Shale Gas Smackdown: Baron Rothschild vs Lord Keynes vs Mother Earth

To Baron Rothschild is attributed the market player’s golden rule that “the time to buy is when blood is running in the streets”, which goes far to explain why so many major oil companies have been buying up smaller shale gas producing companies lately, even as the price for US natural gas has seemingly dropped anchor at multi-year lows.

This week, Chevron (CVX) announced that it plans to acquire Atlas Energy (ATLS) for $3.2 billion ($4.3 billion including debt). Just last December Exxon Mobil launched the trend by swallowing XTO Energy, the formerly-800-pound-anchovy in natural gas from shale rock extraction technology, for $31 billion. Recently, the Chinese national oil company CNOOC struck a deal with Cheasapeak Energy, ostensibly to learn more about shale gas extraction technology. Royal Dutch Shell bought East Resources for $4.7 billion, giving it access to 650,000 acres in the Marcellus Shale, the so-called ”Versailles of natural gas fields“. The Marcellus field undermines virtually the entire states of Pennsylvania and West Virginia, with significant incursions into Ohio, New York, and Virginia (which may make it a kind of gene marker for purple state politics).

National Geographic devoted an entire special report on the topic, featuring Pennsyvania as a state looking toward this technology as a way of lifting itself out of its current economic doldrums, though the City of Pittsburgh recently banned shale gas drilling.

Of course playing contrarian commodity trends is an inherently risky wager against supply and demand fundamentals. The game changing factor has been shale rock hydrolic fracturing technology (so-called “fracking”). Reports in the gas E&P industry press, like this one from Rigzone, suggest that this new technology is not just a shot in the arm but has changed the fundamentals of global gas supply production. Accordingly, North America temporarily at least finds itself with more natural gas than needed. That supply overhang has been blamed for XTO and Atlas falling into the arms of their larger rivals (albeit at sweet premiums to their market values), the latest victims of Lord Keynes’ keen observation that “markets can stay irrational longer than you can stay solvent.”

The acquisitions by the oil majors may be explained by the law of the fish logic that at current depressed prices it is cheaper to buy up the natural gas reserves painstakingly developed by smaller players than it is to develop your own. With their balance sheets bloated with cash from sustained high world oil prices, the oil majors may find these investments in natural gas reserves, even at current prices, compare favorably with other available investment alternatives.

The kicker for why major oil companies may be willing to make a bet on the depressed natural gas market is that they project changes in the demand fundamentals of natural gas. What might be the catalyst for such a fundamental change?

The answer may lie in the mass migration of America’s coal-burning utilities to cleaner-burning gas. The potential effect on the price of natural gas from fuel switching by utilities from coal to gas was explored in an article published in the NY Times back in July 2008. The current shale gas supply jolt has not only held down the spot price of natural gas, it has also reportedly made long-term fixed-price deals attractive to both gas producers and industrial users, like electric utilities. Long term contracts would combat one of the major economic objections to natural gas: price volatility. As the head of Devon Energy observed about gas price volatility: “The peaks are politically unattractive, and the valleys are economically unattractive.”

Near miraculously, fixed long-term moderate gas prices are the ideal conditions required to gain public confidence in the economics of building of natural gas fired power plants instead of other low-cost fuel generation technologies, like coal or renewable energy facilities. The decision on what power technology to build is a once-in-a-generation choice. Once the decision to make an investment in a particular power technology has been made the ratepayers are on the hook to provide a healthy return on the utility’s investment, regardless of how expensive its operation may later turn out to be.

Beyond simple economics, there are of course many environmental objections to building more fossil fueled electrical generation plants, starting with the combustion process itself, which emits both toxic and climate affecting emissions. Shale gas production itself is extremely harmful for the environment. Recent protests in Arkansas and elsewhere show that a public firestorm is brewing to the health risks of this new bid to extend our fossil fuel energy future. Fracking involves extracting natural gas from shale below the earth’s surface by a process using high pressure water, sand and a toxic brew of chemicals — perhaps up to 900 different toxins — that are part of a proprietary special blend. Globally, this fracking technique has been linked to both air and water pollution, increased cancer rates and neurological disease, especially with children. A Congressional investigation into the environmental effects of fracking by a committee chaired by Rep. Henry Waxman (D-Los Angeles) may be one casualty of the recent midterm election defeat suffered by Democrats.

In terms of economic development, investments in any fossil fuel option actually creates far fewer jobs than equivalent investments in clean renewable energy resources. The potential for jobs from renewable energy investment is a major theme in CEERT’s work (see our home page for links to green jobs research).

What about the claim that with shale rock we have an abundance of natural gas? Production of natural gas from U.S. shale formations is still in its infancy, contributing only about 10% of total domestic natual gas production today, roughly the same amount that comes from coal seams. The Energy Information Administration (EIA) shale gas data goes back only to 2007. Natural gas production from shale fields in 2008 was 2 trillion cubic feet with proven reserves at 32 trillion cubic feet. At the current rate of production, the reserves would be gone in only 16 years, and shale gas would be a flash in the pan.

At the end of the day what seems most ironic in this debate over shale gas supply is that the chief impetus to coal-to-gas switching is not the supply or price of gas, but rather the pressure to reduce global carbon emissions and other environmental impacts of mining and burning coal. So the question facing us is how clean is clean enough? If switching from coal to another finite carbonaceous fuel would yield some improvement in CO2 emissions, it stands to reason that a more comprehensive solution –moving to sustainable clean technologies like wind, solar, and geothermal — would be even better.

  • Regulators released a 60-page executive summary of the DRECP at an event headlined by Interior Secretary Sally Jewell and Sen. Barbara Boxer. read here.



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