Dean Barber

A Whole Lotta Frackin’ Goin’ On

In Uncategorized on September 4, 2011 at 10:43 am

Maybe I am naïve. Maybe old T. Boone has got me bamboozled.

But I have to think that he got it right. The cynics among us (and I’ve been known to play that role) would contend that because T. Boone Pickens owns a hedge fund that invests heavily in natural gas assets, that’s the reason he is pushing hard for a structural shift to natural gas.

But I don’t buy it. I’ve heard the man talk and I’ve read what he has written. I don’t think this is about Pickens trying to further escalate his considerable fortune.

Rather, I think this is about an 83-year-old Texas billionaire who loves his country and wants to see an honest-to-God move away from our dependence on foreign oil, which he knowingly argues is costing the United States so dearly in terms of wealth and security.

“I’ve been an oilman my whole life, but this is one emergency we can’t drill our way out of.” Now that strikes me as a different kind of mantra from “Drill, baby, drill,” as exhorted by those public officials who are in the pocket of big oil.

We’ve been talking about energy independence for this country ever since the 1970s. Talk, talk, talk is all we seem to do, and still no concerted energy plan.

“A fool with a plan is better than a genius with no plan, and we look like fools without a plan,” Pickens repeatedly has said.

On July 8, 2008, Pickens announced the Pickens Plan, promoting a radical reduction in the U.S. dependency upon oil provided by nations in the OPEC cartel. Although the plan calls for introduction of various alternatives to oil, including wind and solar, its major component is the conversion of the nation’s commercial transport sector to natural gas. Back in May of this year, T. Boone wrote the following:

“Last month, the United States consumed about 19 million barrels of oil a day. We produced just more than 8 million barrels a day. Where did the rest of it come from?

We imported 11.5 million barrels of oil every day at a cost of $42.5 billion for the month. At that rate, we will be sending more than half a trillion dollars offshore just to pay for the oil we have to import.

Putting aside oil we buy from Mexico and Canada, which are the two largest oil suppliers, our next five oil-trading partners, in order, are Saudi Arabia, Nigeria, Venezuela, Angola and Iraq.”

Pickens has warned the country could very well be spending $10 trillion on foreign oil within a decade, again, much of it from people who don’t particularly like us.

Pickens advocates switching the nation’s 18-wheeler truck segment to natural gas fuels, of which the United States has an abundance of supply. Indeed, reports now show that we have a 100-year supply of natural gas, containing more energy than all the oil reserves in Saudi Arabia.

Having a 100-year supply is a good thing, suggesting that energy independence can be within our grasp. So while I’m onboard with T. Boone that natural gas should play a pivotal role in providing a long-term solution, here is where we may (or may not) differ:  I’m not so sure that we are always getting to this natural gas the right way all the time. (Notice I said I’m not sure.)

About a decade ago, Texas oil engineers hit upon the idea of combining two established technologies to release natural gas trapped in shale formations. Horizontal drilling—in which wells turn sideways after a certain depth — opens up big new production areas. Producers then use a 60-year-old technique called hydraulic fracturing or “fracking” in which water, sand and chemicals are injected into the well at high pressure to loosen the shale and release gas.

As a result of fracking, America’s energy landscape has been transformed. As recently as 2000, shale gas was 1 percent of America’s gas supplies; today it is 25 percent. Prior to the shale breakthrough, U.S. natural gas reserves were in decline, prices exceeded $15 per million British thermal units, and investors were building ports to import liquid natural gas. Today, proven reserves are the highest since 1971, prices have fallen close to $4 and ports are being retrofitted for natural gas exports.

The shale boom is also reviving economically suffering parts of the country, while offering a new incentive for certain domestic manufacturers to stay home. Pennsylvania’s Department of Labor and Industry estimates fracking in the Marcellus shale formation, which stretches from upstate New York through West Virginia, has created 72,000 jobs in Pennsylvania between the fourth quarter of 2009 and the first quarter of 2011.

The Bakken formation, along the Montana-North Dakota border, is thought to h0ld0 f0ur billion barrels of oil (the biggest proven estimate outside Alaska), and the drilling boom helps explain North Dakota’s unemployment rate of 3.2 percent.

But as with most things in life, with rewards also comes risks. On May 26, at annual meetings of Chevron and ExxonMobil, a significant number of shareholders voted in favor of resolutions asking for a report on the environmental and financial risks of fracking.

At Chevron, 41 percent of the shareholders voted in favor, while 28 percent voted in favor at ExxonMobil. Although the resolutions were voted down, even minority shareholder votes can have a big impact. A vote of 10 percent is usually enough to send a clear message to company management.

“We know there are risks,” ExxonMobil CEO Rex Tillerson told reporters after the meeting. “We’re not trying to characterize this as an activity that does not have risks.”

But by and large, it would appear that the oil and gas industry wants to pooh pooh those risks away. Drilling companies will assure anyone who will listen that there has never been a “proven” instance of fracking contaminating groundwater. Critics, however, can point to numerous fines and penalties issued by regulators against shale drilling companies for contaminating drinking water with methane and for spilling toxic fracturing chemicals into streams near drill sites.

By the definition of the industry, however, fracking didn’t cause those problems. That is because no one has yet shown that hydraulic fracturing fluid rises up a mile or so from the production zone, through layers of rock, to pollute drinking water aquifers.

Still, state and federal regulators wonder. Last week, the news broke that the Securities and Exchange Commission – the federal agency that has traditionally focused on insider trading, subprime mortgages and credit-default swaps, —  has started asking question about fracking.

Apparently, the SEC wants to make sure that investors are being informed about the risks a drilling company may face related to its operations, such as lawsuits, compliance costs or other uncertainties. The companies are being asked to supply information confidentially to the SEC. The agency, in turn, will likely require the companies to publicly disclose some of that information, according to government officials.

“If there’s something in [a company’s] field of operation that creates uncertainty, that’s something they may want to talk about” with investors, said a government official.

The SEC is asking what chemicals are being injected into the ground, what companies are doing to minimize water usage and what steps they are taking to minimize environmental impact, according to The Wall Street Journal.

We do know that fracking fluids being used by at least some companies include some toxic chemicals, such as benzene and formaldehyde, according to congressional reports. Some companies have said they will voluntarily publicize their chemicals online at FracFocus.org.

Here in my home state of Texas, now experiencing a historic drought, water usage is of great concern to many communities. Fracking requires a huge amount of water.

Just 20 minutes from my home, Grand Prairie, a suburb of Dallas, has decided not to sell water to natural gas drillers who use the water for hydraulic fracturing. Drillers typically use 3 million to 5 million gallons of water in the Barnett Shale of north Texas.

Meanwhile, the Texas Railroad Commission has approved publication of a draft rule that would implement the nation’s first law forcing natural gas drillers to disclose the chemicals used in fracking. The commission has scheduled an Oct. 5 public hearing in Austin.

In 2010, 15,466 new drilling permits were issued in Texas, according to the TXRRC, with 85 percent of them using hydraulic fracturing.

And that, my friends, is a whole lotta fracking going on.

Need a partner in results-oriented site selection? Contact me, Dean Barber, at 972-890-3733 or at dbarber@barberadvisors.com Barber Business Advisors, LLC is a site selection and economic development consulting firm in Plano, Texas. Please visit our website at www.barberadvisors.com

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  1. Energy is a funny thing…it seems that every energy alternative has some sort of cost or down side. Gas/oil as we currently use it for heating, power, and automotive use requires foreign purchases and emits pollutants. Natural gas minimizes/eliminates the dependency on foreign sources, but still carries pollutants and adds the environmental impacts you discussed. Electricity has not seen sufficient technological advances to truly make it an alternative to gas/oil/diesel for transportation uses, and when you factor in the source (coal, nuclear, even solar and wind), you get a whole slew of other environmental impacts. Hydrogen is showing potential as a viable alternative for transportation uses (and as an unabashed auto enthusiast, that is where I’m hanging my hopes), but at a minimum there are a number of safety-related “costs” that need to be addressed. Ultimately, the pessimist can look at this and basically say “we’re screwed,” or the optimist can look at these challenges as an opportunity to innovate, create, and maybe find that silver bullet that will address the majority of the concerns and needs, while (hoping against hope) we can leverage that into job creation.

  2. As 9/11 approaches I’m reminded that our dependance on the oil provided by those who don’t particularly like us is yet another way we willingly allow ourselves to be held hostage. At this point we seem to need them (their oil) more than they need us. Mining our own energy resources would seem to be a way to bring some balance to kur relationship with those oil producing nations. Another thoughtful blog. Thanks.

  3. The science behind safe horizontal drilling is pretty well defined. The challenge is in ensuring compliance with the procedures that assure safety. In my opinion, the bigger challenge is to help communities impacted by shale gas commercialization avoid the predictable boom-to-bust cycle that will wreck their economy if there is not a strategic plan in place to address the downside risk. For more information on shale gas and economic development, visit http://www.strengtheningbrandamerica.com/blog and skim some of the references provided.

  4. I think we have to pursue a myriad of hybrid energy solutions to eventually lead our energy independence revolt.

  5. I fully support the switch to CNG for class 7 and 8 trucks. Think of the impact on our balance of payments to eliminate 1/3 of our imported oil if all these trucks were powered by CNG. It will take time, but if we do not make it happen through legislation or economics, we are doomed to pay not so friendly countries billions for our energy.

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