What happens if we partner on natural gas with China?

3 Aug

The New York Times has recently reported that what it describes as industry insiders and independent operators have, in email exchanges, expressed doubts about the reserves that the natural gas industry as a whole touts as a result of new plays and new technology. The stories have ignited a firestorm of criticism by many of the world’s largest oil and gas companies including Exxon-Mobil.

Just three years ago, the Wyoming legislature’s joint interim Minerals, Business and Economic Development committee heard a presentation from an industry analyst that seemed to represent common wisdom in 2008, namely that the U.S. was running out of proven and economically viable natural gas reserves and that the nation would soon be faced with the prospect of importing the liquified version of natural gas from unfriendly countries like Russia and perhaps even be held hostage to imports from outright hostile countries like Iran. The analyst urged the committee to help domestic operators and in particular those in the state find, develop, and exploit as never before new gas fields or suffer the geopolitical and economic consequences. The next session of the Wyoming legislature found a way to help.

In early 2009, the legislature was asked to author a joint resolution which called on the U.S. Congress to resist any attempt to regulate or restrict the use of hydraulic fracturing (fracking) as a way to enhance outputs from natural gas wells. Legislators heard advocates of the resolution describe hydraulic fracturing as a safe and decades old technique that has been employed tens of thousands of times across the country as a way to stimulate natural gas well production with no known problems. Against that backdrop (and the analyst’s presentation to the interim committee) it came as no surprise that the legislature endorsed the resolution almost unanimously.

Fast forward to 2011 which looks so much different than 2008. The U.S. has been described as being awash in domestic natural gas, largely because of new and/or enhanced discoveries in places like New York, Pennsylvania, Louisiana, and Wyoming. The geopolitical threat seems to have disappeared (although perhaps it will resurface in a different way – more on that later) but at the same time there is a growing awareness that fracking is not without problems. As it turns out, the fluids used in the hydraulic fracturing process are laced with chemicals that in tiny concentrations are known to cause birth defects and cancer. If those chemicals get into groundwater they can cause contamination for generations. And despite assertions by Exxon-Mobil CEO President Rex Tillerson that there has never been a documented case of groundwater contamination resulting from fracking, it turns out that in 1984 a water well in West Virginia was contaminated and the user forced to abandon its use.

Now come the New York Times articles. They make it clear that hydraulic fracturing has been a springboard for natural gas development in tight shale formations which in turn seems to have fostered, in some independent operators, a gold rush mentality for finding new gas plays – and perhaps for selling them to the next speculator and that speculator to the next. There appears to be evidence that while hydraulic fracturing does stimulate a field into dramatic levels of production that those levels can quickly diminish. By examining production reports submitted to the Energy Information Administration (EIA), some industry analysts are now reassessing whether the nation is, indeed, awash in natural gas. Meanwhile, the boom of U.S. natural gas has been heard world wide and one of the nation’s biggest beneficiaries of the boom, Chesapeake Energy, has partnered with China on many of its domestic U.S. developments. China’s investment has gotten to the point where the Wall Street Journal reports that as much 3% of that country’s diesel fuel demand could be displaced with liquified natural gas by 2015.

The result of all of this could be intriguing to say the least. Industry operators, driven to produce according to their representations to investors and the EIA, will employ whatever technique they can muster to deliver the product. It means that hydraulic fracturing will be used routinely and groundwater will certainly be at risk. An even more ominous threat might be if the gas industry – always a rough and tumble bunch – has found itself entwined with its most formidable partner ever….China, one that may not look too kindly on being the unwitting participant in a speculator’s gold-rush fever. If China were the victim of another U.S. investment gone bad – this time energy development played on the world stage – it might make dealing with Russia and even Iran look easy by comparison.

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