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Fracking offers hope

I’ve just finished The Frackers, the excellent history of how the United States became the world’s leading developer of fossil fuels, by former Wall Street Journal reporter Gregory Zuckerman.

There are three lessons that can be taken away from this history, all of which relate to the development of alternative sources of energy:

  • The government had very little to do with the development of fracking. It was all done by wildcatters who operated far outside major institutions.
  • The founders of these methods didn’t necessarily get permanently rich. All have done well initially but have been undone by their very success, producing a superabundance of gas and oil that has driven down prices to the point where producers are overextended.
  • The maverick wildcatters who have opened up our gas and oil resources are not necessarily opposed to alternative sources of energy. In fact, they have often become the biggest promoters of wind, solar and alternative fuels for our transport sector.

Let’s examine those myths one by one:

The government should get credit for the breakthroughs. Proponents of big government often try to promote the idea that the fracking revolution never would have occurred without the help of the government. They even argue that government was responsible for the fracking initiative. Three years ago, Ted Norhaus and Michael Shellenberger of the Breakthrough Institute published a piece in The Washington Post in which they practically argued that fracking had been invented in the laboratories of the Department of Energy. George Mitchell, who spent 40 years developing fracking, had simply borrowed a few ideas that the DOE had designed.

Read the opening chapter on Mitchell in The Frackers, and you’ll hardly find one reference to the Department of Energy or government help. At one point the DOE contributed a few million dollars to an experiment that Mitchell had designed, but that was it. The rest of the story tells of Mitchell’s fascination with trying to suck oil out of shale rock, and how he nearly bankrupted his moderately successful oil company in the effort. He had no luck trying to convince the major oil companies that shale could be accessed. At one point, Chevron came very close to fracking the Barnett Shale, where Mitchell had his first breakthrough, but the company gave up on the effort. Harold Hamm experienced the same frustrations in the Bakken, where he alone believed there were vast reserves of oil but couldn’t get anyone to support him, until he finally made a breakthrough. The government had nothing to do with it.

Fracking wildcatters always get rich. The great irony for many of these pioneers is that they are often undone by their own success. Aubrey McClendon built Chesapeake Gas into the nation’s second-largest producer of natural gas but was forced to give up his company because the success of his fracking had driven the price of gas so low that he was overextended. The same thing happened to Tom Ward, an early associate of McClendon’s who had built his own company, SandRidge, based on fracking. Ward was forced out of his ownership by the board of directors. Harold Hamm has been having the same trouble in The Bakken since the superabundance of oil has forced the price down. Developing a new source of energy doesn’t necessarily mean you’re going to be permanently rich.

The developers of new ways to access fossil fuels are opposed to other alternatives. Because they have been so successful in reviving production of oil and gas, the assumption has been that the Frackers are wedded to fossil fuels and are undercutting alternatives. This is not true. The primary motive of all these innovators has been to make America more energy-independent and reduce our reliance on foreign oil. All of them see the development of fossil fuels as only a temporary step, and acknowledge that we must ultimately find some other sources of energy. T. Boone Pickens, the dean of oil magnates, put forth a plan that would try to get the electrical sector to rely on wind so that natural gas could be moved over to the transport sector to replace oil. His Clean Energy Fuels Corporation had some success in building a “natural gas highway” that substitutes compressed natural gas for diesel fuel in long-haul tractor trailers. Both Mitchell and Hamm have been exploring alternative energy, and they’re funding efforts to try to substitute renewables for fossil fuels, both domestic and imported.

As Zuckerman concludes at the end of The Frackers:

The great leap forward should have involved alternative energy, not oil and gas. The U.S. government allocated over $150 billion to green initiatives between 2009 and 2014. … There’s little to show for the investments, however. … Instead a group of frackers, relying on market cues rather than government direction, achieved dramatic advances by focusing on fossil fuels, of all things. It’s a stark reminder that breakthroughs in the business world usually are achieved through incremental advances, often in the face of deep skepticism, rather than government inspired eureka moments.

It’s a lesson worth keeping in mind as we pursue alternative fuels to substitute for foreign oil.

Falling oil prices prompt pullback in U.S. drilling

The Wall Street Journal reports today that U.S. oil drillers are scaling back on plans to drill new wells, amid the plunge in global prices.

Nymex crude dropped 77 cents a barrel to $77.91 Thursday.

Crude is down more than 25 percent since June, making it much less profitable to drill for oil in shale-rock plays.

As WSJ (subscription required) notes:

Continental Resources Inc., a major oil producer in North Dakota’s Bakken Shale, said Wednesday that the company wouldn’t add drilling rigs next year. ConocoPhillips Co. said that next year’s budget would fall below the $16 billion spent this year, dropping plans for some new wells in places such as Colorado’s Niobrara Shale.

Pioneer Natural Resources Co. signaled that it might delay adding rigs in Texas unless oil prices rebound.

“We’re in a battle with Saudi Arabia in regard to market share,” Pioneer Chief Executive Scott Sheffield told investors Wednesday. The Irving, Texas, company hasn’t announced its drilling plans for next year, but Mr. Sheffield said they would hinge on where oil prices stand in the next few months.

Investor: If oil drops to $70, ‘bye, bye fracking’

Other analysts and experts have been more circumspect about what will happen to U.S. shale-oil drilling operations is the price of crude continues to drop, from the current level of $80 a barrel. But bond investor Jeffrey Gundlach is more blunt:

“I think it’s going to $70 and if it does, it’s bye, bye fracking. Goodbye all of the great job creation from fracking because fracking becomes too expensive if you can buy oil at $70 a barrel,” Gundlach said on Wednesday at ETF.com’s Inside Fixed Income Conference.

Read the whole story on CNN Money.

(Photo credit: CNBC)

Winston, what would you do concerning natural gas?

Where is Churchill when we need him? How many psychobabble articles and cable commentary about Putin and Russia could we have done without by just remembering good old Winnie’s marvelous, insightful quote in 1939? It’s as near perfection as we are going to get in trying to understand Mr. Putin and Russia. Both are “riddle[s] wrapped in a mystery, inside an enigma; but perhaps there is a key. That key is Russian [and Putin’s] national interest.” (The word Putin is my addition — I am sure Churchill would not have minded.) What does Putin want? Apparently not only full control of Crimea, but also instability in Eastern Ukraine.

Okay, now some of you readers are saying the same about the U.S. We seem to accept Russia’s takeover of Crimea…ah, Russia had it once anyway and it has a big naval base there. Sounds vaguely historically familiar. What about the other place, they say. What was its name? Guantanamo and Cuba! Oh, no?! Please let’s focus on Eastern Ukraine.

Forget consistency and remember Ralph Waldo Emerson. “Consistency [in foreign policy] is the hobgoblin of little minds” (Again, pardon the added-on term, foreign policy.)

Now how does oil come into all of this? None of us, not just President Obama, want to fight a war over the Ukraine, Eastern Ukraine or Crimea. If he were running again, Obama would probably borrow from Woodrow Wilson’s campaign slogan, “He kept us out of war,” at least big wars, particularly with corrupt nations some of which have a history of fascism..

Alright, let’s use tough energy sanctions — oil and natural gas. if the regulations concerning sanctions were tough, they might really hurt Russia’s economy and its ability to move out of the economic doldrums. Let’s hit them where it hurts! No, apparently, we will not, at least for now. Why? Well, Western Europe and our new ally, the Ukraine, depend on natural gas. Without it, both would be in for cold winters and probably a severe industrial recession. So what did our leaders do? They excluded natural gas from the list of recent sanctions. I suspect they, also, will allow Russia and the West to continue to trade in oil not involving new technology from the West.

Absence of natural gas in Europe and the Ukraine (and probably other Eastern Europe nations) is a plus for the U.S. We can make it up by selling natural gas. Isn’t what’s good for the U.S. bad for Russia and Mr. Putin?

Maybe, maybe not…or maybe the view that the U.S can be savior of Western Europe is a myth. Or maybe it’s just too complex for political leaders to grab hold of instantly.

Some verities to deal with:

1. Even with the current rush to permit the export of natural gas, before terminals get built and tankers are ready and environmental issues are disposed of, the first large volume of natural gas would not reach Ukraine or Western Europe until 2016 or later.

2. The U.S., despite the increase in shale development and natural gas production, still imports natural gas to meet domestic supplies — about 12.5% in total. Like big oil, exports of natural gas are to a large degree being sought to secure a higher prices overseas than in the U.S. Hurting Russia for U.S producers is a side show.

3. Russia, ostensibly, can produce natural gas and ship it by pipeline, rail or boat cheaper than we can. According to experts, the cost of U.S.-produced, transported and sold natural gas in Europe and the Ukraine is and will be much higher than Russian-produced and transported natural gas sold globally. Note in this context that Russia just cemented a $4 billion deal for Russia to sell oil to China. Will the Europeans and Ukrainians want higher-priced natural gas from the U.S.?

4. Oh, I almost forgot. Just last winter, U.S. residents in many states, particularly eastern states, nearly froze because of shortages of natural gas resulting from lack of adequate pipeline capacity and pipeline congestion. Consequently, the gas they secured came at very high prices. If ports can be built, pipeline amendments for the east coast cannot be far behind and probably should come first, if money is tight. Can we afford both, given uncertainties concerning price of natural gas and cost of drilling in tight areas? Sure. But the tradeoffs need to be carefully balanced by policymakers and the long term for investors must look bright.

It’s a puzzlement. Our policy seen by many nonpartisan observers as a “riddle wrapped in a mystery…” I will know sanctions are real when gas is included. What I won’t know is whether it will make a difference to Russia, given the fungibility of import-needy nations like China. Sanctions may bring both China and Russia something that communism has failed to do — build back a broken alliance. What I also don’t know is whether the growth of exports will significantly raise natural gas prices over time in the U.S. and lower the price differential with oil, and its derivative gasoline. If it does, producers and distributors may get rich, but opportunities for something I do care about — the development and widespread use of natural gas-based ethanol as a replacement fuel — may be impeded significantly. If this occurs, the environment, our economy and low- and moderate-income Americans may be worse off for it. Policymaking in today’s world is difficult and is something you often cannot fully learn in school.

What Happened to Saudization? Bipolar Fuel Projections!

Just a few short months ago, newspapers, led by the WSJ, trumpeted, many on their front pages, the Saudization of America and the end of America’s and OECD’s reliance on Middle East oil. Do you remember?   Well maybe you don’t have to– at least after 2025. The IEA’s World Energy Outlook for 2013, published Nov 12, indicates that the “Middle East, the only large source of low-cost oil, remains at the center of the longer-term oil outlook.” Within about 10 years or so, it will provide the largest share of the world’s expanded oil supply.

I realize the fragility of projections and have in the past criticized the IEA and the EIA and other makers of global energy projections. At times, projection makers are more artists than scientists. The good artists, sometimes, come close to what actually happens. The not so good ones either get lucky or appear to mute their “over or under” reality numbers. They either provide ranges, permitting them to say they were right in the future, or they complain, perhaps over a good bottle of wine, about the complexity of the variables.

I believe it is important to read the IEA report because it lends a bit of skepticism to the idea that America and its friends are entering the golden era of energy abundance. Indeed, The New York Times on Nov 13 ran the IEA story under the headline, “Shale’s Effect on Oil Supply Is Forecast to Be Brief.”

Here is what the IEA said in their Executive Summary:

“The role of OPEC countries in quenching the world’s thirst for oil is reduced temporarily over the next 10 years by rising output from the U.S., from oil sands in Canada, from deep water production in Brazil and from natural gas liquids from all around the world.  However, by mid-2020, non-OPEC production starts to fall back and countries in the Middle East provide most of the increase in global supply. Overall national oil companies and their host governments control some 80 percent of the world’s proven-plus-probable oil reserves.”

America’s likely surplus combined with a slowdown in the increase of demand will not affect costs of oil and gasoline in a major way.  Escalating demand for both will be reflected in Asia and will place a floor under prices. America’s oil companies function in a global market and are not governed to a great extent by the laws of supply and demand in this country.  They will sell to the highest bidder worldwide.

IEA indicates that “the need to compensate for declining output from existing oil fields is the major driver for upstream oil investment to 2035…conventional crude output from existing fields is set to fall by more than 40 mb/d by 2035.Of the 790 billion barrels of total production required to meet our projections for demand to 2035, more than half is needed just to offset declining production. According to the NY Times, IEA conclusions are generally shared by the EIA; that is, today’s rapid oil production from shale will continue for a relatively short time and then slow rapidly. IEA indicated the slowdown will occur in the mid-twenties, EIA by the late teens.

IEA’s and EIA’s analysis should not generate a bipolar response or create a need for a regimen of pills to cure projection related manic depression. It’s only a projection. Take a deep breath and count to ten.  Next year it will likely change because of “complex variables ” including but not limited to changing world demand, Middle East tension, new technology and the use of alternative fuels.

Until we get better at projection, let’s applaud IEA and EIA’s professionals.  At a minimum, they are honestly and artistically responding to lots of unknowns.  Paraphrasing the comedian Ilka Chase (and changing a word or two) projectionist’s minds are cleaner because they change them so often…

Just kidding!

Their efforts should at least reinforce the need to think through transportation fuel strategies and act with all reasonable speed on what I would consider, at least, low hanging fruit. For example, a coordinated campaign by the public, nonprofit and private sector to encourage the federal government to approve methanol as a fuel would be a good first step.  Federal acquiescence, if combined with simultaneous certification of low cost kits to convert existing vehicles to flex fuel cars could provide the framework for an effective transitional fuel strategy.

It, likely, will take from five to ten years before electric and or hydrogen powered vehicles will be able to reach the budgets and driving needs of most low, and moderate income Americans.  Even when renewable fuel powered new vehicles reach a mass market, the technology will not be able to change the gasoline dependent older vehicles. In this context, alternative transitional fuels could, with the addition of an increased number of conveniently located fuel stations and stimulated by new demand, offer competition to oil company restricted gas-only stations and consumers a choice of fuels.  America would be better off economically and environmentally.  Consumers would secure a more predictable, probably lower price for fuel at competitive pumps and charging stations.  The nation would be less dependent on imported oil.

And that’s the way it is or isn’t — stable oil and gas markets

“And that’s the way it is” was used by my favorite news anchor, Walter Cronkite, to sign off on his highly respected network news show. And that’s the way the content he generally delivered generally was — clear, factual, helpful. I have tried to apply Cronkitism to today’s media analyses and commentary on oil production and oil prices. The new assumed “way it is” regrettably sometimes seems like the way the journalist or his boss — whether print, TV or cable — wants it to be or hopes it will be. Frequently, partial sets of facts are marshaled to ostensibly determine clear cause and effect relationships but end up confusing issues and generating questions as to the author or speakers mastery of content and conclusions.

What’s a Cronkitist to do? I often look to The New York Times for the wisdom grail. Generally, it works. But, I must confess that a recent piece in the Times by outstanding journalist, Clifford Kraus, titled “Is Stability the New Normal?” Oct. 9 bothered me. I found its thesis that a new stability has arrived with respect to oil prices and by implication gas prices at the pump a bit too simple.

The author indicates that “predictions about oil and gas prices are precarious when there are so many political and security hazards. But it is likely that the world has already entered a period of relatively predictable crude prices…there are reasons to believe the inevitable tensions in oil-producing countries will be manageable over at least the next few years, because the world now has sturdier shock absorbers than at any time over at least the past decade.”

What are these absorbers? First, more oil production in the U.S., Canada, Iraq and Saudi Arabia, to balance the loss of exports from countries like Iran, Libya and, I assume, Venezuela and possibly Nigeria. Second, the continued spread of oil shale development throughout the world, including many non-Middle East or OPEC countries. Third, increased auto efficiency, conservation and lower demand for gas in the U.S. Finally, near the end of the article and not really seemingly central to the author’s stability argument natural gas becomes in part a hypothetical “if.” He notes that American demand for gasoline could drop below a half a billion barrels a day from already below peak consumption, if natural cheap gas replaces more oil as a transportation fuel. (At least he mentioned natural gas as a transportation fuel. Most media reports fail to tie natural gas to transportation) break open the champagne! Nirvana is near! Michael Lynch, a senior official at Strategic Energy & Economic Research Inc., is quoted in the article, saying, “Stable oil prices could reduce future inflation rates and particularly curb transportation costs, helping to steady prices of food and construction materials that travel long distances…Lower inflation can also help reduce interest rates. By reducing uncertainty, investor and consumer confidence should both be increased, boosting higher spending and investment and thus economic growth.”

In the words of Oscar Hammerstein II, I want to be a cockeyed optimist…but something tells me to be at least a bit wary of a too-good-to-be-true scenario, one premised on a historically new relatively high price of oil per barrel (bbl.), just under $100 (the price is now about $105) and gas prices likely only modestly lower than they are now (the U.S. average is close to $3.50 a gallon)

So why be wary and worry?

1. The Times accepts the rapid significant growth in oil shale development and production too easily. Maybe they are right! Perhaps the oil shale train has left the station. But the growth of environmental opposition, particularly opposition to fracking, will likely slow it down until regulations perceived as reasonable by the industry and environmentalists are put in the books. Further, the often very early large expectations with respect to new pools of oil in places like the Monterey Shale, featured in media releases, have not panned out after later sophisticated analyses. Finally, the price of hard to get at oil may come in so high as to limit producer enthusiasm for new drilling.

2. The Times correctly suggests that the relationship between oil prices and gasoline costs may be less than thought conventionally. Lower oil costs in the U.S. do not necessarily trigger lower gasoline costs, and higher gasoline costs are not necessarily the result of higher oil costs per barrel

The Times credits the recent visible break in the relationship primarily to an abundance of oil linked to oil shale production in the U.S. and in many other countries and to falling demand for oil throughout the world, including China, to the lack of economic growth and higher efficiency of vehicles.

It’s more complicated. For example, price setting is affected in a major way by speculation in the financial community, and by oil producers and refiners who govern production and distribution availability. Respected analysts and political leaders suggest that companies base their decisions concerning price at least in part on market and profit assumptions. Fair. But, oil’s major derivative gasoline does not function in a free market, rather, it is a market controlled by oil companies. There is little competition from alternative fuels. Unfair and inefficient.

3. The quest for oil independence and the related justification for drilling lead the media to suggest and the public to believe that there is an equivalency between increased production of oil and closing the gap between what we consume and produce as a nation. Yes, we have reduced the gap — both demands have fallen and production has increased. But it is still around 6.0 to 6.5 million barrels per day. Yet, we continue to export nearly half of what we produce every day or nearly 4 million barrels. Our good friends, China and Venezuela, get 4% and 3% respectively. Companies may sing “God Bless America” while extracting, refining, exporting and importing oil, but theologically based patriotism doesn’t govern the oil market. Sorry, but global prices and profits have precedence. Remember the adage — “the business of business is business.”

4. A recently released Fuel Freedom Foundation paper suggests that energy independence is a misnomer. Based on its review of EIA data and projections through 2035, negative energy balances exist that never drop below a $300 billion deficit. If EIA data is to be believed, energy independence, Saudi America and control of our energy future are developments that will not occur anytime soon.

I am disappointed that natural gas as an alternative fuel seems more like an afterthought coming at the end of Kraus’s long piece. I am glad the author mentioned it but it seems at least a bit forced. The commentary was limited to natural gas and not its derivatives, ethanol and methanol, or, for that matter, other alternative fuels. Put another way, it seemed to assume a still very restricted fuel market. Opening up consumer choices at the pump is a key factor in stabilizing oil and gas markets. It also is a key factor achieving reduced prices at the pump for low and moderate income families; the former spending from 14-17% of their limited income on gasoline.