Fracking Revolution Misunderstood by Oil and Gas Industry

By Yossie Hallander

Link to OpEd

The fracking revolution is still largely misunderstood by the oil and gas industry. It helped the US attain a measure of independence from imported oil but even today we import about 6.5m barrels a day, equivalent to one-third of US consumption.

However, the current low price of oil is making many shale operations unprofitable, causing massive lay-offs and threatening to bankrupt many companies in the oil patch. US oil production is declining again.

Here is where oil and gas companies get it wrong. The fracking revolution is not about oil; it is about natural gas and natural gas liquids such as ethane and propane.

Most fracking wells produce more hydrocarbons, in the form of natural gas and natural gas liquids, than oil.

That is one of the main reasons the price of these energy sources has collapsed. In many cases, the wells have been shut down, or the excess of these gas and liquids are flared, or burnt off, into the air.

The solution is to use them in the transportation sector, specifically to turn natural gas into alcohol fuels to run millions of vehicles that are already on the road. This will increase the revenue from each fracking well and the industry will become profitable at oil-price levels under $50 a barrel.

The US is awash with natural gas. Last year, the average Henry Hub price per million British Thermal Units — the standard industry benchmark for gas contracts — was $2.61. This was equivalent to about a third of the of cost of oil calculated by the calorific measure over the same period.

However, in the most important shale-oil regions the price is even as low as $1.

The price of natural gas liquids is much lower still and is often measured in cents. Sometimes it turns negative.

Much of this resource continues to be unexploited. In 2014, drillers flared 288.7bn cu ft of gas, compared with 91.2bn in 2000. That amounts to more than $10bn worth of natural gas simply wasted.

Of course, cheap natural gas has become a favoured fuel for power generation as coal-fired plants are slowly phased out. But the transition is costly and time-consuming. Even if natural gas reached 100 per cent adoption (something that is not likely to happen in the next two decades) it would only replace $28bn of coal-related costs a year.

The largest opportunity is to replace $135bn worth of imported oil a year, or more than $300bn of oil used overall, largely in the transportation sector.

Natural gas has been used as a vehicle fuel for years, in compressed form known as CNG. It is mostly used in larger vehicles such as refuse trucks and city buses. The fuel is an ideal replacement for the diesel market and should grow in the coming years.

But it is not a solution for the gasoline or petrol markets. Passenger vehicles that run on CNG cost thousands of dollars more than their gasoline-powered counterparts. Conversions of the current fleet are similarly expensive.

Even so, there are 250m gasoline cars, trucks and SUVs on US roads today that could potentially run on alcohol fuels like ethanol and methanol.

Most ethanol in the US is derived from corn. However, ethanol could also be produced from natural gas at prices much lower than gasoline. Methanol, for example, is already made from natural gas.

As part of taking economic advantage of low commodity prices, the conversion of gas could be done close to the wellhead and, once converted to liquid, there would be no need to expand pipeline infrastructure to transport it.

The most convenient aspect of fuel derived from the conversion of natural gas to alcohol is that it can be used immediately in more than 19m flex-fuel vehicles already on the road.

These are factory-built to use any combination of gasoline or ethanol blends up to E85, the specification for a fuel blend containing 85 per cent of denatured ethanol fuel and 15 per cent gasoline.

Additionally, tens of millions of other gasoline-only vehicles could potentially be modified to run on alcohol fuels simply through software changes to the on-board computers.

There is no need to wait decades for a new fleet of high-tech vehicles, or massive taxpayer investment, to bring alcohol fuels based on natural gas to market.

The current US fleet is ready to consume cheaper fuels, as shown by the many E85 stations in the country that earn higher revenue and margins on their ethanol-based E85 fuel sales than gasoline.

All that is needed to make this a reality is the will, and the vision, to diversify our transportation fuels market.

The result would be an entirely new revenue source for oil and gas companies, increased employment, a reliable, cheaper price for consumers and a stronger and safer US economy that keeps more of its fuel expenditures at home.

The opportunity is right beneath our feet.

Yossie Hollander is co-founder of the Fuel Freedom Foundation and founder of Our Energy Policy Foundation, a non-partisan group that promotes fuel choice in the transport sector

 

Read more: http://www.fuelfreedom.org/wp-content/uploads/Yossie-Hollander-piec...

Republished with permission.

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Replies to This Discussion

Permalink Reply by Barry D on February 2, 2016 at 11:32am

Not being a visionary, my question is how do we get this started?

Permalink Reply by Thomas Malcolm Pendergast on February 2, 2016 at 2:05pm

Thanks for this.  I agree!

In a rather tangential way, please read my letter to Carly Fiorina:

Hi Carly!

I watched an interview you did with Katy Couric.  One topic you discussed was climate and energy resources.  I think you pointed out that more innovation is needed and less regulation to make progress on those fronts.  I agree.

You may not be aware of the incredible innovations that have been ongoing for at least three decades on, among other things, clean coal technologies.  Much of this has been spearheaded by the DoE's National Energy Technology Laboratory (NETL) in Pittsburgh and Wheeling.  Have an energy policy staffer check them out; you'll be amazed.  I nominate it for one of our national treasures!

Three projects that stand out, in my mind, that the NETL promoted:

1.  The Beulah, ND lignite- (the least desirable type of coal!) burning Great Plains Gasification Plant.
Now in its third decade of operation, it produces electricity with at least 30% reductions in SOx, NOx, Hg and particulates and 90% reduction in CO2 emissions.  It monetizes sulfur production for H2SO4, ammonia and nitrogen for fertilizer and CO2 for EOR (enhanced oil production) which it sends by a 230-mile pipeline to an old oilfield in Saskatchewan where it is permanently sequestured.  It is the largest such facility in the world.

2.  For just over two years now, Duke Energy has been operating a power station in Edwardsport, Indiana that burns high-sulfur Indiana coal with technology similar to the Beulah plant, also pioneered by the NETL with even better results.  The technical designation for that plant is IGCC (integrated gasifiaction combined cycle).  Duke actively collaborates with many Chinese and Mongolian partners on projects in those countries as does Great Plains.

3.  The Texas Clean Energy Plant (aka Summit Energy) between Odessa and Midland, Texas is also an IGCC plant.  Major financing is provided by the China Export-Import Bank in exchange for transfer of technologies - - both ways.

West Virginia University and the NETL as well as many of the people involved in the above three projects are very active in working with Chinese counterparts on implementing clean coal technologies.  So yes, you are quite right; the Chinese will build similar IGCC coal-fired plants.  Not only that; they are building them.  And we've been helping them do so for a long time.

I think you'll also be impressed by the work the NETL is doing to develop rare earth element resources in the U.S.; from coal "waste" materials!  Especially in collaboration with Consol Energy, also in Pittsburgh, a very old-line energy company.

If the opportunity comes up again, I hope you'll point out that we are already producing a lot of innovations in the energy sector without the sledgehammer of regulations (favored by so many Democrats in our government?) not only to our own benefit in America but also to other nations like China.

I'm sure you can't go into the detail I've outlined above on TV.  But I'm quite confident that you can go into some such deeper detail at town meetings etc.  And could we not link this sort of thing with job creation?  For me, that's not a stretch.

Throughout this long "recovery", the energy sector has been at the forefront of job creation.  This is particularly so in the long-depressed areas of southeast Ohio, northern West Virginia and southwestern Pennsylvania.  According to the DoE's Energy Information Agency, this area now supplies the U.S. with 89% of the natural gas America consumes.  Did you know that?

The most encouraging aspect of this in terms of job creation is "wet gas", that is, the ethane, propane, butane and isobutane associated with "dry gas" aka methane or CH4.  Ohio is blessed with an abundance of wet gas and its most commercially valuable components, ethane and propane.  From ethane and propane, we can produce polyethylene and polypropylene, the building blocks for the plastics industry.  America is the cheapest and most plentiful source of those feedstocks in the world.

Currently we send our ethane and some propane to ethane/propane crackers on the Gulf Coast (America's largest petrochemical complex) , Sarnia, Ontario (Canada's largest petrochemical complex) and to Grangemouth, Scotland and Norway.

But two companies are poised to build ethane/propane crackers in the Ohio Valley:  Shell Chemical in Monaca, Pennsylvania and PTT Global Chemical/Marubeni Corp. in Belmont county, Ohio.  We have plenty of advantages to encourage these initiatives:

*  a nearly hundred-year polymer industry legacy (Goodyear, Firestone, Rubbermade, Cooper and the University of Akron aka "The Polymer Kings") . . .

*  legacy and modern take-away-to-market capacity in terms of processing and transportation (pipeline, barge, rail and highway)

*  reputation for stability and reliability and low levels of corruption

My point here is that we need to make it clear to people that we have an enormous potential for job creation, especially if the government would just get out of the way.

You're the best; Ted Cruz, Ben Carson, I like.  But you're the best!

Good luck,

Tom Pendergast
Newark, Ohio

Permalink Reply by Bluflame on February 4, 2016 at 7:35am

Hello Tom,

    The vast NGL resources in the Utica/Marcellus have been well-documented since the advent of horizontal drilling/multi-stage fracking in our part of the world. Early on, the drillers received an "uptick" in revenue from the NGL's. Of course, the NGL component is separated during gas processing and transferred to fractionators for further separation into components. Midstream Operators have proactively built fractionation capacity in the Utica/Marcellus to process these commodities. I'm sure you know all this.

    Unfortunately, mirroring NG & oil, NGL's (Particularly ethane & propane) have experienced collapsed pricing. Downstream products ethylene, propylene and their derivatives polyethylene and polypropylene have also experienced collapsing prices. Cracker spreads are underwater, as transportation (mostly pipelines) and processing (at the gas plants & fractionators) costs push total material cost higher than end product prices. These commercial factors have created negative margins for the crackers. The only winners are plastic product producers further downstream.

    The net result is that Shell is continuing site work at Monaco, PA and PTT Global has committed $100Million for Belmont County engineering work. Both companies have delayed a decision to proceed to a construction phase until 2017. These facilities are massive. If either proceed, production will not commence until 2022 at the earliest, assuming no further decision delays. A third Ohio River cracker is under consideration near Parkersburg, WVA on an old SABIC (formerly GE Plastics) site. The Brazilian owner, Odebrecht/Petrobras is tied up in a corruption matter in South America. However, recent information indicates they may still move forward. They are building, and may have already opened a similar sister plant in Mexico.

   Meanwhile back at the Utica/Marcellus ranch, drillers have moved away from the wet gas zone and are currently concentrating what little drilling that's occurring in dry gas areas. They can't make money producing wet gas. The only wet gas currently being produced satisfies midstream & pipeline "take or pay" contracts. Lots of ethane (>50% of NGL's) continues to be rejected into the NG stream up to the pipeline BTU limitation.

  Tom, I'm probably not telling you anything you don't already know! Utica/Marcellus economics are tough right now.

BluFlame

Permalink Reply by Joe on February 5, 2016 at 5:37pm

So once again all the experts who said the money is in the liquids didn't know what they were talking about. Just like the ones that said the money is in the royalties not the signing bonus.

Permalink Reply by Bluflame on February 6, 2016 at 4:04am

Joe,  

 In fairness to the "experts", there was money in the liquids a while back, probably when they made the assertions. Similar to both oil and NG, the high prices created lots of wet gas drilling activity, inevitably leading to a glut in NGL's and collapsed prices.

    The same argument can be made about "royalties" vs "signing bonus". It's a timing issue, although the entire history of of the US oil & gas business, has been "boom & bust". You've probably noticed, but we are now experiencing "bust"! 

    Lots of 5-yr Utica leases signed in 2011-2012 will expire this year and next. Many have extension provisions built-in. It will be interesting to see whether the E&P's execute the extensions or just walk away. Probably will depend on location and ability of individual E&P's to muster the cash for extension bonuses. Or, they can decline and attempt to re-negotiate.

all IMHO,

BluFlame

Permalink Reply by Bill Bergseid on February 7, 2016 at 3:24am

Why does the NETL need taxpayer funds?  If the value provided is really great, it would not need any funds from taxpayers.

Permalink Reply by Joseph-Ohio on February 3, 2016 at 7:01am
Pretty darn dismal if the industry that developed long horizontal bore Natural Gas and Oil Wells 'misunderstands' their impact on their own market I feel obliged to write.

I can't believe it to be true myself Keith.

A wild shot in the dark ? ?

Wow-Dee-Wow-Wow !

Well now that they know what they harvest they need to develop a market for it as quickly as possible - I suggest light speed ! !

What's the alternative ? ?

Burn it off ? ? ! ! ? ?

I should say not ! ! ! That's a big Nay To That from where I sit ! ! ! BTW I sit in the Peanut Gallery (but, only when there's room for me ! !).

Seems to me to be too much time and money spent on lobbyists / lawyers / and politicians while not enough spent on building markets / infrastructure / development.

JMHOs.
Permalink Reply by Joseph-Ohio on February 3, 2016 at 10:36am
Also feel obliged to add that I think our government entities are causing much delay in taking advantage of our blessings of Natural Gas / Oil / Fossil Fuels.

They (our government entities) moreso than the Industry give me the impression that they don't want to / can't / won't assist in taking timely advantage of our Fossil Fuel blessings.

Seems like an excessive amount of time being spent building hurdles / jousting with windmills / spinning wheels.

We need to give these things traction and begin to build again.

JMHOs / impressions.
Permalink Reply by Joe on February 4, 2016 at 2:00am

I thought I was somewhat knowledgeable on oil and gas facts but find myself confused as to:  "The price of natural gas liquids is much lower still and is often measured in cents. Sometimes it turns negative." I thought all I heard for the last 3 years is the money is in the liquids?? The gas they burn off to get the liquids??? Please excuse my ignorance on this matter.

Permalink Reply by Joseph-Ohio on February 4, 2016 at 2:23am
I'm thinking that they ought to figure out a way / ways to NOT 'burn off' anything that's harvested.

Seems to me that would take commitment to specialized infrastructure and market development investments - that as opposed to blowing capital on politics / politicians and legal activities / dodges / circumnavigations etc.

JMHOs
Permalink Reply by Kyle Nuttall on February 18, 2016 at 2:27pm

The trouble is that we have too much NGL.  We don't have enough fractionation/cracking capacity to use up all, or even close to all, of the NGLs.  What they're doing with the NGLs (ethane in particular) is just putting them into the pipelines and flowing them to regular consumers.  The trouble with this is that NGLs have a higher BTU content than methane.  The gas provided to regular consumers has to be at a consistent BTU level, by regulation.  When the NGLs bump the BTU level above what's allowed, they have to buy methane (usually from another area such as the Rockies) to mix in with the NGL-rich gas we're producing here to bring the BTU levels down.  That costs money, and it can be bad enough that they actually lose money on the gas.  We really need some cracker plants around here.  The LNG liquefaction terminal at Cove Point will help some, too.  

Essentially, LNGs have become a cost, not a benefit, because we have too much.

Permalink Reply by Joseph-Ohio on February 19, 2016 at 1:50am

I think we need to build the right kind of refineries to enable using our production domestically.

Refineries / Fractionators / whatever.

What good does it do to have all this oil if we can't use it domestically ?

Building and operating them mean jobs !

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