The March 6, 2011 edition of Energy Now focuses on the controversy surrounding hydraulic fracturing. Thalia Assuras interviews Ian Urbina, the lead author of the recent New York Times series titled Drilling Down and also hosts a panel consisting of a state hydrologist, a former state official, a gas industry representative and an environmental group representative. Then she watched as two politicians with opposing views argued with and interviewed each other. (That is not exactly fair, but watch the show and see if you see what I mean.)
As regular Atomic Insights readers have figured out, I have decided to invest some time in calling the natural gas industry to task for rushing into a rapidly expanding drilling program without due caution and preventative measures. The industry representative who participated in the panel on Energy Now seemed quite proud of the achievement of a 65% recycling rate for fracking fluids, but there has been a lot of unmonitored disposal on the way to that rate. As impressive as “65% of the fluids are being recycled sounds”, that still means that 35% of the fracking fluid is NOT being recycled.
My response to the current dash to gas is to ask, “Why”? What is the point of a rapid, pell-mell rush during a recession that lowered gas demand to a level lower than the existing supply? Is there really a logical motive for the gas industry to drill so fast that they overwhelm the regulators? It is not like the price of natural gas has been skyrocketing and it is not like there is an easy way for natural gas to be used to mitigate the effects of a rapid rise in the price of oil and gasoline.
The companies involved in the rush are not even making much money right now. Chesapeake Energy, the company that is mentioned several times on the show as a source of the initial funds to establish Energy Now. has been selling off assets in order to reduce its debt load. XTO, the North American natural gas extractor that ExxonMobil purchased for $41 billion last year only contributed $36 million in quarterly earnings to ExxonMobil’s bottom line in the 4th quarter of 2010. That is an anemic rate of return on such a large investment – that is roughly a 1.1% return on investment on an annualized basis.
My suspicious nature, trained by competitive business experience and repetitive analysis of “man’s inhumanity to man” in various works of art as a literature major tells me to look beyond the surface. In an expanded look at the current energy market, one can find out that the low price of natural gas today is having a major impact on the rate at which utilities are planning to build new nuclear power plants. Because I know that every reactor-year of delay inserted into nuclear power plant construction plans yields about $365 million in additional revenue for the natural gas industry, I strongly suspect that the gas rush is a strategic effort engage in a price war designed to slow down the nuclear renaissance.
Rapid drilling increases short term supplies, especially when the drilling is in the form of fracking in shale rock formations. In that kind of well, half of the gas that will ever come out will surface within the first year of the frack completion. I found a bit of supporting evidence for my suspicions in the form of a speech that Keith Rattie, Chairman – QEP Resources and Chairman – Questar Corporation gave last summer to the Colorado Oil and Gas Association. Here is a quote from that speech.
America and the world are swimming in natural gas.
Now, to be sure, not everyone’s happy about this. Certainly not Vladimir Putin, nor Mahmoud Ahmadinejad. For years these guys have dreamed of a global natural gas cartel in the image of OPEC. Sorry, guys, but those dreams have been plugged and abandoned by America’s natural gas industry.
The coal industry and some large electric utilities aren’t celebrating. Booming gas supply threatens coal’s dominance and a nuclear renaissance in the electric-power market.
Read the rest of the speech and see if you do not get the impression that the currently low price of gas is part of an overall effort to grab market share from slower moving competitors. Just in case you pass over it, let me quote again from the a paragraph in the speech where Rattie makes a pretty straightforward statement of that plan.
Before I close I’d like to offer an open letter to the environmental groups that funded “GasLand” and press Congress for onerous, redundant, costly, and unnecessary new regulation of HF (Hydraulic Fracturing). Have you considered the unintended consequences of your actions? If not natural gas, what? More coal? More imported oil? More nuclear power?
Wow – what a horrible, scary thought – more nuclear power. (End sarcasm.)
Though it is not stated, the effect of shifting electrical power market share from coal and nuclear energy to natural gas will be a period of rapidly rising gas prices and profitability for gas companies. As gas price history (2001-2008) has shown rather dramatically, neither one of those alternatives can be built quickly enough to respond when demand exceeds supply.
It is even possible that the current attention and questioning of the gas industry is part of that strategy. The industry will soon be able to take cover behind regulators and environmentalists. They will be able to claim that rising prices are not their fault. They will be able to point to the period of lower than expected prices, when they were drilling without being slowed down, and claim that they really wanted to keep moving faster. They can innocently claim that they wanted to keep natural gas prices down, but those darned liberal “greens” and Hollywood film producers got in the way.
See how this all works? Sure, it is a bit complicated, but think of it like a good mystery novel where there is a host of characters with various means, motives and o
pportunities who are all worth investigating. The guilty party in a good mystery is rarely the one who stands up in the first chapter and loudly confesses. In some of the most interesting novels, like Murder on the Orient Express, the surprising conclusion of the intricate tale of intrigue is that there are a number of independently acting parties who share the guilt. (Sorry if that is a spoiler for anyone who has not read that 1934 Agatha Christie classic.)
New York Times (March 6, 2011) Shale Gas Needs to Allay Concerns