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With Great Energy Fortune Comes Great Responsibility

by | published November 13th, 2012

You might have seen today’s headline in the Wall Street Journal: “U.S. Redraws World Oil Map.”

The article explains that U.S. oil production is on pace to surpass Saudi Arabia by 2020. This would make us the world’s largest oil producer. (We are already the second-largest natural gas producer, according to 2010 EIA estimates.)

It’s all thanks to the U.S. shale boom that has unlocked billions of barrels of oil and trillions of feet of natural gas from the Appalachian Mountains to the Pacific Coast, from the Bakken in North Dakota to the shale fields of southern Texas.

But it also caused some serious economic and environmental problems.

While I greatly advocate increased drilling and domestic production, we still must address a range of problems plaguing the shale oil and gas sectors.

After all – with apologies to Voltaire and Spiderman – with such great fortune comes greater responsibility.

Today, I am in the second day of what has become a very interesting conference here in Pittsburgh. The conference at Duquesne University (my academic base) is a joint project with Penn State and several other campuses. We intend to set a research agenda moving forward to deal with an almost invisible aspect of shale oil and gas drilling.

My keynote address this morning centers on North American unconventional developments from a global perspective. What we did to unlock U.S. shale fields will be repeated elsewhere around the world in the coming years. That is why I am headed to Poland next week and Moscow 10 ten days later for advisory meetings.

We are also beginning to study the downside impacts of the shale oil and gas revolution emerge. For the first time, the conference’s primary focus will be the market negatives from the drilling. We have questions surrounding the water required (the process needs a lot of water to break open rock and release hydrocarbons), as well as the ongoing public health fears from the chemicals used.

Now, we are witnessing parallel economic problems as well.

In the Marcellus basin, researchers are recording some shortcomings in four basic categories.

The real concern is that these four problems – in infrastructure, labor, local inflation, and the environment – will remain well after the drilling (and the revenue) has moved on.

Take a look…

1. Infrastructure Damage Continues to Accelerate

The constant movement in water trucks and equipment has caused widespread destruction to roads, bridges, and access routes. In Pennsylvania, localities have responded by introducing “impact fees,” which are paid by operating companies to offset the damage.

Yet, the payments have to be divided among locations where drilling takes place, those affected but receiving no direct largess from the gas extraction, townships, counties, with a portion left over for statewide conservation, environmental, and state land maintenance issues.

It is too early to determine the result. The low volume of wells due to poor natural gas market prices (until recently) has depressed the anticipated drilling, making estimates difficult. Nonetheless, we do know from earlier experience in the Barnett basin of Texas that, once the drilling picks up, such fee payments are likely to trail behind the destruction.

The damage, in other words, occurs quicker than the funding to fix it.

2. Labor Dislocation Has Become Visible

As the emphasis is placed upon drilling, employment gravitates to the job openings.

This is perfectly natural, in an economy were so many are unemployed or underemployed.

But the short-term emphasis on gas production in each locality throws training and educational programs into imbalance, as well. With the average well producing most of its gas in the first 18 months, and only a finite number of pads (each housing several wells) possible before a company moves on, emphasis to make new jobs available in these communities only makes the aftermath of drilling that much more difficult to face.

3. Local Inflation Punishes Residents

All eyes have been on the money pouring in and the potential for employment from the drilling.

But as shale gas and oil progressively come to dominate domestic production, a “boom and bust” cycle has developed in the towns surrounded by the shale basins. Simply put, the injections of short-term money are introducing a range of problems for local communities.

Local inflation is rising due to dual pressures.

On the one hand, as so much money pours into confined areas in a short period of time, prices rise quickly for everything from housing and basic services to menu items at the corner diner.

On the other hand, dual usage equipment, materials, and supplies – both needed at the wellheads and having a separate demand in non-gas producing segments of the market – increase in price. Supplies are not sufficient. Competition jacks up the cost.

The worst position to be in when both of these hit is living on a fixed income.

It’s no surprise residents of these areas are increasingly relying on public programs. And there are no additional local funds to provide them.

4. Environmental Problems Continue to Mount

Finally, the most disquieting downside, for which no price tag can yet be determined.

Pennsylvania alone has more than 400,000 plugged wells and many more closed coalmines. Most were discontinued some time ago, but there is a double whammy here. Many were capped or sealed poorly. It is difficult even to determine their locations.

As shale gas extractions become more endemic, environmental cleanup expenses are rising as a result of increasing run off, drainage, and spills from much older locations.

These problems are not coming from the drilling projects themselves. They were caused by earlier problems… and are now being released again by fracking.

What Lies Ahead

The costs from these four problems, and a number of others, are not presently factored into any of the analyses done on shale gas impact. That always becomes a ready recipe for economic disappointment.

We need to develop a balanced view of the economic potential and impact. Otherwise, policy approaches to rectify the situation are hardly possible. That is not possible until we have a clearer view of the downside from drilling.

One other consideration to keep in mind is this. By clarifying the downside, we are able to focus on remedies.

And those usually produce new investment opportunities.

Please Note: Kent cannot respond to your comments and questions directly. But he can address them in future alerts... so keep an eye on your inbox. If you have a question about your subscription, please email us directly at customerservice@oilandenergyinvestor.com

  1. Bill Wrightg
    November 13th, 2012 at 14:04 | #1

    Have you heard about the use of natural gas instead of water in the
    fracking process?

  2. Bart Jessup
    November 13th, 2012 at 14:10 | #2

    Does gelled propane fracking offer a solution to water use / contamination issues? e.g. Gasfrac co. symbol GFS on the Toronto Stock Exchange. GFS is currently losing money and cutting back its operations, despite an award winning technology and slightly increasing sales. http://www.gasfrac.com (I have no personal or financial interest in GFS.)

  3. Dominique Manière
    November 13th, 2012 at 14:13 | #3

    Congratulations for being responsibly aware of these problems and working on how to reduce the impact of the great opportunity offered by shale products.

    Another one that has to be addressed too is the fact that a great number of wells just vent the gas from the oil shale wells, as they don’t know what else to do with it.
    It increases the impact on global warming and is not even mentioned anywhere.
    (Actually, methane is 20 times more “active” than CO2 in the global warming equation. I don’t know about the gas being released, though)

    Ok, natural gas is cheap, there are not enough places to stock it. But still, this can be very damaging to the environment too… At least, burning it it “less bad”, until a better solution is found (and what a pity to waste all this cheap energy!)

    Anyway, congratulations again for this responsible attitude.
    It feels good to see that some people are socially responsible and not single-focused on profit at any cost.
    (this being said, nothing would be accomplished if there was no kind of profit in sight. Profit is good and indispensable)

    Thank you.

    D. Manière

  4. Chuck Wertalik
    November 13th, 2012 at 14:14 | #4

    GEEZ!!! We’re damned if we do and damned if we don’t! I think most folks (including me) who have followed the fracking story had it in the back of their minds that there must be SOME sort of enviro impact. I just hope the tree huggers don’t throw a big monkey wrench into this whole picture.

  5. publius
    November 13th, 2012 at 14:18 | #5

    While these are all legitimate concerns, it would be good to NOT KILL THE INCREASING ENERGY SUPPLY GROWTH, which benefits virtually everyone in the country. Yes, greater supply and cheaper energy benefits everyone.

    Obama and the Greens would like nothing more than to do to natural gas and new oil drilling what they are doing now to the coal industry.

  6. Phil Knight
    November 13th, 2012 at 15:05 | #6

    I can’t tell you how refreshing it is to see an investment advisor talk about the downside of the energy boom. Living in Montana I know people who have gone to work on the Bakken, and the stories from there make it sound like hell on Earth. Energy production is never pretty, but you would not know there were any problems associated with it from most finiancial advisors. The downside has got to catch up sooner or later, in terms of social disruption, inflation, and environmental devastation. I would add one more downside: Climate change. Can you say Superstorm Sandy?

  7. David Goldman
    November 13th, 2012 at 15:24 | #7

    Dr Moors:
    As an investor in Ecosphere Technologies-a company that has ALL the ability in the world to clean up frack’d water faster and cheaper than any company on earth and do absolutely NO DAMAGE in the process as they do it on site and eliminate the need for endless off site trucking, why don’t you turn people on to this incredible company?!?! You know the company and how amazing it’s patented technologies are. ECO has the solution-which IF every drilling company bought their equipment at fracking sites-a good part of “the controversy” over fracking would be eliminated once and for all. It’s time this diamond in the rough was exposed-to calm down people that an actual solution is cleaning millions of barrels annually and billions of gallons of water. Thank you for your consideration to hear this impassioned plea. DG

  8. James Renner
    November 13th, 2012 at 15:55 | #8

    Kent,
    You mentioned that “most of the gas is produced in the first 18 months.” Is this Pennsylvania only or all shale oil? How fast does a well degrade over the first, say, 5 years? What is the estimated period when a well will be capped as it now longer is economically viable? Thanks.

  9. Andy J
    November 13th, 2012 at 17:35 | #9

    Your first two posters, Bill Wrightg and Bart Jessup are right on target… fracking with a petroleum based product that can be recovered from the well, reused or sold… There is no water to be disposed of and no environmental damage… I have been following fracking development for years and your column for the past year and can’t imagine why you haven’t become an advocate of petroleum based fracking…

  10. Jan Beaumont
    November 13th, 2012 at 19:01 | #10

    @publius Mr Obama probably has eyes on the tax revenue, so I doubt he will be wanting to close anyone down.

  11. Mike Sullivan
    November 13th, 2012 at 19:13 | #11

    Kent, the environmental problems have been discusswed by the locals for quite some time; but, no one was listening. As with most Big Oil discoveries, the exploration & production (E&P) companies get tax breaks and other financial concessions from gov’t officials at all levels (including tax credits … what a wind-fall! )while the average person living there gets long lasting negative impacts without a long-lasting tax base to support it. Those who exploited the opportunity seldom, if ever (I still haven’t found a case where Big Oil takes care of the citizens and their long-lasting problems from E&P) fully pay for the consequences

    Of course some short-term jobs are created, while the infrastructure and water supply are destroyed. Most profit from such operations, however, are exported from the area being exploited … plenty of examples, both foreign and domestic, are readily available.

    I, too, have been working with aq host of water treatment companies and various technologies to treat waste water from this process (and other processes – refineries, chemical plants, landfills, etc.).

  12. John M. Chenosky, PE
    November 13th, 2012 at 20:24 | #12

    Having been a lifelong Pennsylvania resident and a retired Professional Chemical Engineer, can offer my perspective. Most of what you read or heard in the media is anecdotal and not based on facts. Most water pollution is PA is from mine drainage and farm field runoff. Water used in fracking can be easily and economically treated. Fracking is 60 year old proven technology. The US EPA is guilty of falsifying data especially in Wyoming in an effort to vilify the process. Aquifers are redundantly sealed to prevent contamination.
    Given the economy in our state, officials were anxious to extend a welcome to the drillers as they were supported by outgoing and incoming Governors. With regard to our 44,000+ miles of paved roads many of which are converted cow paths and buggy roads, we can recondition them with the tax revenue from the TRILLIONS of cubic feet projected to last 100-300 years. World petrochem industry is excited about our abundant feedstock methane(NG) provides. Venting does not match wetland or animal discharge of methane or carbon dioxide. Suggest you all access heartland.org for policy and science facts.

  13. eric taylor
    November 13th, 2012 at 22:09 | #13

    It’s hard to determine the Real Costs for the shale extraction industry, and I hope we have the patience to wait for demand to pick up over the long term, as prices could stay low until 2015 to 2020, when utility use will jump, and LNG shipping will be more efficiently utilized. Global fracking is imminent, and may change the supply and demand results, as so many countries are considering shale extraction, although many countries believe it is too dirty, especially where green infrastructures already abound. I guess they feel superior, knowing that coherent integration of their infrastructure seems to be working efficiently. Jealousy of Iceland’s geothermal bonanza is imminent, and they are entitled!

  14. Ed Nichol
    November 14th, 2012 at 01:49 | #14

    Does anyone use a ‘pincushion’ system of small bores and no fracking or pumping for the purpose of flattening the production chart? It would be used in low value coal areas and a with slow progression of drilling with small equipment. The result would be long term production, low impact, and long term jobs.

  15. Tom Pendergast
    November 14th, 2012 at 04:09 | #15

    Dear Dr. Moors,

    Here in Licking County Ohio, we have been holding regular monthly meetings with the county commissioner to educate ourselves on issues related to oil and gas exploration, development and production.

    Only about 35 wells are currently producing, mostly in Carroll County. Thanks to lessons learned in Pennsylvania, the Ohio legislature developed SB315, the most stringent regulations covering drilling activities in the U.S. There are few (rational!) objections to that bill on the part of citizens or drillers.

    As for the environmental impact of drilling activities, both Lisa Jackson and John Hanger have stated that there have been no cases of drinking water contamination due to fracking. Further, the companies involved in Carroll County (Chesapeake, Devon, Gulfport et al) have been quite willing to upgrade county roads to accommodate the heavy truck traffic, at no cost to the county.

    In addition, CO2 emmissions are now at the lowest levels since the end of the Eisenhower administration.

    As for economic disruption, that is to be expected. I’m sure you won’t find many citizens of Youngstown/Warren/Canton complaining of their economic fortunes today, let alone the citizens of Carroll County.

    Innovative technologies that mitigate environmental impacts while improving productivity and profits such as those developed by Ecosphere Technologies, Wavefront Technology Solutions and GasFrac will eventually be widely adopted. But it will take time. These are small companies with limited human resources. GasFrac, for example, only has a handful of crews currently.

  16. Robert Danskin
    November 14th, 2012 at 15:37 | #16

    Why hasn’t the microwave technology to turn old tires and plastics back to petroleum being exploited now? I understand that it is more cost efficient than drilling is. It can also be used to extract hard to pump, heavy crud. One such company is Global Resources Corp GBRC. They seem to be struggling instead of booming. Thanks for any reflection on this futuristic trend.

  17. Jim
    November 18th, 2012 at 11:05 | #17

    A very informative group of posts. I hope Kent will respond to a few of the views on companies with technologies that could address some of the collateral damage associated with fracking.

    As to the poster who said that the US govt. falsified data associated with fracking in Wyoming, please tell me what the evidence is to support that. Also, how can you redundantly seal an aquifer? I thought the size and depth of an aquifer would make that challenging, if not impossible, but I lack the engineering background to address that. Thanks for all the views and information.

  18. enthusceptic
    November 21st, 2012 at 12:06 | #18

    Dr M. can hardly be accused of being an “envirofanatic” – was that a new word? – so it’s good to know that someone like him is concerned. I don’t know how this is in the USA, but maybe in Europe part of the problem is that the areas where one wants to drill are densely populated?
    I have a general comment about responsibility based on personal and ongoing situation: Here in Colombia a company owned by Mr Slim, Telmex, is a provider of broadband, fixed phone and cable. The service is so lousy that there have been public protests, and people, including myself, are changing to other providers in droves.
    Mr. Slim was visiting here recently, and asked about the problems with Telmex he said that he didn’t know about them!
    My point isn’t to complain about Mr. Slim, but that anyone who owns anything has a responsibility for it.
    Personally I don’t own shares in any company that produces arms, tobacco products, alcohol or high sugar products.

  19. enthusceptic
    November 25th, 2012 at 09:45 | #19

    Please let me make a correction regarding something in my last comment to this article by Dr M.. I have asked for the whole comment to be deleted and not published, but in case that doesn’t happen, let me make it clear:
    The billionaire I mentioned made some changes in the ownership structure of his companies a few years ago, so I’m not sure if he is the owner of the telecom company in question now. If this billionaire doesn’t own the company, of course it’s only natural that he didn’t know about problems at the company. The journalist who asked the question could have been as badly informed as I maybe was, sorry!
    My general comments, that Dr M. is no “envirofanatic” and that anyone who owns anything is rsponsible for it, still stand.

  20. November 26th, 2012 at 10:43 | #20

    as this is not a new story much of the concerns mentioned here have been addressed in certain locations! As an example Nigeria has no infasttructure for handling of gas and therefore flares all of it’s gas, amounting to 18% of the total production, aside for the enviromental it’s wasteful! But the good news is that in places like Canada, western Canada where all teh angst is directed towards the Oil Sands we have laws that prevent “flaring” because of it’s impact, we also have government montors for Air and water quality including restricted amounts for the use of water. We also have laws for the reclamation of land that has been mined of bitumen! We have at the University of Calgary here in Alberta over one thousand scientists working on cleaner, better, faster, methods that have less impact and less pollution, all good progress, as a last comment why would the enviromentalists want to shut down the one place where we are making progress that will impact in a favorable way the world’s energy industry,four out of five barrels of oil are produced without regard to the enviroment, human rights, sustainability, etc. the reverse should be the effort, shut down the bad guys not the good guys!

  21. enthusceptic
    December 30th, 2012 at 10:00 | #21

    The question about aquifiers is far above my paygrade, but an important one. In general I believe that technology will improve.
    So Nigeria dosn’t have infrastructure? That’s a pretty lousy excuse! Get Shell or whoever to build it or get thrown out. That gas is valuable and will be more so very soon.

  22. enthusceptic
    December 30th, 2012 at 10:23 | #22

    I must again depart from the main subject and tell you something I have heard recently.
    Mr Carlos Slim is the owner of Telmex, called Claro here in Colombia. The CEO of Telmex has been given the honour of finding soccer clubs to invest in, but I haven’t heard about any initiative to improve the Claro service. Please correct me if I’m wrong.
    If you think “that’s just those crazy Colombians”, I say that responsibility lies at the top.

  23. Dorothy Lock
    January 4th, 2013 at 02:04 | #23

    @David Goldman
    To David Goldman. I agree with you about the company, Ecosphere Technology. I not only read up on it, I bought stock in the company back in 2011! Still optimistic that this company and others who have come up with solutions will break through to the surface of ignorance.

  24. Bill Bates
    January 11th, 2013 at 18:20 | #24

    Kent: I appreciate your research. You are very informative. It is being spouted that there will shortly be more oil than the refineries can handle, this is purported to put pressure on the price similar to Cushing. I am reading this is due to the law against exporting crude from the U.S..

    I wish to explore the following.

    1. Does free trade get involved here, Can Canada export directly to the Gulf for export?

    2. The term crude is questionable, if it is simply unrefined oil. Oil can be simply flash distilled separating the lights from heavies, would the resulting components qualify for export from the U.S.?

    3. Canada has been exporting to the U.S. It seems logical under trade agreements crude could be exported to Canada.

    4. Why is it all the crude is piped, trucked or railed, I hear of very little being shipped on the Great Lakes. There are pipelines from the West to shipping ports, through the Welland Canal to the ocean.

    I have a lot more thought- questions on why Companies are not utilizing what seem so logical to me.

    I hope you will find answeres to my questions.

  25. dr. marlene ahimaz
    March 2nd, 2013 at 20:05 | #25

    i understand you have written an article on the latest cracking of shale to release entrapted natural gas and oil.

  26. dr. marlene ahimaz
    March 2nd, 2013 at 20:07 | #26

    please send me a copy. i am trying understand the latest cracking techniques.

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