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Exposing The Demonizers Of Shale Gas – OpEd

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By Diana Furchtgott-Roth

You’re Ian Urbina, a senior New York Times reporter. In February and March you write that hydraulic fracturing, a method of natural gas extraction, is contaminating Pennsylvania drinking water. Your accusations are subsequently disproved by government tests.

What do you write next?

You write a three-part series in the Times saying that shale gas production is “inherently unprofitable” and a giant Ponzi scheme, as well as loosely-regulated by the Securities and Exchange Commission.

No matter that many emails you cite quoting industry managers, geologists, government officials, and market analysts are two years old. No matter that two of your supposedly objective sources are environmental activists. No matter that profit-maximizing companies are investing billions of dollars in shale gas.

Over the weekend and on Monday The New York Times ran a three-part series by Mr. Urbina on the bullish outlook for natural gas production in the United States and questioned whether some industry officials and analysts are too optimistic.

The article’s timing is significant. The New York Department of Environmental Conservation will soon issue a new Supplemental Generic Environmental Impact Statement that will decide whether New York State will allow hydrofracturing within its borders in order to tap the Marcellus and Utica Shales.

Pennsylvania produces over 80 billion cubic feet of natural gas a year from the Marcellus Shale, a geologic formation that stretches into New York, giving the state an extra $1.7 billion in economic activity a year and 18,000 jobs.

One wonders whether the Times’s three-part series was meant to nudge the Empire State towards a negative decision.

The headlines want to make you call your broker and sell your holdings now. They read “Insiders Sound an Alarm Amid a Natural Gas Rush,” “Behind Veneer, Doubt on Future of Natural Gas,” and “S.E.C Shift Leads to Worries of Overestimation of Reserves.”

Sure enough, natural gas stocks did fall on Monday, although they had recovered as this article went to press. But is the outlook as bearish as Mr. Urbina portrays?

America is forecast to produce 24 trillion cubic feet of marketed natural gas this year, 15 percent more than in 2001, and 5 percent more than in 2010. About 25 percent of this gas comes from shale, through a process called hydraulic fracturing.

Government and industry data show that natural gas production has been increasing rapidly and is on a path to continue. America has 200 years of natural gas supplies.

Trillions of cubic feet are available, and have driven the price of natural gas down to its current level of $4.69 per million Btu from $7 or $8 per million Btu between 2004 and 2009.

As more remote deposits become harder to drill, other large shale fields with more easily-recoverable oil are available for drilling. Estimates of recoverable U.S. natural gas, made by the Energy Information Administration, have climbed dramatically, from 1,100 trillion cubic feet in 1990 to 2,587 trillion cubic feet today. Shale gas production is expected to triple between 2009 and 2035.

According to EIA chief Richard Newell, natural gas is expected to account for 60 percent of the 223-gigawatt addition to U.S. energy capacity projected to occur between 2009 and 2035.

In May, the International Energy Agency suggested that the world might be entering “a golden age of gas,” and projected that world gas usage might rise by more than 50% from 2010 levels and account for more than 25 percent of world energy use by 2035.

And Melanie Kenderdine, executive director of the Massachusetts Institute of Technology Energy Initiative, projects that 500 trillion cubic feet of shale gas are available, with a cost of less than $7 per thousand cubic feet.

These estimates are all consistent. But here’s the question that was the leitmotif of The New York Times stories: is this boom a bubble, like the dot com bubble in the late 1990s, or the housing bubble that burst in the first decade of this century?

No one can predict the future with certainty. But evidence is against a gas bubble because of strong U.S. and global demand for energy.

University of Wyoming economics professor Timothy Considine told me in an email, “Unlike the S&L crisis, the tech wreck, and the mortgage backed securities bubble, in which prices crashed when the market became saturated, the rising tide of energy consumption in China and India will act as a giant demand pull on all forms of fuel, natural gas, coal, and oil. The more we produce here, the better off we are.”

Professor Considine believes that a future flood of Pennsylvania natural gas could change the entire U.S. market, diverting Rocky Mountain gas to the west coast and Gulf coast gas overseas. He forecasts a revival of U.S. gas-intensive manufacturing, including propylene, glass, steel, and chemicals.

As the price of natural gas has dropped to $4 per thousand cubic feet, companies such as Exxon Mobil and Chesapeake Energy have continued their investment. Why would they continue to invest billions in a bubble?

Gas demand will remain strong due to the administration’s phase-out of coal, which now produces 45 percent of our electricity. New administration rules under review would make it more costly to burn coal, due to emissions, and to mine it, due to mine dust.

Something has to take coal’s place, and generators and power plants can be adapted to burn natural gas.

President Obama wants a million electric vehicles on the road by 2015. Natural gas can produce the electricity to power the cars, or cars can be converted to run on natural gas rather than motor fuel.

America now imports 11 percent of its natural gas consumption, down from 16 percent in 2001. There is scope for getting rid of imports completely, and perhaps exporting gas to Latin America.

To support his bubble theory, Mr. Urbina includes two known opponents of domestic energy production among his sources.

Art Berman, described as “a Houston-based geologist” who said “the shale gas revolution is being oversold” is a board member of the Association for the Study of Peak Oil and Gas, a group that promotes “cooperative initiatives in an era of depleting petroleum resources.”

On April 1, at a Cornell University Law School Environmental Law Society conference, Mr. Berman proposed, to thunderous applause, getting rid of private cars and replacing them with public transportation.

Another source, Deborah Rogers, is described by Mr. Urbina as “a member of the advisory committee of the Federal Reserve Bank of Dallas.”

Mr. Urbina did not mention is that she is a steering committee member of the Oil and Gas Accountability Project, a group that considers natural gas to be a dirty energy product and that is working to ban hydraulic fracturing. In May 2009, Ms. Rogers published a paper that blamed deterioration of air quality on her farm in Texas on natural gas development.

The Obama administration seeks to reduce the use of coal. It is nervous about the use of nuclear power. It worries about American dependence on foreign oil. It only supports the so-called “green” or clean-energy sources, solar, wind, and biofuels, which account for five percent of our electricity production.

Who knows what the future will hold? America’s domestic shale gas reserves can be used to generate electricity and to power commercial and passenger vehicles. Those who demonize shale gas may well be demonizing our key to clean energy independence.

Diana Furchtgott-Roth is a Senior Fellow and Director of Hudson Institute’s Center for Employment Policy. She is the former chief economist at the U.S. Department of Labor. This article was published by RealClearMarkets.com and appears here with permission.

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One thought on “Exposing The Demonizers Of Shale Gas – OpEd

  • July 6, 2011 at 12:09 am
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    Interesting op-ed by the former Chief Economist at the Department of Labor.

    Wait, Department of Labor?! How about an op-ed from someone qualified to speak to shale gas hydrofracing?

    The NYT piece was shoddy work, but so too is this. No wonder the American public is polarized on the topic.

    There is good reason to believe that the U.S. will produce a great quantity of NG from shale. There is also good reason to believe that in the medium term the price for gas will likely go up significantly. As it stands now, NG is *mostly* trapped in regional markets. As these markets open up, competition will drive the price up.

    And if you read the 10Ks from the producers, you’ll see that they don’t turn a profit from the sale of NG until $7.50 or so. No smoke and mirrors, no crystal ball, just due diligence. Read the reports.

    Along these lines, anyone familiar with curve fitting models will tell you that we simply don’t have enough data to know whether decline rates will be higher than conventional fields, though it certainly makes sense that they would. The analogy that can be made is that conventional gas flows like a slow leak from a tire, while the nature of hydrofracing is much more akin to a popping of a tire. In both cases, the tire will deflate the total contents, but in the first case, it will take a long time, and in the latter case it won’t.

    The problem is that we’ve assumed that hydrofraced wells will behave like slow leakers. If this is the case, then there the amount of shale gas is really, really huge, and the effort to get it is relatively small. If, on the other hand, the hydrofraced wells behave like a popped tire, then the amount of shale gas is simply huge… but the amount of effort to get the gas will be substantially greater (as wells will need to be reworked).

    As for the danger of natural gas – errr toxin-laced fracing fluids – poisoning water… well, this is an acute concern. Hydrocarbons are unique, and they can be identified in the same way we humans can be identified by our fingerprints. At least one such ‘fingerprint’ study has been done, and it has shown beyond a doubt that gas from a hydrofraced site migrated into a nearby aquifer. If the gas can migrate, then there is a chance that the toxins that are intentionally placed in the fracing fluid can, too.

    This is a great cause for concern and study. Remaining bullish about something which is clearly not well understood by investors is one of the hallmark characteristics of a bubble.

    I encourage readers to do the research so that they can see through the NYT propaganda, and the propaganda in this op-ed as well.

    Reply

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