Saturday, January 15, 2011

Bull Fork vs Bear Fork Comparison For Fractal Gold

The correction in gold this past week has gold fans trying to gauge its significance. About a month ago I posted on gold's big fractal fork in the road, and this correction is occurring right in the middle of the fork. So let's look at this fork. The two directions gold may take are a bearish path if we are in the 64 month bull market fractal (which ends this month, January 2011), and a bullish path if we are instead in a bigger scale of this fractal and are actually going into the mellow part of the 2nd parabola climb of this fractal. As I pointed out in my fractal fork post, the best way to discern which big fractal pattern we are in is the duration of the downtrend separator of the twin parabolas that make up the structure of this fractal. In gold's case, this downtrend is a little ambiguous as to whether it's the 1 year or less version that accompanies the 64 month fractal or the bigger 2 year or thereabout version that accompanies the larger scale overall pattern that seems to typically run around a 9 year length (plus or minus a year or so). To wit:

Here we see the inards of the larger scale bull-case pattern with the ultimately higher end price for gold with the 1 3/4 year separator. This would suggest a present pullback to about $1280 to a gently curving support area. This also is suggested by some technical analysis I ran across having nothing to do with fractals. Now for the bear fork possibility:

If you interpret the downtrend separator as this sharper, shorter version, it points to the 64 month as being the fractal we are in. The puzzlement with this is why haven't we seen the parabola ending manic spike in gold ? Well, if you subscribe to the popular train of thought that the big money bankers are to blame for suppressing the price of gold and silver to prevent panic over the dollar's problems, you would have to suspect that they were wary of what gold was starting to do late last year and perhaps did a total snuff-out of this spike. This is how the bankers think - Paul Volcker is on record as saying that one of the big mistakes made in the '70s was that they did not "manage" the price of gold better. This would leave us with just the collapse at the end of the 64 month fractal.

Which is the case should become apparent in a couple months or so. Just comparing the other examples of these various fractals, you see that in the shorter 64 month scale, the mid-course downtrend ends and the 2nd parabola starts usually right at around the 3 year mark. In the larger fractal, this usually occurs around 4-5 years. In our present gold bull, the 2nd parabola is starting at the 4 year mark. Even with the shorter downtrend, this puts it at over 3 1/2 years. And the 2nd parabolas tend to begin by overlapping the latter stages of the downtrend consolidations - this produces a disjointed curve in the shorter fractal version. These things, along with the bigger fundamental picture I discussed in the fractal fork post, seem to suggest that it's the bigger fractal that is in play.

But I am giving the smaller version possibility plenty of respect for now. Over the past week, I have done a serious re-weighting, taking a boatload of fat profits in gold to the sidelines for now. This would be prudent even if we are in the mellow early stages of a big 2nd parabola, where we will have typical overbought/oversold phases.

And it gives me an excuse to put more weighting into some good looking emerging sectors I've been lusting for - like agriculture. Some serious price action may be starting there as this food shortage article warns. It's a little melodramatic, but there have been a lot of trustworthy indicators pointing to some agri drama coming soon.

Sunday, January 9, 2011

Natural Gas: The 100 Year Bridge

Google "bridge fuel" and you will see a long list of discussions about natural gas being our bridge fuel to the future. I was using this term about nat gas years ago before it became something of a buzz phrase. Unfortunately, it's not creating the buzz it deserves - yet. Just what do they mean with this "bridge" talk anyway? Well, if you want a literal picture of "the bridge" here it is:

Here we see the cumulative global production charts for crude oil and natural gas up until the early 2000s with the Hubbert calculation for peak and decline. If you add NGL (natural gas liquids) to the natural gas curve, the green line actually forms a pretty even double hump with the oil curve - about 25 years apart. Historically, gas has been a Cinderella byproduct of oil production, but as the geometry of the above chart shows, it is now becoming the belle of the ball as conventional crude passes peak.

Nothing on the earth - solar, wind, batteries, ethanols, or algea - is going to come anywhere near matching the massive scale that natural gas is already providing in the years immediately ahead. This situation alone should cause nat gas to be the #1 alternative fuel consideration. In other countries, it is. But in America, congress and our president are going out of their way to ignore it in their drive to make the USA the global village idiot of energy policy.

I want to look at something that has happened to the bridge above. The chart was made before the advent of shale fracing and the huge reserve increases made from the Marcellus, Haynesville, Fayetteville, Barnett and other shale plays. As a result of this recent development, the 25 year bridge has become what many are calling a 100 year bridge provided to us by natural gas before we have to scale up a fossil fuel replacement team. These plays in North America are only a small part of this reserve addition. Schlumberger and other American drilling giants have developed the drilling method, so it is being put into use here first. But there are many shale areas around the world awaiting development. So globally, it looks as if we may have a big safe bridge ahead of us to develop alternative energy on.

This outlook, however, may wind up being a dangerous illusion. Natural gas drilling and recovery is subject to the same math that oil obeys with regard to net energy discussed in my post Oil: Beyond The Barrel And Over The Cliff. Making a producing horizontal well with intense water fracturing, separation and recovery is a very energy intense way of getting gas energy online compared to the way we used to do it. Even with the old fashioned drilling, we are running up against this EROI wall about now :

This net energy study was done by Jon Friese, a software engineer in Minneapolis as part of his volunteer work with Twin Cities Energy Transition Group. He used Canadian data because they provide much better well data than our energy policy challenged US counterpart does, but by indirect comparison measures, he thinks pretty much the same thing is going on with drilling on the US side of the border. If you consider the "cliff" location to be the 3 to 4 zone of the EROI ratio as shown in my post, this drilling picture has us rushing there in just a few short years. Obviously, we need such a study for the shale drilling, but considering that it is more energy intensive than what is shown, the chart would likely look just as scary.

We have exponential problems we are coming up against long before we reach the end of the 100 year bridge:

Here I graphed what the number of rigs would have to look like on top of the gas production per rig chart as it follows a fitted straight line per past data collected by Baker-Hughes. Just to keep production flat, you have an exponential curve develop as per rig production declines. We will have to come up with new technology and operations that jar us away from this geology induced straight line descent, or we will be forced to punch holes in rock like crazy to meet energy demand. Will shale drilling do that for us?

Despite the vast reserve additions being booked for our natural gas supply, there are real causes for doubt as to whether we will actually see all this energy feasibly produced. Over at the and the Arthur Bermin has an article Shale gas: Abundance or mirage: Why the Marcellus Shale will disappoint expectations where he makes this bearish statement on the nat gas companies:

Shale gas plays in the United States are commercial failures and shareholders in public exploration and production (E&P) companies are the losers. This conclusion falls out of a detailed evaluation of shale-dominated company financial statements and individual well decline curve analyses. Operators have maintained the illusion of success through production and reserve growth subsidized by debt with a corresponding destruction of shareholder equity. Many believe that the high initial rates and cumulative production of shale plays prove their success. What they miss is that production decline rates are so high that, without continuous drilling, overall production would plummet. There is no doubt that the shale gas resource is very large. The concern is that much of it is non-commercial even at price levels that are considerably higher than they are today.
He states that profitability is hard to come by at sub $5 gas, and he is not alone in saying this. An attendee of the Biophysical Economics 2nd International Conference wrote on his blog, about a study of the Barnett Shale made by Bryan Sell comparing a conventional field to the shale field:

Recent studies have shown only 28% of these wells have been profitable, and Sell showed costs per foot drilled in the Barnett at $150, three times conventional well costs. Shale plays also tend to be much deeper than conventional wells, driving up per-well cost. The Marcellus and Haynesville plays are more difficult and deeper than Barnett, and cost per foot drilled is double or more what it is for Barnett.
Sell also had some net energy numbers to report on Barnett:
The EROI went from 84:1 in 2000 to 38:1 in 2007, and overall volume per well had also dropped to half over the same period. This trend suggests another halving in 7 years, a 10% decline rate. Despite initial positive EROI, Barnett will show lower EROI than the conventional PA play in about 10 years time.
If that's the case for all the shales, their EROI chart will look like the one above for conventional gas in just 10 years after they reach the stage of maturity that Barnett is at now - rushing to the edge of the net energy cliff.

Many analysts, including Jim Cramer, have pegged natural gas stocks as a next big thing. But they could be up against a pickle with spending a fortune for oil and other energy input costs to extract a product that is residing at near breakeven pricing with plenty of it on the market already. They may be in a chronic situation where they can mothball capacity to raise the gas price, put a small wave of it on the market until price declines force them back into mothballing again. There is plenty of gas there, but the energy and production costs may be an ongoing dilemma for decades.

I am a great fan of the Pickens Plan for natural gas energy independence for America. And I think natural gas is our best bridge fuel for getting us to the post carbon world. But the bridge may be shorter and shakier for us gas fans than we think.