Congressman Markey still worries about U.S. natural gas exports

Michael Giberson

A few weeks back Congressman Ed Markey asked the U.S. Department of Energy whether exports of natural gas might not be in the public interest (see prior note here, related note) as exports would tend to push U.S. gas prices higher.

The USDOE’s response apparently didn’t mitigate Markey’s concern; today the Congressman introduced two bills intended to impede the export of natural gas. (See here and here.) One bill would prevent the Federal Energy Regulatory Commission from approving any new LNG export terminals until 2025. Another bill would require natural gas produced from federal lands be sold only to American consumers. (Shall we require hotels on federal lands to only rent to American consumers as well? Those foreign tourists visiting the Grand Canyon are just driving up the cost for American tourists, right Congressman?)

I’m neither for or against the prospect of exporting LNG, but I’m entirely for letting companies finding the best offer for their products. If the product is natural gas and the best offers come from customers outside the United States, then by all means I’d want them to export.

I continue to wonder why the Congressman from Massachusetts is singling out natural gas exports as an object of concern, since any big growth in such exports is a few years from reality and the United States remains a net importer of natural gas. At the same time, Massachusetts producers are exporting billions of dollars worth of goods and services each year – over $26 billion worth of goods and services in 2010 – which by the Congressman’s crabbed logic is contributing to higher prices for U.S. consumers and therefore harmful to the public interest.

Congressman, why are these Massachusetts exports okay, but natural gas exports are not?

Art Berman spots distress in the natural gas industry

Michael Giberson

Apparently I’m just a hot-headed, temperamental guy unwilling to sit still and listen to a patient explanation of a contrary point of view. I’ve only read the first paragraph of Art Berman’s new post at the The Oil Drum and already I’m arguing with my computer screen and searching around for data to illustrate my rebuttal.

Here in the first paragraph in question, from a post entitled “After The Gold Rush: A Perspective on Future U.S. Natural Gas Supply and Price”:

On January 23, 2012, Chesapeake Energy announced that it would curtail drilling in shale gas plays in the United States. Subsequently, other operators have followed suit. While the outcome of this announcement is unclear, it is a signal that the industry is in distress. One can argue that this distress stems from a lack of discipline as market price began to decline.

Distressed? Chesapeake Energy is in the oil and gas business. The ratio of oil prices to natural gas prices is at historic highs. Chesapeake announces they are shifting their drilling activities away from natural gas resources and toward oil resources. Since when is responding to incentives a sign of distress?

Jump back six years ago and oil prices (quoted in barrels) were about 6 times the price of natural gas (quoted in million BTU), a ratio that happens to be near the relative energy contents of the two energy resources. Prices of both went up and then down together in 2007 and 2008, oil a little more than gas, but beginning in 2009 oil prices resumed an upward path while gas prices have drifted downward. The current oil-to-gas price ratio is an astounding 40 to 1.

The following EIA chart is from May 2011, but it shows that the oil and gas industry as a whole has been quite reasonably switching from natural gas drilling to oil drilling as the relative price differences began to change. The trends shown have continued over the last several months.

U.S. oil rig count overtakes natural gas rig count (Chart)

U.S. oil rig count overtakes natural gas rig count. Source: EIA (Link to EIA analysis and supporting data.)

If anything, to the extent Chesapeake stayed with natural gas drilling even as the oil-to-gas price ratio was shifting against gas, it signals one of three things: (1) their gas operations were exceptionally profitable, at least relative to their oil opportunities, but now prices have tipped their calculations toward oil, (2) they had contractual obligations that kept them in gas drilling longer than they would have preferred, given the way prices developed, or (3) they irrationally stuck to natural gas drilling well after incentives should have pushed them to oil, but they’ve recently regained their senses. Which of these three options reveal an industry in distress?

The reality is simpler. A few moments searching Google news turns up stories from 2011, 2010, and 2009 in which Chesapeake has said it was shifting from gas to oil drilling. Chesapeake has been slowly shifting from gas to oil drilling over the past few years just like the rest of the industry, perhaps the only change in the most recent announcement is that the company is increasing the pace of its shift.

Okay, later today I’ll have time to read the rest of Berman’s post. Maybe reading the rest of his reasoned analysis will enlighten me, will calm me down a bit.

Will the gas boom go bust?

Michael Giberson

Over at the Oil Drum appears an article under the heading, “Gas Boom Goes Bust.” The author compiles many data charts – big picture, close-up, long run and short, etc. – quotes a few other writers and a few headlines, and eventually arrives at this conclusion:

The bottom line is that natural gas is a cyclical industry which recently enjoyed a very large boom. As night follows day, a bust is sure to come. Based on the information presented above, I would humbly submit that it has just arrived.

Among all of the charts and graphs, I take the essential points to be that some natural gas developers, including some important ones, have employed financial strategies enabling them to avoid the harmful consequences of low gas prices so far, but gas prices are now so low and projected to stay low for so long that these strategies are no longer available. The author expects to see some developers in bankruptcy court this year – evidence of the bust.

But this diagnosis seems to confuse the fortunes of a few (or even many) businesses with the outlook for the market. The natural gas boom was never about the fortunes of individual natural gas developers, it was about the ample supplies of natural gas coming into the market.

Companies may well go bust, but the gas boom itself continues.

Presidents, policies, prices and production

Michael Giberson

Robert Rapier posts this chart:

U.S. Oil Production under Bush and Obama [Chart]

Via Robert Rapier and R-Squared Energy Blog

Rapier noted that last week Obama observed the energy production trends:

“Under my administration, domestic oil and natural gas production is up, while imports of foreign oil are down,” Obama added in his statement. “In the months ahead, we will continue to look for new ways to partner with the oil and gas industry to increase our energy security … even as we set higher efficiency standards for cars and trucks and invest in alternatives like biofuels and natural gas.”

Notice that Obama doesn’t directly claim credit – he just observes the correlation without asserting causation. (I imagine the phrase “we will continue to look for new ways to partner with the oil and gas industry” generated a few eye rolls among energy producers.)

It takes four to six years, Rapier says, for policies or higher oil prices to bear fruit. So Carter saw a boost in domestic oil production largely due to the Nixon’s push for an Alaskan oil pipeline and the sustained oil price increases that began in 1973. Similarly, he said, current increases in production are largely due to higher prices over the last several years which led companies to green light projects that were sub-marginal at lower prices. (I’d only add to the story a brief nod to technological improvements that are bringing down the cost of drilling and enhancing recovery.)

Does a public good argument justify subsidizing private energy production?

Michael Giberson

Yesterday I disputed the analysis by which the Breakthough Institute wanted to claim credit on behalf of the federal government for the shale gas boom; today I dispute their claimed broader implications for federal energy R&D policy.

Late in their op-ed, the Breakthrough folks shift emphasis from a narrow drilling technology story to a broader examination of energy R&D policy:

Giving the federal government credit where it is due takes nothing away from Mitchell, who was determined and tenacious. But the lesson of the shale gas revolution is that we should not be so quick to judge government investments in energy technology. Between 1978 and 2007, the Energy Department spent $24 billion on fossil energy research. Billions more were spent through the Gas Research Institute and non-conventional gas tax credits. Those investments were widely panned as a failure during the ’80s and early ’90s, when gas was plentiful and cheap.

Whatever one thinks about shale gas today — we worry about its environmental consequences — there’s no denying the extraordinary economic return on taxpayer investments.

This last point is interesting, but undeveloped in the article. If one were to calculate the “economic return on taxpayer investments,” would one have to conclude they were extraordinary?

The essay ultimately wants to argue against claims that the Solyndra episode proves governments can’t pick winners and the shale gas boom proves private enterprise can. Defenders of subsidies for solar power projects claim critics are too focused on a single failure, Solyndra, when reasonably critics should be assessing the overall portfolio of projects supported. It is a fair observation, but it may turn against their conclusion. If we are to consider the return on “taxpayer investments” in energy R&D, we’d reasonably need to survey the full portfolio of energy technology concepts funded by the federal government. We’d have to count the winners and losers both, based on the best current understanding, and again (as yesterday) we’d want to work out some idea of what would have happened in the energy technology space without federal government intervention. Further, we wouldn’t just worry about the environmental consequences, we’d have to compute some estimate of the costs and include it in the analysis.

The article goes nowhere close to presenting the relevant case. Near the end of the article they claim federal credit for “nuclear power, natural gas turbines, solar panels, and wind turbines — pretty much every significant energy technology since World War II.” Hmmm, notice they don’t mention the other big selectively-cited-by-critics failure: the Carter-era launch of an$88 billion effort to make oil from coal. Like the Solyndra and Synfuels Corp. complainers, the Breakthrough Institute wants to draw policy implications for an uncertain future based on a selective invocation of history.

It is further a kind of mistake to invoke Solyndra in an essay all about energy R&D policy. Much recent taxpayer-extracted support for energy shows up in the production tax credit, the investment tax credits, the Section 1603 Treasury grants and miscellaneous other subsidies that are directed to help promote the fortunes of companies building renewable power components or producing power via renewable sources. While some of these companies are pursuing technological developments, these subsidies are not tied to research in any substantial way and yield very little in the way of publicly available research results. Try gathering detailed data on production from a wind farm or solar power plant benefiting from millions of dollars in taxpayer-supported subsidies – their lawyers will likely tell you it is commercially-sensitive information and not publicly available. And by the way it isn’t just renewable energy, the lawyers for subsidized production from low-output oil and gas wells will likely say the same thing.

There is a respectable public good argument that can be made in support of subsidizing at least some research. The “extraordinary economic return” that the Breakthrough Institute wants to claim on behalf of government subsidized research into oil and gas drilling technology is this kind of an argument. If Breakthrough wants to drag Solyndra and the full range of energy production subsidies into this argument, an economist looking for a respectable public good argument has got to ask: where is the public good in subsidizing private energy production from projects that hide publicly useful information from public review?

A good non-technical introduction to shale gas

Michael Giberson

Paul M. Barrett, for Bloomberg, has written up a pretty good introduction to natural gas from shale. The article delves a bit into the history and geology of the subject, but focuses more on the business efforts that turned a modestly interesting rock into a significant economic resource and the environmental politics that have risen in response. Highly recommended if you want to know where the natural gas that is changing the world’s energy outlook has come from.

A few things are left out of this “introduction.” Of course we could dig deeper into each of the topics mentioned. The next step in the story is the international angle – shale gas is being developed in Argentina, the United Kingdom, Poland and elsewhere – with significant implications for national and international trade and public policy. Among other things, as examples, central and western Europe will likely become less reliant on Russian gas supplies, and the United States and Canada probably don’t build a natural gas pipeline from Alaska through Canada and into the Midwestern U.S. for at least thirty or forty years.

The complete story of shale gas would also delve a bit into the controversy over the size of the the resource, would go a little deeper into the particular efforts of Devon Energy, and talk about the spillover of the shale gas boom into a boost for unconventional oil. One might wrap up the story by casting it into the big picture “cornucopians vs. Malthusians” debate.

So Bloomberg doesn’t do everything in this introduction, but it is a pretty good introduction to the shale gas issue.

NOTE ALSO: For a bit more on the environmental politics of shale gas, in September the journal Nature carried a pair of articles under the heading “Should Fracking Stop?” The case for stopping was written by Robert Howarth and Anthony Ingraffea, both of Cornell University; the case for continuing was written by Terry Englander of Penn State University. Neither piece gets very close to a complete policy analysis, but both highlight a bunch of the relevant issues.

 

Praise for a New York Times article on natural gas fracking (Or, How property rights help mitigate potential environmental harms)

Michael Giberson

I’m writing in praise of a New York Times article on natural gas fracking. Yes, really! Even more surprising, I’m writing in praise of a New York Times on fracking written by Ian Urbina. Yes, really!

What is this marvel, you ask? I answer, “Rush to Drill for Natural Gas Creates Conflicts With Mortgages.”

What is so marvelous about this article? I answer, the way it highlights how property and contract laws can serve to regulate potential environmental harms from gas drilling and hydraulic fracturing.

Of course, as the headline suggests, the focus of the article concerns mortgage restrictions which may be violated if a property owner leases part or all of the property for oil or gas development. Mortgage lenders usually include such limiting provisions in loan contracts to help ensure protection of the property, which typically serves as collateral for the loan. Obviously mortgage contracts differ and the article notes that only sometimes will leasing violate a mortgage. The article further notes that lenders who don’t secure such restrictions in their mortgages, or who fail to closely police compliance with such restrictions, may find it difficult to resell their mortgages in the secondary market.

But here is the deal: almost all of the well-documented environmental harms from natural gas drilling and hydraulic fracturing happen within a few hundred feet of an active well: cases of methane in groundwater, spills from holding ponds filled with produced water from fracking, and so on. If the landowner owns the surface and mineral rights free and clear, and owns a large enough piece of property that effects on neighbors are unlikely, then most of the potential hazards from drilling and fracking are faced by the property owner who can weigh the trade-offs between the costs and benefits and negotiate reasonable protections within the lease with a developer. Actions taken by the developer in response to such a contract to mitigate the likely harm to the property-owner will also almost inherently serve to mitigate any possible harm to neighboring properties. If methane doesn’t migrate from the well into the groundwater immediately around the well, it can’t subsequently migrate across a property line some tens or hundreds of feet distant.

When a landowner borrows against the land, the lender naturally gains an interest in protecting the land’s valueas a tool to help ensure the loan’s repayment. In may be the case, as the article mentions, that the a lease enhances the value of a property and the resulting income makes loan repayment more likely. On the other hand, gas drilling and fracking may reduce the value of the surface property. The point is that – working in the context of contracts and property law –  landowners, lenders, and gas development companies have a natural interest in trying to work out these issues in an way that should naturally reflect most of the potential costs and benefits from exploitation of the shale resource.

Not every potential hazard will be well contained within a mortgage contract and a mineral lease. For example, the landowner may not care too much what the developer does with produced water from fracking operations so long as it is safely removed from her property. Other issues may depend on rights to surface water crossing a property or the contribution to any local air pollution hazards. In such cases liability rules and potential litigation by neighbors might be the efficient regulator, but government-provided regulation is also sometimes the efficient response.

I praise the New York Times article for highlighting (even if only indirectly) the way that decentralized decision making in the context of the rights and responsibilities attendant to property and contract law can serve to regulate environmental harm. The next step, from the view of government policy, is to refocus the efforts of government regulators on just those harms that are not well addressed within the scope of voluntary decentralized decisions.

[NOTE: For additional commentary on Urbina’s NYT reporting on natural gas fracking, none of it laudatory, see this search of the KP archives.]