Clearing The Air

Financial Crisis = Energy Crisis?

Up until a few weeks ago, energy was a front-page topic. Now its place has been taken by our financial crisis. But while all the mainstream media attention regarding the present financial crisis has focused on its threat to America’s financial sector, the fact is that threat very much includes our present and future ability to meet our energy needs.

Most of our domestic natural gas production is not the work of so-called “big oil,” but rather by independent producers who are entrepreneurial businesses that make their revenues only by producing natural gas. They utilize the futures market to reduce risk and to ensure a certain return on what they produce but have no retail or other operations that can offset big swings in price. Current domestic production is threatened because of the massive amounts of capital it requires to drill and produce that natural gas here in the U.S. Producers must have access to that capital.

At the same time, the financial crisis has increased the volatility of the energy markets. Bear Stearns, Lehman Brothers, Goldman Sachs and others all played a major role in the commodities markets, including energy. The buying and selling that has occurred, as the major players have had to liquidate some positions and cover others have roiled the markets, making it extremely difficult for independent producers to do any long-range planning. It also has left some holding the bag. Tulsa, Oklahoma-based Semgroup LP’s bankruptcy, caused by the firms’ huge exposure to energy options trading, has left thousands of small producers who sold oil to the firm owed millions, and the producers unable to pay royalty owners.

We don’t have to go far back in time to see what happens if the independent producers are harmed. In the late 1990’s, Venezuela flooded the U.S. market with below-cost Venezuelan oil. Oil fell to $8 a barrel, if you can imagine that now—less than 10 years ago.  This was done with the goal of driving America’s independent oil producers out of business, about a million barrels of oil a day. Thousands of independent producers who had hung on through the boom and bust 1980’s were put out of business, and our reliance on foreign oil, and the transfer of American wealth overseas, increased accordingly.  But it wasn’t only our domestic oil production that was lost. Many of the independents were also natural gas producers.

But we were able to move from a position of natural gas want to natural gas abundance with new, more expensive technology and new ideas that unlocked natural gas from shales and sands. That brings us to a less tangible, but no less real aspect to the present threat, and it is the fact that independents also bring the kind of  “outside the box” thinking needed to solve our energy and environmental problems.  In the 1970’s, while the best and brightest of the biggest oil companies were busy telling Congress we were running out of natural gas, such small independents as GHK’s Bob Hefner had the gall to challenge them both in words and deeds, in the end proving that natural gas could be found even where no oil existed, and at depths never before thought possible. Independents were way ahead of the curve in jumping in with both feet when it came to natural gas, to the point where today in America, more than 90 percent of the working rigs are exploring for the natural gas that is so critical to our present and future energy needs. The shale production techniques that have played such a key role in just the past four years in providing abundant supplies of clean-burning natural gas were developed by an independent producer and it is the American independent producers that are leading the way in developing these clean energy sources for the future right now.

This kind of entrepreneurial thinking is also driving the current development of wind, solar, and biomass, which, in conjunction with natural gas, can form an energy portfolio that will secure a green energy future for us. But these sectors are also facing the same threats. Access to capital is essential for these “plays” to develop to their full potential.

The need for wise, forward-thinking policy decisions has never been greater. You cannot have a sound economy without American energy to fuel that economy.  A strong capital market is essential to any energy policy.   And an energy policy that ignores the environment is self-defeating. It’s not just financial institutions that are at stake in this debate, but our energy and environmental future as well.

posted @ Tuesday, September 30, 2008 8:30 AM | Feedback (0)

Richer Than We Know

“Door Open To Energy Future.” “Proven, Clean Fuel Is Found To Be Abundant In America.” 

Those are just a couple of the headlines I long to see when it comes to natural gas, particularly in light of new numbers that should silence those who continue to insist we are running out of natural gas. But I’ve long since learned that one of the more intriguing aspects of the way we use numbers in formulating and reporting on government policy is that while bad news travels fast, bad news accompanied by big numbers tends to travel even faster, however (oddly enough) that’s not usually the case when it comes to good news.

And to say the news is good when it comes to our natural gas supplies is an understatement.  The latest comes from a July 2008 study by Navigant Consulting, Inc. (NCI) commissioned by American Clean Skies Foundation.

To cut to the chase, the NCI study shows that when it comes to domestic natural gas supplies:
•    Our total proved natural gas reserves are growing, not shrinking.
•    Our production of natural gas is increasing.
•    Our current estimates of our reserves are too low.
•    The driver of both reserve growth and production growth is major shale gas plays located in convenience to distribution and demand.

Even the need for the study is telling in itself. To put it simply, because of production from shale, coal-bed methane, and other so-called unconventional natural gas production, America is like a company producing a product faster than can be counted. A kind of mega-study was needed to get a clearer view of what’s happening and its implications for our energy future. Indeed, the NCI study found that most of the gas-supply data available to the public, from both industry and government, understated both the actual contribution and the potential of unconventional resources simply because their emergence has been so rapid that the traditional models used just have not been able to keep up.  Consider: Total U.S. proved natural gas reserves 10 years ago were 167 trillion cubic feet (Tcf). But we produced 170 Tcf, and our proved reserves today are about 212 Tcf. This is because of unconventional gas production, production largely believed to be impossible ten years ago.

Using a model that included actual producer data and analysis, reports in the trade press, government and industry estimates as well as other sources, the NCI study is the first that captures a clear snapshot of what is a speeding train. That picture is made up of numbers that are truly mind-boggling.

At current (2007) production levels, the NCI study puts the conservative estimate of our natural gas resource at 1,680 Tcf, a supply of about 88 years.  Impressive. But when the industry survey of shale production is included, the number goes to 2,247 Tcf, a 118-year supply at current production levels.

And that term “current production levels” is important. The fact is that production from shale is still in its relative infancy, with the vast majority of the potential shale plays in America still being explored.

In recent weeks, the idea of expanding our use of clean-burning, affordable natural gas has received increased attention both inside the beltway and across America. This has been accompanied by continued questioning regarding our supply. The NCI study clearly shows the answers to such questions are positive. To quote directly: “The rapid escalation of unconventional production observed historically is continuing, and the unconventional resource base appears adequate to support that escalation to allow significantly increased volumes of unconventional production to continue for decades.”

More simply: We’re richer than we know.

posted @ Wednesday, July 30, 2008 10:19 AM | Feedback (0)

Revenge of the Nerds - Redux

Energy Nerd (en’er je nurd), n. Slang 1) A person who takes great interest and some pleasure in studying statistics regarding energy production, use, supply, etc. 2) Yours truly.

OK, I admit it. I eagerly grab and review the latest energy stats like a Trekkie jumping at a new video of Star Trek outtakes. But in my defense, there’s a perfectly sound, serious reason: The key to our energy future can only be found in the present. To that end, the present count for rotary rigs drilling for natural gas and oil in the United States is at an all-time high according to Baker Hughes, Inc. As of July 11, there are 1,922 rigs active and 1,544 of those are drilling for natural gas. Oil and Gas Journal reports that, “shale and other unconventional gas plays were claiming large shares of the drilling in Texas and numerous other states.”

“Unconventional natural gas production” is the rather dry term given to a very exciting development - the use of new drilling techniques and technologies to do what only a few years ago was viewed as impossible - successfully producing natural gas from shales, so-called “tight sands,” and coalbeds. What was really unconventional has become conventional.

For those still not familiar with the term, “shale gas production” is production from earth’s most common sedimentary rock. It’s been known for some time that shale can contain natural gas, but it has only been since early 2000 that the key to unlock this treasure chest was discovered. Now new projections show the sheer potential size of the treasure is mind-boggling.

To put this in perspective, first consider that of the 22 major shale basins in the U.S., only a few have been explored. Now take a look at the Energy Information Administration projections. The EIA projects that by 2018 unconventional gas production will reach 26.3 billion cubic feet (Bcf) a day, about 50% of projected domestic U.S. production. That’s impressive. But it pales in comparison to the latest estimates from those who are actually putting hundreds of millions of dollars at risk and already successfully producing natural gas from shale formations in the U.S. They now estimate production from just 4 of the shale formations that are currently being explored and produced will be higher than the EIA’s projection of total production from all unconventional sources.

Here’s a breakdown of the projection:  

1)    Barnett shale in Texas – 8 - 9 Bcf a day
2)    Haynesville shale in northern Louisiana: 8 - 10 Bcf a day
3)    Fayetteville shale in Arkansas: 3 - 5 Bcf a day
4)    Marcellus shale from West Virginia to New York: 8 – 15 Bcf a day

Total: Up to 240 trillion cubic feet (Tcf) a year. Again, that’s just from 4 of the 22 major shale formations. In 2007, the total U.S. gas consumption was 23,057,969 Mcf.

Nor is this restricted to the U.S. In Canada, producing gas from shale is just now beginning in several of the provinces - with promising results.  With Canada and the US markets being fully integrated through a network of pipelines it truly is exciting.

Obviously, these numbers fly in the face of those who hold that we’re running out of natural gas. The reality is quite different. We now know that there are abundant, domestic supplies of a resource that can easily be used as a transportation fuel, generating fuel, key component in various industrial manufacturing processes, and most importantly, a key component of a green energy portfolio that includes wind and solar energy.

You certainly don’t have to be a nerd to get excited about that. In the coming weeks, American Clean Skies Foundation will be revealing something else to be excited about – a study that shows the significant impact that shale plays are beginning to have on the supply of natural gas within the United States. It is truly exciting, so stay tuned here and to our websites listed below for more detail.

posted @ Friday, July 18, 2008 9:48 AM | Feedback (0)