Category — Energy Sources

“I’m sorry for you—coming to Texas [in 1915] to look for oil. Don’t you know there is no oil in Texas?!”

- Wallace Pratt (oil and gas geologist), quoted in “Oil Finding—the Way it Was,” Petroleum 2000 Issue, Oil & Gas Journal, August 1977, p. 144.

The New York Times has published two amazing front-page articles on shale gas (here and here), which raise a number of issues about the prospects for the resource, suggesting that the reserves and profitability are vastly overstated. A careful reading of the articles, however, suggests that it is more smoke than fire.

Two specific issues raised in the article are important: the profitability of shale gas wells and their long-term production profiles. Many ancillary issues are also raised but can be dispensed with.

First, the reports that many landowners were not paid the promised bonuses or made much less than expected: this is hardly unusual when a resource boom occurs. Some companies are overly optimistic, rush in with offers that are intended to line up prospects as quickly as possible, then find that they can’t satisfy them.

The method’s use of water and potential contamination are certainly concerns, and is being addressed by the government. While the industry downplays concerns, and much of the coverage is the usual NIMBY hype, it is quite possible that this will add to long-term costs.

The entire articles are very poorly done, making references and implications that are completely unsupported by any real facts. A Fed official is skeptical? Some wells are described as underperforming?

Skepticism, True and False

That there are skeptics is hardly surprising: there are always skeptics, those who grumble about new technologies, who think that claims are overblown, and downplay the long-term success or applicability of techniques that appear promising. [Read more →]

[Ken Glozer's new book, Corn Ethanol: Who Pays, Who Benefits?, sponsored and published by Hoover University Press, will be released this month. Mr. Glozer is president of OMB Professionals, a Washington, D. C. based energy consulting firm. He was a senior executive service career professional with the White House Office of Management and Budget in the energy, environment, and agriculture area for 26 years.]

“Clearly, reducing petroleum imports with the current ethanol policy is a costly ineffective policy. The nation and its taxpayers and consumers would be far better off if the federal government adopted a competitive market-reliance policy for ethanol and thereby avoided the very substantial costs that current ethanol policy has imposed on the nation’s consumers and taxpayers. The current corn ethanol policies should be phased out over a year or two.”

My new book provides detailed a political history of how the United States ended up with current federal corn ethanol policy.

Part I relates the significant external events that have driven the politics that in turn has driven the policy since 1977. I address important questions about when the policy started, how it evolved, what were the major political and market forces that drove it, and, most important, who were the key officials that formed and shaped the policy.

Part II of the book contains an in-depth objective evaluation of the major claims made by those who have advocated the ethanol policies during the past thirty years. I probe how well the ethanol policy has worked compared to the claims made by two presidents, three federal agencies, and the corn, soybean growers, and ethanol producers.

The book evaluates the Renewal Fuels Standard (RFS), which was first enacted in 1975 then doubled, to a mandatory 15 billion gallons of corn ethanol blended into the nation’s gasoline supplies. The surprising finding—that federal ethanol policy has little to do with energy and everything to do with wealth transfer—is particularly compelling because, after three decades of federal subsidies, trade protection and most recently mandated ethanol blending, ethanol remains uneconomical.

According to the Department of Energy’s Energy Information Administration, ethanol never has and never will have a significant impact on petroleum imports compared to what could be achieved under a competitive market policy. Thus my sober conclusion: taxpayers and consumers are the victims of the current policy in that they have no choice but to pay and pay.

From the Preface [Read more →]

When it comes to climate, are all fossil fuels equal?

“No,” the answer has been until very recently. In terms of how much carbon dioxide (the major force behind the human alteration of the atmospheric greenhouse effect) is produced when burning various fossil fuels to produce a unit amount of energy, there is a definite ranking. From the most CO2 produced to the least, the list goes coal worst, oil next worst, and natural gas least worst.

While it would be stretch to call natural gas the sweetheart of climate-change-fearing environmentalists, many have considered it to be the lesser of the reliable-energy-source evils. Of course, they rally behind the wind and the sun, but even renewable energy idealists understand that there needs to be a bridge between where we are now and where they would like us to be—and that bridge is envisioned to be constructed primarily from natural gas (a foundation furthered by the nuclear problems in Japan).

But a new study out of Cornell University makes the natural gas bridge out to be another Gallopin’ Gertie rather than a secure pathway to the future—at least when it comes to being a climate-change mitigator/savior.

The Climate Impact of Natural Gas

According to the carbon dioxide emissions factors given by the Energy Information Administration (which assume 100% combustion), coal burning emits on average about 95 kilograms (209 lbs) of carbon dioxide per million BTUs produced. Burning oil to produce a million BTUs of energy produces about 20kg less, or about 75 kg (165 lbs) of CO2. And burning natural gas to do the same thing saves you another 20kg, producing only about 55 kg (121 lbs) of carbon dioxide.

So, on the face of things, numbers like these are what make natural gas the darling of climate change mitigators. They see that a switch from coal to natural gas could cut global-warming CO2 emissions by more than 40%. This number falls quite a bit short of the long term goals of reducing greenhouse gas emissions by more than 80%, but nevertheless it is a big step in the right direction. Thus, natural gas is viewed as a “bridge” to a largely carbon-free energy production—that is, it is a construct which buys time for other technologies to mature and/or be developed. [Read more →]

Remember all this? America is running out of natural gas. Prices will soar, making imported liquefied natural gas (LNG) and T. Boone Pickens’ wind farm plan practical, affordable and inevitable. Well, reality intervened. We are having an energy transformation, but just the opposite of what the non-market energy planners predicted.

Shale Gas Revolution

Barely two years later, America (and the world) are tapping vast, previously undreamed-of energy riches – as drillers discover how to produce gas from shale, coal and tight sandstone formations, at reasonable cost. They do it by pumping a water, sand and proprietary chemical mixture into rocks under very high pressure, fracturing or “fracking” the formations, and keeping the cracks open, to yield trapped methane.

Within a year, U.S. recoverable shale gas reserves alone rose from 340 trillion cubic feet to 823 tcf, the Energy Department estimates. That’s 36 years’ worth, based on what the USA currently consumes from all gas sources, or the equivalent of 74 years’ of current annual US oil production. The reserves span the continent, from Barnett shale in Texas to Marcellus shale in Eastern and Mid-Atlantic states – to large deposits in western Canada, Colorado, North Dakota, Montana and other states (and around the world).

Instead of importing gas, the United States could become an exporter. The gas can move seamlessly into existing pipeline systems, to fuel homes, factories and electrical generators, serve as a petrochemical feedstock, and replace oil in many applications. States, private citizens and the federal government could reap billions in lease bonuses, rents, royalties and taxes. Millions of high-paying jobs could be “created or saved.” Plentiful gas can also provide essential backup power for wind turbines. [Read more →]

Author’s note: No, I have not been in a cave for the past two weeks.  The impacts of unconventional gas on energy markets will be measured in months and years, not in days and weeks.  There is essentially nothing that current unconventional gas production can do to moderate crisis-driven escalation of oil prices and oil-linked LNG prices in the next few weeks.

In Part I and Part II of this series, the impacts of unconventional gas discoveries in the U.S., Australia, Canada and elsewhere were explored.  Gas-to-gas competition was seen as a powerful force for price moderation.

U.S. shale gas discoveries and production from coal bed methane (CBM) have already provided great benefits for energy consumers in the Atlantic Basin.  Gas-to-gas competition – shale v. LNG – has led to interesting market outcomes and investments.  Gone are the panic days of encouraging any and all LNG regasification plants in the US in the fear that the US might “lose out” to others on the LNG bonanza.

Now, the U.S. is quickly moving toward overall sufficiency in gas supplies with investments in two-way (regasification and liquefaction) LNG plants now firmly on track in Texas and Louisiana.

Other markers of the sea change in gas markets include proposals for another two-way LNG plant in Canada and investments in gas-to-liquids production in British Columbia.

In the U.S., shale gas production has led to investment in new gas separation facilities and a revival of moribund petrochemical firms.

Australia’s exploitation of its CBM resources has created investments in more than 14 million tonnes/y (mtpa) for export to Asian markets.

In China, India, Poland and elsewhere, drilling is firming up new supplies of shale gas and CBM.

Even the U.S. government has entered the fray, with its Global Shale Gas Initiative.  The program aims to assist countries in identifying shale gas resources and the technology to produce it.

Where will it end?

Will the Gas-to-Gas Party Be So Much Fun That Oil Joins In?

The short answer is no, or at least not yet.  However, detailed investigations of the impacts of unconventional gas on energy markets in the US, Indonesia and elsewhere indicate that eventually the unconventional gas bonanza will “leak” into markets where gas can act as a near substitute for refined oil products. [Read more →]

In Part 1 of this series, the trends in U.S. unconventional gas output in were explored. The impacts on gas markets — $3–5/MMBtu — were noted. If unconventional gas puts pressure on LNG and Gazprom, can this supply and supplier turn to Asia as their new market? Maybe, and just for a while. (1)

1.1.1 Australia’s Experience with Coal Seam Gas

CSG accounts for almost 15% of Australia’s growing gas production, and as much as 30% of probable reserves. LNG plants based on CSG are slated to commence production in 2014, with production of 794 Bcf/y (~16.7 mtpa). Australia’s CSG is believed to occur roughly above shale gas basins, raising the possibility of further unconventional production. Figure 1 shows the CSG, conventional gas fields and transmission infrastructure in Australia’s Queensland State.

As was the case in the U.S., Australia’s development of its CSG occurred proximate to gas transmission infrastructure. The current CSG fields in Australia are just east of the Surat Basin gas fields, providing ready access to transmission and population centers.

Figure 1: Coal Seam Gas Resources and Infrastructure in Queensland, Australia

A peculiarity of unconventional gas, one that is shared with unconventional oil sources (shale oil, tar sands), is a long reserve lifetime. The unconventionals, at least using current technology, resemble mining or industrial operations more than they do traditional oilfield operations. This means moving a lot of material – water, overburden – and repeating the process continuously so as to maintain a constant rate of output. (1) [Read more →]

[Editor note: Part II tomorrow will summarize unconventional gas developments in Europe and Asia.]

In 2003 and again in 2005, Alan Greenspan, Chairman of the Federal Reserve Board, called on America’s governors and natural gas users to embrace vastly larger imports of methane energy. In his words: “North America’s limited capacity to import liquefied natural gas (LNG) has effectively restricted our access to the world’s abundant gas supplies.”

As he was speaking, a revolution was brewing under his feet. New methods of producing gas from unconventional resources–tight gas, coalbed methane (cbm) and shale gas–had greatly expanded the universe of gas resources available throughout the world.

By the end of that decade, the U.S., Australia and Canada would be able to book unconventional reserve additions in excess of annual production from all gas sources.

Production of Gas From Unconventional Sources: Experience in North America

So dynamic has been the process of conversion of unconventional resources into reserves for the three onshore options that unconventional gas production in 2010 accounts for about half of the US gas output and about 15% of Australia’s gas output. With output from traditional gas fields in North America declining it was believed that only vast imports of LNG, as much as 80 million tonnes per annum (mtpa), by some estimates, could meet the ongoing demand from the US. With imminent “shortages” on the horizon the general consensus was that the era of abundant hydrocarbon supply for the US was over. The alarm about US supplies was augmented with concern that Canada could no longer step in as a reliable supplier for the northern tier states.

What changed the North American supply picture, even as the worries about gas output reached a crescendo in 2005-2008, was the growing ability to produce gas from difficult geological structures at reasonable costs. The first of the unconventional resources to enter major production was tight gas. The key that unlocked this gas was hydraulic fracturing – pumping a water-sand mixture into the formation at very high pressures. So successful was this “fracking” that tight gas output has risen to roughly 25% of US gas production, about 5.2 tcf/y. Indeed, tight gas (see Figure 1) is no longer classified by the US Department of Energy (DOE) as unconventional. Even more important, the US service industry has learned to employ fracking as an ordinary, and quite cost effective tool. A strong support system of contractors, equipment suppliers, engineers and banks has developed in the US around fracking activities.

Without unconventional production U.S. gas output might be as low as 60% of current output, about 12–13 tcf. [Read more →]

[Editors note: This is the final installment of Alex Epstein's four-part exploration of innovation and creative destruction of the early oil market. Read Part 3 here. References are at the bottom. This post was originally published in The Objective Standard.]

John D. Rockefeller’s improvements, which can be enumerated almost indefinitely, helped lower the prevailing per-gallon price of kerosene from 58 cents in 1865, to 26 cents in 1870—a price at which most of his competitors could not afford to stay in business—to 8 cents in 1880. These incredible prices represented the continuous breakthroughs that the Rockefeller-led industry was making. Every five years marked another period of dramatic progress—whether through long-distance pipelines that eased distribution or through advances in refining that made use of vast deposits of previously unrefinable oil. Oil’s potential was so staggering that no alternative was necessary. But then someone conceived of one: the electric lightbulb.

Actually, many men had conceived of electric lightbulbs in one form or another; but Thomas Edison, beginning in the late 1870s, was the first to successfully develop one that was practical and potentially profitable. Edison’s lightbulb lasted hundreds of hours, and was conceived as part of a practical distribution network—the Edison system, the first electrical utility and distribution grid. As wonderful as kerosene was, it generated heat and soot and odor and smoke and had the potential to explode; lightbulbs did not. Thus, as soon as Edison’s lightbulb was announced, the stock prices of publicly traded oil refiners plummeted. [Read more →]

[Editors note: This is part 3 of 4 in Alex Epstein's exploration of innovation and creative destruction of the early oil market. Read Part 2 here. References are at the bottom. This post was originally published in The Objective Standard.]

George Bissell was the last person anyone would have bet on to change the course of industrial history. Yet this young lawyer and modest entrepreneur began to do just that in 1854 when he traveled to his alma mater, Dartmouth College, in search of investors for a venture in pavement and railway materials. 26 While visiting a friend, he noticed a bottle of Seneca Oil—petroleum—which at that time was sold as medicine. People had known of petroleum for thousands of years, but thought it existed only in small quantities. This particular bottle came from an oil spring on the land of physician Dr. Francis Beattie Brewer in Titusville, Pennsylvania, which was lumber country.

At some point during or soon after the encounter, Bissell became obsessed with petroleum, and thought that he could make a great business selling it as an illuminant if, first, it could be refined to produce a high quality illuminant, and, second, it existed in substantial quantities. Few had considered the first possibility, and most would have thought the second out of the question. The small oil springs or seeps men had observed throughout history were thought to be the mere “drippings” of coal, necessarily tiny in quantity relative to their source.

But Bissell needed no one’s approval or agreement—except that of the handful of initial investors he would need to persuade to finance his idea. The most important of these was Brewer, who sold him one hundred acres of property in exchange for $5,000 in stock in Bissell’s newly formed Pennsylvania Rock Oil Company of New York. [Read more →]

[Editors note: This is part 2 of 4 in Alex Epstein's exploration of innovation and creative destruction of the early oil market. Read Part 1 here. References are at the bottom. This post was originally published in The Objective Standard.]

Today, we know oil primarily as a source of energy for transportation. But oil first rose to prominence as a form of energy for a different purpose: illumination.

For millennia, men had limited success overcoming the darkness of the night with man-made light. As a result, the day span for most was limited to the number of hours during which the sun shone—often fewer than ten in the winter. Even as late as the early 1800s, the quality and availability of artificial light was little better than it had been in Greek and Roman times—which is to say that men could choose between various grades of expensive lamp oils or candles made from animal fats. 16 But all of this began to change in the 1820s. Americans found that lighting their homes was becoming increasingly affordable—so much so that by the mid-1860s, even poor, rural Americans could afford to brighten their homes, and therefore their lives, at night, adding hours of life to their every day. 17

What made the difference? Individual freedom, which liberated individual ingenuity.

The Enlightenment and its apex, the founding of the United States of America, marked the establishment of an unprecedented form of government, one established explicitly on the principle of individual rights. According to this principle, each individual has a right to live his own life solely according to the guidance of his own mind—including the crucial right to earn, acquire, use, and dispose of the physical property, the wealth, on which his survival depends. [Read more →]