Correcting Misperceptions About Shale Natural Gas

From Forbes

“There are high hopes that the natural gas extraction technique known [as] hydraulic fracturing, or fracking, will boost the economy and bring the U.S. closer to energy independence, but if the energy industry expects to break new ground and fulfill a growing demand anytime soon, they need to make friends with the people who reside near the drilling rigs.”

So begins a recent Reuters story titled “A Local Obstruction in the Fracking Pipeline”.  It’s difficult to imagine any other 60 word sentence ever written that contained more false premises and incorrect assumptions.  As such, it is an unfortunately excellent example of the sort of inaccurate reporting about the oil and natural gas industry that takes place in the American media many times every day.

Let’s take the initial thought, that natural gas extraction through hydraulic fracturing “will”  – presumably at some point in the future – “boost the economy”.  The truth of the matter is that the extraordinary shale gas boom that has taken place over the last decade has already provided a major boost to the nation’s economy, and turned previously moribund parts of the country into marvels of economic development.  From Pennsylvania to Ohio to Colorado to Louisiana to Arkansas to Texas, shale natural gas has helped to insulate communities and state economies from the seemingly intractable struggles of the national economy.

How about the second thought, that shale natural gas will – again, presumably at some point in the future –   “bring the U.S. closer to energy independence”.  Again, this has already happened.  The U.S. is already well on its way to a high degree of energy independence, and multiple credible sources – like the U.S. Energy Information Agency (EIA) – are projecting that North America can be independent of overseas sources of oil imports within the coming decade.  Already, oil imports into the U.S. have dropped dramatically, from almost 70% just a few years ago to less than 50% today.

So let’s trudge on to the next thought in the sentence at hand, that being “but if the industry expects to break new ground…”.  Huh? Beg pardon?  Say what?  Have the folks at Reuters been sleeping the last 5 years, as the supply situation related to U.S. natural gas has been fundamentally transformed from one of scarcity to one of almost unprecedented abundance?

Look, I worked on the 2003 Natural Gas Supply and Demand study conducted by the National Petroleum Council at the request of the Secretary of Energy.  We had a collection of the best and brightest minds on the subject of U.S. natural gas working on that effort for a full year, and issued a report whose findings projected a very tight supply situation and persistent high prices through 2025, continued overseas flight of manufacturing jobs in industries dependent on natural gas as a feedstock, and a rapidly growing Liquified Natural Gas import sector.

In other words, we were wrong about everything.   What we’ve seen instead since 2003 is rapid growth in supply, a dramatic drop in price, a return of tens of thousands manufacturing jobs to the U.S. from other nations, and proposals to convert a slew of LNG import facilities to LNG export facilities.

Which leads to the next false assumption in the sentence in question.  That would be the one where the author questions the industry’s ability to “fulfill a growing demand anytime soon”.  Persistent record natural gas storage levels and a drop in the price of the commodity from $12/mcf in 2008 to the $2-$3 range says all one needs to know about the industry’s ability to meet growing demand.  And this has all happened as the natural gas drilling rig count has dropped from a high of about 1600 to around 400 today.  Persistent high supply + 75% drop in rig count means there is an incredible amount of excess production capacity in the system, there to rapidly meet any significant increase in demand, in the forseeable future.

The writer concludes this ill-considered sentence with the phrase “they need to make friends with the people who reside near the drilling rigs”.  Well, ok, there is a smidgen of a point in there.

While it is true that some who live near drilling operations in parts of the country have become disenchanted with the process, the reality is that, even in controversial areas in the Northeast, surveys consistently show that more folks approve of the industry than those who oppose it.  In places like Texas and Louisiana, where the population has been used to the industry being around on a constant basis for many  years, the public overwhelmingly approves of the industry and appreciates the economic development it invariably brings along with it.

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