December 26, 2009
Natural gas and capitalism to the rescue
Marxist grandees slipped in and out Copenhagen last week thanks to the plentiful jet fuel whose combustion they claim poses grave threats to the future of mankind. While they solemnly convened to tax hydrocarbons out of existence and roundly mocked and discredited the market system whose wealth they covet, we should be grateful that capitalists were at work in America to help increase our carbon footprint.
Last week's announcement by ExxonMobil that it would acquire XTO Energy in an all-stock transaction (with debt assumption) valued at $41B marks the most significant energy-related news event of the year for Americans. With Copenhagen hypocrites humbled but not destroyed, and cap-and-trade legislation still lurking in Congress, we needed something to cheer about.
This domestic transaction is the largest Exxon has made since its merger with Mobil Oil in 1999. By acquiring XTO, ExxonMobil is declaring to the world just how highly it values domestic natural gas assets and the expertise to extract it from non-traditional sources. Natural gas already contributes 24% to the country's total energy usage, heating half of our homes and, in compressed form, operating a growing number of large vehicles. It generates 24% of our electricity, and it is a key chemical feedstock to fertilizer manufacture. As the world's largest private energy company, Exxon's implied commitment to the extraction of natural gas from our own domestic shale deposits makes energy independence more palpable than at any other time in recent memory.
XTO Energy was one of the pioneers of the technique that allowed natural gas trapped in the pores of impermeable shales to be extracted in commercial significant volumes. The technique, call hydro-fracing, injects high-pressure fluids (mostly water) into sealed, horizontally drilled wells to increase the fracturing in deep shale deposits. As the shale becomes more highly fractured, more paths for gas migration are created, allowing significant amounts of naturals gas to be captured at the wellhead.
Hydro-fracing has led to a radical upward revision in natural gas reserve estimates, a dramatic reduction in wellhead price, and a concomitant explosion in demand that ExxonMobil did not want to miss out on.
The Marcellus Shale formation reaching from the Appalachians to central New York State illustrates why natural gas is enjoying a new popularity in the energy limelight. Just seven years ago, the U.S. Geologic Service estimated recoverable reserves in the Marcellus at 1.9 trillion cubic feet (tcf). Then, in 2008, a pair of geologists named Englander and Lash, recognizing how successfully the hydro-fracing technique was applied to the Barnett Shale formation in north Texas, upped the ante considerably. They estimated that the Marcellus formation might contain upwards of 500 tcf.
Factors of 250 don't come easily in oil and gas exploration. In addition to heaping ridicule on the commonly repeated theory that we are living in the era of peak oil, these numbers suddenly brought great attention to non-traditional geological storehouses of natural gas. This is especially true since gas shales are distributed much more democratically than other hydrocarbons.
In addition to the East Coast, Marcellus, and north Texas Barnett shales, deposits in Haynesville (250 tcf), Louisiana hold enormous potential as well. The Bakken formation in the upper Midwest (that extends into Canada) is also hydrocarbon-rich. To put these numbers in perspective, if 30% of the upper combined reserve estimates of Marcellus and Haynesville could eventually be recovered, then a full ten years of the country's total current natural gas usage could be satisfied. And at $4 per 1,000 cubic foot at the wellhead, these two deposits have an economic value of 2 trillion dollars. Even in today's insane spending environment, that's real money, real taxes, and real jobs.
While we look forward to the time when western Pennsylvanians will wear ten-gallon hats and speak with a drawl, don't count out the ability of our current government to rain ruin on the nation's private energy developers' plans to reinvigorate natural gas production. After all, we live in a time when our EPA has labeled CO2 as a pollutant and our Energy Secretary is nonstop booster of wasteful research on biofuels and carbon sequestration.
So far, users of hydro-fracing have escaped the wrath of the Clean Water Act because the affected shale deposits are much deeper than aquifers and the industry has a generally excellent record in sealing wells from contact with groundwater. But that exclusion could be in jeopardy. Democrats led by Edward Markey will hold hearings next year to determine if hydro-fracing merits this ongoing exclusion. Exxon is sufficiently concerned to have inserted an escape clause in their XTO acquisition terms to allow it to scuttle the deal if any new laws make hydro-fracing commercially impractical.
Still we can hope that rationality will prevail. Exxon's sizable financial, strategic, and marketing resources could help guarantee that natural gas resources owned and controlled by Americans will not only power and heat us, but possibly move our goods in the decades to come. Other supermajors besides ExxonMobil are likely to stake their own claims on the remaining natural gas plays still available for purchase.
And as much as America badly needs this energy jolt, the radical environmentalists need it even more. In order to promote their latest obsession -- the plug-in hybrid -- America's electrical grid will need vast electrical capacity upgrades. Only coal and natural gas can scale up fast enough to meet the potential demand. And how they hate coal.
What a delight it's going to be to see solar, wind, and other utopian alternatives that were sucking away our attention fall from view as a solid, practical energy future occupies our thoughts once again.
Claude can be reached at email@example.com.