Big Oil Betting on Shale Gas

Ken Silverstein | Jul 31, 2011

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Oil companies keep placing their bets on shale-gas. They are not snubbing petroleum. They are, however, choosing to diversify and explore for a commodity that they once considered excess and just burned off.

It's an economical play. But it's also a move that recognizes the global pressures to curb carbon emissions and to invest in cleaner burning fuels. It is all coming at a time when Big Oil is reaping record profits from the sale of high-priced gasoline -- money that is getting reinvested into the exploration of shale-gas that is purported to be the next bonanza.

Exxon Mobil Corp. may exemplify the trend. After closing on XTO Energy in June 2010 for around $31 billion, it is now evaluating additional prospects. According to Bloomberg news, it is considering up to a dozen such purchases worldwide. Since its XTO acquisition, it has spent about $3 billion to collect shale-gas leases through the United States, which includes parts of Texas, the Southeast and Pennsylvania. That totals 10 trillion cubic feet.

"The economic returns are very good," says XTO President Jack Williams, in an interview with Bloomberg. "We're running economics on every individual well. We're making sure each well makes economic sense before we drill it. We're not drilling anything that's losing money."

He goes on to tell the news service that the company plans to dig 40,000 wells around the world and that it will double its gas production over the next decade. Williams also says that the company has deep pockets and has no desire to bring in any partners, noting that such a strategy would only dilute the potential earnings on a commodity that is priced relatively low.

Exxon Mobil's business strategy comes atop earlier estimates from the Potential Gas Committee that say that the country's natural gas reserves are 35 percent greater than they were a few years ago. Reserve levels now stand at more than 2,000 trillion cubic feet, it says, which is the most they have been in nearly a half century.

The increase is because of shale, which is a sedimentary rock that is less porous than sandstone where traditional natural gas is found. While explorers have always known that such formations are filled with gas, it has only been in recent years that retrieving those resources has been technologically feasible. With horizontal drilling, producers can move laterally beneath cities and neighborhoods to extract the product.

To produce gas from shale, tons of water, sand and chemicals must be pumped deep down into the wells to loosen it. And that has created concerns among many communities and environmental groups that say the process contaminates the groundwater. Nevertheless, many insist that natural gas is the cleanest burning fossil fuel but that its current appeal must remain temporary until green energy sources are primed.

Bigger Trend?

ExxonMobil, in fact, has previously said in its annual energy outlook that it anticipates natural gas to grow faster over the next 20 years than either oil or coal.

"As the outlook shows, the world will still rely on oil and natural gas to meet much of its energy demand for years to come ...," says the American Petroleum Institute. "The outlook also underlines the growing importance of clean-burning natural gas. It notes that 'imposing higher costs for carbon emissions would impact energy prices and provide an incentive to switch' to natural gas and other less carbon-intensive fuels to meet electricity demand."

Chevron Corp. is pursuing a similar strategy. It completed the $3.2 billion purchase of Atlas Corp. in February so that it could get access to 9 trillion cubic feet of shale-gas in the Appalachian region. BP, Royal Dutch Shell and Statoil are all positioning themselves for what could become a "gold rush" and a heavy move into shale production in the United States. Shell, for example, bought last year most of East Resources for $4.7 billion in cash.

As for Chevron, Reuters is reporting that the company will not dive head first into the shale business and that its approach will be measured. After it consummated the Atlas deal, it scooped up in May 228,000 acres in the Marcellus region.

"You're not going to see Chevron -- I can't speak for others -- just shift the whole business into shale, and let other things go," Bobby Ryan, Chevron's vice president for global exploration, said at the Reuters Global Energy and Climate Summit in Houston.

The question now posed to energy analysts is whether other oil giants will start bidding on the smaller natural gas producers that might need more financial muscle. Big Oil has typically invested much of its resources harnessing overseas oil fields. Natural gas development, in this country, has pretty much been left to smaller enterprises.

An earlier MIT study says that, globally, as much as 160 years worth of natural gas reserves exist. But substantially increasing that production for power plant usage is likely to take a few decades. After 2050, though, the MIT report says natural gas could give way to green energy forms, which over time, will become more and more cost effective as developers and suppliers perfect their techniques.

"In a carbon-constrained world, natural gas will become a larger part of the energy mix," says Ernest Moniz, director of the MIT initiative. "But in the longer term, it will be necessary to shift to 'essentially zero-carbon' sources so we better not get mesmerized by gas either. We need to do the hard work of getting those alternative technologies ready to take over."

Today, shale-gas is the hot investment. Big Oil, which has had its hands tied here in this country, sees the commodity as a potentially rich vein that can add to its bottom lines over time.

EnergyBiz Insider has been named Honorable Mention for Best Online Column by Media Industry News, MIN. Ken Silverstein has also been named one of the Top Economics Journalists by Wall Street Economists.

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Oil Companies and Several Electric Utilities are all betting Sha

Excerpting from my recently published article

NATURAL GAS POWER PLANTS’ FUEL OF CHOICE

Published: Energy Pulse Weekly; July 26, 2011

“Over reliance on Natural Gas to supply base-load power plants introduces a risk dependency relationship. Duke Energy Corp. CEO James E. Rogers said the U.S. should be careful about relying on natural gas for energy.

 The fuel's historic volatility, questions about accessible reserves and the possible environmental implications (i.e. gas shale fracking) of drilling all raise concerns. Rogers stated “if shale gas turns out to be a mirage,” and the U.S. has switched too much electricity production to gas-fueled power plants, the country will need to import liquefied natural gas (LNG). The price of LNG is closely tied to global oil prices (increasing USA energy dependence on imported fuel).

An 2010 MIT report predicts that the 2000 trillion cubic feet of recoverable natural gas in the United States—equivalent to a 92-year supply under current consumption rates—will increasingly contribute to generating electricity over the next 40 years and that unconventional resources like shale will be a primary reason for that growth. The American Public Power Association reports that supplies of natural gas are adequate to meet demand but the cost of those supplies to serve demand levels will be potentially much higher than today. Prospective EPA regulations governing techniques such as hydraulic fracturing could impact both the cost and supply of natural gas.

Please remember the past decade’s spike in Natural Gas prices that reflected in dramatic rise of electricity cost. The development of Gas Shale Extraction could reduce such volatility but its cost-effective demonstration remains embryonic. “

Please following consider Recent Actions Taken by Major Electric Utilities:

·        FPL

This month (July 2011) FPL announced plans to build a new 1280 MW Natural Gas Fired plant in Port Everglades; costing about $1Billion or $781/KW (similar to my article’s older $2010 cost figures).  Building this NG base load plant justified their long-term delay of expanding capacity at Nuclear Plants [Pt. St. Lucie and Turkey Point].

·        AEP

This month (July 2011) AEP announced a long-term delay of their CCS demonstration at Mountaineer plant that, in part, was based upon costs similar to those in my article. Also Mike Morris, AEP CEO, warned against dependency on Natural Gas for base-loaded power plants rather than peaking units.

Consider Henry Hub Natural Gas Spot prices over the past year: June ’10 ($4.80/MMBTU) vs. July ’11 ($4.42.MMBTU). These cost lie well within the upper boundary of $6/MMBTU and short-term ($4-4.5/MMBTU) effect of Shale Gas – triggering alternate fuels for base loaded plants.

The costs (cited in my article) or similar relative comparisons are those used by Electric Utility Executives when planning for new units e.g. AEP (Base Load using Coal and Nuclear) vs. FPL (Base Load vs. Nuclear and Natural Gas). Time will tell (next 3 – 5 years) which approach is more financially sound.

Dr. Richard W. Goodwin P.E. West Palm Beach FL

NG: The Future

"After 2050, though, the MIT report says natural gas could give way to green energy forms, which over time, will become more and more cost effective as developers and suppliers perfect their techniques"

Gee....2050....39 years away.

"Today, shale-gas is the hot investment. Big Oil, which has had its hands tied here in this country, sees the commodity as a potentially rich vein that can add to its bottom lines over time."

The EPA must have been asleep at the wheel on this one....or too busy devining new ways to cripple the offshore exploration & production business. I expect them to keep pounding the groundwater scare...never mind that the shale work is thousands of feet below.

Measured approach needed to "renewables"

I believe that if we had concentrated on modernizing our fleet of nuclear and fossil power plants we would be a lot further down the road of constraining carbon, assuming that is truly a needed action.  Instead of making sure we had the technology for solar PV and wind fully developed and as inexpensive as possible, we dove in head first without checking the depth of the water by giving taxpayer money to developers of wind and solar farms before the technology reached a competitive stage.

Even now, the wind energy groups are arguing that wind turbine caused avian mortality is very low with most such deaths being the result of birds flying into power lines.  The disingenuity in that position is that the wind energy developers and proponents are asking for the public to pay for long distance transmission lines to keep their facilities from being curtailed due to congestion.  More long distance power lines increase the amount of avian deaths due to flying into power lines.

In short, we should be concentrating on building power plants that are able to produce power round-the-clock at lower costs and using less fuel per MWh to rebuild our manufacturing base instead of bleeding the taxpayers and ratepayers--including residential, commercial, and industrial--while the R&D types figure out how to build renewables for less expense.  I have yet to hear a single major organization address the economic impact of the massive amount of construction materials required to build wind (on either a per MW nameplate or per MWh basis).  All the traits of wind--federal grants, special tax treatment, low capacity factor, intermittency, massive use of construction materials, remote location necessitating long transmission lines which will run at partial load most of the time--are adversely impacting the economy of the USA in my humble estimation.

Bird Suicide

Like your comments....but about the birds. The only birds at risk of death due to transmission power lines are those intent on committing suicide. Sure, some build nests where the risk of a line-to-line electrocution could happen....but I think you'll find that deaths are more likely at the distribution voltage level where conductoring is sometimes congested at terminal and transformer poles thus making line-to-line and line-to-ground contact more frequent.