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Monday, December 12, 2011

A Review: Technology, Energy Affordability and the Environment

Technology often changes businesses, industries, and the lives of consumers dramatically for the better. Consider on the energy technology front, particularly the vast opportunities opened up in terms of domestic energy production due to horizontal drilling and fracturing technologies.

For example, in a 2006 report, the U.S. Energy Information Administration noted: "Through the use of technology, U.S. oil and natural gas operators are converting previously uneconomic oil and natural gas resources into proved reserves and production. The Bakken Formation of the Williston Basin [covering much of North Dakota] is a success story of horizontal drilling, fracturing, and completion technologies. The recent, highly productive oil field discoveries within the Bakken Formation did not come from venturing out into deep uncharted waters heretofore untapped by man, nor from blazing a trail into pristine environs never open to drilling before. Instead, success came from analysis of geologic data on a decades-old producing area, identification of uptapped resources, and application of the new drilling and completion technology necessary to exploit them. In short, it came from using technology to convert unconventional resources into reserves."

Indeed, such technology has changed dramatically the energy landscape for the U.S. Consider the following two updates provided by the EIA late last month on what's happening in North Dakota:

• Regarding oil production in North Dakota, the EIA reported: "North Dakota's oil production averaged over 460 thousand barrels per day (bbl/d) in September 2011, more than four and one-half times its September 2005 level. Although the State's oil production growth slowed during the first few months of 2011, more favorable weather conditions helped operators significantly boost output in June, July, August, and September. North Dakota currently trails only Texas, Alaska, and California among oil-producing States... Production increases in North Dakota are mainly associated with accelerating horizontal drilling programs in the Bakken shale formation situated in the northwest portion of the State (and extending into Montana and portions of Canada). By combining horizontal wells and hydraulic fracturing (the same technologies used to significantly boost the Nation's shale gas production), operators increased North Dakota's Bakken oil production from less than 3 thousand bbl/d in 2005 to over 230 thousand bbl/d in 2010."

• Along with this oil production comes natural gas as well. The EIA noted: "Natural gas production in North Dakota has more than doubled since 2005, largely due to associated natural gas from the growing oil production in the Bakken shale formation. Gas production averaged over 485 million cubic feet per day (MMcfd) in September 2011, compared to the 2005 average of about 160 MMcfd... North Dakota natural gas production from the Bakken shale, which is situated in the northwest portion of the State, increased more than 20-fold from 2007 to 2010, and the number of wells producing natural gas increased 7-fold."

But the energy landscape has not just changed in places like North Dakota. Consider this brief summing up on the Marcellus Shale from a December 7 report at "The Marcellus Shale is a super-massive formation of Middle Devonian-age black carbonaceous (organic rich) shale, which occurs in the subsurface beneath large areas of Ohio, West Virginia, Pennsylvania and New York. The Marcellus Shale has been estimated to contain more than 500 trillion cubic feet of natural gas. Using some of the same horizontal drilling and hydraulic fracturing methods that were applied to the Barnett Shale in Texas, it is estimated that as much as 10 percent of this natural gas might be extracted. An estimated 50 trillion cubic feet of natural gas is enough to power the entire United States for about two years, and would be worth about one trillion dollars."

On the Marcellus Shale, the EIA reported in late August: "In the Northeastern United States, natural gas production has grown rapidly since early 2009 as a result of increased drilling activity in the Marcellus Shale. The largest production gains have occurred in Northeastern Pennsylvania, with noticeable increases also in Southwestern Pennsylvania and West Virginia. According to Bentek Energy, LLC estimates, natural gas production in West Virginia and Pennsylvania now averages almost 4 billion cubic feet per day (Bcf/d), more than five times as much as the average from 2004 through 2008. It accounts for over 85% of total Northeastern natural gas production."

What does Marcellus Shale mean for the economy? A July 2010 study ("The Economic Impacts of the Marcellus Shale: Implications for New York, Pennsylvania, and West Virginia" performed by Natural Resource Economics, Inc. for the American Petroleum Institute) found the following:

• For West Virginia and Pennsylvania in 2009, "Output of dry natural gas and petroleum liquids increased to over 600 million cubic feet of gas equivalents during calendar year 2009. Total value added or contribution to gross regional product for these two states increased by $4.8 billion as a result of Marcellus production activities. This increase in value added is distributed across a broad swath of the economy, generating more than 57,357 jobs and $1.7 billion in local, state, and federal tax collections. The gains in value added are broad based, which dispels the notion that natural gas production contributes benefits to only a select few sectors or individuals."

• Looking ahead for West Virginia, Pennsylvania and New York: "The high development scenario envisions a substantially greater level of drilling activity but well within the realm of possibilities given recent experience in the Barnett shale gas play in Texas. In this case, the level of Marcellus drilling and production activity forecast in 2020 could generate almost $25 billion in value added and more than 280,000 jobs. Under this scenario, the Marcellus could be producing over 18 billion cubic feet of clean burning natural gas per day, which would make it the second largest producer of natural gas in the U.S. behind Texas. Even with this rapid development, the 40 TCF of cumulative Marcellus natural gas production from 2005 to 2020 would leave more than 90 percent of remaining reserves for future production. So the Marcellus resource will last generations. Increasing domestic energy production and employment without subsidies comes at an opportune time when our nation faces record budget deficits and many states are struggling with fiscal solvency."

Indeed, all of these developments are good news for energy producers and consumers - with small businesses critical components of each group.

However, misguided government policies at the federal and state levels - overwhelmingly pushed by radical environmentalists opposing any kind of carbon-based energy development - could threaten these critical means (namely, hydraulic fracturing) for expanding domestic energy production.

For example, consider the following from a December 5 report by Abby Wisse Schacter in the New York Post:

The state Department of Environmental Conservation is on course to kill any hope of a New York natural-gas boom with the death of 1,000 stalls. The DEC is taking too long, and paying too much heed to disingenuous critics, in issuing rules to allow the key process of "fracking" - aka hydraulic fracturing, which involves forcing water and chemicals at high pressure into shale-rock formations to release natural gas. Last week, the DEC announced it's extending for another 30 days the public-comment period on its proposed fracking rules. This, after already stretching the period from 60 days to 90 days - and after many hearings have turned out more like Occupy Wall Street protests than a sober assessment of safe and effective drilling rules...

The DEC claims it wants to give everyone a chance to voice their concerns about the drilling rules. But offering so-called experts like actor Mark Ruffalo the platform to demand that New York abandon natural-gas drilling in favor of solar power is a waste of time. Nor does it do anything about the problems with the DEC rules. Its proposed regulations - including severe limits on where fracking can be done and a complex and drawn-out permitting process - seem designed to discourage investment by major oil and gas players. Geologist John Conrad says the rules would make New York uncompetitive in gas drilling. "The DEC claims that . . . only 15 percent of the Marcellus Shale play [would be] inaccessible to drilling," he explains, "but I've looked at areas currently leased by oil and gas operators, and as much as 100 percent of a tract can fall under those restrictions."

It is important to understand key points regarding the hydraulic fracturing process regarding its environmental impact:

It has been in use since the 1940s, and proven safe in practice over the subsequent decades.

• In terms of the fracturing liquids used, 90 percent is water, 9.5 percent is sand, with chemical additives making up 0.5 percent, as report by API.

• As for used fluids, as an API primer explains: "Spent or used fracturing fluids are normally recovered at the initial stage of well production and recycled in a closed system for future use or disposed of under regulation, either by surface discharge where authorized under the Clean Water Act or by injection into Class II wells as authorized under the Safe Drinking Water Act. Regulation may also allow recovered fracturing fluids to be disposed of at appropriate commercial facilities. Not all fracturing fluid returns to the surface. Over the life of the well, some is left behind and confined by thousands of feet of rock layers."

In the end, current industry standards and regulation have worked well in protecting the environment, while the nation is able to gain in terms of economic, employment and business growth, and more affordable and secure energy sources - all due to the advancements in technologies allowing economical production of U.S. oil and natural gas resources.

The U.S. cannot afford to sacrifice critical and safe domestic energy production at the altar of environmental extremism. Both federal and state officials need to deal with economic and environmental realities, and put aside the scare tactics and rants of the political Left who care not at all about the economy, jobs or affordable energy.


Raymond J. Keating is chief economist for the Small Business & Entrepreneurship Council. His new book is "Chuck" vs. the Business World: Business Tips on TV.

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