Tuesday, October 30, 2012

Selling Shale Gas by Tom Wilbur

[Although vividly described in this book, see Josh Fox’s movie Gasland for what is perhaps a more accessible view of the unchecked corporate exploitation, deceit, recklessness and destruction of the Shale Gas Industry as it plays out on the ground among small stake-holders and by-standers in Pennsylvania, New York, West Virginia and Ohio.]

The international rush into America’s shale boom was accompanied by renewed questions about its economic sustainability. At the end of 2011 the USGS estimated the Marcellus Shale deposits to hold 84 trillion cubic feet of gas rather than the 410 trillion cubic feet estimated by the U.S. Energy Information Administration (EIA). Production from initial wells coming on line through 2011 remained strong, but revised numbers underscored talk that Marcellus wells might taper faster than expected. In addition, a week prior to the USGS announcement, New York Attorney General Eric Schneiderman began an investigation into whether companies accurately represented the profitability of their wells in the Marcellus. Range Resources, Cabot and Goodrich Petroleum Corporation received subpoenas for documents detailing formulas used to project how long wells can produce gas without additional hydraulic fracturing. The Securities and Exchange Commission was also investigating how energy companies calculate and publicly disclose the performance of their shale gas wells.

Combined with growing protests against growing environmental destruction caused by the industry, this uncertainty over the longevity and, consequently, the value of shale gas reserve, was a growing public relations problem for the industry. Both industry analysts and government officials downplayed the significance of disparities in federal agencies’ calculation of Marcellus reserves. Philip Budzik, an operations research analyst with the EIA, told Bloomberg that there was still relatively little comprehensive information to draw on regarding estimates: “Layer on that the fact that over the next 30 years, the technology is going to evolve. It will have an impact on our projections. We need a keep a sense of proportion here.” The same report offered this perspective from Kevin Book, managing director of ClearView Energy Partners, a policy analysis firm: “One fifth of a big number is still a big number. . . It shouldn’t tell you anything about your conclusions. It should tell you what you need to know about estimates: they get revised.”

The proof of estimates about the size of shale gas reserves, as one industry representative told me, ultimately would play out with drilling results; and at the end of 2011, they were looking good. So good, in fact, that a market glut was inevitable without an easing of production or a surge in demand. With all the capital in play, an easing of production was not a likely option. In other words, a big push to produce America’s shale gas would necessitate a big push to sell it.

Working with the heads of others in the industry the C.E.O. of Chesapeake Natural Gas outlined plans for such a market push. Chesapeake would divert 1 to 2 percent of its forecasted annual drilling budget away from production and put money towards projects to stimulate demand. This amounted to some $1 billion over ten years to support infrastructure, such as fueling stations for natural gas-powered vehicles, in order to, in the words of the company’s press office, “reach the tipping point” where manufacturers “will have sufficient confidence to increase their production of natural gas-powered vehicles. The investment would also encourage other “end-use technologies” including the conversion of methane into a liquid fuel that could be blended with diesel or gasoline, or even as a replacement for both of these fuels. To provide a model, the company was converting its own fleet of 5,000 trucks to run on natural gas.

Chesapeake had some powerful allies motivated by similar goals, including the influential energy baron, T. Boone Pickens, founder of Mesa Petroleum , one of the largest independent oil companies. As the shale gas boom became established in Texas, Pickens also formed Clean Energy Fuels, a company that owns and operates natural-gas filling stations and production plants to supply them. When Marcellus prospecting heated-up in July 2008, the eighty-year-old Pickens began a campaign to “wean the country off foreign oil” through aggressive development of natural gas. Pickens, by his own account, spent $82 million over three years promoting these initiatives in “The Pickens Plan” which was delivered to mainstream America through television, newspaper, Internet and magazine news coverage. It advertised natural gas as clean, abundant and cheap. America was depicted as the “Saudi Arabia of natural gas.”

At the time, Tony Ingraffea, a engineer and fracturing mechanics scholar and ecologist and biochemist Robert Howarth, both of Cornell university in upstate N.Y., were just finishing their paper challenging the hypothesis that natural gas was a clean alternative to coal. Their peer-reviewed methodology took into account something that was generally unaccounted for: fugitive emissions from methane released from shale formations during hydraulic fracturing. With these emissions factored into the equation, Howarth and Ingraffea found shale gas extraction was a greater global warming threat than coal mining. Industry reporters characterized these findings as “disingenuous”, “simply not true”, a “Gusher of Hogwash”.

In a series of debates with Terry Engelder, a geology professor at Penn State - which itself had already leased thousands of acres to gas companies - Ingraffea calculated that recovering nearly 500 trillion cubic feet of gas from counties overlying the Marcellus and Utica Shale deposits in Pennsylvania, New York, Maryland, Ohio, and West Virginia would require 400,000 wells – 170,000 in Pennsylvania. At the time, just over 2,000 wells had been drilled, and less than a third of them fracked. All the environmental problems Pennsylvania had been experiencing were but a hint of what was to come. “You’re only 800 frack jobs into a 60,000 frack job experience!”, Ingraffea explained.

Devonian shale formations are typically highly fractured to begin with. When cleaved by hydraulic forces at any given point, the natural system of cracks provided an “flow-network” of gas, not all of which could be captured by man-made systems. Even if the industry could someday “get it right” and eliminate all the spills and leaks that are under their control, the global impact from burning nonrenewable energy would be a net loss. The idea of using natural gas as a bridge to some brighter sustainable energy future was a carefully crafted industry myth, according to Tony Ingraffea: “When are we going to stop kicking the can down the road to our kids and grandkids and suck it up, and solve the damn problem now?”

Nevertheless, a manifestation of the Pickens Plan found support in Congress. House Resolution 1380, commonly known as the Natural Gas Act, would provide a series of tax breaks over a period of five years to trucking companies, vehicle owners, vehicle manufacturers, and fueling station owners. These tax breaks were geared to encourage the transition from gasoline and diesel to natural gas. In the summer of 2011, 108 Democrats and 75 Republicans ( in a typical show of ‘bi-partisanship’) signed onto the bill, which also received encouraging signals from the Obama administration which soon came up with its own plan “recognizing the importance of shale gas development and supporting global efforts to displace oil with natural gas.”

HR 1380 looked like a legislative winner, until it was knocked off track by an opposing political force, nurtured in conservative circles and backed by another tycoon with a fortune staked to energy: Charles Koch. Koch and his brother David, control Koch Industries, a $100 billion privately held conglomerate with major holdings in cattle, timber, and oil. The company is also vested in petrochemical companies, the profitability of which depends on cheap natural gas supplies. The Pickens Plans posed dual threats to Koch. First, it encouraged higher prices with the stimulation of natural gas demand and, second, it encroached on the oil market on which Koch-owned refineries and pipelines depended. Charles Koch went on the attack, casting HR 1380 as an unfair and unhealthy meddling with free markets, a “well-intentioned but misguided suggestion. . . .promoted, in large part, by those seeking to profit politically, rather than by competing in a market where consumers voted with their wallets.” Koch articulated a view supported by editorial writers of the oil trade and financial market publications and conservative political action groups, including the American conservative Union, and Americans for Prosperity (a group co-founded by David Koch).

The Koch brothers were not Pickens’ only commercial antagonists. Using natural gas as both fuel and feedstock, Dow Chemical Company had a hand in manufacturing 3,300 different products, from paints to personal care items, and the company stood to lose if government-subsidized initiatives encroached on its supply of natural gas, driving up its price. Dow alone uses the equivalent of 850,000 barrels per day (approximately the daily energy use of Australia) mostly in the form of naphtha, natural gas, and natural gas liquids.

As HR 1380 circulated in Washington offices, Dow presented its own position paper to the Committee on Energy and Natural Resources in the U.S. Senate. It flatly summarized the downside of attempts to reduce dependency on foreign oil and domestic coal: “The potential exists for demand (of natural gas) to outstrip supply, assuming that fuel switching from coal to gas continues to accelerate and factoring in the proposals by some to displace 25 percent of our oil imports with natural gas.” While the Pickens pitch relied heavily on the foreign oil-dependency theme, the petrochemical industry countered with the promise of jobs, a promise that never lost its appeal given the economic problems of the day.. Access to vast shale gas reserves that made available abundant cheap feedstock and fuel to supply the petrochemical industry, the Dow report concluded, “will provide an opportunity for more than 400,000 jobs – good jobs.” This was the future promised by the natural gas boom, “barring ill-conceived policies that restrict access to this supply.”

The fight pitting Pickens and Chesapeake against the Koch brothers and Dow Chemical was a fight over the rate and flow of shale gas. Chesapeake and Pickens, in the supply side of the business, stood to gain from a broader market. Dow and Koch, on the consumptive side of the equation, stood to lose.

Meanwhile the number of faulty well casings cited by the Department of Environmental Protection continued to climb in 2011, even after Pennsylvania’s new standards took effect in February. During the first nine months, the department issued eighty-nine citations for faulty casings and cementing practices – seven more than for all of 2010 – of Marcellus shale wells throughout Pennsylvania operated by Range Resources, Cabot, Chesapeake, Chief Oil and Gas, Hess, Exco Resources, Williams Production, and XTO Energy. The industry continued to characterize the many problems associated with fracking as exaggerated and irrelevant.

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