Many have profited financially from hydrofracking, from George Mitchell, who made billions of dollars by inventing “slickwater” fracturing, to truck drivers in North Dakota, who saw their earnings jump to $2,000 a week hauling fracking fluid, to rural landowners in New York State, who leased their land for $5,000 to $6,000 an acre with 20 percent royalties, which could translate into hundreds of thousands of dollars per year.1
Or consider Terry Pegulia, who founded a company called East Resources with $7,500 borrowed from friends and family. Starting with one well in the Marcellus Shale region of western Pennsylvania, Pegulia eventually got the assistance of Ralph Eads III, a banker and a legendary salesman and a vice chairman at Jefferies & Company in Houston.2 They parlayed that one well into 75 wells in a single year. In 2010, Pegulia sold East Resources to Royal Dutch Shell for $4.7 billion.
Floyd Wilson, a Texan who created Petrohawk Energy in 2003, drilled his first well in the Haynesville Shale in 2008, and sold the company to BHP Billiton, an Australian energy firm, in 2011 for $15 billion. Wilson and his executives earned $304 million.3
So for a lucky few, hydrofracking has been a highly lucrative gamble. Not everyone profits and the business remains volatile, yet the tales of quick riches are one of the things that keep others so feverishly interested.
In a word: revolutionary. As proponents point out, hydrofracking has helped to create new jobs, higher incomes, and tax windfalls for cash-strapped states.
For decades, the dialogue about oil and gas has been built on a paradigm of limited supply, declining production, and volatile pricing. These assumptions were based on the pioneering work of M. King Hubbert, a Shell geologist who in the 1950s forecast that American oil production would peak in 1971.4 Shale gas reserves have turned those assumptions on their head.
The United States produced less oil in 2012 than in 1971—Hubbert was correct—and prices remained high. Yet America produced more oil in 2012 than in any year since 1994, and natural gas production is nearing record levels. In 2000, shale gas represented merely 2 percent of the nation’s energy supply; by 2012, it was 37 percent.5
The abundance of gas has set off ripples throughout the US economy, with numerous additional impacts. As power companies substitute gas for coal in their generators, for instance, consumers benefit from lower prices. This switch has led to another important boon: a significant reduction in CO2 emissions.
“One thing is clear,” writes Steven Mufson, an energy and financial news reporter at the Washington Post. “Tumbling natural gas prices have changed every calculation and assumption about the energy business.”
The development of shale resources supported 600,000 jobs in 2010, a number that the American Petroleum Institute (API) reports is “constantly increasing.”6 Many economists believe that the boom in hydrofracked fuels—the “shale gale”—will continue to rev the economy for years to come, and could give the United States a competitive advantage in the global marketplace.7 Ed Morse, a Citigroup energy analyst, predicts that by 2020 the natural gas industry will have created some three million new American jobs. Hydrofracking, he says, will add up to 3 percent to America’s gross domestic product and trillions of dollars of tax revenue.8 In his 2012 State of the Union address, President Obama approvingly cited an estimate by the natural gas industry that hydrofracking will supply a century’s worth of gas reserves and 600,000 new jobs by 2030.9
If the hydrofracking boom in the Marcellus Shale is any indication, he could be right. The Marcellus remains relatively untapped, but in 2009 hydrofracking there created over 44,000 new jobs in Pennsylvania, $389 million in state and local tax revenue, and nearly $4 billion in value added to the state’s economy.10 In the same year in West Virginia, which also sits atop the Marcellus, fracking added 13,000 new jobs and over $220 million in federal, state, and local tax revenue, and nearly $1 billion in value added to the state economy.11
In 2010, proved reserves of natural gas and oil in the United States rose by the highest amounts ever recorded, according to the US Energy Information Administration: 2.9 billion barrels of crude oil (surpassing 2009’s high by 63 percent), and 33.8 trillion cubic feet of natural gas (17 percent higher than 2009).12 Largely thanks to hydrofracking, annual production has climbed to some 30 trillion cubic feet a year, and prices have dropped precipitously, from about $13 per million BTUs in 2006 to less than $4 per million BTUs in 2013.13
In short, abundant supplies have led to lower prices. America’s Natural Gas Association (ANGA) estimates that between 2012 and 2015 low gas prices will add $926 in disposable income to each household, a number that could reach $2,000 by 2035.14
States like Pennsylvania, which was once a natural gas importer, are now producing so much shale gas that they are poised to export it.15 Energy-intensive industries that have moved factories overseas in search of cheaper fuel are now able to stay in the States, or even “reshore” (bring back) facilities. Even in industries where electricity represents a minimal percentage of costs, the price of gas can have a profound impact.
The fossil fuel industry represents a modest slice of America’s overall economic pie, but the relative drop in gas prices has been so dramatic that it could boost a manufacturing renaissance that would add 0.5 percent a year to GDP by 2017, according to the Swiss bank UBS.16
Industry uses around a third of US gas output, and one of the biggest consumers is petrochemical manufacturing.17 Manufacturing products like methanol and ammonia, a key ingredient of fertilizer, require gas as feedstock (raw material for industrial processes). Switching feedstock from naphtha, derived from oil, to ethane, derived from gas, has kept petrochemicals affordable even as oil prices have spiked. These chemicals in turn provide cheaper raw materials for farmers, automakers, manufacturers of household products, and builders, or are exported at prices competitive with state-owned firms in the Middle East, the world’s lowest-cost oil and gas producers.
In industries where petrochemicals are a large part of the cost base, companies could shorten the supply chain and return manufacturing work stateside. Should this come to pass, the accounting firm PricewaterhouseCoopers estimates, lower feedstock and energy costs could add one million new American factory jobs by 2025.18
The American Chemistry Council says that a 25 percent increase in the supply of ethane, a liquid derived from natural gas, could add over 400,000 jobs, provide over $4.4 billion in annual tax revenue, and add $16.2 billion in capital investment by the chemical industry alone.
Louisiana provides a case study in how the fluctuating price of natural gas has shifted the fortunes of major corporations. Because the state is resource-rich, and natural gas once cost just $2 per thousand cubic feet, Louisiana enticed numerous chemical companies to build plants across the state. But in the fall of 2005 Hurricane Katrina devastated the Gulf Coast, and the price of natural gas jumped sevenfold, to $14 per thousand cubic feet. This sent a jolt through the industry. Yet even before the storm, Louisiana’s gas supplies were dropping and prices were rising, which caused several big employers either to mothball plants or to move them.19
Consider the case of Dow Chemical. Gas represents half of its operating costs, and the skyrocketing prices after Katrina forced the temporary shuttering of one of its largest petrochemical plants. “The US is in a natural gas crisis,” Dow CEO Andrew Liveris testified before the Senate at the time. “The hurricanes have dramatically underscored the problem, but they did not cause it.… We simply cannot compete with the rest of the world at these prices.” Switching its focus abroad, Dow invested in China and the Middle East—including a $20 billion joint venture to develop oil and gas facilities in Saudi Arabia—where energy prices were much lower. “Our industry will continue to grow,” Liveris maintained. “It’s simply a question of where we will grow.”20
By the fall of 2012, however, natural gas prices had fallen dramatically, to about $4 per thousand cubic feet, and chemical industry employment figures nudged up for the first time in a decade, according to the Bureau of Labor Statistics. Dow Chemical restarted its plant in St. Charles, Louisiana, and planned to build a new complex in Freeport, Texas.
That same year, Methanex Corporation, the world’s largest methanol producer—which had closed its last US chemical plant in 1999—paid over $500 million to disassemble a methanol plant in Chile and move it to Ascension Parish in Louisiana. “The proliferation of shale gas in North America … underpins the very attractive economics for this project,” observed CEO Bruce Aitken. If gas prices remain steady, he added, the Chilean plant will be paid off by 2016, and the company might move a second plant from Chile to Louisiana.21
Similarly, the Williams petrochemical company was spurred by low gas prices to invest $400 million in expanding an ethylene plant. And CF Industries announced a $2.1 billion expansion of a nitrogen fertilizer plant. Gas prices account for 70 percent of its manufacturing costs at its ammonia and urea units (urea is used in fertilizers and to synthesize resins and plastics).22 With cheap natural gas, the company is betting it can successfully compete against imported nitrogen fertilizers, which represent over half of sales in the United States.
This kind of growth is already having a beneficial impact on numerous industries associated with energy, from trucking to high tech, glass, sand, steel, and even plastic toys.
U.S. Steel, for instance, has struggled in recent decades, undercut by Asian producers and unable to respond creatively, and saw its stock price drop nearly 90 percent. But today it is in the midst of a Phoenix-like resurrection. Hydrofracking requires lots of steel products, from pipelines to drilling rigs and well casings, and U.S. Steel recently invested $100 million on a facility to produce “tubular product” specifically for the hydrofracking industry. The company may see even bigger gains in coming years, as the shift from coal to cheaper natural gas reduces its energy costs. In 2011, U.S. Steel used 100 billion cubic feet of natural gas: every time the price dropped a dollar, the company saved $100 million. In a further cost-saving measure, the company is retooling its blast furnaces to reduce the amount of coke (a fuel derived from coal) used, and increase the amount of natural gas it can inject. The result is that blast-furnace costs could be cut by as much as $15 per ton of hot metal produced. When demand is strong, U.S. Steel produces some 20 million tons of steel annually. The company’s advantage grows as competitors in Asia and Europe are forced to pay more for their energy. “It has become clear to me that the responsible development of our nation’s extensive recoverable oil and natural gas resources has the potential to be the once-in-a-lifetime economic engine that coal was nearly 200 years ago,” announced U.S. Steel chairman John Surma in a 2012 speech.23
As the tide of natural gas rises, other industries are seeing their boats rise with it. One might not associate high-tech companies with natural gas; yet a few of them have leaped on the shale bandwagon. In 2012, Honeywell—known for making thermostats, electric motors, and components for nuclear weapons—paid $525 million for a majority stake in Thomas Russell, a provider of equipment for natural gas processing and treatment. In coming years, Honeywell will offer products that allow energy companies to remove contaminants from hydrofracked natural gas, and to recover natural gas liquids used for fuel and in petrochemicals.24
As energy costs dip, companies along the value chain (a series of companies that work together to deliver products or services to the market) are retrenching; some that fled the United States for foreign shores are contemplating a return home. The manufacture of plastic toys by injection molding, for instance, requires lots of power but minimal labor costs. For now, Chinese factories dominate the market. However, given the costs of transportation, lengthy supply chains, and other factors—such as fear of intellectual property theft—the calculation about where manufacturing takes place is shifting.
According to a study done by scientists at MIT, residential and commercial buildings account for 40 percent of America’s total energy consumption, in the form of electricity or gas, making up over half the country’s demand for gas.25 Low gas prices have meant that the cost of heating schools and other government buildings, often itemized on local tax bills, is falling.
After years of losing manufacturing jobs, communities near productive shale plays are using incentives—and their proximity to natural gas supplies—to lure foreign investments.
In 2012, for example, Orascom Construction Industries, based in Cairo, Egypt, and one of the world’s biggest fertilizer manufacturers, announced it would build a $1.4 billion plant in Wever, Iowa. The company chose this site over one in Illinois because part of its investment will be funded by a tax-exempt bond that provides $100 million in tax relief. The plant, Orascom announced, will be “the first world-scale, natural gas-based fertilizer plant built in the United States in nearly 25 years.”26
A number of states that sit atop the Marcellus Shale—Ohio, West Virginia, and Pennsylvania—were recently engaged in a head-to-head competition to woo Royal Dutch Shell, the energy firm based in London and The Hague. The company ultimately decided to build a $2 billion petrochemical plant northwest of Pittsburgh.27
Currently the 12 member nations of OPEC produce over 40 percent of the world’s oil, which gives the group tremendous control over the price of crude oil, the biggest factor in gasoline costs.28 As the United States adds to its energy reserves through hydrofracking shale, OPEC’s influence on prices at the pump will weaken.
Indeed, a 2012 report by the National Intelligence Council (NIC), an adviser to the CIA, found that the success of American shale oil and gas exploration could soon cause a fundamental shift in the global energy market. The NIC estimates that US oil production could expand to 15 million barrels a day, more than double the current rate. This would reduce domestic oil prices, increase US economic activity by 2 percent, add 3 million jobs, and could turn the United States into a major oil exporter by 2020.29 A separate Energy Department analysis found that the United States now has sufficient natural gas supplies to make it a major exporter. “In a tectonic shift, energy independence is not unrealistic for the US in as short a period as 10–20 years,” the NIC found.30
Another report, “Oil: The Next Revolution,” compiled by the Belfer Center at Harvard, confirms this prediction: shale oil could provide as much as 6 million barrels a day by 2020, which would bring the United States close to energy independence in oil by then.31
Alan Riley, professor of energy law at the City Law School at City University London, notes: “The major geopolitical impact of shale extraction technology lies less in the fact that America will be more energy self-sufficient than in the consequent displacement of world oil markets by a sharp reduction in US imports.”32
As shale oil supplies are tapped in China, India, England, Australia, Argentina, and elsewhere, global oil prices will sink further—a possibility that was unthinkable just a few years ago.
The place where natural gas increases could ultimately have the biggest impact is by replacing gasoline in the world’s cars, trucks, and buses. At the moment, transportation accounts for 70 percent of America’s petroleum use, and 30 percent of US carbon emissions.33 In 2011, President Obama vowed to cut oil consumption by a third in the next decade, and two years later he said that emissions would be cut by 17 percent by 2020.34 Natural gas is an important part of his plan to reduce oil imports and greenhouse gases.
The combustion of natural gas produces 30 percent less carbon dioxide than oil, and could be used instead—either directly, as compressed natural gas (CNG) or liquid natural gas (LNG), or indirectly, by converting natural gas into liquid fuel or power for electric vehicles.35 At the moment, just 1.5 percent of the world’s cars and trucks—about 16 million vehicles—are powered by natural gas. Morgan Stanley estimates that the gas used by these automobiles replaces about 1.2 million barrels per day of oil products.36 In a best-case scenario, that use could rise to 5.6 million barrels per day, or 7 percent of oil supplies, in a decade.
The United States and Western Europe already have a gas infrastructure that pipes gas into buildings that is well developed; the so-called “last mile problem” (a phrase borrowed from the telecom industry, which refers to the final leg of a delivery system that connects suppliers with customers) can be solved with devices that allow people to refuel their natural gas-powered vehicles (NGVs) at home.37 This is not as farfetched as it might sound. The number of NGVs in the United States doubled between 2003 and 2009 to 110,000. That is a miniscule number, representing only 0.1 percent of all vehicles on the road, but it is growing.
The Dallas–Fort Worth Airport runs 500 maintenance vehicles on gas (and allows hydrofracking beneath its runways). AT&T is buying 8,000 CNG-powered vehicles, giving it the largest commercial NGV fleet in the country. School buses, garbage trucks, and other municipal vehicles are switching.38
CNG is not ideal. It has to be stored at high pressure in bulky tanks. An average-sized CNG tank provides only a quarter of the traveling distance of gasoline tanks. Retrofitting vehicles with CNG equipment is costly, and refueling infrastructure is not widely available. There are only 1,500 public CNG stations in the United States, compared with 115,000 regular filling stations. Still, CNG is catching on among fleet-delivery vehicles (FedEx and UPS trucks, for instance) and public buses. Some 20 percent of local buses already run on CNG or LNG.39
Natural gas could also power ships. In an effort to save fuel and reduce emissions, ferries in Argentina, Uruguay, Finland, and Sweden are already powered by LNG. In 2014, a new LNG ferry will start plying the St. Lawrence River in Quebec. And in a New York City pilot project, one of the Staten Island ferries is being retrofitted from a low-sulfur diesel to an LNG power plant; the switch will cut fuel consumption in half and reduce greenhouse gas emissions by 25 percent. Such pilot programs could lead to similar conversions on much bigger, oceangoing container ships. The research firm IHS CERA projects that by 2030 a third of all cargo carriers will be fueled by LNG.40
In Europe, regulators are pressuring shippers to reduce emissions, especially on inland waterways. Royal Dutch Shell has chartered two LNG-powered tanker barges to work on the Rhine River. The barges emit 25 percent less carbon dioxide than their oil-burning competitors, and are quieter.41
Another way to fuel transport is through gas-to-liquids (GTL) technology, which uses heat and chemistry to convert natural gas into liquid fuel (similar to the way crude oil is converted into gasoline). The technology uses catalysts to turn gas into longer-chained hydrocarbons, like diesel and kerosene, or various petrochemicals. There are now several GTL plants operating around the world. Shell’s $19 billion Pearl facility in Qatar (jointly owned by the Qataris) is by far the largest, and Shell may build a similar facility on the Gulf of Mexico.42
A 2011 MIT report coauthored by Ernest Moniz, President Obama’s new secretary of energy, found that natural gas exploration has, overall, had a good environmental record.43 This gladdened the industry, of course, which maintains that hydrofracking takes place thousands of feet below the water table, and the chemicals it uses are typically separated from groundwater by impermeable rock. Supporters note that over 20,000 wells have been drilled in the past decade, and that only a few instances of groundwater contamination have been reported, all of them due to breaches of existing regulations. “The data show the vast majority of natural gas development projects are safe, and the existing environmental concerns are largely preventable,” Scott McNally, an environmental engineer who has worked for Shell, blogged for Scientific American.44
In 2011, then-EPA administrator Lisa Jackson testified to the Senate that she was unaware of “any proven case where the fracturing process itself affected water.”45 In 2012, officials from the Department of the Interior told Congress that “we have not seen any impacts to groundwater as a result of hydraulic fracturing.”46
An average shale well uses a lot of water—some 1.2 to 5 million gallons over its lifetime47—but, the industry says, that number is not as alarming as it might sound. To put it in perspective, all of the shale wells drilled and completed in 2011 used 135 billion gallons of water, which was equivalent to 0.3 percent of total US freshwater consumption, according to an analysis by TheEnergyCollective.com (an independent forum supported by Siemens and Royal Dutch Shell).48 Yet agriculture used 32,840 billion gallons of water annually (243 times more water than hydrofracking for natural gas), and golf courses used about 0.5 percent of US fresh water.
Furthermore, the volume of water used by hydrofracking compares favorably to that used to produce other forms of energy. According to ConocoPhilips, natural gas uses about 60 percent less water than coal and 75 percent less water than nuclear power generation.49
When hydrofracking opponents complain that public health is put at risk by the 2005 ruling under which companies are not required to disclose some of the chemicals they use because they are trade secrets, energy groups vehemently deny they are hiding anything nefarious. This special exemption for hydrofracking, reportedly inserted by Vice President Dick Cheney, a former CEO of Halliburton, was dubbed “the Halliburton Loophole” by opponents.50
One industry group, Energy in Depth (EID), maintains that state regulations governing hydrofracking fluids are robust, and that there is no need for federal oversight. “Getting the public to believe that hydraulic fracturing is essentially unregulated is critical to some folks’ strategy of shutting it down,” EID writes. “But here’s the truth: States have regulated the fracturing process for more than six decades now, and by any legitimate measure have complied an impressive record of enforcement in that time … (hydrofracking) has never in its nearly 65-year history been regulated under the Safe Drinking Water Act.… If a bill never covered you in the first place, how can you be considered ‘exempt’? Does that mean [hydrofracking companies] are exempt from Medicare Part D too?”51
EID notes that “there isn’t a single ‘hazardous’ additive used in the fracturing process that’s hidden from public view,” adding, “So what’s with all the controversy over ‘trade secrets’? In rare cases, a company may ask that a certain ‘constituent’ contained within a larger ‘additive’ set be protected, though … under law that information must be released to response and medical personnel in case of emergency.… Indeed, the vast majority of these (chemical constituents) are considered ‘non-hazardous’ by EPA—quite the contrast from what you’ve read in the papers.”
As we will see in the next chapter, there are those who strongly disagree with this assertion.
This question, perhaps more than any other, epitomizes the public confusion and sharp disagreement that splits the two sides of the debate over hydraulic fracturing. Adding to the misunderstanding, regulators at the federal EPA have shifted their position on this question.
One of the main justifications for promoting natural gas is that power plants fueled by gas emit about half the climate-changing gases that coal-fired plants do.52 Advocates say the gas boom has been a key reason the United States is the only major nation to see significant reductions in climate-warming emissions. But some argue that methane leaks in gas operations nullify those benefits, because methane (the primary component of natural gas) is a formidable greenhouse gas.
First the good news. Between 2007 and 2012 the United States reduced its greenhouse gas emissions by 450 million tons, the biggest drop of any nation in the world.53 Hydrofracking advocates are quick to claim that this is a result of the nation’s fundamental shift from coal to natural gas and renewable energy.
In 2000, coal powered 52 percent of US electric generation, natural gas provided 16 percent, and renewables were only 9 percent. By 2012, according to the Energy Information Administration, coal had plummeted to 38 percent, gas had jumped to 30 percent, and renewables had risen to 12 percent.54 “Pragmatic leaders understand … that with natural gas we don’t have to choose between our economic and environmental priorities. Instead, responsible natural gas development is having very real and positive impacts in the 32 states that are home to this abundant domestic energy source,” the American Natural Gas Alliance writes in a recent report.55
A study by the environmental investor group CERES found a nearly 70 percent reduction in sulfur dioxide and smog-forming nitrogen oxide over the past 20 years, thanks to growing use of natural gas among the nation’s top 100 utilities.56 Nearly half the reduction came in just a two-year period from 2008 to 2010. The EIA has similarly noted that US carbon emissions from the power sector are at 20-year lows, largely due to the increasingly prominent role of natural gas in the nation’s energy portfolio.57 (The European Union, by contrast, has seen its greenhouse gas emissions rise over the same timeframe, despite a more concerted effort to tackle global warming than the United States has made.58 This is driven by the EU’s increased reliance on coal for generating power.)
However, methane is the main component of natural gas, and it has a notoriously potent greenhouse effect, with a global warming potential 72 times higher than carbon dioxide—the leading greenhouse gas—over a 20-year period, according to the Intergovernmental Panel on Climate Change, and 20 times greater over a 100-year period, according to the EPA.59 The EPA has long held that natural gas operations represent the leading source of methane leaks in the United States, accounting for 145 metric tons in 2011. (The second-largest source of methane was “enteric fermentation,” aka gas emitted by cows and other animals, at 137 metric tons. The third-largest source were landfills, which emitted 103 metric tons.)60 Yet the EPA estimates that all sources of methane combined represent just 9 percent of greenhouse gases.
The industry has been working hard to reduce emissions, in part to build public acceptance of hydrofracking but also because every methane leak represent a loss of lucrative product.
In April 2013, the EPA dropped a bombshell of sorts, announcing that it had dramatically reduced its estimate of the amount of methane the gas industry leaks. Although gas production has grown 40 percent since 1990, thanks to hydrofracking, the EPA found that tighter pollution controls—from better equipment, maintenance, and monitoring—resulted in an average decrease of 41.6 million metric tons of methane annually between 1990 and 2010, or over 850 million metric tons in total.61 The EPA’s new numbers represent a 20 percent reduction from the agency’s previous estimates.
Both advocates and opponents erupted at the EPA announcement. “The methane ‘leak’ claim just got a lot more difficult for opponents,” blogged Steve Everly, of industry group Energy in Depth.62 But Robert Howarth, a professor of ecology at Cornell University who authored a celebrated methane study critical of hydrofracking, flatly stated, “The EPA is wrong.” Howarth and researchers at the National Oceanic and Atmospheric Administration (NOAA) had recently published a new study detailing huge methane leaks from gas-drilling sites in Colorado and other western states. He said the EPA was “ignoring the published NOAA data,” and called for “an independent review of (EPA’s) process.”63
A leading environmentalist says the latest fracas misses the larger point. “We need a dramatic shift off carbon-based fuel: coal, oil and also gas,” Bill McKibben, founder of the climate group 350.org, told the Associated Press. “Natural gas provides at best a kind of fad diet, where a dangerously overweight patient loses a few pounds and then their weight stabilizes; instead, we need at this point a crash diet, difficult to do” but necessary to limit the impact of global warming.64
The EPA says that despite its revised estimate, natural gas operations remain the country’s leading cause of methane emissions. The agency has vowed to continue collecting data and researching the subject, and may change its conclusions again.
The acquisition of shale gas is depicted by the energy industry as an unquestionably good idea in a time of economic uncertainty: a vast, clean, 100-year supply of energy. In coming years, hundreds of thousands of new wells across the United States and, perhaps, around the world will be hydrofractured. But the true environmental and health costs of this method of extracting natural gas and oil are not well understood, and have many—even some who support hydrofracking—concerned.