Shale gas, from ‘Gasland,’ through the GWPC, to 40¢ per gallon?

Neil McNaughton gets tangled up in the thorny subject of shale gas. On the one hand, environmentalists now have the whole industry in their sights. On the other hand, natural gas production is victim of its own success with prices in free fall. On the ‘other other’ hand, this means an oil to gas energy cost ratio of 6:1. When will we see 40¢ per gallon equivalent CNG at the pump?

Writing on shale gas production and hydraulic fracking falls into two camps. There is the industry camp, where the technology and benefits are held in awe and the environmental impact is, lets say, glossed over. The other camp—driven by Nimbys* and the Green movement—holds that shale gas is the devil’s work and must be resisted at all costs.

Possibly most readers of Oil IT Journal will be in the former camp. But the importance of the anti shale gas movement is hard to underestimate, at least in Europe. In France, where I live, government policy on the subject has been largely informed by Josh Fox’ documentary ‘Gasland’. France has banned hydraulic fracturing and revoked three exploration permits. The effect of the film, the Macondo disaster and the revelation that oil companies ‘do not pay tax’ mean that in an election year, few politicians will defend the industry. The situation in the US varies from State to State. But objection to non conventional exploration is a very real phenomenon—and it is one that is likely to extend into more anti-industry sentiment.

I found the presentations from the US Groundwater Protection Council event, held late last year in Atlanta, a worthwhile contribution to the debate. The GWPC has been working to track the health of the US’ groundwater with its ‘risk-based data model’ and the FracFocus portal. You can read our report on page 5 of this issue and/or checkout the meeting’s presentations.

Of course the GWPC is exactly the kind of thing that some would like to see abolished—although quite why is hard to understand. I know, ‘self-regulation’ is a wonderful idea. But when there is an incident, it is a bit facile to attribute it to a ‘rogue operator.’ Regulation needs to be independent and properly resourced. If you want safety, you need oversight. If you want oversight, it costs money. What was the name of that agency again?...

The GWPC has been operating a ‘risk-based data management system’ (RBDMS) of drilling activity that impacts US groundwater for a couple of decades. The RBDMS is expanding apace, with a new hydraulic frac module to track the increasingly complex operations of the non conventional boom. But, while such a database is undoubtedly a good contribution, in-field inspection and surveillance will be necessary to catch the rogues!

Another contribution to the shale gas debate comes in a new publication, the Journal of Economics of Energy and Environmental Policy (currently a free download) published by the International Association of Energy Economists. The inaugural issue includes a lengthy article on the influence of shale gas on US energy and environmental policy by researchers from the Massachusetts Institute of Technology. This provides a measured analysis of the shale gas phenomenon putting the additional regulation-driven cost at around $500k per well. While the authors claim this will not ‘very significantly’ affect economics, some will undoubtedly find this prohibitive.

The study also looks at the likelihood of a more active LNG market becoming ‘more akin to the global oil market, with prices differentiated only by transportation cost.’ While gas producers may be interested in ‘aligning’ gas prices with oil, this is definitely not the way the US is heading right now. Also, although data in the EEEP study has prices rising from $5 per MMBTU, today they are in free fall—around $2.50 at the time of writing.

Which brings me to another fascinating analysis, from Ziff Energy. Ziff compares the relative value of gas versus oil when measured on an energy equivalent basis. With oil at $100 per barrel, the natural gas price ‘should be’ around $17, i.e. a ‘natural’ ratio of 6:1. Ziff states, ‘the ratio has widened to current unprecedented levels of 24:1, and 32:1 going forward into 2012 as valued on the New York Mercantile Exchange.’ Ziff concludes that the current ‘value disconnect’ is a driver for proposals to export liquefied natural gas (LNG) to countries ‘where natural gas is priced relative to oil on an energy equivalent basis.’

The incredible and widening cost of energy from the two fuels must be making domestic energy consumers wonder why more natural gas isn’t being used in transport. One such ‘wonderer’ is Chesapeake’s Aubrey McClendon, quoted recently in the Financial Times as stating that ‘natural gas is not oversupplied in the US, it is under-demanded.’ Right now, the price ratio of a barrel of oil to a MMBTU natural gas is around 40:1. If the ‘natural’ ratio is 6.1 that means that energy from natural gas is around seven time cheaper than energy from oil.

Exactly what this means at the pump is a bit trickier to figure. I am indebted here to Wikpedia, where I learned that compressed natural gas (CNG) is measured and sold in ‘gasoline gallon equivalents’ (GGE)—i.e. the amount of fuel that gives the same amount of energy as a gallon of gasoline. At $2.5 natural gas and $100 oil, the Ziff ration is now 40:1. Divide this by the ‘natural’ ratio of 6:1 and we find that energy from natural gas is seven times cheaper than oil. So with gasoline at $3 per gallon, a GGE of CNG ‘should’ be around 40¢! Unfortunately this is far from retail reality with CNG at some $2.5 per GGE in the Houston area**. A problem of infrastructure? Instead of powering a transport revolution, in some areas, shale gas is being flared as companies go for the more profitable associated liquids.

Actually, in the couple of conferences I attended last month in the US, the unrepresentative sample of folks I chatted to were less involved in conventionals than in a myriad of projects to re-vamp existing production with a facility upgrade here, and a new well or workover there. Sometimes the ‘big picture’ is the little picture. In fact for most, it is business as usual—even if things are happening at an unusually frenetic pace. Which is more than can be said for the rest of the economy.

* Not in my back yard.

** More calculations on the Oil IT website.

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