Michael McElroy and Xi Lu on natural gas, fracking, and U.S. energy prospects | Harvard Magazine Jan-Feb 2013
Supply and Demand
A KEY QUESTION is whether the current low price for gas can persist.
Shales in different regions are characterized by variable combinations of hydrocarbons. Some are gas- (methane-) rich, described as “dry.” “Wet” formations yield significant concentrations of condensable heavier hydrocarbons—such as ethane, pentane, and propane—referred to collectively as natural gas liquids (NGLs). Still others—notably the Bakken field in North Dakota—are gas-poor but oil-rich and are being developed primarily to extract that valuable resource. (In fact, only Texas outranks North Dakota now among U.S. oil-producing states.)
The hydrocarbon mix matters, because the break-even price for profitable extraction of natural gas from a dry shale well is estimated at about $5/MMBTU—about one and a half times the spot-market price in October. The bulk of the natural gas produced from shale today is derived from wet sources: marketing of the liquid products (which command higher prices) justifies the investments.
That means that the economic momentum of the shale-gas industry can be sustained for the long term only by decreasing production (ultimately causing prices to adjust—a process that may be under way as drilling diminishes at current prices) or by increasing sales of its product.
Increased use of natural gas for transportation could provide an additional domestic market, taking advantage of the significant price disparity versus gasoline or diesel fuels (as noted above). Doing so would require not only an investment in facilities to produce and deliver compressed natural gas (CNG), which is in limited use now, but also the introduction of vehicles capable of running on this energy source. Buses, taxis, and public vehicles (police cars, for example), suitably equipped, that could be charged at central stations would appear to provide an attractive early marketing opportunity. The benefits of such conversions would include reduced demand for imported oil, improved urban air quality, and a further decrease in CO2 emissions.
An even larger opportunity may lie in exports. Natural-gas prices in Europe and Asia were five to seven times those in the United States during the first half of 2012; Japan is an especially eager consumer, given the wholesale closure of its nuclear-electric generating capacity in the wake of the Fukushima earthquake, tsunami, and power-plant crisis in March 2011. But exports require multibillion-dollar investments in facilities for liquefaction of gas and in the ports through which liquefied natural gas (LNG) can be shipped. Exxon Mobil Corporation, the largest producer of natural gas in the United States, has taken steps to form a $10-billion partnership for LNG exports. If this and other investments proceed, and the prices realized for LNG are high enough to justify further shale-gas drilling, the U.S. economy could benefit from significant energy exports—and the importing countries might also realize environmental benefits. China, where coal is the principal fuel source, could profit in particular: a cleaner source of energy would mean less local pollution from coal (including emissions of particulates, sulfur, mercury, etc.). And the global environment would benefit overall from a reduction in—or lessened growth of—CO2 emissions. (China became the leading source of such emissions in 2006.)
To date, then, we can say conclusively that a shift to natural gas from coal has changed the U.S. energy system in ways that yield economic and environmental gains. But there are serious environmental challenges associated with freeing that gas from the shale and distributing it to consumers.
A Fracking Primer