Paper and Other Absolute Truths Providing Analysis and Perspective Uncommon in Mainstream Media

U.S. oil and natural gas production peaked in the early ‘70s. Oil production in the lower 48 states has subsequently plunged by about 65%.  Additional supply from Alaska and offshore Gulf of Mexico has come on stream since the peak, and this has reduced the overall drop in U.S. oil production to around 50%. U.S. natural gas production has held up much better, down from the peak by only 10% or so. (See the following graphs)

Oil has long been an international commodity, but natural gas was a local commodity. If the U.S. or any country consumed more oil than it produced, it was available internationally, and could be delivered by oil tankers. There was, however, no offshore back-up for natural gas. The U.S. could only consume what we (and our Canadian suppliers) could produce and transport via the extensive North American pipeline and storage system.

In recent years liquified natural gas (LNG) technology has been perfected. Natural gas can now be liquified and transported via tankers. Vast pools of natural gas in the Middle East and Russia now have an international market. Natural gas is no longer just a “local” commodity.

There are significant problems with LNG, however. Costs to transport LNG are very high. These costs must allow for the building costs of the specially made tankers, the LNG shipping terminals designed to liquify natural gas, and the receiving terminals needed to process the LNG back into a gas state. 

Inflexibility is another issue. A limited number of LNG vessels have been built. At the present time nearly all of these vessels have contracts in place that will  keep them busy for a while.  Other LNG tankers will be constructed, of course, but probably not without firm contracts between buyers, sellers, and shippers. The costs are too great to be building LNG tankers and terminals on spec, especially while the natural gas market is undergoing dramatic changes with uncertain consequences.

Natural gas is no longer a local commodity, but it is still semi-local – at least for the next decade or so.

Natural Gas Crisis – It was just five years ago that the U.S. was rapidly approaching a supply crisis. Most of the large pools of natural gas were winding down, or already empty. It took more and more drilling rigs to find the remaining smaller fields of natural gas, and keep production more-or-less flat. (Compare the increase in producing wells from 1995 through 2004  in the graph below with the previous graph showing flat production).

It appeared that the U.S. would be required to rely on expensive LNG imports to supplement North American production. There was even a legitimate concern that North American natural gas production would fall so quickly that new supplies of LNG  might not come on-line soon enough to keep up with U.S. demand.

Our Greatest Hope – What the U.S. needed in 2005 was a new domestic source of energy that could reduce our dependence on Russia and the Middle East. This new energy source would be, under ideal circumstances, enormous, long-lasting, affordable, and have a minimal environmental impact.

The Technological Breakthrough – The large multi-national energy companies said it could not be done; obtaining commercial quantities of natural gas from shale basins was not possible. They had the money, but not the courage. And, as it turned out, they were wrong. Thanks to the entrepreneurial drive of a few small U.S. natural gas companies, we have that new energy source.

The natural gas-from-shale effort did not begin in 2005, it started many years earlier. It was around this time, however, that a significant volume of natural gas began to flow from the first of the major shale plays.

It was not a government program that accomplished this miracle. No government funds were needed. It was the much maligned profit-motive that made it happen. Profits paid for the research. The enticement of much higher profits in the future was also a requirement. Future profit potential had to be substantial to warrant the significant  investment risks. 

By the way, important breakthroughs never occur in government run energy companies. Major advances in technology always come from profit oriented businesses.

The Magnitude of This New Opportunity- The first big shale play in natural gas was the Barnett Shale, in and around the Fort Worth Texas area. About 10% of U.S. onshore natural gas production already comes from this location. The second big play was the Fayetteville Shale in Arkansas. Then the big monsters were located – the Hanesville Shale in Northwestern Louisiana/Eastern Texas, and the Marcellus Shale which covers hundreds of miles of the central Appalachian area. These are the Big Four. New reserves of natural gas, from shale deposits, are so huge that our current consumption levels are covered for the next 100 years.

This is not, however, the end of the game for shale-type natural gas discoveries. There are at least another six significant shale-sand plays under development – the big four will likely grow to a higher number over the next few years. It does not end there either. There will be more discoveries both in North America and around the world in the years to come.

The environmental issues do not appear to be game changers. If that continues to be the case, then we are awash in natural gas. In another 10-20 years, we will have a 200 to 300 year supply – based on current consumption.

What Do We Do With All This Natural Gas? – The obvious point here is that we have so much natural gas available, we should be looking for opportunities to use more of it. The most logical new use is as a replacement for gasoline. Rather than becoming increasingly more dependent on oil imports, we will be able to gradually reduce our need for offshore oil. Cars and trucks run well on natural gas. The technology is in use today in a number of places.

The wrong thing to do would be to replace coal with natural gas in electricity generation. That would reduce CO₂ emissions, but the bigger issue is ending our energy reliance on unfriendly governments.

This is a huge opportunity for us.

Natural GasPricing – Pricing will continue to cycle. In fact, natural gas prices have been lower over the last year than average pricing is likely to be in the future. In addition, production disruptions due to hurricanes, other extreme weather, periods of very low prices, etc. could result in short periods of time in which demand outstrips supply, and prices spike up 50% or so above the mean. Prices will always, however, revert back to the mean. Assuming no environmental limitations, there is no risk of prices escalating rapidly and remaining at high levels in the foreseeable future.

The market for natural gas will remain over-supplied. Government policies will have the greatest impact on natural gas prices. The price trend for natural gas will relate to state, local, and national policies on taxes, environmental regulations, and other regulations. Prices will also be influenced by normal inflationary pressures. On the positive side, however, natural gas-from-shale production efficiencies will continue to improve for many years, and new low-cost discoveries of shale-type deposits could keep pressure on prices. A more detailed price forecast is planned for part two of this report.

Emissions and Environmental Issues – Natural gas is, as the commercial suggests, “a clean burning” fuel. Carbon dioxide emissions from natural gas are about 45% less than coal and 25-30% lower than oil. The table below also demonstrates that natural gas usage results in fewer emissions of “other” pollutants as well.

Natural gas from shale is not an energy panacea. Problems remain. It is interesting that the global warming true believers tend to be natural gas skeptics – in regard to both potential reserves and currently unknown but potential environmental risks.  Their skepticism will, I am confident, turn out to be invalid. But it is fair, I suppose, to caution that a six-year history is insufficient to claim complete confidence that all environmental issues will remain well under control. Nevertheless, the Department of Energy (April 2009) expressed no skepticism regarding either issue. See Modern Shale Gas Development in the United States: A Primer. For those interested, a summary of the environmental remarks from this report follow.

Summary [Environmental Considerations: The primary differences between modern shale gas development and conventional natural gas development are the extensive use of horizontal drilling and multi-stage hydraulic fracturing. Horizontal drilling allows an area to be developed with substantially fewer wells than would be needed if vertical wells were used. The overall process of horizontal drilling varies little from conventional drilling, with casing and cementing being used to protect fresh and treatable groundwater. The use of horizontal drilling has not introduced new environmental concerns. On the contrary, the reduced number of horizontal wells needed, coupled with multiple wells drilled from a single pad, has significantly reduced surface disturbances and the associated impacts to wildlife and impacts from dust, noise, and traffic. Where shale gas development has intersected with urban and industrial settings, regulators and industry have developed special practices to help reduce community impacts, impacts to sensitive environmental resources, and interference with existing businesses.

Hydraulic fracturing has been a key technology in making shale gas an affordable addition to the Nation’s energy supply, and the technology has proven to be a safe and effective stimulation technique. Ground water is protected during the shale gas fracturing process by a combination of the casing and cement that is installed when the well is drilled and the thousands of feet of rock between the fracture zone and any fresh or treatable aquifers. The multi-stage hydraulic fracture operations used in horizontal wells may require 3 to 4 million gallons of water. Since it is a relatively new use in these areas, withdrawals for hydraulic fracturing must be balanced with existing water demands. Once the fracture treatment is completed, most of the fracture water comes back to the surface and must be managed in a way that conserves and protects water resources. While challenges continue to exist with water availability and water management, innovative regional solutions are emerging that allow shale gas development to continue while ensuring that the water needs of other users can be met and that surface and ground water quality is protected.

An additional consideration in shale gas development is the potential for low levels of naturally occurring radioactive material (NORM) to be brought to the surface. While NORM may be encountered in shale gas operations, there is negligible exposure risk for the general public and there are well established regulatory programs that ensure public and worker safety.

In part two we will look at the political response to this good news, offer a natural gas pricing forecast, and touch on future prospects for oil and oil prices.