Update On Marcellus Shale Play

The Marcellus shale is a Middle Devonian-age black (organic rich) shale that occurs in the subsurface beneath much of Ohio, West Virginia, Pennsylvania and New York. About 10%  of U.S. natural gas currently comes from unconventional shale gas plays such as the Marcellus shale. Early in October I wrote an article about slower development expected in the Marcellus Shale. I wrote that the  Marcellus play may slow as a result of problems with drilling permits and environmental concerns. I mentioned that both New York and Pennsylvania would provide the main roadblocks to development.

Associated Press today reported that oil companies are moving their drilling rigs out of Pennsylvania to neighboring states. Executives of drilling companies say the economic windfall expected from the Marcellus shale may not come to pass if Pennsylvania doesn’t get its regulatory house in order. Industry officials complained about the time-consuming and lengthy permitting process and cumbersome regulations making it difficult for them to operate in Pennsylvania. Industry executives also opposed a tax on natural gas that the administration of Gov. Ed Rendell has said it is considering. The oil companies say the new taxes will stymie Marcellus development which could be a boon to the state’s economy.

Peak Oil : Real Or Self-Imposed?

Peak Oil is defined as a point in time when the maximum rate of global oil production is reached, after which the rate of production will continue to decline. In other words all the large oil fields have been discovered and that any additional new oil discoveries and development will not be sufficient to increase world oil supply levels. Some experts are saying that we reached a peak oil rate of 85 million barrels per day in 2004. They say that the rising trend of global oil production ended in 2004 and has been flat since. This is supported by government statistics. The International Energy Agency (IEA) recently released its energy outlook report in which it dismissed fears about peak oil. They said “Global oil production is not expected to peak before 2030, conventional crude oil production is projected to level off toward the end.” The IEA also warned that there could be an oil supply crunch in the medium term from under-investment. They project that world oil supply is projected to rise from 84 million b/d in 2007 to 106 million b/d in 2030, with the bulk of the increase expected toward the end of the period.

Other opinions on peak oil say that we have a “practical” peak oil or perhaps a “self-imposed” peak oil as a result of “resource nationalism”. I reported on “resource nationalism” in a previous post. I said that Saudi Arabia will restrict output by not expanding oil field development or at least delaying development in order to save oil for future generations. This would result in lower exports. Some have referred to it as “resource nationalism”. If their cash coffers are filled as a result of the high prices, perhaps they can reduce exports to save some of their oil for future generations. It was reported in April that Saudi Arabia has put its plans to increase long-term production on hold. It will not expand oil field development beyond 12.5 million b/d. Current Saudi production capacity is about 11.3 million b/d and scheduled to rise to 12.5 next year. Similarly, the United States Government has restricted domestic oil production for years forcing the U.S. to import almost 70% of our oil needs. Drilling bans imposed by Presidents and Congress have prevented our oil and gas resources from being developed. The peak oil theory proponents need to take into account factors such as “resource nationalism” and the U.S. Government’s campaign against U.S. domestic oil exploration and development.

Geothermal Energy: Meeting Our Energy Needs

Heat from the Earth or geothermal energy can be and already is accessed by drilling water or steam wells in a process similar to drilling for oil. Geothermal energy is an enormous, underused heat and power resource that is clean or emits little or no greenhouse gases. It also is very reliable and is homegrown making us less dependent on foreign oil. Geothermal resources range from shallow ground to hot water and rock several miles below the Earth’s surface. Deep wells can be drilled to tap steam and very hot water that can be brought to the surface for use in a variety of applications. In the U.S., most geothermal reservoirs are located in the western states, Alaska and Hawaii.

The U.S. generates more geothermal electricity than any other country but the amount of electricity it produces is less than one-half of one percent of the electricity produced in the U.S. Only four states have geothermal power plants. California has 33 geothermal power plants that produce almost 90 percent of the nation’s geothermal electricity. Nevada has 14 geothermal power plants and Hawaii and Utah each have one geothermal plant.

Almost everywhere, the upper 10 feet of Earth’s surface maintains a nearly constant temperature between 50 and 60 degrees Fahrenheit. A geothermal heat pump system consists of pipes buried in the shallow ground near a building along with a heat exchanger and ductwork into the building. In winter, heat from the relatively warmer ground goes through the heat exchanger and ductwork into the building. In the summer, hot air from the building is pulled through the heat exchanger into the relatively cooler ground. Also, technology is being developed to drill into hot dry rock being heated by molten magma. Cold water is injected down one well and circulated through the hot fractured rock and then the heated water is drawn off from another well. Geothermal energy does not deplete like oil and natural gas fields, so geothermal energy is considered a renewable form of energy and therefore eligible for significant investment tax breaks.

Who Secures Energy Supplies To Meet Our Nation’s Needs?

The U.S. Petroleum Industry and especially the International Oil companies like Exxon Mobil are being taken to task by the U.S. Government, Congress in particular, for doing what the industry is suppose to do. American oil and gas companies take risks to find and produce energy for the nation and further refine it into products used by every American. The U.S. Government and the majority of Americans do not understand nor appreciate what the petroleum industry does year after year during both high oil prices and low oil prices in helping to assure the nation of adequate energy supplies. Other than during hurricanes or natural disasters, when we go to a gas station we can expect adequate supplies of gasoline will be available and of a quality that our vehicles will run efficiently. The government and environmental groups constantly feeds public hostility toward the industry, they impose strict environmental and regulatory roadblocks to the development of our resources making it difficult for the companies to do their job. The government also bans areas from drilling preventing the development of our own domestic oil and gas supplies while they criticize Saudi Arabia for not producing more oil. Congress is currently considering harsh new taxes on oil companies and increased restrictions on drilling. Recently, news sources reported that the government wants to ban or restrict drilling onshore in the state of Utah.

Aside from the criticism and challenges in the U.S., the oil companies are facing new and difficult challenges because reserves are becoming increasingly hard to find and expensive to produce. One of the challenges is competition from government-owned national oil companies (NOC’s) that control over 70% of the world’s oil reserves. The NOC’s are taking their recent wealth as a result of high oil prices and are investing in energy-related activities outside of their national borders. Such investments include drilling partnerships, pipelines and new refineries. The long-term implications of these investments could impact our energy security. If the U.S. government continues its negative campaign against American oil companies, in the future we will all be dependent on gasoline imports from foreign refineries.

Economic Concerns Plague Oil Price

Crude oil futures are reaching the lowest levels since 2005 on concerns about the health of the global economy and its impact on energy demand. A sharp slowdown in global growth will spell reduced demand for oil and the lower price will impact planned drilling projects. The whole oil industry will re-evaluate new projects and expansions of existing projects. They will be re-assessed based on the current economic circumstances. Instead of evaluating projects at $80  or $100 per barrel, they will be using $65 per barrel or less. Future price levels will primarily depend on the magnitude and duration of an economic downturn as well as OPEC and non-OPEC producers behavior. Even the recent announcement by the Chinese that they are implementing a $586 billion economic-stimulus package aimed at reversing slowing growth has failed to overcome the economic concerns. Also, neither the news that Saudi Arabia told refiners that it would cut December supplies 5% or the fact that OPEC producers agreed to cut their output quota of 28.8 million barrels per day by 1.5 million bpd starting November 1st had any effect on the oil price decline.

Politicians in power were complaining about oil traders and speculators driving the oil price well above $100 per barrel on concerns of a tight oil market. Now,  when these same traders are driving the oil price down on concerns about the U.S. and global economy, you don’t hear a peep out of these politicians. Irregardless of the fact that the oil price is now $56 per barrel and gasoline is below $2.00 per gallon, you still hear of plans for a windfall profits tax on the oil companies by the President-Elect and the Democratically controlled Congress. I suspect that shortly after inauguration, legislation on a windfall profits tax will be formulated. Since the oil price has already declined significantly, the added tax might be applied to all incremental profits as the oil price goes back up above some trigger price such as $70 per barrel. The more greedy politicians will try to make the tax retroactive. Such legislation will only result in higher prices for the consumer and less domestic oil supply.

American Power Association says there is a “Dash To Gas”

Utility executives fear that the cancellation of coal-fired power plants and the implementation of carbon reduction policies might make it difficult to deliver power in some regions in the U.S. Broad scale fuel-switching from coal to natural gas could negatively impact power reliability according to a new report by the North American Electric Reliability Corp. (NERC) published this month.  The American Power Association has called this “dash to gas” the most immediate risk to reliability. The NERC report identified initiatives currently underway to address climate change and reduce greenhouse gas emissions. They include: (1) States requiring power companies to meet certain percentages of their energy supply from renewables, for example 20% from renewables by 2020, (2) U.S. federal legislative proposals to reduce CO2 emissions such as the cap and trade legislation, and (3) Individual state policies or legislative proposals to reduce CO2 emissions including bans on building new coal-fired power plants. If timetables are too short for some of these initiatives, new technologies may not be available for renewable sources in order to prevent massive fuel-switching from coal to natural gas. The electric system may not be able to accommodate the relocation of power generating facilities.

Having clean air and no electric lights is the risk if carbon policies are implemented too far in advance of new technologies. Coal currently provides 49 % of the electrical power needs of the U.S. Demand for power keeps increasing and a mismatch between supply and demand could mean lights out in some places. The potential for solar and wind power is simply not high enough in some regions to meet renewable goals or initiatives

Natural Gas Picture Under Obama

According to a Reuters article, the election of Democratic Sen. Barack Obama to the presidency should be a boon to natural gas producers, however, the forecast for oil and coal industries that are already coping with falling prices could turn dark. The author contends that regulation of carbon dioxide emissions and a windfall profits tax on major oil companies such as Exxon Mobil, Chevron corp. and ConocoPhillips will be goals of the new Obama Administration. The Illinois Senator supports a trading system that would set penalties for utility companies that emit carbon dioxide. That policy could hurt producers of coal like Massey Energy, Peabody Energy and Arch Coal. Coal has long been one of the cheapest forms of energy in the United States and the source of half of the nation’s electricity.

The article indicates that this could be an opening for the natural gas industry to boost its 20 percent share in the nation’s power generation mix and even more if natural gas moves into the automobile market. Chesapeake Energy’s chief executive Aubrey McClendon told analysts that this Administration will be very favorably inclined to try to do something about introducing natural gas into the transportation network in a more aggressive way. According to the article, Obama, like many other Democrats, are opposed to opening new areas for drilling such as the Outer Continental Shelf. Obama recently softened his stance on this issue when oil prices raced to a record above $147 per barrel.

Commentary - I have commented previously on the carbon tax proposed by Obama and others. It is a covert way of applying an energy tax on the American consumer. If the utility companies cannot use coal in their power plants they will switch to natural gas which is more expensive and the cost will be passed on to the consumer. If the utility companies incur penalties for trying to keep electrical rates to their consumers low by using coal, they will have to pass on those penalty costs or go bankrupt. As far as the new Administration being favorable to the natural gas industry, implementing a windfall profits tax will not result in more natural gas wells being drilled. Also, with the recent drop in oil prices, I foresee that Congress will most likely try to re-establish the ban on offshore drilling or restrict it in a way to prevent development.

Natural Gas Powered Cars, Buses, Trucks and Trains

Compressed Natural Gas (CNG) vehicles may not have hit your radar screen yet, but the demand now in Utah for CNG-ready vehicles is so great that Honda can’t make them fast enough. The Natural Gas Vehicles for America (NGVA) estimates there are 150,000 Natural Gas Vehicles (NGV’s) on the U.S. roads today and over 5 million worldwide. There are about 1500 CNG refueling stations in the U.S., which is about the same number of commercial stations offering E85 ethanol blends. Utah has a total of 91 CNG filling stations, most of which are reserved for commercial fleet use, but there are 20 open to the public. Utah has 5,000 CNG vehicles, up from none a few years ago, essentially overwhelming the refueling network. The NGVA says there are 50 different manufacturers producing 150 models of light, medium and heavy-duty vehicles and engines that run on CNG. Unfortunately, there’s only one for sale to individuals, Honda’s Civic GX and it’s only offered in California and New York with Utah next. It is also possible to convert either used or new vehicles to natural gas. The tax savings are substantial. In Utah, combining state and federal tax credits can almost completely offset the difference in price between regular and CNG-ready vehicles.

Most nations of the world have gone ahead to manufacture gas powered cars, buses, trucks, and trains. Even Nigeria is not left out of this as the Nigerian Gas Company (NGC) at the 2007 Lagos International Trade Fair showcased a gas-powered Peugeot 504 car and explained how its engineers had modified the engine of the car to run on natural gas. Come November, Toyota will debut its CNG-electric hybrid Camry at the Los Angeles Auto show.

Commentary - This is the third time I have mentioned CNG vehicles in my posts. I still believe that if we are to meet our nation’s energy goals we need to use more domestic energy supplies such as CNG for transportation fuel. I have mentioned before that we have the infrastructure for CNG and it appears that some automakers are now looking to provide a CNG-ready vehicle. CNG can serve as an alternative fuel and should be allowed to meet the government’s new mandates on renewable fuels for automobiles. Natural gas is a clean-burning fuel and abundant in supply.

Big Increase In U.S. Drilling For 2008

U.S. drilling increased in 2008 as operators continue to develop conventional plays and target new shale-gas plays throughout the country. RigData’s list of the top 50 oil and gas operators, based on footage drilled, shows that they drilled 15,279 wells in the first 9 months of 2008. Of the 15.279 wells drilled, 6,911 were directional or horizontal wells. The total wells drilled is 18% higher than the comparable period in 2007. The top 50 operators account for only 44% of all the wells drilled in the U.S. through September 2008. The number of directional or horizontal wells, 6.911, represented 45% of all wells drilled. Three operators each drilled more than 500 horizontal wells: Chesapeake Operating Co. (922), Devon Energy Production Co. LP (622), and EOG resources Inc. (549). RigData ranks Patterson-UTI Drilling Co. first in rig utilization among U.S. drilling contractors. U.S. rig counts are considerably higher than a year ago. The 4-week average for all U.S. rigs in September 2008 was 2,018, up 13% from 1,787 rigs a year earlier.

Commentary - This new drilling boom uses advanced technology to find natural gas trapped in shale beds that was believed to be unrecoverable just a decade ago. The competition among companies for rights to the new shale-gas has set off a frenzy of leasing and drilling. We are seeing a new era in the natural gas industry. The drilling has resulted in increases in natural gas production that is currently pushing down prices. I would expect that this drilling boom will slow down with the lower natural gas prices, but activity in the shale-gas should be strong.