Tuesday, December 11, 2012

Federal report gives thumbs up to shale gas exports Scenarios would help investors, hurt wage earners

Exporting the country’s shale gas reserves would drive up prices and drive down wages, according to a report commissioned by the U.S. Department of Energy. Yet drawbacks would be more than offset from gains to economic stakeholders in the natural gas extraction and exporting industries, the report concludes.

The report by NERA Economic Consulting was forwarded last week to Christopher Smith, Deputy Assistant Secretary of the Department of Energy. It shows that policy to encourage exportation of domestic energy reserves, thought by some to be a political non-starter, is being weighed by an administration that has identified on-shore drilling as a priority to stimulate energy independence.

With 20 different plays, the collection of shale gas reserves in the lower-48 United States is thought to be among the largest in the world. President Obama’s support of shale gas development comes despite opposition from some environmental organizations and grass roots campaigns that argue drilling poses risks to public health and the environment while channeling resources away from sustainable energy development.

Wrapped up in the exporting question is a debate over the merits of high volume hydraulic fracturing, a controversial practice to fracture bedrock and release gas by injecting well bores with pressurized chemical solutions. In 2005, the Bush/Cheney administration encouraged shale gas development by making fracking exempt from the Safe Drinking Water Act. That exemption -- known to critics as the Haliburton Loophole -- came in addition to exemptions from hazardous waste laws enacted by Congress in both the Carter and Reagan years. The report issued last week is a sign that, despite a growing anti-fracking movement lead by progressives, the Obama administration could be thinking less about repealing exemptions and more about stimulating demand for the country’s shale gas.

The risks and merits of shale gas development are the subject of a polarizing national debate, including unresolved prospects of the Marcellus and Utica shale’s underlying parts of New York state. While fracking has lead to an onshore drilling boom in Texas, Pennsylvania, Louisiana, Ohio, Colorado, Arkansas, West Virginia and other places, New York, has held off on permitting shale wells as it reexamines policy in light of concerns about impacts on environment and public health. While governor Andrew Cuomo’s administration is shooting for a deadline in late February to finalize regulations, it is awaiting analysis from an independent panel of health experts, and Cuomo has left the door open to shelving the process.


To make it suitable for exporting in tankers, gas is converted into liquid (Liquid Natural Gas or LNG). The idea of exporting domestic supplies to lucrative overseas markets in Europe and Asia is sure to spur more controversy. As prices drop domestically with increased supply, companies have proposed more than a dozen projects to build coastal exporting facilities. These include a $6 billion liquefied natural gas export terminal, already approved, at Sempra Energy’s existing import terminal at Hackberry in southwestern Louisiana, with permits for other projects pending. Gas exports would stimulate more shale gas development by easing a market glut and raising prices. Higher prices, in turn, provide incentive for more exploration, development and infrastructure build out. Critics warn that unconventional extraction methods have outpaced science and regulations to understand and mitigate the costs, even without the catalytic affect of exports.

“Exporting means more fracking, and there are a lot of regulations that need to be developed before this is even close to safe,” said Craig Segall, an attorney for the Sierra Club. “You haven’t done an analysis of the cost to the public and the environment. This is a huge one and you have to think about it.”

Jim Smith, a spokesman for Independent Oil & Gas Association of New York, said the agency would not be inclined to support policy that raises costs to manufacturers, which are a mainstay of the agency’s membership. “We have to look carefully at both sides of the equation,” he said.

Nationally, any gas exporting policy is sure to meet resistance from the manufacturing sector. Gas and its derivatives are used as both fuel and feedstock for domestically produced goods ranging from textiles to fertilizer to packaging. Domestic petro-chemical manufacturers, including DOW Jones and the Koch Industries, have already successfully lobbied against proposed federal subsidies to use natural gas to fuel vehicles because, the argument goes, increased demand would raise prices and hurt manufacturing.

Yet operators and investors can fetch much higher prices in overseas markets due to global demand. The winners and losers under exporting scenarios break down accordingly, with the winners being the natural gas industry and those who invest in it, and the losers being manufacturing, transportation, service, and agriculture sectors.

Under exporting scenarios, according to the NERA report:

“Wage income decreases in all industrial sectors except for the natural gas sector. Services and manufacturing sectors see the largest change in wage income in 2015 as these are sectors that are highly labor intensive.” The report explains that “the overall effect on the economy depends on the degree to which the economy adjusts by fuel switching, introducing new technologies, or mitigating costs by compensating parties disproportionately impacted.”

The most viable “fuel-switching” scenario is this: Plants that might otherwise burn gas would likely be more inclined to burn coal as gas prices rise. Critics argue that could leave the U.S. with both the environmental consequences of air and water pollution (including methane emissions) from unconventional shale gas development, plus CO2 and mercury pollution associated with burning coal.

Updated Dec. 12 Jannette Barth, an economist, consultant and shale gas industry critic, issued a critique today charging that the DOE study did not account for hidden costs -- ranging from increased demands on municipal resources to environmental degradation -- on local communities to produce gas. Barth argues that gas exports will benefit shareholders in gas extraction companies who tend to be affluent. “Only 54% of Americans own stock of any kind, retirement savings or otherwise. Clearly, not all of the 54% own natural gas stock.” Most who do “likely hold tiny numbers of shares in mutual funds.” Additionally, according to Barth’s assessment, many shareholders in the U.S. domestic shale gas play are from outsides the U.S.

What other reports and considerations are relevant to the discussion? What do you think?


10 comments:

  1. This LNG issue is kind of weird. I guess with warmer winters we'll need new markets or something. Here's additional information on the LNG subject:

    From Dow Chemical:
    http://www.dow.com/news/press-releases/article/?id=6138
    Dow isn't happy given its interest in keeping locally supplied shale gas cheap - as a chemical manufacturing feed stock.

    Another source of information, I believe you know of already is Deborah Rodgers. From her blog, "Energy Policy Forum:"
    http://energypolicyforum.org/2012/12/06/department-of-energy-new-reports-on-exportation/

    In other news - gas line explosions in West Virginia. The pipeline owner, Ni-Source operates transmission lines throughout the Marcellus play.

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  2. Thanks for the additional info and link

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  3. Great article (I actually read it from start to finish this time).
    And it gets weirder. From NiSource Gas Transmission and Storage:
    http://www.ngts.com/en/about-us.aspx

    The facilities and pipeline map shows a slew of lateral gas lines through the Marcellus play and manifolding into a main trunk line starting around Charleston, West Virginia and ending somewhere near the mouth of the Mississippi River. I guess the idea of building LNG processing and loading on Staten Island wasn't taken seriously. Let's hope the trunk line is routed around the Bayou Corne sink hole. Man, that thing is a problem! Here's a nice summary I've been following from the Examiner website and blog on that subject, if anyone is interested:
    http://www.examiner.com/topic/bayou-corne-sinkhole-disaster/articles

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  4. Tom,
    On a separate issue I've been looking into, I found an interesting article from the Scranton, PA Times-Tribune dated 8/13/12 regarding mined land reclamation upon completion of resource exploitation. It appears that Janette Barth is onto something.
    http://thetimes-tribune.com/opinion/restore-funds-for-mine-land-reclamation-1.1357734

    Here's a chunk of the article from the citation above:

    Part of the pressure to hold the gas industry responsible for environmental stewardship flows from the failure to hold the coal industry responsible. The government has been primarily responsible for cleaning up the portion of the coal industry's mess that has been attended to so far, but now, its ability to continue doing so has been compromised by Congress.
    A House-Senate conference committee that recently reconciled differences in transportation funding bills passed by each chamber, without debate or hearings, decided to raid the Abandoned Mine Land Trust Fund.
    Money for the fund comes from a per-ton tax on coal production. It is collected by the federal government and distributed through former coal-mining states for projects to reclaim abandoned mine land.
    The new law puts a $15 million-a-year cap on distributions to the states and allocates the rest of the money for unrelated projects.
    Over 10 years, Pennsylvania stands to lose $178 million for mine reclamation projects, the second-highest amount after Wyoming's $700 million. Other states that would lose money are West Virginia, $102 million; Illinois, $55 million; Kentucky, $54 million; Ohio, $34 million; Indiana, $18 million; Virginia, $16 million; Alabama, $15 million; and 13 other states, an aggregate $50 million.

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    1. I live in NY now (and have lived here for 28 years), but I was born and raised in Scranton, PA. I grew up there during the 1960's. We had a lovely legacy from the coal industry--subsidence, mine flushing, and burning culm dumps were all a part of my childhood. The coal boom was long over and the area was depressed and depressing. I had a group of close friends during high school--every one of us got a college education and every one of us left Scranton. I have seen--and lived through--the future that shale gas extraction will create. It isn't pretty, and I don't intend to live through it all again. Once was more than enough.

      Jannette Barth is right--you have to look at the "hidden" costs of shale gas extraction because somebody (i.e. the PUBLIC) is going to have to pay those costs--they are not going to just magically disappear.

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    2. Thanks for your assessments, Michael and Mary. I will add that John Hanger, former DEP Chief in Pa. and now gubernatorial candidate, has pushed hard to raise bonding requirements for natural gas wells to discourage companies from walking away from problems. This cost taxpayers $16 million in Pa. in 2009 alone, and that didn't begin to take care of the problem. More here: http://blog.bayjournal.com/?p=173

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    3. John Hanger sounds pretty awesome. It's sad that he has to go outside Penn's system. Glad to hear that he is going back into it. I was born in Meadowbrook, PA (my birth certificate is valid, btw) so maybe I can help his campaign without being a Chicago lefty carpetbagger.

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  5. I made coffee this morning. Picked up the New York Times. Sat down in my comfy chair. Opened up the Sunday Review Section and read this editiorial:

    "Sending Natural Gas Abroad"

    From the last paragraph (went online to cut and paste, of course):

    "There is no certainty that the Obama administration will approve more than a few new liquefied natural gas terminals, which take several years to build. But 15 new terminals have been proposed by the industry. Of these, four are scheduled to receive regulatory decisions in 2013. At the very least the administration should give the green light to the four that are pending and accelerate the review process for the rest."

    So how about locating a plant in Westchester County? It's in close proximity to the Marcellus play, on the Hudson with port access and protected geographically from "Super Storms" and storm surge.

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  7. I loved reading this piece! Well written! :)

    jason
    Property investment

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