Giuliani: Americans will embrace the ‘shale revolution’

Former New York City Mayor Rudolph W. Giuliani delivered the keynote address on the first day of the fifth Shale Insight natural-gas conference in Philadelphia on Wednesday, telling the crowd that Americans are “afraid” of fracking but that the industry can alleviate the fear with a coordinated effort.

“The public-relations problem that you face is that a lot of people dismiss the whole shale revolution, from the point of view of being afraid of it,” Giuliani said. “They’re irrationally afraid of it, but they’re afraid of it.

“They’ve become convinced by some of the more liberal newspapers, some of the more vocal, I think, extreme environmentalists, because if you thought of it from the environmental point of view of, when you substitute natural gas, you’re … having a tremendous benefit for the thing they’re most concerned about, which is global warming, and the impact that all of that can have on our world.”

Giuliani, 71, served two terms as mayor of New York and now is a partner in the Houston law firm Bracewell & Giuliani, which is a sponsor of the Shale Insight gathering. The two-day conference promotes efforts to create economic activity related to the Marcellus shale-rock formation that contains vast stores of natural gas beneath parts of Pennsylvania, Ohio, West Virginia and New York state.

Giuliani said the Marcellus shale has been good for Pennsylvania, but concerns about the safety and environmental issues related to hydraulic fracturing, or fracking, need to be addressed. “We need to organize better, in a much more comprehensive way, in order to educate the American people on the risk-reward that is involved in extracting natural gas from the ground by this method. This is a relatively safe process; it’s a process that’s become safer and safer over time. There are no massive incidents like we’ve had with other forms of energy.

Giuliani cited oil spills and nuclear accidents, but noted that no one has died from an American nuclear mishap, not even Three Mile Island in 1979, in Pennsylvania.

“I don’t want to see happen to you what happened to nuclear power,” he says.

“As the American people become educated about this, they will change their minds.”

The demise and resurrection of the natural gas industry

Borrowing from Mark Twain, the reports of the natural gas industry’s death have been greatly exaggerated. Words and phrases — like epic decline, demise, abandonment, crushed, confused, over-leveraged, bankrupt ideas and financially ill — have been used by many in the media and some analysts to define the state of the sector. Why? According to a recent article from USA Today, “the U.S. is producing more natural gas than ever in 2015, despite low prices that make it increasingly difficult for companies to spend money on drilling.”

Henry Hub-2015While the negative evaluation of the industry’s health sounds a bit premature, and perhaps hyped up a bit to sell papers as well as economic and market news on cable, there are real problems facing producers, refineries and distributors:

1. Gas inventories are higher than they’ve been in a long time. This fact, combined with decreased demand, has and will continue to put downward pressure on prices. While a hot summer kept the natural-gas market relatively stable (e.g., high demand for air conditioner use), the mild weather that’s projected for late fall and winter will exacerbate the gap between supply and demand as gas-powered utilities face lower consumer need for heat.

2. Natural gas prices have dropped by more than 30 percent since a year ago. Understandably, falling prices have aborted investment in new rigs and drilling. The recent decline in the development of new rigs and the abandonment or capping of older rigs dropped the number of natural gas rigs from near 1,600 in 2009 to just over 200 presently. But the totals are blurred because many rigs produced both oil and natural gas and were reclassified as oil rigs for investment purposes. The diminished production of legacy wells, even if demand increases, are unlikely to result in significant and immediate pressures on gas prices, given the extent of inventories and a recent history of annual surpluses. Assuming visible growth in demand, it will probably take 1-3 years for the equilibrium to return to the natural gas markets and for prices to move significantly higher. Instead, what we are likely to see is relatively short-term, modest up-and-down movements.

3. Bankruptcies, particularly among small and medium-size participants (e.g., drillers, suppliers, operators, etc.) in the gas industry, have and will continue to increase, leading to increased market share for larger firms.

More than a handful of lender/investors/bankers seemed to have benefited from the recent rise and fall of natural gas prices. Indeed, some skeptics, even more cynical than I am, have suggested that in the relatively recent past, Wall Street investors “orchestrated” gas gluts by investing in shale exploration knowing that prices, because of overproduction, would decline and transactional costs would be worth millions. In essence, bankers lent, production increased and prices declined. Subsequently, lenders sold – many on the upside of the down curve and many at bottom prices. Some generated mergers and acquisitions and, in the process, secured large fees. It’s a tough dog-eat-dog world out there.

I suggest the cynics are overplaying the ability of bankers to make what they believe are rational decisions and, contrary to law, work together to achieve nefarious ends. Right now, the financial industry, despite the rewards flowing to some for guessing right on recent short-term price movements as well as the values embedded in some firms, has tightened up on investment, whether equity or debt, for the capital costs associated with natural gas production and distribution.

Sorting out whether the current changes in the natural gas industry are likely to lead to permanent structural changes is difficult. We know there will be fewer firms, at the least at the outset of any long-term recovery. Clearly, starting new capital-intensive natural gas companies is more difficult, for example, than starting new housing firms after a down or unstable economic period.

It is surprising that an industry with an uncertain present and future seems wedded to playing only a minor role concerning the development and use of natural gas as a transportation fuel. Because of variables, related mostly to costs and access to infrastructure, only approximately 150,000 vehicles in the U.S. out of nearly 300,000,000 are powered by natural gas – either CNG or LNG. The industry, paraphrasing Israel’s former Ambassador Abba Eban’s comments on the Middle East, has and appears willing to continue to miss opportunities and therefore misses opportunities to commit, in a meaningful way, to use of natural gas as a transportation fuel.

In light of available technology, natural gas and/or its possible derivative, ethanol, would be cheaper for consumers and emit fewer pollutants and GHG emissions. Because of its abundance in the U.S., if used more extensively, natural gas and/or ethanol could reduce dependency on oil imports from currently unfriendly or potentially unfriendly nations. Neither natural gas nor ethanol are perfect fuels. But in terms of the environment, global warming, the price at the pump and national security, natural gas and ethanol are both better than gasoline. Both are welcome transitional fuels until electric cars, hydro fuels and other renewable fuels are ready for prime time.

Existing and proposed federal and state regulations already have and, in the future, will reduce methane leakage problems (e.g., methane traps significantly more heat than carbon dioxide and therefore is a potent global warming contributor) and hopefully respond to fracking problems.

Natural gas-fueled vehicles are generally more costly than gasoline-fueled vehicles. However, lessons learned from the multi-state demonstrations led by Gov. John Hickenlooper of Colorado (Democrat) and Gov. Mary Fallin of Oklahoma (Republican) show promise in reducing vehicle costs. Twenty-two states are participating in the demonstration. Collectively, they have agreed to purchase natural gas vehicles to replace older, internal combustion cars from state fleets. The “market scale” of the demonstration will facilitate an effort by manufacturers to develop cheaper cars. Finally, the growing number of Detroit-produced flex-fuel vehicles and the development of simple ways to convert older vehicles to flex-fuel status suggest an increased market for natural gas-based ethanol. Happily, technology is emerging that will be able to convert natural gas to ethanol efficiently and at a scale and cost necessary to respond, hopefully, to increased demand and compete with gasoline.

Socrates, the legendary natural gas philosopher, once said, “the unexamined [future business plan] is not worth [having]” (I only added a couple of words)., Paraphrasing the “The Elephant’s Child” from Rudyard Kipling’s “The Just So Stories,” the natural gas industry needs “six honest serving men” or women (my addition. Kipling was a sexist.) to develop a doable plan and strategy to expand the use of natural gas as a fuel. “Their names are What and Why and When and How and Where and Who.” The old way of doing business may be changing but a new, better way can be resurrected with expanding natural gas markets to develop a decent, competitive transitional transportation fuel.

The pot calling the kettle black: The AEA and alternative fuels

justice2I have great sympathy for the coal miners of this nation. Their job in supplying this nation with coal is among the toughest in the world. Their historical contribution to the nation’s economic well-being is well established. They were, and many remain, beset with long hours, moderate pay (currently $22,000 to $64,000 per year), negative health and safety problems, and, at times, an unsavory public and private sector bureaucracy.

The glory years for coal appear to be over. Increasingly, the public and environmental experts and policy leaders view coal as a dirty fuel. Succinctly, coal emits significant amounts of greenhouse gases and other pollutants. Most analysts believe the future of the coal industry is dim.

Clearly, in the past decade, market forces, not public policy, have forced many electric utilities to substitute natural gas for coal, and the competition with coal to date suggests coal will be the economic loser. The cost differential between the two, generally, has favored natural gas.

Without a bipartisan commitment to find transitional pathways for miners and/or successful economic development options for their communities, present-day miners will regrettably become part of America’s throwaway society — consumed and discarded by technological change and the fear of global warming. Congress, the White House and the American public have a moral — if not an economic, social and political– obligation to look hard at training and mobility initiatives for miners, as well as economic development strategies in their places of residence and work.

Regrettably, the conservative American Energy Alliance (AEA) has put its muscle behind a frontal attack on the president’s effort to substitute alternative fuels for coal to power utility plants instead of a well-defined effort to define workable strategies to help miners find other than declining mining positions. If a coalition cannot be built to find feasible solutions to expand job opportunities for miners, many miners, whose experience is often limited, will find themselves locked in place and will face a life of poverty or near-poverty — even when the economy returns to health and unemployment decreases. The structure of the American economy has changed, and the change does not favor mining.

Surprisingly, given its history in opposing social welfare initiatives, AEA indicates that the EPA’s recently announced Clean Power Plan, which requires the states to cut back significantly on GHG emissions, is “justice denied” to millions of minorities and low-income households. While analyses of the impact of the Clean Power Plan on different demographic and income groups are not yet precise, the AEA statement does not acknowledge the fact that alternative fuels, like natural gas, have been on a per-dollar kilowatt-hour cost cheaper than coal. The AEA also fails to note the potential savings in health and other societal costs (for low-income families in particular) resulting from lower GHG emissions and other pollutants. A disproportionate number of low-income people live near utilities, refineries and coal mines because of the absence of affordable housing and cheap transportation. Until relatively recently, gasoline prices limited the ability of many low-income households to travel from decent housing to their current or potential jobs. Several respected economists view the current drop in oil and gasoline prices as a relatively short- to intermediate-term phenomenon (1-2 years), and that the norm, once the world economy improves, will much higher than it is today.

The American Energy Alliance is pro-oil and pro-coal. That’s okay — this is its right. But in this context, its support of both fuels should mute its legitimacy as a research organization or the research of many of the organizations it supports or its supporters support. The AEA is, plain and simple, an advocacy group whose causes are predetermined by the self-interest and ideology of its donors.

Unfortunately but understandably, the AEA is unlikely to ever support the considered use of high-octane alternative fuels or their independent study, whether for utilities or transportation. Placing alternative before fuels, even though it could mean improved choices and lower costs for low-income consumers, improved environmental conditions, less GHG emissions and greater overall economic benefits is and will not be in AEA’s lexicon. In this context, AEA seems to have hijacked the term or phrase “justice denied” in a manner that does not fit the intent of some of the original users — Martin Luther King, Jr., William Gladstone, and Frederick Douglass. Their respective purposes in using the term were to expand choices, to redress societal inequities and to lessen the burdens of the disadvantaged. It is time we consider alternatives to weaning the nation and the world off of oil and coal, and acknowledge the fact that justice denied diminishes justice everywhere, and in the ethicist John Rawls’s words, hurts the least advantaged among us.

methanol car

Why aren’t we using methanol?

The more you look at the contemporary scene with gasoline and imported oil, the more you have to wonder why we’re not switching some of our fuel needs to methanol.

Look at what’s happening: Oil has become so plentiful that we’re reverting to the old situation of the 1950s, when the big concern among oil people was that some new discovery was going to be made in some far corner of the world and there would be a new “glut” that would cause the bottom to fall out of the market. It was during this era that we placed a 20 percent cap on our oil imports. The concern was that there was so much cheap oil in the world that the American oil industry would be decimated.

All that changed in 1970 when American production finally leveled off — right about the time geoscientist M. King Hubbert had predicted “Hubbert’s Peak” would occur. The import ban proved easy to circumvent, and before we knew, it we were importing 36 percent of our oil, most of it from the Persian Gulf. OPEC, first convened in Baghdad by Saddam Hussein in 1960, suddenly became more than a debating society and realized it had real market leverage. Instead of begging the oil companies for higher royalties, the OPEC nations suddenly realized they could raise their price and even withhold supplies. The era of the Energy Crisis had begun.

Congress did all the wrong things in responding. It extended President Nixon’s price controls on one commodity, oil, creating a domestic shortage — too much consumption, not enough production. We made up for this by importing more oil, in which the price controls didn’t apply. While President Carter mandated a “moral equivalent of war” and wore cardigan sweaters, the price controls had the exact opposite effect: Our imports swelled from 36 percent to 50 percent in 1980, and we were sitting ducks when the outbreak of the Iran-Iraq War suddenly cut short supplies. The result was the Second Gas Shortage.

President Reagan put an end to all this by striking down the oil-price controls his first week in office. Drillers went wild in Texas, and the Saudis flooded the market in trying to maintain market share. Soon prices had collapsed back to 1972 levels, and the “oil shortage” was pretty much forgotten.

Meanwhile, similar developments were taking place in natural gas. This commodity had been subject to federal price controls since the 1930s. Basically, it was an attempt by the Northern consuming states to rob Texas and Louisiana of their natural resources. In 1977 we actually experienced a “natural gas shortage” that caused factories and schools all over the North to close down in mid-winter, while Texas and Louisiana were burning natural gas for electricity — then considered horribly wasteful — because the price controls did not apply intrastate. This “crisis” was solved more slowly as natural-gas price controls were not phased out until 1988. Once again, supplies gushed forth. (We did learn a lesson. Nobody has talked about price controls on oil and natural gas since.)

Even with the market freely operating, however, the natural supplies of both oil and natural gas seemed to be diminishing, so that by 2005 we were running short of gas and back to importing more than half our oil. Then George Mitchell’s fracking revolution began. Suddenly, America was the world’s leading producer and oil and gas were once again in abundance.

Yet as far as freeing ourselves from further dependence on foreign oil, the results have been disappointing. Even though we are again producing 10 million barrels of oil a day, we are still dependent on imports for 30 percent of our oil, about one-quarter of this from the Persian Gulf. Low prices have stimulated consumption. People are going back to buying bigger cars and our gasoline use is hitting new records. Sales of electric cars and other alternative vehicles have nearly collapsed. Whatever impulse there is toward conservation is highly dependent on price.

Anything that requires a new infrastructure — electric cars, hydrogen vehicles, compressed natural gas and propane — will have trouble getting beyond a niche market. It’s simply too troublesome and expensive to get people to convert. But corn ethanol and methanol both slot easily into our current system of gas pumps and can compete.

The trouble with corn ethanol is that we are rapidly exhausting the potential supplies. We now use 40 percent of the corn crop to replace 3 percent of our gasoline. Cellulosic ethanol may expand supplies, but it is still basically experimental.

That leaves one fuel that could potentially replace vast amounts of our imported oil — methanol made from natural gas. We have enough natural gas supplies from fracking to make this a game-changer.

The great irony is that China sees this opportunity and is already seizing it. The Chinese are busy constructing two huge methanol conversion plants in Texas and Louisiana in order to take advantage of the abundant supplies coming out of the region. The Chinese have a million methanol cars on the road and will be carrying these supplies back to China to power their growing transport sector.

Yet the EPA continues to refuse to allow methanol to be used in car engines, mainly because of the reputation earned as a poisonous “wood alcohol” during Prohibition.

As Anne Korin of the Institute for the Analysis of Global Security once said: “I think methanol fares poorly in Washington precisely because it doesn’t need any subsidies or government assistance in making it economical. For that reason you have no big constituency behind it and no member of Congress crusading on its behalf.” The entire farm belt is working to support ethanol, but there is no “methanol state” or corresponding congressman working in its favor. For that reason it languishes.

For almost 50 years the Indianapolis 500 cars have run on methanol. Yet it is still forbidden in our commercial transport sector. Isn’t it time that somebody considered the general good and started crusading on behalf of methanol?

(Photo by Vivid Racing, posted to Flickr)

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Poet biofuels

Former Shell Oil chief: U.S. must become more oil independent

Just in time for the Fourth of July weekend: Our very own John Hofmeister speaking words of wisdom about the need for the United States to wean itself off oil as its dominant transportation fuel.

“It’s incumbent upon the United States of America to become more oil independent,” Hofmeister said at a security conference in Israel in June. “Because it still relies on nearly 7 million barrels a day of imports, and in a nation that uses 18 and a half to 19 million barrels of oil per day, the loss or the risk of 7 million barrels a day of imports puts that nation at about two-thirds of independence, and that’s not enough for the world’s largest economy.

“So there remains an interdependence, until the U.S. can find independence, and it has every right and every responsibility to pursue independence. As does every other nation.”

Watch Hofmeister’s full talk at the Herzliya Conference in Tel Aviv:

Hofmeister knows of what he speaks: He was the president of Shell Oil Co., the American subsidiary of oil giant Royal Dutch Shell, from 2005 to 2008. The author of “Why We Hate the Oil Companies” now travels the world talking about the need for alternatives to oil. He’s not only on the board of directors and advisors at Fuel Freedom, he founded a nonprofit called Citizens for Affordable Energy.

U.S. crude prices closed at $56.96 a barrel Wednesday, down $2.51 or 4 percent, the biggest one-day drop since April 8. Compare that to last summer, when the price was above $100. But the market remains volatile, and Hofmeister said having oil at an affordable price long-term is necessary for national security.

“If you’re not taking care of yourself, no one else will,” Hofmeister said.  “And so nations should look to their security — not just to their defense forces, but to their energy supplies — which in the United States, is why I’m almost entirely focused now on transitioning natural gas to transportation fuels, as well as biofuels, as well as electricity for transportation. Because the future of oil is simply limited. We’re not running out. It won’t disappear. But it simply won’t be available at this price for an indefinite future.”

Hofmeister expanded on another of his major themes: that natural gas, which is cheap and plentiful in the United States, could help the U.S. and other nations reduce oil consumption. Natural gas is used as a fuel in its gaseous, compressed form — as CNG and LNG — and it can also be processed into liquid alcohol fuel, ethanol or methanol.

“Over the next decade, nations like the United States, or like Israel, or like much of Europe if not the whole of Europe, that are not transitioning at least a third of their oil demand away from oil and toward natural gas will only look back in regret.”

(Photo credit: Poet Biorefining plant in Macon, Missouri. From

Being a fuel agnostic and a believer, simultaneously

enemyBeing agnostic about certain things in life either makes you a person of little faith or willingness to leap across no or partial data; a wise person who is intellectually and emotionally strong enough to reflect on his or her personal doubts; a person who would prefer not to think about life’s complexities; or, succinctly, a person who is intellectually and emotionally lazy.

No, I am not going to discuss God at this time. But I do want to talk about fuel agnosticism. When people ask me which fuel I like, most times I reply that I am fuel agnostic. Put another way, except for gasoline, I have only strategic short-term fuel favorites among the fuels now on, or soon to come on, the market. As far as gasoline, I agree with the president, almost all environmentalists and a growing number of business leaders, that America must wean itself off gasoline. It just does not cut it, given the country’s air quality, GHG, pollution, economic and security objectives.

Happily, drivers, particularly owners of flex-fuel vehicles (new or converted) have fuel choices at the present time besides gasoline. They are not perfect by any stretch of the imagination. But they are better than gasoline with respect to key public policy and quality of life commitments.

Flex-fuel vehicles (FFVs) can use E85 ethanol blend, the vast majority of which is made from corn; battery powered vehicles can power up on electricity; vehicles with fuel cells can fill up with hydrogen. Natural gas-based ethanol likely will come on the market relatively soon, perhaps within the next 3 to 5 years. This is only a partial list, but they include the “biggies” with respect to alternative fuels.

Obstacles exist restricting consumer ability to exercise their choices among alternative fuels. Among them:

  • lack of investment in infrastructure — fuel stations, pumps etc.
  • franchise agreements excluding sale of E85 at brand-name stations

Both electric and hydrogen-cell cars, on average, are too expensive right now for most Americans to purchase, and reliance on batteries increases the psychiatrist’s bill for many drivers because of mileage constraints. Fear of being stuck on a freeway without electricity and without proximity to fuel stations induces lots of pre-driving psychodrama and expands the use of Ambien the night before driving relatively long distances. Misery, in this case, doesn’t like company. Sort’ve up the crowded creek without a paddle. However, on the good news side, we may have a paddle soon, as electric car producers are aiming at batteries capable of “driving” cars longer distances and producing cheaper sticker prices. Hopefully, with increased use of natural gas, wind and solar power as substitutes for coal, electric cars will become even better than they are now concerning life-cycle GHG emissions.

Corn-based ethanol is presently the best alternative fuel capable of competing with gasoline on a large scale and simultaneously responding to environmental, pollution and GHG objectives. Independent retailers selling E85 have grown in number and locational diversity. Better land management by farmers and an ample supply of corn have lessened the intensity of the food vs. fuel dialogue. While varying over time, the price of ethanol now in most areas of the nation is very competitive with gasoline on a mileage-per-gallon basis. The price differential between the two fuels seemingly has stabilized at between 20 and 26 percent.

Detroit, aided by available federal incentives, has put more than 17 million FFVs on the road. And even though there is a paucity of fuel stations, sales of E85 have still increased modestly.

Because of costs related to development and certification, only one EPA-approved conversion kit exists to change internal combustion engines to FFVs. It is very expensive. Even though consumers, including drivers of fleet vehicles, administered by the public sector, indicate driver satisfaction with the kit, its limited use to convert EPA-approved vehicles to FFV status is understandable. An increase in the number of certified kits would bring down their price and lead to expanded conversion of existing gasoline-only autos.

Natural gas-based ethanol has stimulated a good deal of interest. The process of making ethanol from natural gas seems doable. Coskata, Inc., has developed and tested a process to convert natural gas to ethanol. It results in a product that is relatively inexpensive and responds well to environmental and GHG objectives. The company is seeking financing to build one or more facilities. Its success will provide a strong contender among alternatives for consumer fuel dollars.

It is important that we extend the menu of choices at the pump. Right now, the nation has no real strategy to get from where we are now, which on paper and in a limited way at your friendly gas station is promising, to an effective nationwide menu of consumer fuel choices. Acting now to secure such a strategy is important, in light of GHG emissions, pollution and security problems, including growing tension in the Middle East and our allies’ continued need for imported oil.

We need an immediate, transitional and long-term strategy that increases competition, over time, among multiple fuels — fuels able to respond to national economic, social welfare, and environmental as well as GHG objectives. Through public-private sector partnerships, the nation should be aiming at low-hanging fruit (substitute fuel) like corn-based ethanol E85, and, when it’s ready, natural gas-based ethanol.

Electric vehicles and hydrogen-fuel vehicles are not yet ready for prime time, but both, with technological, cost, and design improvements, could be a necessity in the intermediate and long-term future. Let’s not meet the enemy only to find out that he or she is us (Pogo). We have the data to become a believer concerning the benefits of a transitional and growing fuel menu, while at least for now being fuel agnostic.