Tag Archives: Natural Gas

“The U.S. Current Natural Gas Situation”

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Michael Giberson

What do changes in the domestic U.S. natural gas market have to tell us about the world oil market? Hirsch, Bezdek, and Wendling wrote, “The North American natural gas situation provides some useful lessons relevant to the peaking of conventional world oil production.”

Here is their assessment of the North American natural gas situation:

U.S. natural gas demand is increasing; North American natural gas production is declining or poised for decline as indicated in references 53, 54, and 55. The planned U.S. expansion of LNG imports is experiencing delays. U.S. natural gas supply shows every sign of deteriorating significantly before mitigation provides an adequate supply of low cost natural gas. Because of the time required to make major changes in the U.S. natural gas infrastructure and marketplace, forecasts of a decade of high prices and shortages are credible.

Hirsch, Bezdek, and Wendling, “Peaking of World Oil Production: Impacts, Mitigation, and Risk Management,” (2005) p. 36. (Commonly referred to as the “Hirsch Report.” References 53, 54, and 55 are the US EIA Annual Energy Outlook 2000, a 2004 CERA report on gas supplies, and an Oil and Gas Journal article also from 2004.)

US EIA,

US EIA, “Projected natural gas prices depend on shale gas resource economics,” Today in Energy, August 27, 2012.

Indeed, forecasts of a decade of high gas prices were credible, as many energy experts agreed. But as it has turned out about a year after the report was published U.S. natural gas production began a period of sustained growth, and high gas prices lasted only about 3 years. The planned expansion of LNG imports has turned into a pressing desire to export North American natural gas to Europe and Asia. As of May 17, 2013, two export licenses have been approved and 19 more applications are under review at the US DOE.

Makes me wonder what Hirsch, Bezdek, and Wendling think about the peaking of world oil production now. One clue, from 2010, suggests they no longer draw analogies from the North American gas market when discussion world oil production.

Some natural gas posts worth reading

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Lynne Kiesling

Last week the EPA released a report on the extent of methane release during shale gas drilling; the results indicate that methane release is substantially smaller than previously thought. According to an article in Fuel Fix summarizing the report,

The scope of the EPA’s revision was vast. In a mid-April report on greenhouse emissions, the agency now says that tighter pollution controls instituted by the industry resulted in an average annual decrease of 41.6 million metric tons of methane emissions from 1990 through 2010, or more than 850 million metric tons overall. That’s about a 20 percent reduction from previous estimates. The agency converts the methane emissions into their equivalent in carbon dioxide, following standard scientific practice.

The EPA revisions came even though natural gas production has grown by nearly 40 percent since 1990. The industry has boomed in recent years, thanks to a stunning expansion of drilling in previously untapped areas because of the use of hydraulic fracturing, or fracking, which injects sand, water and chemicals to break apart rock and free the gas inside.

Experts on both sides of the debate say the leaks can be controlled by fixes such as better gaskets, maintenance and monitoring. Such fixes are also thought to be cost-effective, since the industry ends up with more product to sell.

This excerpt reflects my thinking on the leaks — since methane is the product they are extracting to sell and the cost of managing leaks is relatively low (but not zero), the firm has a self-disciplining incentive to reduce leaks (although not eliminate them, since the cost is not zero).

In a post on the EPA report, Walter Russell Mead remarks that

Companies are developing more sophisticated leak detection systems, and unlike many other environmental problems (like, say, power plants’ greenhouse gas emissions), there is a market incentive to prevent these leaks without any sort of green interventionist policy. Every unit of methane released into the atmosphere during drilling is lost profit.

But that’s not stopping misguided greens like Bill McKibben from bemoaning the news. McKibben took this opportunity to stress the need to transition away from fossil-fuels altogether, rather than appreciating the fact that we’re extracting one of the cleanest fossil-fuels more efficiently and with much less environmental impact than ever before. McKibben’s blinders are firmly in place; we’re unlikely to see a revision to a post of his earlier this month in which he suggested that methane leakage might make natural gas worse for the environment than coal.

I’ve never found McKibben’s arguments compelling, and now I realize why: his advocacy for dramatic, fast changes does not reflect how real people in real-world, complex decisions make changes in their behavior. McKibben fails to think at the margin. He does not acknowledge that the long transition to cleaner fuels is already in process. Long transitions are typical in technological change; think about how long it took to transition from water power to steam power — 60 years! McKibben’s argument for sudden, dramatic change does not reflect economic thinking.

Fracking at the Becker-Posner blog

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Lynne Kiesling

Fracking and energy self-sufficiency is the topic of the week at the Becker-Posner blog. Becker’s contribution provides a stream-of-consciousness overview that is consistent with the past fracking discussions here; it touches on fuel source competition, the quest for self-sufficiency, the environmental impact of fracking, and the likely effects of fuel export regulation. I’m disturbed by seeing the spectre of fuel export regulations rise again, and Becker correctly points out that at least in oil, as long as the world price is higher than the US domestic price, export regulations will have no impact. And with natural gas inventories so high that natural gas prices are falling toward zero, why harm US natural gas companies by restricting their ability to export to countries with higher prices when we have a surfeit?

Becker’s ultimate focus is how fracking contributes to energy self-sufficiency in the US: “Fracking has made the US self-sufficient in gas, and it is leading to reduced imports of oil. If this progress continues, before too long US consumption of oil as well as natural gas would not be drastically affected even by an entire breakdown of imports from the Middle East.” This conclusion depends on there being a reasonably high elasticity of substitution between oil and natural gas, but natural gas is not perfectly substitutable for oil in all instances. Take, for example, electricity generation. According to the EIA’s Electric Power Annual for 2010, there are 55,647MW of generation capacity using petroleum for fuel, and 40.2 percent of that capacity is switchable with natural gas (Table 1.8). Total nameplate generation capacity in 2010 was 1,138,638MW (Table 1.2), which means that only 4.89% of generation capacity uses petroleum fuel, and thus that 1.96% of total nameplate capacity is switchable to natural gas. Electricity is not where the oil-natural gas substitutability is. Coal-natural gas is a different story, but neither Becker nor Posner touch on that analysis, which is less relevant to their main question of energy self-sufficiency.

Bad news for the natural gas suppliers, but good news for natural gas consumers

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Michael Giberson

I’ve been meaning to remark on natural gas prices for several days, especially since a regular reader pointed out that natural gas prices have reached their lowest levels in a decade. But now, in what may be a first, I’ll just outsource the discussion by favorably linking to a post on the Climate Progress blog.

By the way, note that the prices shown in the post’s graphic (from EIA) are average prices over 2011. Current prices for natural gas are about $1 below what is shown there. (In January, typically peak demand time for natural gas!)

In the post Stephen Lacey worries about the effects of low natural gas prices on renewable power, and it is a problem if you want to roll out more renewable power capacity anytime soon, but for consumers it is a win-win. Low gas prices push down now on (non-transportation) energy prices, particularly power prices. The delay in new installations of renewable power means that, when natural gas prices recover in a few years, the power plants built will have better technology than exists today. Meanwhile, the subsidies avoided will have a very small but beneficial effect on the federal government budget.

And if your primary concern is greenhouse gas emissions, note that natural gas-fuels power plants will continue to displace coal-fired power even as the additions of renewable power plants are slowed.

Gas Exporting Countries Forum wants higher output and higher prices

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Michael Giberson

The Gas Exporting Countries Forum is meeting in Qatar. From a few news stories I gather they want to boost output and obtain higher prices, and they don’t want to issue quotas or be a cartel. My thought is that, unless they’ve discovered an end-run around basic economic principles, they will be unsuccessful in achieving their stated goals.

From the Voice of Russia:

Russia has won the support of the world’s 12 largest natural-gas exporters over the need to cooperate in developing projects for production and sale of the fuel to raise prices and boost supply at the Gas Exporting Countries Forum (GECF) in Doha on Wednesday. Russia’s Energy Minister Sergey Shmatko has described this as an integral part of the Russian energy diplomacy.

In a declaration they issued after the one-day summit the 12-member Gas Exporting Countries Forum expressed the need to reach a fair price for natural gas based on gas to oil prices indexation.

From Bloomberg:

The world’s largest natural-gas exporters aim to cooperate in developing projects for production and sale of the fuel to raise prices and boost supply.

Officials from Qatar, Iran, Egypt and Algeria, among others, agreed today in the Qatari capital Doha that the price of the fuel used to generate electricity is too low. They disagreed on how the Gas Exporting Countries Forum, a producers’ group set up to share market information and coordinate projects, could also help maximize the income of its 11 members.

Producers need to narrow the gap between prices for gas and crude oil without trying to limit production, said Hamad Bin Khalifa Al Thani, the Emir of Qatar, the world’s largest exporter of liquefied natural gas.

From AFP:

Emir of Qatar Sheikh Hamad bin Khalifa al-Thani opened the summit by complaining about disparities between oil and gas prices despite the rise in gas consumption in recent years.

“It is illogical that discrepancies between oil prices and gas prices increase in favour of the first,” said Sheikh Hamad, who added that he does not call for controlling production to influence prices.

Egyptian Petroleum Minister Abdullah Ghorab, who represented his country, said a fair price “is the cornerstone for developing the gas industry.”

… GECF has been working for a fair gas price which its leaders say is the fastest growing energy source, but they deny it aims to control prices or become a cartel like the Organisation of Petroleum Exporting Countries (OPEC).

Gas prices are currently determined either in long-term contracts between sellers and buyers, which some exporters index to oil, or on spot markets.

Texas legislature passes fracking disclosure bill

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Michael Giberson

The Texas legislature has passed the nation’s first hydraulic fracturing fluids disclosure bill. The governor is expected to sign the bill into law. The text of the bill is available from the Texas Legislature Online website.

In summary, a oil or gas well operator performing hydraulic fracturing will have to disclose the volume of water and the chemical ingredients of the fracturing fluids used. An operator will be able to withhold from disclosure information for which it claims trade secret protections, but affected property owners and neighbors to the property owners will be able to challenge the trade secret designation. In addition, a means will be provided to supply the information to health professionals and emergency responders in case of an injury or other accident.

Aspects of the bill remain controversial, for example the NRDC has criticized limiting public disclosures to ingredients found on the Material Safety Data Sheet (as the law requires) and broad trade secret protection limits.

The requirements will only apply to wells for which the initial drilling permit is issued on or after regulations implementing the law have been adopted by the Texas Railroad Commission. Any well with an initial drilling permit issued before the regulations are adopted will be governed by preexisting laws.

The website of State Rep. Jim Keffer, who introduced the bill in the State House, provided these additional details:

Upon the adoption of rules by the Texas Railroad Commission, an operator with a well that has undergone a hydraulic fracturing treatment will use the website http://www.fracfocus.org to disclose chemical ingredients of hydraulic fracturing fluids on a well-by-well basis. The registry is a joint project of the Ground Water Protection Council and the Interstate Oil and Gas Compact Commission, and was designed for operators to report chemical ingredients listed by the federal Material Safety Data Sheet (MSDS). Under HB 3328, all chemicals intentionally used in the fracturing process (whether listed by MSDS or not) must be reported and publicly disclosed.

Some companies have already posted disclosures voluntarily at www.fracfocus.org. For example, Chesapeake Energy disclosed that on April 7, 2001 at a well in Hidalgo County, Texas, it injected fluids that were composed of about 94 percent fresh water, 4.5 percent CO2, 1.5 percent sand, and a handful of other materials in concentrations ranging from 0.032 percent to 0.0006 percent of the hydraulic fluids.* (As the form says, “Information is based on the maximum potential for concentration and thus the total may be over 100%”)

A Caspar Star-Tribune story reports that Wyoming already has fracking disclosure laws and several other states are considering such laws. Regulators in Montana have proposed fracking disclosure rules, also challenged due to trade secret protection rules.

*In order of decreasing concentration: Petroleum Distillate Blend, Polysaccharide, Mineral Oil (Paraffin Oil, White Mineral Oil), Magnesium Hydroxide, Magnesium Peroxide (Magnesium Dioxide), Magnesium Oxide, Methanol (Methyl Alcohol), Ethoxylated Nonyl Phenol (Nonyl Phenol Ethoxylate), Zirconium sodium hydroxy lactate complex, Triisopropanolamine, Ammonium Hydroxide, Acetic Anhydride, and Acetic acid.

The Fracking Song: explainer with lyrics and links

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Michael Giberson

NYU journalism students produced “My water’s on fire tonight (The Fracking Song)” as part of a collaboration with ProPublica, a non-profit investigative news program that has been examining natural gas drilling and the environment.

ProPublica says a bit about the music video here. Explainer.net, another part of the NYU journalism collaboration with ProPublica, explains more about the music video, including lyrics with links (reproduced below).

If you are looking for a pop culture treatment of fracking, “The Fracking Song” is more accurate (and has higher production values!) than the Oscar-nominated film Gasland. One could quibble with parts – it mentions the toxic chemicals in fracking fluids without relating how dangerous (or not) the chemicals typically are at usual levels of dilution; little mention of waste water treatment and disposal issues which are likely more of a problem than underground gas or fluid migration issues that get mentioned.  Still, it isn’t bad as a 2 1/2 minute introduction.

From Explainer.net:

“My Water’s On Fire Tonight (The Fracking Song)” is released under a Creative Commons Attribution-Share Alike license.

Music by David Holmes and Andrew Bean
Vocals by David Holmes and Niel Bekker
Animation by Adam Sakellarides and Lisa Rucker

Lyrics:

Fracking is a form of natural gas drilling
An alternative to oil cause the oil kept spilling
Bringing jobs to small towns so everybody’s willing
People turn on their lights and the drillers make a killing

Water goes into the pipe, the pipe into the ground
The pressure creates fissures 7,000 feet down
The cracks release the gas that powers your town
That well is fracked….. Yeah totally fracked

But there’s more in the water than just H2O
Toxic chemicals help to make the fluid flow
With names like benzene and formaldehyde
You better keep ‘em far away from the water supply

The drillers say the fissures are a mile below
The groundwater pumped into American homes
But don’t tell it to the residents of Sublette Wy-O
That water’s fracked…. We’re talking Benzene…

What the frack is going on with all this fracking going on
I think we need some facts to come to light
I know we want our energy but nothing ever comes for free
I think my water’s on fire tonight

So it all goes back to 2005
Bush said gas drillers didn’t have to comply
with the Safe Drinking Water Act, before too long
It was “frack, baby, frack” until the break of dawn.

With the EPA out it was up to the states
But they didn’t have the money to investigate
Sick people couldn’t prove fracking was to blame
All the while water wells were going up in flames

Cause it’s hard to contain all the methane released
It can get into the air, it can get into the streams.
It’s a greenhouse gas, worse than CO2
Fracking done wrong could lead to climate change too

Now it’s not that drillers should never be fracking
But the current regulation is severely lacking
Reduce the toxins, contain the gas and wastewater
And the people won’t get sick and the planet won’t get hotter

What the frack is going on with all this fracking going on
I think we need some facts to come to light
I know we want our energy but nothing ever comes for free
I think my water’s on fire tonight

Natural gas fracking news update

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Michael Giberson

Fracking for natural gas continues to make headlines. For example, USA Today: “‘Fracking’ for natural gas also splits towns and families” and from Bloomberg, “Oil, gas companies injected toxic chemicals into ground, U.S. report shows.”

These stories extend the understanding of shale gas development a little, but mostly cover familiar ground. Another angle, mentioned here before, is that the big players in the industry favor regulation targeted to discourage cheap, low-quality shale gas development. See this discussion by Marc Gunther, based on a recent Shell Oil event. My summary: Every job done badly by low quality firms threatens to produce delays and potentially more-costly regulations that will hit the more established firms harder. By raising rivals’ costs in this way, the regulation-seeking companies may be maximizing the overall value of the gas ultimately produced from shale.

The new shale gas fracking news last week was generated by a research report on fracking that concluded fracking for natural gas has a bigger greenhouse gas impact over 20-years per unit of energy output than that associated with coal.

The study, “Methane and the greenhouse-gas footprint of natural gas from shale formation“, was published last week in the journal Climatic Change.

I speculate two things account for the continued newsworthiness of natural gas fracking.

First, fracking is new to many people, raises some new concerns, and shale gas has emerged as a potentially immense resource (i.e., big enough to affect national energy policies). In part, the news stories reflect natural interest in the developments.

Second, the uncovering of this vast new resource creates social tensions, as a bunch of people are making sometimes substantial sums of money, mostly by being lucky rather than good. That is to say, people now receiving thousands of dollars – and sometimes millions – mostly bought their properties for other reasons and paid nothing extra for the shale gas resource they acquired because at the time of purchase it wasn’t worth anything. Envy and resentment over apparent unearned wealth help motivate social conflict, and social conflict makes news.

Model oil and gas resource development regulations for Arkansas

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Michael Giberson

The Arkansas Public Policy Panel, a citizen policy non-profit that has been around since 1963, has commissioned a study of recommended regulations to cover oil and gas resource development in the state. The resulting study, “Model Oil and Gas Laws, Regulations and Ordinances,” concludes that many states and localities offer stronger regulation than currently provided for by the state of Arkansas. The report recommends numerous changes.

The report appears thoughtful as it sorts through the varying regulations of oil and gas drilling activity in several states. But this report really is no more than a beginning to analysis. The author has collated related regulations from various states and offered a considered opinion on how Arkansas might change its law, yet the reader gets very little in the way of reasons to agree or disagree with the author. The approach might be described as “here is what I found, this is what I think about it.” Good public policy analysis requires more.

For a simple example, consider the discussion of noise. The report observes that noise is a problem associated with oil and gas development operations, notes that it is not regulated by the federal government or most states (including Arkansas), describes a small number of state or local rules that do apply, then recommends “Arkansas implement a noise standard of 55 decibels during the day and 45 decibels at night.”

No explicit consideration of scale or scope of the problem, no discussion of whether the regulations imposed were effective in achieving the intended goals, no indication of whether the associated costs were worth the resulting benefits, if any, no examination of alternative legal or regulatory approaches, and no discussion of what legal responsibility or authority the state may have in this realm. We get the well-considered opinion of the author, but very little in the way of support for that opinion. Other topics are approached the same way.

Public policy decisions typically involve trade-offs, and a good policy analysis will help reveal the trade-offs involved. The report may be a start, but Arkansans will have to do more work before they can fairly assess the proposed recommendations.

Can we count on cheap natural gas for decades to come?

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Michael Giberson

The new U.S. gas triumphalists say the gas resource supply picture has changed, shale gas has saved us from importing lots of expensive LNG, we’ve got tons and tons of gas now and for years to come, and public policy ideas based on the idea of diminishing supplies of ever more costly gas need to be replaced.

Not so fast, a few analysts are saying. A few recent examples:

Both suggest, among other things, that gas may be cheap now but it won’t be cheap later, so don’t let your public policy (or your private long term investments) get hooked on cheap gas.

The Our Finite World piece is the less-sound of the two. It seems to add up to a claim that gas is so cheap that it doesn’t pay to invest in more production capacity, and if no one invests in more production capacity supplies will run down, and then gas will not be cheap anymore. So watch out! There are many informative charts in the post.

The Financial Times column essential comes down to a view that shale gas resources won’t yield as much gas as proponents believe, and ultimately the U.S. is going to find itself back on the tail end of a very expensive LNG supply chain. The story ends on an ominous note, suggesting that if we don’t hurry to line up LNG supply contracts now at twice the current price of gas in the U.S., then China might grab those supplies first.

I guess I’m still more in the gas triumphalist camp. My evidence is rather weak, admittedly: a combination of observing current market conditions (have you compared the price of gas to the price of oil lately?), reading about gas reserves and technology, some general understanding of economics, and a tendency toward “cornucopian” rather than “Malthusian” sentiments on long-run resource issues. (I can be convinced otherwise, but it will probably take a few years more of data from shale gas wells to make much a dent in my current beliefs.)