SQUEEZING BLOOD FROM STONE

By Paul Bermanzohn, MD

The development, in 1993 after years of research and trial and error by Texas oilman George Mitchell, of a new technique called hydraulic hydrofracturing was combined in 2002 with horizontal drilling, another new technique, to make possible the extraction of so-called “natural gas” from long-coveted Marcellus Shale rock formations. The techniques have been used in several other large shale gas fields in the US, unleashing a veritable gold rush, as companies scramble to get a piece of the action, all hoping to extract large profits from the vast reserves of gas a mile or more below the ground.

The expected production of gas from shale may actually be exceeded by the vast amounts of gas blown off by a chorus of bloviating politicians and self-appointed experts whose noise level rivals that of a fracking station. These misleaders all hail the gas revolution as bringing a new utopia of  “energy independence” and economic uplift for the vast unemployed and underemployed masses. These “experts” ” ignorance is matched only by their dishonesty.

What follows is the first of a series of posts in which I hope to look at the shale gas explosion from the perspective of what best serves the majority of people and emphatically not from the perspective of what is best for a few billionaires. The billionaires are well represented; they already own most of America’s political and media machinery. They don’t need another representative.

A particular angle I hope to develop more fully is that the environment needs us to resist the development of the gas fields. Global warming and peak oil both mean that we need to go past fossil fuels and push to develop sustainable, renewable sources of energy. Big Oil hopes to maintain its economic supremacy in the world economy by keeping us addicted to fossil fuels. This is the real meaning of their campaign to promote gas as “the transition fuel to the future.” The future they hope to salvage is their own, to which our futures and that of the planet may be sacrificed to keep their economic supremacy in place.

The economic domination of big oil is a key reason that the political system in the US has been unable to make any real steps toward stopping the world’s dangerous, probably lethal addiction to fossil fuels. For this reason we need to stop them from continuing our reliance on fossil fuels as our main energy.  And like any community trying to get rid of drug dealers, we ourselves need to take decisive steps toward driving the dealers out of the community; we can’t wait for the authorities to get rid of the dealers. The official powers are too invested in the maintenance of the system of addiction to do what is needed to break us from this fatal addiction. The fight to stop fracking is the fight against global warming.

My intent is to focus on what is happening on NY State. The reason for this is twofold: This is where I live so I know most about what is happening here and NY State is the first place where it appears possible to stop the drillers.

GAS PRICES AND THEIR EFFECT

low prices are good for the monopolies

The techniques of hydraulic fracturing combined in 2002 with horizontal drilling to open vast reserves of gas that lie in shale rock formations thousands of feet below the earth. The largest of these gas fields in North America thus far opened up is the Marcellus Shale, which stretches under 7 states, from NY to Tennessee.  The Marcellus is one of several large formations in the US from which large quantities of gas have been extracted. This has caused a glut of natural gas in the US market, with major consequences. The first result of the glut in gas has been a significant drop in price, and the effects of these reduced prices have implications for how drilling in the Marcellus will proceed, how the industry will develop, and its effects on all of us.

The biggest oil companies in the US and the world have begun to move into the Marcellus. (See the attached chart.) These 3, the largest of the oil giants (ExxonMobil, Chevron and Shell) have each made billions of dollars in investments. Purchasing natural gas drilling companies and their leases, Big Oil hopes to begin drilling soon. They announced their initial buyouts during and after the summer of 2010. More recently, on May 5, 2011, Chevron announced plans to buy 228,000 acres of leases in southwestern Pennsylvania. While they are so far largely centered on the Marcellus states where drilling has begun, especially Pennsylvania and West Virginia, we can expect them to take a great interest in NY State goings-on, especially as public sentiment turns toward stopping hydraulic hydrofracturing for natural gas in NY. If NY were to stop this practice by outlawing it in the state – a ban – it would have a galvanizing effect on those states where it is already happening, as well as in other countries. (This is being written as France’s lower house of Parliament voted for a national ban on the practice of hydraulic hydrofracturing; the Canadian province of Quebec recently instituted a 2 ½ year ban on fracking.) The oil companies will undoubtedly not want to lose their enormous investments in this hazardous process, not to mention the billions in profits they hope to “free” from the Marcellus Shale.

Shell was the first to announce its purchase, when on April 30, 2010, they said they were buying East Resources, a gas drilling company based in Warrendale, Virginia, for $4.7 billion.  Not long after, ExxonMobil, the world’s biggest oil giant, closed the deal to buy the country’s biggest gas drilling company, Texas-based XTO Energy, for $41 billion (this figure includes debt they  assumed in the takeover). Congressional review of this giant merger was promised, but there is no evidence that any took place. Finally, Chevron, the US’s second largest oil giant closed the deal on the purchase of Pittsburgh-based Atlas Energy for $4.3 billion. This last deal was almost undone when India’s biggest private energy company, Reliance Industries, Inc., intervened and tried to buy Atlas out from under Chevron, provoking a short but intense bidding war which Chevron won.

These three deals had been in the works for years and the purchasers had made it clear that their reason for buying these gas drilling companies was to get into the Marcellus Shale. An important part of each deal is that the giants got many thousands of acres of Marcellus drilling leases as part of their purchase, making it easier to start drilling in the target area. Just last week, on May 7, 2011, Chevron announced a deal to purchase 228,00 acres of drilling leases in southwestern Pennsylvania. In 2008, Rex Tillerson, CEO and President of ExxonMobil, told Forbes Magazine that his company intended to get a position in the Marcellus “early and quietly.”

Widespread drilling throughout the country in various shale gas formations has led to an overproduction of gas, flooding the market and depressing prices. In the decade 2000 to 2010, gas prices peaked in 2006 at about $14.00/cubic meter, then they settled to about $8.00/m³. There was a second peak in mid-2008, again at about $14.00 per m³. This was followed by a steady decline in price, currently at about $4.00 /m³. (There is an informative graph of natural gas prices in the Wikipedia article on “natural gas prices,” from which these numbers are taken.) Some companies maintain that they can make a profit with prices of about $5.00 per cubic meter, while some industry experts insist they need to be at least $7.00 per cubic meter to sustain them.

What they need to survive probably varies for each company, but it is clear that the current low price of gas makes it very hard on the smaller companies, which cannot recoup their investments at the current price levels. Low gas prices are affecting the industry in 3 major ways:

1. consolidation by the monopolies

First, and perhaps most important, low prices for gas have ushered in a period of consolidation in the Marcellus Shale. This is what we’re seeing now with the large investments by Big Oil. The oil companies have begun buying up not only gas drilling companies but also hundreds of thousands of acres of leases where they might drill.  Smaller companies, even some of the larger ones, are being forced to adapt to these conditions. Unable to drill in the current market, they are consolidating their lease holdings and selling them off in order to get cash to survive. Even the giant Chesapeake Energy, the biggest driller in the Marcellus, has felt the impact of low gas prices.  They recently announced a change in strategy and will be selling off their vast holdings of leases and move more into searching for and drilling for oil. These dynamics are turning land trading in the Marcellus into a real estate bazaar.

 

This process of consolidation now underway is similar to the consolidation that went on in the early days of the oil industry, culminating in the emergence of the Standard Oil Trust led by John D. Rockefeller. Two of the 3 companies currently in the Marcellus are direct descendants of the old Standard Oil Trust (Exxon and Mobil were Standard Oil of New Jersey and of NY, and Chevron was Standard Oil of California.) and so cannot be unaware of John D. Rockefeller’s oft-repeated injunction to “Buy all we can get.” He especially followed this course of action when prices were low, the best time to buy out competitors. (I recommend reading Daniel Yergin’s classic book on the oil industry, “The Prize” for a historical perspective on the booms and busts and the “gold rushes” in the energy industry. It helps to understand what we face now. While it is decidedly pro-industry, it is a fountain of detailed information on the history of these giants, and well written to boot.)

 

2. potential conflicts with landowners

The smaller companies’ not drilling because of low prices affects the landowners who leased their property for drilling to the companies. These landowners are eager to make money from the transaction and many of them suspect the companies are not acting in good faith.  Many leases specify that the landowner will be paid a proportion of the profit earned from the gas that comes out of their land, called a royalty. Some believe that the companies are not drilling to cheat them out of the money they should be earning. This may allow some dialogue to open with some property owners about how their land is being taken over by giant multinationals which do not keep their interests at the forefront of their business planning. This may open some of the landowners’ eyes to what is going on, but probably not many. There is still the exhilaration of the gold rush, the hope of vast riches suddenly flowing out of their ground.

Some of those seeking to lease their land for drilling are farmers getting crushed by agribusiness who cannot make a living from farming. Some of these farmers are opting to try to save their land by leasing it for gas drilling. This is a sad and futile gesture. These farmers are desperate to survive, but they are taking steps to save their land which will likely destroy it.

While farmers who cannot survive the death of family farms are among those leasing their property for drilling, many of the landowners seem to be trying to make a fast buck in the spirit of American capitalism and the get rich quick scheme.

Even so, landowners are not the enemy of the anti-fracking movement, a perspective that remains too common in the movement. It has been very difficult for many years to make a decent living in upstate NY. Today, with global economic crisis added to the long-standing depression of NY’s upstate, people have even more difficulty in making ends meet. We need to approach the landowners who hope to lease with understanding, not moralism. Lessors and lawyers who specialize in leasing have noted that the amount paid for leases has gone down in the last year, since Big Oil has begun to consolidate its holdings in the Marcellus.

3. Pressure to export gas

The third big result of low prices for gas is an irresistible pressure to export the gas, to places where it can fetch a better price. Just like companies go abroad to get cheaper labor, multinationals seek out their best profit by surveying the world market. The expectation is that the gas extracted from the shale will be sold, at least while current price differentials prevail, to places like South Korea and Japan, the world’s biggest importers of the fuel, or to Europe. The companies can expect to get a higher profit than in the US because of low prices here.

This could well lead to proposals by the oil giants to set up liquid natural gas export facilities. Although it is a dangerous way to ship energy, gas can be shipped overseas only in the liquid form. As recently as last year, New Jersey Governor Christie vetoed an LNG export facility off the coast of his state, citing the “unacceptable risks to the State’s residents, natural resources, economy and security.” But let’s not be surprised if new proposals surface for LNG export facilities in the region in the period ahead.

There is nothing wrong, of course, with trade with other lands, but one of the main reasons given for the imperative necessity for gas drilling in the US is that it will bring a mythical “energy independence.”

Not if it’s exported by profit-seeking multinationals.

(In future posts I will deal with the myth of energy independence and other myths of the Marcellus.)

Purchases of drilling companies & leases in the Marcellus by major oil companies
copyright 2011 by Paul C. Bermanzohn,MD

 

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