New Lessons from the Fracking Revolution

Fracking well in West Virginia

Fracking well in West Virginia

by James A. Bacon

Silicon Valley may be the biggest fount of innovation and productivity in the American economy, but the oil & gas industry arguably comes a close second. Fracking entrepreneurs have boosted U.S. oil production by 3.6 million barrels daily in just the last four years and have deluged the country in natural gas. Many analysts fretted that the extraction of oil and gas from shale, which took off when oil sold at $150 per barrel, would become unprofitable under $100. But thanks to continued innovation, some operators say they can produce more profitably today at a price of $65 a barrel than they could at $95 a barrel three years ago.

Donald L. Luskin and Michael Warren suggest in the Wall Street Journal today that innovation could drive the profitability point even lower, writing, “The oil patch today is afire with the same technological imperative and competitive mission that has powered the U.S. electronics revolution—think Moore’s Law—to dash headlong down the learning curve, crushing costs and prices and making up for it in volume.”

The Marcellus Shale formation where much of this oil and gas production is taking place, skirts along the edge of Virginia. Only one finger of the formation runs through the Old Dominion, and much of that is in protected national forest. While Virginia is not likely to benefit much from the production of oil and gas, it can position itself as a consumer — of gas especially.

Natural gas is the most clean-burning of all the fossil fuels and it releases less carbon dioxide into the atmosphere than coal, which it has largely displaced in Virginia’s electric power industry under Environmental Protection Agency pressure to to meet tougher toxic emissions standards. The restructuring of Virginia’s electric power industry will continue under another round of EPA mandates to reduce CO2.

gas_prices

Natural gas prices at the Henry Hub in U.S. dollars per million BTUs. Source: Wikipedia

One of the big questions facing Virginia’s power companies and utility regulators is how much to depend upon natural gas. Gas is abundant and cheap now but historically it has been prone to wide cyclical price fluctuations, as seen in the chart to the left. If gas prices are likely to stay at their current low levels forever, it would be an easy choice to use gas as a base-load fuel, not just save it for power stations that can dial output up and down quickly to match fluctuations in demand for electricity. While coal and oil are out of favor as base-load fuels, due to pollution considerations, Dominion Virginia Power believes that nuclear is a viable alternative over the long run. Local environmental groups oppose construction of a third nuclear unit at the North Anna power station.

Dominion argues in favor of nuclear, in part, as a fuel diversification strategy. The more the state relies upon natural gas to power its electric turbines, the more ratepayers become vulnerable to spikes in gas prices. It is prudent to diversify fuel sources to include nuclear and even some renewables in the electricity-generating portfolio, the argument goes.

So, the question becomes, what are the odds that gas prices will spike as they have in the past? If export controls on natural gas are relaxed, and the U.S. begins exporting gas, could prices becomes more even volatile? Could Virginia electric power generation become too dependent upon natural gas?

Luskin and Warren argue that fracking has altered the economics of the oil-and-gas industry to make supply less volatile, which implies that prices will be more stable.

Wells in light tight-oil formations can be drilled and completed for millions—not billions—of dollars, and the majority of the estimated recovery will occur within a year or two of bringing it on line. Capacity across a diversified portfolio of wells can be turned on when future prices justify it, and off when they don’t. That turns upside-down the traditional model of oil megaprojects that require billions in upfront capital, years of lead time, and always-on production irrespective of price.

All this means that, for the first time in history, oil production is becoming a modern manufacturing process. The frackers are engaged in “just-in-time” production, analogous to the methods pioneered by Japanese manufacturers in the 1970s and 1980s, which led directly to hyper-efficient global supply-chain management perfected by Wal-Mart in the 1990s.

I don’t sense that public opinion full appreciates the extent to which fracking changes the rules of the energy game. Virginians need to incorporate these new realities into their thinking about energy policy.

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16 responses to “New Lessons from the Fracking Revolution

  1. .. .. .. .. ..

  2. U.S. Shale-Oil Boom May Not Last as Fracking Wells Lack Staying Power

    http://goo.gl/hqgcB0

    Natural gas: The fracking fallacy
    The United States is banking on decades of abundant natural gas to power its economic resurgence. That may be wishful thinking.

    then food for thought:

    Why EPA’s alleged ‘war on coal’ may actually be a war on energy waste

    • Interesting article. I’m inclined to trust the people with major skin in the game. But even that’s no guarantee.

    • Not surprising. My understanding is that natural gas was always a leftover hydrocarbon from something heavier/more useful and that we’re eating the leftovers now (and doing some not inconsiderable environmental damage to water supplies and maybe causing earthquakes along the way) instead of changing our diet.

  3. Unless the United States makes a major commitment to go nuclear, just as it did for nuclear submarines, all the government is doing is playing games.

    • So the government should be responsible for generating electricity is what you’re saying?

      • No, but federal policy should support the use of nuclear power if we really want to control carbon emissions. I was recently informed by a knowledgeable government official that, for example, the proposed new reactor at Calvert Cliffs could power one-half the homes in Maryland. That is significant by any standard.

        We’ve operated nuclear submarines without accident for decades. We can do the same for nuclear power.

        • What policy could be put in place to better support the use of nuclear power?

          So the government shouldn’t be responsible for generating electricity but they’re the ones who ran the nuclear submarine so who is the “we” that should be running nuclear power without accident in the future?

          • TooManyTaxes

            Nuclear energy generation should be done by the private sector and under regulation. Years ago, I did legal work for Exelon, which operates multiple nuclear generating plants. I learned of the significant extent of regulation of nuclear plants and the massive set of regulations that control the construction and operation of those plants. Post 9-11, the security and safety regulations became even tougher. Those regulations are based, in part, on what the Navy learned by operating nuclear subs. I hope this clarifies my comments.

          • LifeOnTheFallLine

            It does and thank you for the clarity!

            And as a nuclear agnostic I’m legitimately curious what policies you think the government could put in place.

          • TooManyTaxes

            10 C.F.R., Parts 1 through 173 are the regulations of the Nuclear Regulatory Commission. I suspect there are other federal rules that also have an effect on nuclear power plants.

        • I hate to be a broken record on this, but my father was a nuclear engineer for Westinghouse and started up the first small commercial reactor in Shippingport PA and did a lot of nuclear sub reactor work under Admiral Rickover. I don’t think my father nor Rickover were comfortable with the size and nature of the large commerical plants. Utility management invariably sees the solution as enormously large plants or groups of plants.

  4. I think nuclear as we know it today is dead. there’re too susceptible to terrorists and earthquakes, they have to run flat out … or off – and they melt down when they break.

    smaller nukes that shut down without melting down could change things – lots of talk – but little else. Dominion is singing in the breeze if they think they’re going to put a 3rd nuke where we just had an earthquake and the govt ain’t going to backstop them on liability any more.

    There are thousands of populated islands on the planet that currently have to import diesel oil at a cost of 50 cents kwh that do not have nukes. why?

    of course they don’t have wind or solar either…

    but I think they’re closer to wind/solar than nukes.

    Deepwater Wind says electricity rates on Block Island (Rhode Island) would drop by 40 percent if a wind farm is constructed off the island

    http://goo.gl/xQh2XY

    barring a breakthrough that will make them smaller and more adaptable

  5. The author and the story he cites miss some of the points.

    The bloom is off the fracking rose. Fracking is actually MORE expensive than traditional drilling since it is driven by pricey horizontal methods and needs a far greater amount of data to locate the energy.

    Even of the downturn? Look in the Southwest where many drillers are out of work. They don’t expect a pick up for a couple of years.

    Meanwhile, fracked areas are left with messes, such as ruined parking lots for scores of water trucks; base camps for diesels generators and so on. The vehicles have chewed up local roads. The royalty checks are getting smaller.

    Wonderful, ain’t it.

  6. If it was my state, natural gas would be the default energy source for future power plants. I believe natural gas will remain the low cost, relatively low emission lead option. Failure to realize this is probably a failure to appreciate the new energy paradigm were are witnessing today.

    Nonetheless utilities and politicians have never really embraced natural gas, probably in part because big coal plants and big nuclear plants have more money floating around for campaign donations etc. If you don’t think Gov McAuliffe and Dominion are serious about pushing nuclear, just look at Georgia. The EPA CPP is probably a nuclear revival act for Virginia…not necessarily for all states, but CPP is intended to give states the option.

    A few years ago Bill Gates said we should build a whole lot more AP1000 nuclear plants (these are the updated design) which I don’t currently share his enthusiasm. But I see one coming to Virginia. If for no other reason, the EPA CPP essentially mandates that VA keep its current level of about 50% carbon free power generation.

  7. I might have to eat my words but it’s taken two years for Louisa to replace their high school that was ruined by an earthquake. Older homes in Spotsylvania and Caroline had their chimney’s toppled.

    I just cannot imagine the NRC approve the siting of a future nuclear plant on a known active fault.

    If we come up with a pebble-bed or equivalent technology that allows a plant to automatically shut down without a risk of meltdown.. maybe.. even better – smaller plants that can ramp up and down more quickly.

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