Fracking’s future an illusion at best – by David Olive (Toronto Star – February 23, 2013)

The Toronto Star has the largest circulation in Canada. The paper has an enormous impact on federal and Ontario politics as well as shaping public opinion.

Strip away “possible” and “speculative” reserves, add in surging demand and costs, and a century’s worth of resources plunges to 11 years’ worth of supply. The fantasy of “Saudi America” may end up making one of the speedier exits in the history of catchphrases.

As recently as last year, the U.S. petroleum industry was boasting of a new, 100-year supply of oil and gas, mostly from advanced extraction technology — namely, hydraulic fracturing, or “fracking,” of underground rock formations.

The industry’s irrational exuberance migrated to the industry-friendly International Energy Agency (IEA). The IEA predicted in 2011 that burgeoning U.S. oil production would overtake that of Saudi Arabia and Russia by 2020, and that America could achieve self-sufficiency in energy by 2035.

“OPEC should find it challenging to survive another 60 years, let alone another decade,” a giddy Ed Morse, global head of commodities at Citigroup Inc., said of the Organization of Petroleum Exporting Countries in a Bloomberg interview earlier this month. “The U.S. should see its role in the world as a singular superpower enhanced and prolonged.”

Yet while not exactly a hoax, the feel-good news about what The Economist dubbed a “North American hydrocarbon bonanza,” in which Alberta’s undeveloped shale gas and shale oil reserves alone might rival those of the U.S., is at best an illusion.

Strip away the new reserves classified as merely “possible” and “speculative,” add in surging demand as world economies recover, and factor in soaring extraction costs as shale formations are rapidly depleted, and the century’s worth of additional petroleum resources quickly plunges to just 11 years’ worth of new supply.

A more sobering report by the Energy Information Administration, a data-gathering branch of the U.S. Department of Energy, puts recoverable shale-oil reserves in the U.S. Lower 48 states at 24 billion barrels. At the U.S. rate of consumption of 6.9 billion barrels in 2011, that’s a mere 3.5 years’ worth of new supply. And that’s ahead of a dynamic recovery in the U.S. economy and in energy consumption by mid-decade.

Almost everything about this “bonanza” has been wildly misstated. The industry has exaggerated reserves, recovery rates, prices and economic viability. And it has understated the rapid depletion rates typical of shale plays and the runaway capital costs required to maintain production levels sufficient to make debt and lease payments.

We are approaching the end game of yet another boom and bust cycle, no different in kind from the property bubble that triggered the Great Recession. Like that real-estate catastrophe, this bubble was spurred by easy money pushed at start-ups and blue-chip companies alike by Wall Street dealmakers preying on the greedy and gullible.

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