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November Outlook

Tapping the Shale Revolution

The United States is awash in natural gas. Much of this valuable energy resource is trapped in hard-to-reach places, but recent technological advancements in hydraulic fracturing and horizontal directional drilling have produced a boom in natural gas production in states such as Pennsylvania, West Virginia and Texas.

According to energy analyst Robert Bryce, it’s hard to overstate the economic impact of this so-called “Shale Revolution.” Bryce contends that increased energy production from shale will not only play an important role in the nation’s overall energy portfolio, it will also unleash an industrial renaissance in this country.

The main obstacle, Bryce argues, resides in the realm of public policy. Across the country, environmental groups are attacking the gas extraction process known as hydraulic fracturing, or “fracking.” Fracking involves blasting water, sand and chemicals into rock formations so oil and natural gas can escape. Environmental groups are claiming the process is not safe and can pollute groundwater. But Bryce, a fellow with the conservative Manhattan Institute think-tank, dismisses many of their claims and says the fight over fracking is really a proxy for the fight over land-use issues that come with increased drilling.

Outlook: Characterize the importance of the recent shale boom to the overall American economy.
RB: The developments over the past three to four years, collectively known as the “shale revolution,” are the single biggest developments in the North American energy story since the discovery of the East Texas Oil Field in 1930. The combination of hydraulic fracturing and long-reach horizontal drilling is changing how the United States positions itself with the rest of the world in regard to not only energy but also carbon dioxide emissions.
The U.S. is now the single biggest natural gas producer in the world. This will fundamentally change the U.S. energy supply picture over the coming decades. And it will benefit consumers, too. From 2005 to 2008, the average price for natural gas was over $7 per 1,000 cubic feet. Today, it’s under $4. That price drop represents a savings to U.S. consumers of $60 billion a year.
And it’s not just about shale gas; it’s also about shale oil. We’ve seen a dramatic turnaround in domestic oil production. The United States is now reversing a decades-long downward trend in oil production, and some analysts are predicting that U.S. oil production could increase by as much as 2 million barrels a day over the next five years. The U.S. rig count for the last week in November was 2,000. That’s an increase of more than 300 from a year ago and that’s a dramatic increase from two to three years ago when drilling fell off dramatically because of the financial crisis.

Outlook: What will the economic effect be in states that have shale?
RB: If you have more rigs drilling, then you have more people working. In the last 18 months alone, the oil and gas industry in Pennsylvania has hired about 50,000 new workers. This past summer, Halliburton announced that it would hire 11,000 workers this year in North America – most of them in the United States working on shale-related projects.
This surge in drilling means a dramatic increase in employment in states that have shale and a dramatic employment increase in other industries related to drilling. And then, due to the low cost of “feedstocks” – that includes natural gas and the natural gas liquids that coming onto the market because of all of this drilling – we’re creating, or re-creating, entire new industries such as petrochemicals and steel.

Outlook: You contend that increased natural gas drilling can help revive the manufacturing base in the United States? How so?
RB: Since the shale revolution began, we’ve seen a huge increase in the U.S. production of propane and ethane, which are found in natural gas and oil as it comes out of the ground. Those two ingredients are critical to petrochemical manufacturing. That increased production has led to a number of announcements from petrochemical manufacturers that they’re going to build new plants in the United States. They make everything from plastic drinking cups to milk jugs to thread for your clothes to plastic casing around televisions. We’ve had multiple announcements from companies that are expanding or building new plants in Texas and Louisiana. We’ll also see new petrochemical plants in Appalachia. Those new projects will create a huge number of construction jobs to build the plants, and then once they’re built, it will mean large number of high-paying jobs to staff them.

Outlook: What other industries will benefit?
RB: The steel industry uses huge quantities of energy. In the past, it was heavily dependent on metallurgical coal. They’ve found they can now use natural gas in place of coal. And if you have low-cost natural gas, and you can get a long-term supply of it, it suddenly makes the United States more attractive than overseas locations for that steel production. In the past year, we’ve seen Nucor, the largest steel producer in the country, begin construction of a major new steel plant in Louisiana. They’ll spend $750 million on the plant but Nucor has said it may invest as much as $3 billion on new production capacity in Louisiana. They’ll use a process at the plant called direct-reduced-iron, in which they use super-heated natural gas as a key energy source. It allows them to produce steel more cheaply and with lower carbon emissions than if they were using coal. There are multiple wins here. They’ll create up to 1,000 high-paying jobs, produce steel at a lower cost than their overseas competitors, and they’ll do so with less air emissions.

Outlook: The overall cost advantages of natural gas compared to coal seem significant.
RB: Throughout society we’re moving toward things that are smaller, faster, lighter, denser and cheaper, and the move to natural gas is part of that. It’s lighter. It has good density in terms of the amount of hydrogen relative to the amount of carbon, and it’s cheap. Think about a utility. If you’re going to build a new power plant, you know that coal is clearly under regulatory attack for a number of reasons, including air emissions. You’re going to need a big area to store the coal and you’ll need a rail line coming by the plant. And you’re going to need expensive scrubbers to meet air quality regulations. Compare that to the small footprint that comes with a gas pipeline that people can’t even see, and if you use that gas pipeline to feed a fuel cell, then there are no air emission issues at all. Or assume you use a conventional natural gas-generated turbine. The footprint for that turbine would be a fraction of that required for a coal-fired power plant. It makes a whole lot of sense in terms of less capital cost and in reducing potential fir pushback from the public.

Outlook: How big of a drawback is the historic volatility we’ve seen in the price of natural gas?
RB: That’s always been a concern. Prices have been volatile. In the 1970s, natural gas prices went through the roof. To be blunt, it was too much federal government intervention in the market, and numerous studies have shown that. Regulations constrained drilling for new natural gas resources, and that led to a shortage. If you’re a utility executive and you have to produce electricity 24 hours a day, seven days a week, there is some comfort in looking out into the yard and seeing a big pile of coal that you know will last you for a month. With a gas pipeline you’re not necessarily assured of that. You are instead betting on reliability of the supplier and betting that the price you locked in will stay not just for six months but for six years or whatever the length of time might be. The volatility of pricing is always a concern for everyone, and with natural gas it’s extra important.

Outlook: How has the natural gas drilling boom helped increase oil production?
RB: In shale formations, you can produce oil and gas together. Drillers are looking at low natural gas prices and are seeing that they can make more money by targeting areas in the shale formations where they can produce oil, too. Right now we see more rigs that are targeted to oil production than gas production – a reversal from a year or so ago. The result: They’re producing more oil, and the natural gas coming out of the ground is almost a side benefit..

Outlook: Hydraulic fracturing has grown more controversial in recent years. How much of a role is it playing in the drilling boom?
RB: It’s absolutely pivotal. We’ve seen a lot of news coverage, almost all of it negative, along with a huge amount of pushback from environmental groups claiming it’s dangerous and it’s not regulated. But the reality is this is a proven technology, it is well-regulated and most of the fears about it are dramatically overblown.

Outlook: How long has fracking been around and why do you think it’s safe?
RB: It’s been around for about 60 years, and it’s been used on over 1 million wells in the United States. When people claim that hydraulic fracturing is a danger to groundwater, they are ignoring several basic facts. First, the target zone for hydraulic fracturing in almost every case is at least a mile below the geologic zone where drinking water supplies are located. So, you have a mile of rock separating the target zone, whether it’s shale or another type of rock formation, from the zone that’s being targeted for fracturing. The well operator and the drillers make certain to have several layers of pipe between the interior of the well and the exterior. The last thing any driller or operator wants is to have contact with groundwater in the surrounding area because that means there’s a problem with well and it won’t produce properly.
The key issue here is one of image. For decades, the public has been conditioned to hate the oil and gas industry. Now we have a technology that can fundamentally change the energy picture in the U.S. but through very clever campaigns and simple slogans, environmental groups are capitalizing on this decades-long enmity toward the oil and gas industry. They’ve made hydraulic fracturing the issue when in fact these breakthroughs in hydraulic fracturing are like a gift from God for the United States.

Outlook: A 2004 study by the Environmental Protection Agency found that hydraulic fracturing posed no risk to drinking water and Congress even exempted it from the Safe Drinking Water Act. So why did it suddenly become so controversial?
RB: The increase in drilling is bringing a lot of rigs into areas where there wasn’t drilling before, particularly in Pennsylvania and New York. The issue isn’t really hydraulic fracturing. Instead, fracturing has become a proxy for other issues such as more truck traffic, air issues and others.

Outlook: Still, critics argue that fracking has lead to contamination of water supplies and point to more than 1,000 cases of contamination that have been documented by courts and state and local governments in Colorado, New Mexico, Alabama, Ohio and Pennsylvania. What do make of their arguments?
RB: For people who want to promote this idea that fracturing is bad, all they have to do is produce one video clip showing someone lighting water from their kitchen sink on fire, and it gets replayed over and over and many people will then think that’s going to happen to them if there’s hydraulic fracturing in their region. In that specific case, of gas being lit on fire in a Colorado kitchen, the state’s environmental authorities investigated it and found it had nothing to do with oil and gas drilling. It was due to biogenic gas, or naturally occurring methane, that was in that groundwater. But that doesn’t make it on television, does it?

Outlook: The EPA is studying fracking again with a final report due in 2014. Do you think it will end the controversies?
RB: It won’t. The pushback against the oil and gas business has been ongoing for decades. The message of those who oppose drilling is easy and fits on a bumpersticker: “Big Oil will pollute your water.” What’s the oil and gas sector’s response? “Oh no, we won’t.” From a PR standpoint, the industry has already lost.

Outlook: Wouldn’t it help end some of the mystery and controversy if the industry simply disclosed the ingredients of its fracking fluid?
RB: Disclosure is imperative and the industry is already responding. Look at fracfocus.org, which is a joint project of the Interstate Oil and Gas Compact Commission and the Groundwater Protection Council. Many companies are using fracfocus.org so they can disclose all of the ingredients in their fracturing fluids. But again, this is a battle for public opinion. And it will be a long battle between the anti-drilling forces and the oil and gas industry. It will last for years into the future and there’s no way around it. The industry’s only option is to be more open and more transparent. They just have to be better all around.

Outlook: Are other countries using fracking?
RB: Yes. The shale revolution started here but it’s going global. It has tremendous potential to change the energy picture around the world in the next decade or two. There’s now shale drilling in Poland, Eastern Europe and in China, Australia and South America. These technologies of long-reach horizontal drilling and hydraulic fracturing are helping companies around the world unlock galaxies of natural gas. The world is awash in natural gas and by helping unlock that methane, these technologies are providing unbelievably good news for the global economy.
I’m optimistic, even amid all of the pushback. The opportunities presented by low cost natural gas are so compelling that eventually this fuel source is going to come to the market in great abundance. It’s just incredibly good news.

Outlook: What role will natural gas play in the country’s future energy portfolio?
RB: It’s critical. The U.S. gets 24 percent of its electricity from natural gas. It is viable as a transportation fuel but it will take a long time to move a significant portion of the country’s transportation fleet away from gasoline and diesel fuel to natural gas. That said, nat gas provides a hedge against the oil market if oil prices get too high.
Natural gas also plays an essential role in space heating for the residential and commercial markets. And it’s essential for industrial uses, such as petrochemicals, refining, process heating, and steel production. The U.S. is turning into the Saudi Arabia of natural gas. Indeed, serious people are now talking about exporting liquefied natural gas from the U.S. to Europe. That idea would have been thought a joke just three years ago.
U.S. energy policy should be very simple: We should aim to keep energy cheap, abundant and reliable. If we can do those things over the long term then we can put people back to work and revive the economy. If energy is expensive and scarce and sporadic, it will wreak havoc on the economy.



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