U.S. Natural Gas: Motivation + Opposition = Stalemate

The U.S. needs energy. We consume about 100 Quadrillion BTU’s (Quads) of energy each year, with 30% going towards transportation, and the remaining 70% split to meet the electricity and heating/cooling needs of the residential, industrial, and commercial sectors [1]. Because electricity gives us the option to power machines that move, make heat, and create light, we’ll focus on it first.

Coal has been the nation’s big electricity source for a long time. In 2007, coal accounted for half of the electricity generation (20.99 of the 42.09 Quadrillion BTU)[1], but because of extensive mining and heavy GHG emissions, it is seen as dirty and harmful for the environment. The 2nd highest input was Nuclear Power with 8.41 Quads, but questions regarding safety and radioactive waste make Nuclear unpopular as well. However, coming in a close 3rd with about 8 Quads was natural gas. The U.S. has an abundant supply of clean-burning Natural Gas, which emits about half as much CO2 as coal does per energy output [2]. So if you want to generate electricity and not generate as much CO2, Logic says to invest in natural gas.

Now let’s look at transportation. 95% of transportation needs are met by petroleum sources, and refinery production is dominated by motor gasoline, which accounted for almost half (8.3 / 17.9 MMBbl/D) of the blended and refined output [1]. Other important oil-derivatives like motor oils, lubricants, and plastics will likely not find substitutions soon, but cars CAN avoid gasoline by adapting to other fuel sources, including electricity.

In 2007, the U.S. produced about 5 million barrels of oil per day (MMBbl/D), and imported another 10 [1]. It isn’t favorable to have twice as many imports as exports, and a common assertion in political rhetoric is to “remove our dependence on foreign oil.” We have 2 options to follow through with this claim:
1) Produce more oil at home.
2) Stop using so much gasoline for transportation.

By replacing more gasoline cars with electric cars, we can shift the energy source away from the pump and towards the natural gas power plant. This type of Policy would allow us to continue producing domestic oil for derivatives, stop importing foreign oil for gasoline, and trade high tailpipe emissions for lower natural gas plant emissions. It seems that natural gas can kill two birds with one stone as a clean electricity-generator that also helps get gasoline out of cars. Great, so let’s get more natural gas!

Natural gas has always been produced as a byproduct of oil operations. Recent demand has grown to the point where some companies, like XTO Energy, can devote their entire business to producing gas, and a switch to electric would drive that demand even higher. Unfortunately, “conventional” sources for both oil and gas (like high permeability sandstones) have become harder to find. The good news is that the U.S. has huge “unconventional” sources for both (like shale). In fact, according to Senator Byron Dorgan of North Dakota, “our country leads the world in unconventional and deep well drilling, and we need to maintain that advantage”.

http://www.youtube.com/watch?v=l-eDDxjb5ok

The biggest U.S. unconventional source is shale, a clay-rich rock that has very low permeability, or connectivity of pores. When organic matter deposited with the shale is buried, heated, and pressurized in Earth’s interior, it can be transformed into oil and gas and trapped inside the pores. However, because of low permeability, the valuable oil and gas cannot easily escape the tight pockets and produce into a well. So to better connect the pores and establish a flow network, hydraulic fracturing is employed.

Hydraulic fracturing involves the pumping of a fluid (mostly water, with some sand and chemicals) that rips open the formation and allows the oil and gas in pores to escape into the well, up the production tubing, and through the operation facilities. Frac’ing, along with horizontal drilling, have been key production methods, allowing operators in the Barnett Shale of North Texas and the Marcellus Shale of the Eastern states to pull up oil and gas out of wells that weren’t accessible before.  So we know how to get it, excellent!

But not so fast! As with any novel idea, there is opposition. Critics have pointed to hydraulic fracturing as the culprit for fouling water supplies. These concerns have driven Onondaga County in New York to ban frac’ing until it can be further studied [3]. The threat is understandable…after all, gas wells do require 2-4 million gallons of water per frac job, though it only accounts for 1/1000 of a percent of U.S. water use [4]. Frac’ing has certainly gotten legislators’ attention, and media coverage and creative podcasting have been picking up.

http://www.youtube.com/watch?v=kr5Gq-S9Y9U

http://www.youtube.com/watch?v=Au4p7clRk-Y

But as Senator James Inhofe of Oklahoma, who serves on the Environment and Public Works Committee, stresses, frac’ing has been employed for 50 years, with 35,000 wells currently being frac’ed each year. In the nearly 1 million wells that have been frac’ed, “no one has found any evidence that there is any contamination of ground water with hydraulic fracturing.” In fact, in 2004, the EPA “concluded that hydraulic fracturing doesn’t warrant further study”.

http://www.youtube.com/watch?v=TsjdZQb1_-U&feature=channel

So why all the fuss? The bottom line is that water is a huge issue in the Eastern states, and people generally don’t trust oil and gas company methods of handling frac fluids and produced water, especially when they don’t know exactly what is in the fluid. This issue is on the tables of both the House and Senate, as they attempt to ammend the 25-year-old Safe Water Act with the “Frac Act” that will force operators to disclose the constituents of the fluid to the state, and the exact chemical formula in the case of medical emergency.

Though just under 1% is chemicals, Frac Fluid is really turning people off to the practice.

While it makes sense that people should know what kind of chemicals are being injected “in their backyard,” oil companies fear that the passing of this act would reduce their competitive advantage by disclosing their “secret sauce.” Even worse, this could be the first step in an effort to completely ban frac’ing [5]. Exxon Mobil, who just bought out XTO Energy, included a clause in the contract stating that if frac’ing was outlawed, they could back out of the agreement, seeing as how that would severely impair XTO’s gas operations.

Natural gas has its advantages in emissions and domestic availability. It also isn’t very popular, like most of our energy sources, and gives rise to NIMBY-ism (Not In My Back Yard). But the move has started. Natural gas production has started to grow in the electricity sector despite the stalemate in the East. The coming legislation, or lack there of, will determine in what direction the nation will go from here.

[1] Energy Information Administration. “Annual Energy Review 2007”. 2008.

[2] http://www.eia.doe.gov/oiaf/1605/coefficients.html

[3] http://www.syracuse.com/news/index.ssf/2010/02/onondaga_county_legislature_ba.html

[4] Arthur, Daniel J. “Environmental Considerations of Shale Gas Development” SPE, 2009 

[5] http://www.dallasnews.com/sharedcontent/dws/bus/y!finance/exxon/stories/012110dnbusexxonxto.98af6951.html

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2 Comments

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2 responses to “U.S. Natural Gas: Motivation + Opposition = Stalemate

  1. Brian McConn

    Good blog, lots of information. It will be very interesting to see the regulatory activity that surrounds the environmental impacts of frac’ing in these shale regions. As you pointed out, the US has such a vast amount of these unconventional gas resources that could, at the very least, reduce our dependence on foreign oil.

    You mentioned the Barnett and Marcellus shales – it seems the Eagle Ford shale in South Texas could lead to the next big movement in shale drilling. I don’t think the resource base is quite as large as that of the Barnett, but it could prove to be the most economical. I/P rates (initial production) have been high, although not quite as high of some other shale plays, such as Haynesville. Rig counts have increased significantly there over the past six or seven months, although much of that may be a result of drilling requirements.

    It will be interesting to keep our eyes on these plays and the activity that surrounds them. Perhaps XOM’s acquisition of XTO could become a trend as the supermajors and large independents feel the need to grab hold of these valuable domestic resources.

  2. dwymond

    These are all good points. Developments in drilling technology have certainly pushed shale gas to the forefront of the industry over the last few years. I think you’re right that the XTO acquisition by XOM could be an indicator of what’s to come. It will be interesting to see if the other majors follow suit.

    The shear volume of gas that has now come online is astounding. The U.S. gas market is now suffering from an oversupply of historic proportions. http://blogs.wsj.com/environmentalcapital/2009/10/07/gas-pains-lots-of-supply-and-little-demand-spells-bearish-future-for-natural-gas/?KEYWORDS=natural+gas+oversupply

    One element of this topic that has been less discussed is the increased need for more gas infrastructure (i.e., pipelines, storage facilities, compressor stations, etc.) to deal with the so-called “gas glut.” Gas transmission and storage companies have been seeing an increase in demand for their services and have been rapidly trying to gain approval for more pipeline and storage fields to accommodate the increase in demand. Conversely, companies that recently invested heavily in developing LNG import terminals are now in trouble because the need to import gas now seems non-existent. Additionally, two proposals for pipelines to bring gas from Alaska to gas markets in the Lower 48 are now in jeopardy. Capacity limits of U.S. gas storage facilities were tested this winter as record storage levels were recorded. http://ir.eia.gov/ngs/ngs.html

    These are all direct impacts of the shale gas phenomenon.

    I think it will be interesting to watch how the oversaturated gas market and the actions of the major producers will impact the midstream.

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