I am writing this article having lived through the first half of the presidential primaries. It has been painful. I have been watching the debates on television and listening to proposals put forth by the Democratic candidates. In particular, I am concerned by their proposed regulatory changes that would ban hydraulic fracturing – a practice that was first patented in 1948 and successfully used throughout the United States since that time. Their proposals have not surprised me because they fall into the constant anti-fossil fuel rhetoric I hear.
The Math of Frac’ing
It has been said that wise people surround themselves with the smartest people they can find and then listen to them. I am always looking for opportunities to learn something about the future of oil and gas from people in other disciplines. In late February, with that thought in mind, I attended a luncheon hosted by the Unites States Association for Energy Economics at the Federal Reserve building in Houston, Texas. I met Michael C. Lynch, the keynote speaker and an analyst with Strategic Energy and Economic Research, and Edward Hirs III, energy fellow at the University of Houston, at the luncheon. It was thought provoking to meet and listen to these professionals who view oil and gas issues from a non-geologist’s lens. I would like to share some of what I learned while attending the USAEE luncheon.
While eating lunch prior to the speaker beginning his presentation, I casually asked the professionals at my table what they thought about the Democratic debate proposals to immediately ban frac’ing. Ed Hirs told me that I needed to read his article, “The Arithmetic of Fracking” in that month’s Forbes magazine. Please consider reading it for yourself. The following are just a few highlights from Ed’s article:
Hydraulic fracturing has put an additional $200 billion dollars into the pockets of U.S. consumers by dropping the commodity price to $2.56 per thousand cubic feet – the same price it was in 1987 without any significant damage to surface or ground water resources. More recent wastewater disposal well regulations have reduced the incidence of localized earthquakes. These improved practices leave only the massive flaring issue – about 900 thousand cubic feet per day in the Permian Basin – as the major negative environmental impact, and the Texas Railroad commission and shareholders are looking to significantly reduce this practice.
The collapse on natural gas prices has expedited the transition from coal to gas power plants and has lowered the price of plastics, glass and fertilizer, which are viewed by the general public as good things. Finally, the jump in 2019 oil production to 12.5 million barrels per day, of which 8 million a day comes from the shale play, has resulted in a nearly $169 billion boost to U.S. GDP. Eliminating hydraulic fracturing would reduce natural gas and oil production quite rapidly, given the short life span of producing wells in the shale play.
The estimate given by luncheon speaker Michael Lynch was that it would take a little more than two years before we started to feel the effect of this policy in higher costs for natural gas and oil as feed product stock. This would result in an increase in unemployment and commodity-induced inflation. The last time we had this combination of events, it resulted in substantially reduced U.S. GDP. The worst is that we would not see much reduction in greenhouse gas emission from flaring, because non-Western governments like Russia and the Middle East, where our fossil fuels would come from, do not have similar environmental regulations.
There has been a strong national movement to block any and all pipelines, called “Keep it in the ground,” regardless of what is being transported through them. Speakers at the USAEE luncheon discussed an example of the unintended consequences of blocking pipelines. They pointed out that New England is currently meeting peak gas demand with Russian LNG instead of using low-cost natural gas from the Marcellus in Pennsylvania.
You might ask, “How this can happen?”
Anti-pipeline groups successfully blocked the Access Northeast pipeline project in the Massachusetts state legislature. The goal of this pipeline was to meet the growing natural gas demand in New England in the face of declining natural gas supply. The result of this effort is increased energy costs for residents in New England.
Another, more personal example I can share of this movement is the “Stop Pipeline 5” campaign, which is everywhere in northern Michigan, my home away from home. Activists believe that the entire Great Lakes ecosystem will be destroyed if the currently operating pipeline under the Straits of Mackinac is not permanently closed right now, despite the costly innovative engineering plan that Embridge, the pipeline operator, has proposed. Shutting down this pipeline would likely result in increased tanker truck traffic, more oil-carrying marine vessels and higher fuel prices in the region.
ACE 2020 DPA Luncheon
Continuing in the belief that wise people surround themselves with the smartest people they can find and then listen to them, I have invited Scott Tinker, state geologist of Texas, to be the keynote speaker at the Division of Professional Affairs Luncheon at the 2020 AAPG Annual Convention and Exhibition in Houston currently planned for June. He is an engaging speaker and widely-quoted geologist. Scott has a good understanding of the energy transition and the unintended consequences of poorly throughout polices. Be wise and please join me at the ACE 2020 DPA Luncheon.