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Giberson: “Did the Federal Government Invent the Shale Gas Boom?” (December 20 post becomes part of a national debate)

One of the nation’s important energy analysts is Michael Giberson, an economist at the Center for Energy Commerce in the Rawls College of Business at Texas Tech University. Giberson, who has occasionally posted at MasterResource,  teaches energy courses at Tech such as U.S. Energy Policy and Regulation and Energy Economics.

Giberson is also a principal (with fellow energy expert Lynne Kiesling of Northwestern University) of the energy-centric Knowledge Problem, described as “Commentary on Economics, Information, and Human Action.”

A month ago, Giberson critically reviewed a study by the Breakthrough Institute that claimed, basically, that government energy activism crucially enabled the shale gas (and oil) revolution that is now sweeping much of the United States and many countries around the world.

“New Investigation Finds Decades of Government Funding Behind Shale Revolution,” announced Breakthrough on December 20, adding:

Breakthrough Institute research and interviews show the direct and sustained support federal agencies provided to the gas industry leading up to the modern natural gas revolution.

And virtually on the same day (Giberson was on holiday), a rebuttal came at Knowledge Problem (reprinted with separate comments at  Energy Collective) that is now part of the national debate.

On Tuesday night, the Breakthrough Institute trumpeted Obama’s mention under the headline “Obama’s Energy Revolution,” adding:

In his State of the Union, President Barack Obama referred to the findings of a Breakthrough Institute investigation, which found that 30 years of federal funding led to the shale gas revolution.

Given the high-stakes debate, MasterResource is pleased to repost, in its entirety, Giberson’s analysis–and his challenge for deeper research.  The debate is joined.

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In the Washington Post the folks at the Breakthrough Institute try to learn us some history about the shale gas boom. Maybe you think the shale gas boom was some big surprise suddenly made real after the decades-long work of a hard-headed oil and gas guy – George Mitchell – willing to spend millions of dollars on the crazy idea that hydrocarbons stuck in a rock could be produced economically, once the right mix of technologies could be brought to bear.

Wrong, says the Breakthrough Institute, credit the shale gas boom to the federal government.

They have their reasons:

  • “Slick-water fracking, the technology that Mitchell used to crack the shale gas code, was adapted from massive hydraulic fracturing, a technology first demonstrated by the Energy Department in 1977.”
  • “Mitchell learned of shale’s potential from the Eastern Gas Shales Project, a partnership begun in 1976 between the Energy Department’s Morgantown Energy Research Center and dozens of companies and universities ….”
  • “Mitchell’s success depended on a revolution in monitoring and mapping technologies driven largely by government labs.”
  • In 1991, Mitchell asked the publicly funded Gas Research Institute, then funded by a tax on gas production, and the Energy Department for help.”
  • “Sandia National Labs provided Mitchell with many critical microseismic tools.”
  • “Mitchell also benefited from 3-D imaging, which the Energy Department had long supported.”
  • “The third critical technology was horizontal drilling and well installation …. In 1976, two government engineers … patented an early-stage directional drilling technology that became the precursor to horizontal drilling.”
  • “A joint venture between the Energy Department and industry drilled the first horizontal Devonian shale well….

There are a few more similar points. The article pursues a larger goal – some statement concerning current energy policy support – but today I just want to consider how to assess the credit for technological advancement. (See tomorrow for part II.)

A fair analysis of credit and blame requires more than just a recounting of history, such as provided in the article, we need also to construct a counterfactual history for comparison. Should we reasonably believe that, but for the energy technology programs of the Department of Energy, we’d be unable to produce natural gas from shale? It would be difficult to do this analysis well, and the authors don’t attempt it here, but a full assessment calls for it.

A sketch of technology developments may be helpful. Note that fracturing as a well-stimulation technology started in Pennsylvania in the early 1860s. A few clever folk discovered dropping gunpowder down a well (later, dropping  liquid nitroglycerin)  often brought marvelous returns. Edward A. L. Roberts submitted a patent application for the process in 1864. Hydraulic fracturing technology was first developed by Standard Oil (Indiana) in the late 1940s.  In the 1960s, Project Gasbuggy had the federal government collaborating with the oil and gas industry to test a nuclear-weapon based fracturing technology on federal land in New Mexico. The Breakthrough Institute’s story picks up in the 1970s, but what the backstory reveals is a history of efforts to develop fracturing technology, funded privately in some cases and publicly in others. Department of Energy involvement may have shaped the direction of research, but I suspect its pool of research funds was merely convenient to technological advancement and not necessary. (More recently, GasFrac Energy Services of Alberta has pioneered a propane-based fracturing technology.)

Directional drilling, a precursor to horizontal drilling, first became practiced in the industry in the 1920s – well before “two government engineers … patented an early-stage directional drilling technology” in 1976. (See “Slanted Oil Wells,” published in Popular Science magazine in 1931.) As with hydraulic fracturing,  the industry found the technology quite useful in application and companies pursued technological advancements. Taxpayer funding may have been convenient support for the oil and gas industry, government research involvement may have shaped the direction of directional-drilling research, but the industry would have pursued the technology in any case.

So possibly the federal government’s involvement advanced by a few years the technologies that were finally blended in a sufficiently promising mix by George Mitchell. Even if we grant as much, it isn’t the whole of the shale gas boom that federal involvement gains credit for, just the added value that comes from shifting shale gas production forward by a few years. Of course, possibly the whole of the federal government’s involvement in the industry – tax policies, regulatory policies, antitrust policies, federal lands policy, and so on – could reasonably be counted as delaying technological advancement when compared against what would have happened under some more rational regime.

Admittedly, they were just writing an op-ed and I’m complaining that they didn’t do a dissertation’s worth of work to support it. Maybe my complaints are a little unfair.

Okay, here is an offer: I’ll admit my complaints are unfair if they admit that their analysis was insufficient to justify their conclusions.

11 comments

1 Was federal government support critical to the shale gas breakthrough? « Knowledge Problem { 01.26.12 at 9:57 am }

[...] The President’s comment echoes a claim advanced by the Breakthrough Institute last month (as they were happy to point out after the speech), namely that credit for the shale gas boom ought to go to the federal government. I commented on the Breakthrough Institute’s claim in December (see here and here), and the Master Resource blog has republished the first of those posts this morning. [...]

2 LSlezak { 01.26.12 at 11:43 am }

There is a world of difference between government funded R&D having contributed to advances and the notion that government can interdict in energy markets to bring about positive econmomic outcomes. Obama and Breakthrough Institute are attemepting to have the former justify the latter.

3 Nathan { 01.26.12 at 12:12 pm }

You’re arguing, essentially, that no credit is due anyone for anything, because without them, someone else would have come up with it eventually. This is nonsense. When Edison invented the light bulb, it was his work, intelligence, and persistence that paid off, and he was the one who deserved the credit and profit. Just because you have some personal or political need to devalue every government action doesn’t mean that some of them don’t have value and deserve credit for their role in a prosperous (still?) America.

4 Lionell Griffith { 01.26.12 at 12:16 pm }

The Government invented the shale gas boom the way Al Gore invented the internet: by pretense, scam, and wishful thinking. They stood in the way until We the People ran right through them in spite of their pontification. Its way past time to run them out of town. By its basic nature, Government can’t do anything but take things that don’t belong to it, break things that aren’t theirs, and kill people (only a few of which needed to be killed).

5 Mike Giberson { 01.26.12 at 2:27 pm }

Nathan: actually I suggest that government support of research may be credited with advancing the development of shale gas resources by a few years, not that no credit is due to anyone for anything.

True, Thomas Edison gets a lot of credit for inventing a light bulb, but even Edison deemed it prudent to go into partnership with Britain’s Joseph Swan who had developed a practical bulb before Edison did. Edison had a couple advantages over Swan – one, an interest in publicity and talent for self promotion; and two, a workable scheme for an electric power distribution business which would make his electrical lights a commercially-useful product. Swan was content with the inventions and technical advance, and not so interested in pioneering the electric power industry.

You might actually say, in this context, the U.S. government was like Swan in promoting technological advances, and George Mitchell was like Thomas Edison in turning the ideas (his own ideas and those of others) into an industry.

6 Steve C. { 01.28.12 at 3:18 pm }

Fortunately for us, the United States Government took the initiative in inventing a man named George Mitchell. He was able to integrate all pieces invented by various government agencies. Or, at least that seems to be the moral of the story.

I guess we shouldn’t credit Henry Ford for his influence on auto manufacturing either. After all, he did not invent the gas combustion engine, the automobile, the petroleum industry, the assembly line, “factories”, the business corporation, banks or interchangeable parts.

7 Karl { 02.06.12 at 10:47 am }

In 1975 gas well drilling was up and reserves were dropping. The government was afraid that natural gas production had peaked and that we were facing a crisis. The major producing companies actually had an even gloomier view than the government; Mobil’s estimate of remaining recoverable natural gas reserves were about a third of the USGS’s lowest estimate. This was when ERDA (precursor to DOE) began its research, which continued on until about 1992 but was mostly done in the early to mid 1980s. DOE’s research was responsible for a lot of “firsts” related to the develoment and application of technology for producing gas from shale. These demonstrations provided some early grist for the innovation mill. However, even on into the late 1980s, US major oil and gas companies remained uninterested in unconventional natural gas resources and research to produce them. They were focused on finding oil in other places than the US and their R&D groups had been gutted. US independent producers should get the credit for developing the US domestic natural gas resource base, and many are willing to share the credit with the DOE for helping to provide data and funding for research when others were not interested. The line from early research to final application of commercial technologies is rarely clear and simple.

8 rbradley { 02.06.12 at 11:57 am }

Karl’s comment brings to mind the fact that wellhead price controls on interstate natural gas over a half-century (1940 to the mid-1980s) created a climate of pessimism and shortage that would not have occurred in a free market setting.

So the question can be asked: how much did anti-industry government intervention stymie internal R&D and artificially stimulate external (government) R&D?

9 Karl { 02.06.12 at 6:11 pm }

I would think natural gas price controls did make it unattractive to invest in unconventional gas production technologies pre-1980s. But I believe the general trend in cutting back major oil company R&D shops during the 1980s and 1990s was more related to the shift towards shorter term performance goals by investors than to government meddling in the marketplace. Companies could not justify the costs in an increasingly cost-conscious environment and, ultimately, shifted much of the research role to the oil and gas service companies, each of which have their own reasons for advancing (or in some cases not advancing) specific technologies.

Other questions might be: Is there ever a role for government funding of basic research that has as its objective a long term public benefit that the marketplace is not interested in funding in the short term? Is the acceleration of technology development, even by only a few years or decades, worth the expenditure of public funds if it results in accelerated recovery of useful natural resources or lower costs to consumers?
Methane hydrates is perhaps a good example. Right now, few gas producers are interested in spending money on understanding the physics of how to locate and produce this natural gas resource. In fact, if estimates of the shale gas recoverable resource are true, tapping more methane from such an even more “unconventional” source will not be an economic investment for many years.

The DOE (and the USGS and to a lesser extent a few other agencies) have been spending public research dollars on characterizing the U.S. methane hydrate resource and testing possible production mechanisms. The data and information that is acquired (with cost sharing from industry partners) is public and available for anyone to use to develop new technologies. Should they be doing this?

10 rbradley { 02.06.12 at 8:08 pm }

Think in terms of private companies involved in R&D, trade associations who might do the same with greater common industry (member) investment, and then nonprofit groups that might find a public purpose in place of the public good.

If that is not enough and only the government knows what is best, then on what basis might that be?

11 Karl { 02.08.12 at 5:48 pm }

Say that a resource that the nation will very likely need to develop in the future (say >40 years), for both economic and security reasons, will require significant research effort to produce. However, the companies likely to be in the business of developing this resource do not see any short term benefit to such research (and they have a very short term profit outlook) or do not individually own enough of the rights to the resource to make it in their interest to invest and are not of the sort to share secrets. Still, collecting and then making publicly available fundamental information about the resource and how to produce it would benefit future consumers by advancing the speed with which the marketplace can act and deliver benefits once an investment makes economic sense.

This is a step above simply inventorying national resources like the USGS or DOI do (which I assume is seen as a useful expenditure of public funds?) since there is some investment in research related to how best to produce the resource.

Oil and gas companies have a very short horizon these days. Just look at the rig count and the ups and downs in employment with price volatility.

Isn’t there a benefit to spending public funds to help make sure that the right knowledge and technology is available when it is needed?

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