February 5, 2010

WHAT'S IRONIC ABOUT COSTS DRIVING INNOVATION?:

The Quiet Energy Revolution: How ironic that during the ‘drill, baby, drill’ demonstrations as gasoline prices spiked in 2007 and 2008, a silent revolution with natural gas was already underway that will make those concerns largely irrelevant. (Max Schulz, February 4, 2010)

The first profound shift was made possible by a little-noticed technological breakthrough in the last three years that has changed the way we extract natural gas. Engineers now make use of two important innovations. One is horizontal, or directional, drilling, which permits wells to move laterally beneath the surface instead of going straight down. This technology minimizes the number of holes that have to be drilled, leaving a smaller surface footprint and accessing a larger area. The other technology is hydraulic fracturing, used to extract gas trapped in porous shale rock. In this process, also known as fracking, water and chemicals are pumped at tremendous pressure into shale rock formations to push gas into pockets for easier recovery.

By marrying and perfecting the two processes into a technology called horizontal fracking, engineering has virtually created, from nothing, new natural gas resources, previously regarded as inaccessibly locked in useless shale deposits. Suddenly, the mammoth shale formations in Texas, Pennsylvania, Ohio, New York, North Dakota, and elsewhere have the potential to produce abundant amounts of gas for decades to come.

How significant are these developments? Exxon Mobil announced in December that it will pay $41 billion—that’s right, billion—to acquire XTO Energy and its expertise at extracting unconventional natural gas resources. The French energy company Total SA, meanwhile, is paying $2.2 billion to acquire a 25 percent stake in Chesapeake Energy’s Barnett Shale operations in Texas.

Human ingenuity has turned theoretical gas reserves—too costly ever to be exploited—into practical resources. And just in time. Less than a decade ago, experts were noting that conventional natural gas production had begun to plateau, despite annual increases in the number of wells drilled. The National Petroleum Council warned in 2003 that “North America is moving to a period in its history in which it will no longer be self-reliant in meeting its growing natural gas needs.” In the spring of 2004, Federal Reserve Chairman Alan Greenspan warned that, driven by these looming shortages, wellhead natural gas prices might top $6 per thousand cubic feet by summer, roughly double 2002 prices; and indeed, until the recession brought down demand, natural gas did sell in the $5–$9 per thousand cubic feet range.

Horizontal fracking has helped eliminate many of those grave worries. As Pulitzer-prize winning author and energy analyst Daniel Yergin and his colleague Robert Ineson wrote recently in the Wall Street Journal, production in the lower 48 states “surged an astonishing 15 percent from the beginning of 2007 to mid-2008.” And this is just the tip of the iceberg, as production ramps up in the nation’s shale formations, such as in Marcellus, Bakken, and Haynesville. What was once a shortage has given way to a glut, or, as Yergin and Ineson put it, a “shale gale.”

Proven reserves of natural gas in the United States have been revised upward by 50 percent in the last decade, and those numbers are sure to climb higher as more shale gas is discovered. Perhaps not surprisingly, other nations are sending geologists to the United States to study techniques for extracting gas from unconventional sources. China, India, and Australia all have enormous shale fields. In the coming decades, the shale gale won’t be just an American phenomenon; it will blow all over the globe.

A technological advance created the first shift, driven by free markets not by government edict.


The actual irony that Mr. Schulz is looking for is that, because of Republicans, the profits from this period of artificially high oil prices have gone to rotten regimes and speculators rather than to the US Treasury.

Posted by Orrin Judd at February 5, 2010 6:44 AM
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