Stepping on the Gas
With the nuclear industry in crisis and oil prices on the
rise,
could the solution to our energy problems be in the ground at home?
Daniel Yergin on the promise of shale gas.
Wall Street Journal
2 April 2011
By Daniel Yergin
In the early 1980s, George P. Mitchell, a Houston-based independent
energy producer, could see that his company was going to run out of
natural gas. Almost three decades later, the results of his effort to
do something about the problem are transforming America's energy
prospects and the calculations of analysts around the world.
Back in those years, Mr. Mitchell's company was contracted to deliver a
substantial amount of natural gas from Texas to feed a pipeline serving
Chicago. But the reserves on which he depended were running down, and
it was not at all clear where he could find more gas to replace the
depleting supply. Mr. Mitchell had a strong hunch, however, piqued by a
geology report that he had read recently.
Perhaps the natural gas that was locked into shale—a dense sedimentary
rock—could be freed and made to flow.
He was prepared to back up his hunch with investment. The laboratory
for his experiment was a sprawling geologic formation called the
Barnett Shale around Dallas and Fort Worth. Almost everyone with whom
he worked was skeptical, including his own geologists and engineers.
"You're wasting your money," they told him over the years. But Mr.
Mitchell kept at it.
The payoff came a decade and a half later, at the end of the 1990s.
Using a specialized version of a technique called hydraulic fracturing
(now widely known as "fracking" or "fracing"), his team found an
economical way to create or expand fractures in the rock and to get the
trapped gas to flow.
Today, in an age that craves innovation in energy, George Mitchell's
breakthrough in the Barnett Shale has opened the door to a potentially
profound change in the global energy equation.
What has become known as the "unconventional-natural-gas revolution"
has turned a shortage into a large surplus and transformed the
natural-gas business, which supplies almost a quarter of America's
total energy. This revolution has arrived, moreover, at a moment when
rising oil prices, sparked by turmoil in the Middle East, and the
nuclear crisis in Japan have raised anxieties about energy security.
Government and producers alike have turned their attention back to
domestic resources.
The rapid rise of shale-gas production has also drawn scrutiny and
controversy. Some environmental groups say that the process threatens
to contaminate drinking-water supplies. The industry, for its part,
points to a long safety record, with some form of fracking having been
used in more than a million wells in the U.S. since the end of the
1940s.
“Estimates of the entire U.S. natural-gas resource base are now as high
as 2,500 trillion cubic feet.”
As late as 2000, shale gas was just 1% of American natural-gas
supplies. Today, it is about 25% and could rise to 50% within two
decades. Estimates of the entire natural-gas resource base, taking
shale gas into account, are now as high as 2,500 trillion cubic feet,
with a further 500 trillion cubic feet in Canada. That amounts to a
more than 100-year supply of natural gas, which is used for everything
from home heating and cooking to electric generation, industrial
processes and petrochemical feedstocks.
The effects of the "shale gale" are also being felt in the rest of the
world, changing the economics of the liquefied-natural-gas business.
Its impact on international energy relations could be significant. Some
proponents believe that the U.S., once thought to be short of natural
gas, could even become a natural-gas exporter.
It is a revolution that has progressed in stages. Hydraulic fracturing
uses the concentrated pressure of water, sand and a small amount of
chemicals to promote the flow of oil and gas in a reservoir. Mitchell
Energy's breakthrough was to apply one particular approach—"light sand
fracking"—to break up what had seemed impermeable: hard shale rock.
With this technique, the company's gas output began to climb, but
capitalizing on the innovation would require a good deal more money. In
2002, Mr. Mitchell merged his company into a larger independent, Devon
Energy.
Devon had expertise in a second technology that would be critical to
the shale-gas revolution—horizontal drilling.
Advances in control and measurement allowed operators to drill down to
a certain depth and then to drill at an angle or even sideways. This
exposes more of the reservoir, permitting the recovery of a much
greater amount of gas (or oil). "At that time," said Larry Nichols, the
chairman of Devon, "absolutely no one believed that shale drilling
worked, other than Mitchell and us."
Devon experimented with yoking the two technologies together. In 2003,
the company drilled 55 wells in the Barnett Shale, optimizing the
combination of fracking and horizontal drilling.
As Devon's gas production started to rise, other independents saw what
was happening and honed the techniques further. But the wider energy
industry remained focused on what seemed to be the imminent shortfall
of conventionally produced natural gas in North America, which, it was
thought, would make it necessary to import large quantities of
liquefied natural gas from places like Trinidad, Qatar, Algeria and
even the Russian island of Sakhalin.
Then something surprising happened: Thanks to shale gas, overall U.S.
natural-gas production went up from 2007 to 2008. That was the signal
to the rest of the energy industry, and larger companies were soon
turning to shale. It was not until the fall of 2009, however, that
leaders in the nation's capital woke up to the fact that something was
changing in the U.S. energy mix. It's now well-recognized. In his
energy speech on Wednesday, President Barack Obama said, "Recent
innovations have given us the opportunity to tap large reserves—perhaps
a century's worth—in the shale under our feet. The potential here is
enormous."
In the energy industry, use of the new technology quickly gathered
speed. The know-how was applied across North America, in such shale
formations as Haynesville, mostly in Louisiana; Eagle Ford in South
Texas; Woodford in Oklahoma; Horn River and Montney in British
Columbia; Duvernay in Alberta; and the "mighty Marcellus," the huge
formation that spreads from Pennsylvania and New York down into West
Virginia.
Gas output rose dramatically, and the anticipated shortfall turned into
a large surplus. As the volume rose, the inevitable happened—prices
came down. Substantially. Today, natural-gas prices are less than half
of what they were just three years ago.
Shale gas changed the strategic direction of the industry. Larger
companies have maintained their commitment to existing
multibillion-dollar liquefied-natural-gas projects around the world,
but they now intend that gas for markets in Europe and Asia, not North
America. At the same time, they have made new multibillion-dollar
investments in shale-gas extraction in North America.
Outside the U.S., potential reserves of shale gas have been identified
in countries from Mexico and Argentina to Algeria. Chinese interest is
rising swiftly, both for shale gas and for another form of
unconventional natural gas, coal-bed methane. It is now thought that
Europe's unconventional-gas potential may be as great as North
America's.
Even with increased energy efficiency over the next two decades,
growing demand for power in the U.S. could require the equivalent of
540 new coal plants or 200 new nuclear power plants. Coal is
inexpensive and abundant, but there is regulatory and environmental
opposition to its use because of carbon and other emissions. Nuclear
power is carbon-free and has evolved new passive safety features, but
it is expensive and, especially after the catastrophe in Japan, faces
regulatory and political uncertainty.
In most states, utilities are now required to have a certain share of
renewable energy sources. Most of it has been wind power, but wind is
still small-scale and relatively expensive. Because it supplies energy
only intermittently, it can be difficult to integrate into the electric
grid.
Further complicating the picture for all of these rival energy sources
is uncertainty about what kind of new carbon regulations might come
from Congress and the Environmental Protection Agency.
Power companies have been reluctant to make a larger commitment to
natural gas because of worries about supply and price volatility. Over
the past 30 years, natural gas has been, at different times, abundant
and cheap or scarce and expensive. Utility executives made commitments
in the late 1990s to what was supposed to be cheap natural gas, only to
see prices spike as supplies tightened, contributing to the California
power crisis and sending some companies into bankruptcy.
But shale has changed the equation. Abundant, relatively low-priced
supplies now make natural gas a highly competitive alternative to both
nuclear and wind power and even to coal generation. It has the added
advantage of being relatively low-carbon (though even natural gas will
be constrained if the U.S. adopts a policy similar to the European
Union's objective of an 80% reduction in carbon emissions by 2050).
Could natural gas also be a game changer for transportation? That is
much more of a challenge. Automakers and the fuel-supply industry are
already dealing with a multitude of imperatives—more fuel-efficient
cars, more biofuels, plug-in hybrid electric vehicles, pure electric
vehicles. Making a major push for natural-gas vehicles would add yet
another set of mandates and incentives, including the creation of a
costly new fueling infrastructure.
Moreover, the price advantage of natural gas over gasoline shrinks as
cars become more fuel-efficient. The most obvious growth area for
natural gas in transportation is for urban fleets (taxis, buses and
other service vehicles) that have access to a central refueling
facility. Some argue for adding long-distance trucks to that list. But
if there is a strong large-scale push in general transportation, it
might make the power industry fearful of having to compete against
motorists for natural-gas supplies and thus more cautious about making
a major commitment themselves.
“Gas can be an 'enabler' for renewable energy, providing power when
wind and sun fall short.”
The arrival of shale gas has received a mixed welcome from
environmentalists. Some applaud it as a lower-carbon source of
electricity. It is also an "enabler" for renewable energy, providing a
source of electricity that can step in to fill the gap when the wind is
not blowing or the sun is not shining. "The sudden abundance of
low-cost natural gas is a gift," said Tim Wirth, president of the
United Nations Foundation, who, as a U.S. senator, ran the hearings
that turned climate change into a national issue. "But it is a gift
that has to be managed properly." Mr. Wirth, like other pro-gas
environmentalists, has called on the industry to set standards and
create an operating compact with regulators.
Criticism of shale gas by some environmentalists has risen as
operations have spread into regions that are largely unfamiliar with
modern oil and gas drilling. Some worry about the amount of water used
in the process. But last year, the 3,500 shale-gas wells drilled in the
U.S. used only about 0.02% of total water used in the U.S.
Concerns also have been raised about the possibility that hydraulic
fracturing could contaminate the aquifers that supply drinking water.
But fracking occurs below drinking-water aquifers, separated by a mile
or more of impenetrable rock.
In Texas, the birthplace of the shale-gas revolution, there is
currently a stand-off between the federal Environmental Protection
Agency and the state Railroad Commission, which regulates oil and gas
production. The EPA maintains that two water wells in Parker County,
west of Fort Worth, were contaminated by gas from hydraulic fracturing
more than a mile below it. The Texas Railroad Commission, using
chemical fingerprinting, maintains that the EPA is wrong and that the
gas seeped into the well from a shallow formation a few hundred feet
beneath the surface, much closer to the water wells.
Environmental attention has recently shifted to the wastewater that
comes back to the surface during drilling. As in any industrial
activity, this water has to be either recycled or disposed of in an
environmentally appropriate way. In many parts of the country,
companies inject the wastewater into deep disposal wells.
It is not clear whether Pennsylvania has enough of the deep geological
formations necessary for such disposal. For the vast Marcellus shale,
the issue is whether the state's wastewater treatment facilities are
adequate and can keep up with the pace of expansion in shale drilling.
The industry has moved to increase the amount of wastewater recycled in
drilling operations, currently at over 70% by some estimates.
The extraction of oil and gas is a highly regulated activity.
Historically, the actual drilling, including fracking, has been
regulated by states. Virtually all disposal of wastewater is regulated
by the EPA, either under the Safe Drinking Water Act or the Clean Water
Act, but the EPA may delegate actual enforcement of these regulations
to the states.
In an era of heightened environmental awareness, any incident, even
involving a single water well, can become a national event. As a recent
analysis from the Massachusetts Institute of Technology Energy
Initiative put it, "With over 20,000 shale wells drilled in the last 10
years, the environmental record of shale-gas development is for the
most part a good one. Nevertheless, one must recognize…the damage that
can be caused by just one poor operation."
Debates will continue about state versus federal regulation, industry
standards and the underlying facts in particular cases. What many
analysts expect to see is the emergence of a set of "best practices,"
endorsed by both regulators and industry, that are tailored to the
specific characteristics of the diverse basins across the country. For
shale gas production to succeed on a massive scale, public confidence
will be essential.
All of these issues have emerged relatively recently, and it will take
some time to sort them out. But we should not lose sight of the larger
picture: the potential for a century's worth of inexpensive,
environmentally attractive energy. At a time of increased energy
anxiety, the shale gas revolution is both a major innovation and a
formidable new addition to our energy supply.
George Mitchell was certainly on to something.
— Mr. Yergin is chairman of IHS Cambridge Energy Research Associates,
an energy research and consulting firm. His new book "The Quest" will
be published in September. He received the Pulitzer Prize for his book
"The Prize: The Epic Quest for Oil, Money and Power."