Replies to This Discussion

Permalink Reply by Robert Duke on November 28, 2010 at 7:56

I actually think we also have a case here of "free market forces" that are biting the natural gas industry and mineral owners. These leasing frenzies, followed by HBP drilling at a loss due to gas overproduction are a case where free market forces don't work for the longterm good. The smaller companies who pushed the technology are being forced to overextend, and are all going to get bought up by larger companies, and then there is less competition. The small mineral owner may (or may not) have gotten a great lease bonus, but he is going to lose money due to an artificially low price for natural gas - I say artificially low, because companies under purely free market conditions, would throttle back on overproduction until the price comes back up, but the leasehold situation prevents this. In the short term, the free market works in that the consumer gets a great price for natural gas (but it is really a regulated price through utilities still, and any utility-based price is not true free market), but in the long term the resource becomes unavailable sooner than it would otherwise, due to early overproduction. It's too late, so I suppose mostly academic, but a great example of things not working.

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Permalink Reply by Les Bamburg on November 28, 2010 at 8:24

Robert, sorry but you are not correct that HBP drilling is the reason for the oversupply. The majority of current drilling is not for HBP purposes and is economic. Remember that producers are currently netting $5.00 to $6.00+ per MMBtu for much of their natural gas sales. In addition, some production nets a higher price due to associated condensate, oil & NGL production. Even in the Haynesville Shale, much of the drilling activity is in sections and/or units where acreage is already held by previous HS or other producing wells. We have already seen some effects of gas prices on drilling rig counts and you will see additional decreases as hedges roll off and producer gas prices decrease.

Consumer gas prices are not really regulated as they float with the wholesale market price. Regulators only control the rate charged for the utility transportation and distribution service.

Actually, the market is working just the way intended. We see this in all commodities. When supply is short - prices rise and when in oversupply prices fall and the market responds by decreasing supply and increasing demand.

I do not think shale gas players will be somehow forced into selling but rather simply make choices that enhance value to their stock holders. There will always be plenty of competition in natural gas production industry - especially when you compare it to other industry segments (auto, refining, chips, etc).

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Permalink Reply by Robert Duke on November 28, 2010 at 8:51

Okay, my scenario might well be slanted by what the current cost of natural gas ($3.60, last check) is doing to MY profits more than the driller's profits, given indeed, that the driller can engage in hedging! But I do remember some discussion in the group about consolidation occurring as companies get overextended. And then there is Chinese investment, where the Chinese undoubtedly want not the investment, but the technology. I don't really follow commodities markets, but I am extraordinarily impressed by how wildly prices fluctuate, and how the fluctuations are driven to a certain extent by speculation, and while some guys are getting rich on this speculation, Joe-average finds himself paying $5/gal for gasoline before it is necessary. And I should avoid even beginning to wade into agricultural commodities issues, but many decent hardworking folks have been driven out of a livlihood into the "service economy" by "economies of scale" in farming and unpredictability of prices in agricultural commodities - to the total detriment of the quality of our food supply, our health, and our environment. So yes, I believe in free markets, but my religious fervor on the topic is somewhat damped by examples where things don't always work out best for everyone. At the same time, I "trust" the govt gardians - to get it wrong most of the time, that is. At points I was sort of sorry I brought this whole discussion up, but in the end I felt like it was a great airing of the range of views around the issue within our own community; imagine the range of views within the population as a whole.

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Permalink Reply by sesport on November 27, 2010 at 20:12

Les & Robert - Perhaps what the NE is concerned about is some select information about fracking technology from the past. According to Haliburton, they've been using this technique for about 60 years (I'm assuming this was for vertical wellbores into shallower formations) and it then included the use of diesel. Here's their postition statement.

http://www.halliburton.com/AboutUs/default.aspx?pageid=2720&nav...

Perhaps the NE is now doing an "overcorrection" for what other industries have contributed to their water problems in the past? I've said before that it might be in the best interests of all involved (industry, government, land/mineral owners) if baseline data was collected on the local water supplies before drilling & fracking take place.

BTW, Les, I honestly don't think they're whining. It's been my experience that this is just their usual tone. lol

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Permalink Reply by Robert Duke on November 27, 2010 at 21:36

I would bet there are a number of reasons folks are less receptive to having shale wells put in up there, some very rational and some completely irrational. There has been a lot of hype, and there are lots of folks that for various reasons want to slow down development. So figure out what the various concerns are, and address them, in loco. I think you can point to general studies of fracture tech safety as a starting point, but you are going to have to take water baselines everywhere, as sesport says, and do some local studies before you can stand up and claim irrefutably that you know what is going on. There may be anecdotal misinformation on water wells getting ruined, it may be happening for other reasons - doesn't really matter what the cause is until you prove, in loco, that it is not something attributable to you. Some guy burning firewood and who is in a section over from a well that will never yield income for him is not going to give a hoot if the natural gas resource is not utilized; he is going to be concerned about all the stories of bad water, O&G running over the little guy, etc. Proprietary fracture fluids do not instill trust; it is my understanding that their are now disclosure requirements, but I swear I heard something on NPR or somewhere (I don't believe they are impartial) about some toxic materials used in fracturing - may be incorrect, but tell that to the guy that heard it on NPR, who believes everything they say, and is concerned about his drinking water. And I think one really does need to be sensitive to landowner rights in a unitization environment, where folks may be essentially forced to allow a gas well in their section, unleased, and to landowner rights in adjacent sections. Until you prove you are doing no harm THERE, I actually don't understand why anyone thinks everyone will just be okay with the situation. So I sort of don't understand being heavy-handed about it, other than that the O&G companies are forced into this leasing frenzy situation which is actually horrible for sane development of the resource. I think the best thing that could have happened is let them put a 5 yr moratorium on development up there, study the heck out of it with test wells or whatever it takes, then allow leasing and infrastructure development; we'd have a better price for gas, and gas would be available further into the future. I DO understand that this is now a REAL MESS because the O&G companies already have investments sunk into leases, etc. up there, and have to start drilling, or lose big bucks.

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Permalink Reply by Stevew on November 27, 2010 at 22:07

Interesting analysis Robert. Thanks for bringing this up. I agree that people in other parts of the US might not want their shale developed and will work to stop it. I've wondered if this would be beneficial to the HS. In the long run I can see more electrical plants in the South selling power to the West.

I can also see the logic for a detailed study on fracing in the NE. There will be a lot of activism that could spill over and effect development in other areas and slow the progress of NG.

I am interested in what research says are the actual effects of deep gas wells. I know the EPA looked at fracing a few years ago but the public will want more. I certainly don't want wells polluting the lake I swam in as a boy. How do I know that nearby wells or drilling won't contaminate it? Sorry, I don't trust the companies or their lobbyists in state government. If there are problems in developing NG then we need to acknowledge them and get the tech people to work on them.

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Permalink Reply by Les Bamburg on November 28, 2010 at 5:14

Robert, basically the issue is the casing and cement program for the vertical section of a well where it penetrates the groundwater or local drinking water supply. Because the target horizon is separated from the these shallower formations by 3000 ft to 10000 ft of rock the only communication path would be thru the well annulus. I believe most states require 3 casing strings thru the groundwater with cement in each annulus to provide a high level of protection. These requirements have been around for many years and I believe should have been well researhed by the agencies in control. Any problems with a particular well would be related to execution rather than design. All of this applies equally to all wells drilled (vertcal, horizontal, frac'ed, un;frac'ed, etc). In many cases the anti-fracing crowd have cited incidents that were unrelated to frac'ing but rather just industry issues in general. In the specific cases related to frac'ing, it appears the operator and/or state agencies have conducted studies and gathered information to conclude they were not the cause.

You noticed I said there was not a substantial amount of toxic material in fracture fluids. The fluids are over 99% water and proppant and the remaining 1% could contain a small fraction that would be considered toxic (when in concentrated form) although I think that has been almost totally eliminated. Remember this fluid is injected into a producing formation and not in contact with the groundwater. Many companies had already publicly disclosed the contents of frac fluids before the EPA ruling. Of course govenment agencies always knew the contents.

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Permalink Reply by Robert Duke on November 28, 2010 at 8:22

Hi Les,
I understand your position and logic on this. I am virtually certain you know more about the geology than I do (I have many many years of scientific training, just not geology...). The straw man I would throw out there is the case where there are fractures that permit exchange of liquids and gas between deep and shallow layers. I presume what you are saying is that there is nil evidence for such things being able to get material out of the shale up into the water table - I can imagine that say 5000 ft of solid rock is a bit of a barrier. But I think 1) that needs to be more widely understood if that is the case, and 2) it probably needs to be demonstrated in locales where folks have a problem, be it rational or emotional, with doing this. There are forces at work that will do anything they can to obstruct development, and their real motivating reasons may have nothing to do with actual contamination. BUT O&G has contaminated land (as have the large chemical companies) through other mechanisms in the past, and you have to live with your past. And I once had someone say something that took me several months to accept, but I believe now is true. "With people", he said, "emotion trumps reason every time". We are less rational than we give ourselves credit for. And on toxics in the frac fluids, well, studies have been done that show that humans are extraordinarily poor at prioritizing risks. We can be whipped into a frenzy and induced to spend a fortune to prevent one cancer death caused by some sort of contamination, all the while smoking 3 packs of cigarettes a day. I am personally unconcerned about the use of diesel in the past - it was being pumped into a hydrocarbon-rich layer, for heaven sakes, and is basically a fraction of oil (though undoubtedly some additives, but I bet fuel tank leakage of gas and diesel is a much larger problem, as was the use of tetraethyl lead in gasoline). I actually don't understand the frenzy over low level oil seepage because a bit of hydrocarbon IS part of the natural enviromnent in various places, that the biota does manage to deal with - but pools of the stuff on 1000 miles of beach line is another story. The thing that mystifies me is methane and other junk in the water. If somebody has a water well that is "methane rich" 50 years ago, I think it takes a fair bit of cheek to be raising cane about fracking putting methane in the water supply. So are these folks all working a scheme, or have other O&G activities screwed up their water or what? I think in some cases at least it is the latter, and O&G is behooved to be incredibly responsive to tank leaks and what have you.

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Permalink Reply by Les Bamburg on November 28, 2010 at 4:38

Sesport, basically this is what happens on many issues. Anti-industry people for whatever reason raise tons of concerns. Most of the statements have no factual basis (ie Gasland) but get a lot of press because it makes a good story - the evil industry is in collusion with a corrupt state government and the environmentialist have to save the people. Many of the statements made by these "guardians" are absolutely false but they are not held to same standard as the industry because they are supposedly on the side of good.

It is interesting to note that in some cases the anti-fracing movement in the northeast includes a lot of people that do not own land in the area and are not impacted while many local residents are in favor of development.

Although the use of diesel in frac fluids in the past sounds bad, I do not believe it created any real issue. After all diesel consists a mix of certain hydrocarbons that are contained in condensate and crude oil. It would be a very small percentage of the frac fluids and you are just injecting hydrocarbons into a hydrocarbon containing reservoir.

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Permalink Reply by P.G. on November 28, 2010 at 3:32

Has the government (EPA especially) ever regulated anything on a case by case basis rather than using a blanket (one size fits all) approach?
And how hard would it be to divide those voters who will never see a royalty from those .01% who will by some ambitious politicians looking to promote themselves?
Somewhere in there will be some truth but where? For now it sounds more like a sales pitch.
Like this "Carbon Dioxide" bologna stuff....

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Permalink Reply by Max on November 28, 2010 at 8:25

Good open discussion, there are always two sides to every issue and each side uses the tools provided to them, real or bogus.

Years ago when the 220 loop was being planned, a major concern was the overpass over Cross Lake and the possibility of an accident shutting down the lake as a drinking water source.

Shreveport needed the loop and they needed the source of water, so what did they do? They invested more funds into studies and invited environmental groups to suggest ways to protect the major water source for the city if the loop was to proceed.

This gave the public an investment into the planning of the project and when you let the people choose, they will step up to the plate and make intelligent decisions. Yes, the loop was built at an greater cost to the public, and the water supply protection added to the overpass gave the opposed constructing side of the loop "a win".

Both sides claimed a victory and the loop was built. The results, a win, win for everyone, not just a special interest group or an overpowering government.

As I understand it, the greater population of the Northeast water supply comes from the area in question. New York City along with other population centers have invested billions to supply the water needs to millions of citizens, more than the population of the combined States of Louisiana, Texas, Arkansas, Mississippi, and Oklahoma.

Should we sit down with them and discuss their fears?

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Permalink Reply by Les Bamburg on November 28, 2010 at 8:35

Max, only a small portion of the Marcellus Shale lies in the area that includes the water supply for New York City. There are no current plans to develop that portion of the Marcellus Shale. The anti-fracing crowd want to stop all development - not just the portion in upstate New York that involves the NYC water supply. There have been significant studies and discussions (including public forums) around any additional protective measurements required for the NYC water supply region.

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