Commodities Obey Supply and Demand (It’s a Law)

As I have traveled to AAPG conferences during the past year-and-a-half I have been impressed by the number of symposia on shale gas.

I am not struck by the fact that they are held, but rather by the fact that they have all drawn capacity crowds. It is as if 80 percent of our members are working in shale plays or, at the very least, expect to be working in shale plays in the near future.

The most recent of the conferences to feature a session on shale gas was the recent European Region conference in Kiev, Ukraine (see related story, page 39). The interest in shale gas plays is certainly high in Europe, but since the surface owners typically do not own the minerals in Europe, the sight of a drilling rig is much less appealing to the farmers.

As strange as it may seem, I also have been struck by the similarity of the shale gas play to dairy farming. I will stipulate that I personally have not been involved in dairy farming since my youth, but the basic technology and the economics have not changed much in the last 40 years.

Both industries require a substantial capital investment, are labor intensive and are seven-day-a-week operations. The products of both industries are sold at posted prices, and the laws of supply and demand govern the magnitude of the posted price. Therefore, in both markets, there is a penalty for success. The greater your success, the more product you make available to the market – and the lower the price is likely to be.

Both industries are dominated by large corporations, but there is still room in each of them for the small independent.

Depletion is a significant factor in both industries. As the means of production age, the volumes decline.

While dairy farmers do not have the luxury of shutting in production until the price improves, they do not face the need to invest additional capital with the inevitable result of increasing supply in order to maintain their acreage position.

There is nothing unique about milk. Any natural resource is subject to the laws of supply and demand. The exception to that rule may be diamonds, where the supply and price seem to be fairly well controlled.

Before you fire up the computer to send me an e-mail noting that prior to 1973 there was a limited natural gas market and the market price of oil was essentially controlled by the Texas Railroad Commission, I will grant that, at the very least, crude oil market forces were substantially constrained prior to 1973. The entire energy industry experienced a major change in 1973. Texas was able to influence crude oil price prior to 1973 because approximately 38 percent of the U.S. oil production from 1935 through 1970 came from Texas.

For those of you outside of Texas who wonder what a Railroad Commission has to do with oil and gas production, the Texas Railroad Commission was established in 1891 to regulate – as the name implies – railroads. However, in 1917 they were given jurisdiction over oil and gas pipelines, and in 1919, they were given jurisdiction over “the conservation of oil and gas, forbidding waste.”

In 1920, the production and sale of natural gas in Texas was deemed to be a public utility – and the Railroad Commission was given jurisdiction.

As they say, the rest is history.

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President's Column - David G. Rensink

David G. Rensink, AAPG President (2010-11), is a consultant out of Houston. He retired from Apache Corp in 2009.

President's Column

AAPG Presidents offer thoughts and information about their experiences for the Association. 

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The Tarim Basin is one of the most important hydrocabon-bearing evaporite basins in China. Four salt-bearing sequences, the Middle and Lower Cambrian, the Mississippian, the Paleogene, and the Neogene, have various thickness and areal distribution. They are important detachment layers and intensely affect the structural deformation in the basin. The Kuqa depression is a subordinate structural unit with abundant salt structures in the Tarim Basin. Salt overthrusts, salt pillows, salt anticlines, salt diapirs, and salt-withdrawal basins are predominant in the depression. Contraction that resulted from orogeny played a key function on the formation of salt structures. Growth strata reveal that intense salt structural deformation in the Kuqa depression occurred during the Himalayan movement from Oligocene to Holocene, with early structural deformation in the north and late deformation in the south. Growth sequences also record at least two phases of salt tectonism. In the Yingmaili, Tahe, and Tazhong areas, low-amplitude salt pillows are the most common salt structures, and these structures are commonly accompanied by thrust faults. The faulting and uplifting of basement blocks controlled the location of salt structures. The differences in the geometries of salt structures in different regions show that the thickness of the salt sequences has an important influence on the development of salt-cored detachment folds and related thrust faults in the Tarim Basin.

Salt sequences and salt structures in the Tarim Basin are closely linked to hydrocarbon accumulations. Oil and gas fields have been discovered in the subsalt, intrasalt, and suprasalt strata. Salt deformation has created numerous potential traps, and salt sequences have provided a good seal for the preservation of hydrocarbon accumulations. Large- and small-scale faults related with salt structures have also given favorable migration pathways for oil and gas. When interpreting seismic profiles, special attention needs to be paid to the clastic and carbonate interbeds within the salt sequences because they may lead to incorrect structural interpretation. In the Tarim Basin, the subsalt anticlinal traps are good targets for hydrocarbon exploration.

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The gas transport in organic-rich shales involves different length-scales, from organic and inorganic pores to macro- and macrofractures. In order to upscale the fluid transport from nanoscale (flow through nanopores) to larger scales (to micro- and macrofractures), multicontinuum methodology is planned to be used.

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