas" we called it.
Since the event in late July, our search for clues has only picked up in intensity.
Today, the imbalances left over from 2008 are becoming even more unbalanced. The Fed's balance sheet now stands at $4 trillion. The personal savings rate is still below 5%. The national debt continues to balloon -- the latest number stood at an unfathomable $17.2 trillion.
Yet last year, we couldn't help but admit the huge swell of medical breakthroughs in both the personalized and regenerative medicine space that put longer, healthier lives just within your reach. And now after 80 years, American innovators -- via private equity crowdfunding -- are about to access a massive $300 billion source of capital previously locked away.
| Will entrepreneurs and innovators lead us from the wilderness into a new age of prosperity? | The biotech industry will see certain companies flourish. New household names will undoubtedly be thrust upon us as quickly as Twitter and Bitcoin.
Using technology developed to gas and oil fields in the United States, a new shale gale is blowing up on foreign shores too.
Today, the question remains as it did a year ago: Will entrepreneurs and innovators lead us from the wilderness into a new age of prosperity? Or will the dunderheads in Washington -- and those greedy bankstards on Wall Street -- get it wrong one last time and take the whole system down with them?
With this cheerful conundrum as our backdrop, we begin our week of 2014 forecasts.
[Cheap smile and a wink.]
China is as good a place to kick us off as any. Today, a handful of resourceful American companies are aiming to rake in the lion's share of a $3.4 trillion shale bonanza -- in China. We call it the "shale gale 2.0."
"China has considerable shale resources on paper," explains the Brookings Institution's Erica Downs. "According to the U.S. Energy Information Administration, China's technically recoverable shale gas resources are the largest in the world (and almost 50% greater than those of the U.S.), and its technically recoverable shale oil resources are the world's third largest (behind Russia and the U.S.)."
The Chinese government plans to pump $318 billion into the sector through 2020 according to some estimates. They have a slight problem, though.
"The Chinese lack the technical expertise to recover their oil quickly or efficiently," explains our own Bryon King, "having never employed modern fracking techniques on a grand scale."
Hmmn… whom could they possibly turn to?
Read on…
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| | | | The "Shale Gale" and the "Shale Monsoon" | | | | by Byron King | | | Good news keeps rolling in for America's booming shale plays.
Last week, the U.S. Energy Information Administration (EIA) released a report describing how the Marcellus Shale region is on track to supply 18% of total U.S. natural gas production in December.
Let's take a look at two important charts and examine how North America is changing the world…
Production in the Marcellus shale is booming. Here's the first chart.
Basically, more and more "takeaway capacity" has come online in the past year. This is despite a flat rig count, according to data from Baker Hughes. In other words, the same number of rigs are drilling more wells. That comes with improved learning curves and better efficiencies based on experience in the field.
As things stand, Marcellus gas output exceeded 13 billion cubic feet per day (bcf/d) in November and will top 14 bcf/d in December. Based on wells already drilled and ready to tie into the distribution grid, expect to see over 400 million cubic feet per day (mmcf/d) of additional "new" gas coming online from December to January.
What's the secret? First, it helps to have reasonable government policy. Overall, the state and (most) local governments in Pennsylvania, West Virginia and Ohio have been open to shale energy development — unlike in New York, where the legislature has imposed a moratorium in order to "study" the issue. (Study it to death, I suspect.)
Thus, with a fair set of rules and regs, more and more PA-WV-OH operators have leased land and drilled wells, gaining valuable experience and delivering hydrocarbons.
Now we're several years into the play. We've reached the point where output from new wells is growing fast. In terms of engineering and well building, operators are drilling longer wells — called "laterals" — and adding more down-hole production sections, called "frack stages." This is delivering more output from more stages, in longer wells.
Data from EIA indicate that production per well in the Marcellus will pass a new milestone this month. Each well averages about 6 mmcf/d, on track to bump up toward 6.2 mmcf/d by January. Here's the chart:
Meanwhile, more pipelines and processing facilities are coming online –I like MarkWest Energy (NYSE:MWE) in this space. These new systems enable formerly shut-in wells to come online, while increasing overall production that feeds the marketplace.
At the cash register, "more gas" has pushed the average price down. By one key metric, the forward price of natural gas at the Columbia Gas Transmission Appalachia hub ($3.93 per mcf) is now below Louisiana's benchmark Henry Hub price ($4.00 per mcf). | | | | | | |
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Find out what these 2 words are, right here, and discover just how you can make them work for you. | | | | | | | | In addition to natural gas, a key driver for Marcellus output is associated oil and other natural gas liquids (NGLs). These liquids come up the well casing with the gas and change the overall economics of drilling. That is, a "break even" gas program becomes a highly profitable gas-oil-NGL program. In other words, oil companies aren't drilling wells in order to lose money. That's not the idea.
I've heard many people criticize new "shale gale" plays across the country. Close to home, I've encountered many Marcellus development critics here in Pennsylvania.
The best of anti-shale critiques include points like "energy return on energy investment" (EROEI) is poor. In other words, EROEI today is lower than in the olden days of drilling classic "textbook" oil formations. Well, yes. That's basically true. Shale fracking has lower EROEI than poking holes into oil- and gas-rich reservoirs with fabulous porosity and permeability. But so what?
Relatively low EROEI doesn't mean that what works right now — directional laterals and multistage fracking in hydrocarbon-rich shale — doesn't work. Clearly, it works. We're getting gas and oil, right? OK, it costs more to drill the new wells than to drill the old wells. Again, so what? Pay up.
Also, critics claim that overall, fracking is too energy-intensive for what you get back. Part of it is that right now, gas prices are "too low." Another way of saying it is that in the big scheme of things, shale development is a flash in the pan. It will all peter out in a few years. It just won't last. Then again, we'll all live long enough to find out, right?
On these last points, we get into all manner of raw speculation over energy and its underlying economics. We know the price of natural gas today. We can look at futures markets for prices tomorrow, next week, next month, next year, etc. But for how long can this new fracking idea deliver the goods? Beats me, but the data indicate that it's working now. The trends look favorable.
| For now, new directional drilling technology — and fracking — is changing the world. | My investment caution here is NOT to dismiss any of the critiques outright. Beware addressing important, complicated issues with a bumper-sticker mentality. When it comes to energy development, you need to stay focused on thermodynamics and classical economics. Follow the iron discipline of physics and math. There's no free lunch. Moving ahead, we MUST keep our eyes open — not to mention our minds.
For now, new directional drilling technology — and fracking — is changing the world. It's delivering energy in immense volumes, as just the new news out of the Marcellus shows — see above. All that and more, across the U.S. and Canada. Soon in Mexico. Perhaps in Europe, and then Africa, the Middle East, South America too.
The energy revolution in North America is changing the world. The shale revolution is delivering energy and feedstock. That's a fact. New tech is delivering product, creating cash flow and providing investment opportunity, perhaps most importantly in China. Fracking technology has its best years ahead of it. It'll last for a while, I suspect — all the critiques notwithstanding.
In fact, China may have the largest energy oil and gas reserves in the world, and nobody knew it until this year. Some estimates put the total value of oil and gas trapped under Chinese ground at a staggering $3.4 trillion.
"That's not a shale 'gale'" commented Addison. "It's a monsoon."
However, there's a catch. The Chinese lack the technical expertise to recover their oil quickly or efficiently. They've never employed modern fracking techniques on a grand scale. So China's leadership is looking abroad for partners to help develop its vast natural resources. China's plans to become an economic and political powerhouse can't succeed at this rate, not unless it begins exploiting domestic energy reserves. So it's opening its projects to bidding from the best of the brightest of Western oil and gas and service companies. That means, along the way, it's all going to be investable.
Already, four international service companies are onboard. China is putting hundreds of billions of dollars on the table, guaranteed revenue for whatever companies can do the job. And just like with the U.S. shale boom, the early birds will get the biggest piece of the pie.
It could be the story of next year… I'll keep you posted. In the meantime, I hope you'll take a look at some of my other predictions for 2014 right here.
Regards,
Byron King
for The Daily Reckoning
P.S. My publisher, Joe Schriefer asked me to remind you about the live webinar he's hosting tonight. He's going to show you live how you can generate $450 in under five minutes. It doesn't cost a penny to watch and you don't need to make a commitment. Joe just asks that you register here beforehand at this link. | | | | | | | | |  Byron King is the managing editor of Outstanding Investments and Energy & Scarcity Investor. He is a Harvard-trained geologist who has traveled to every U.S. state and territory and six of the seven continents. | | | | | | | | | BE SURE TO ADD dr@dailyreckoning.com to your address book.
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