Good for Exxon Does Not Mean Good for American People

The oil and gas industry public relations organizations are spinning up in response to the New York Times pieces on the long term viability of natural gas produced by hydraulic fracturing. Several commentaries appeared yesterday that are worth discussing.

The ExxonMobil Perspectives blog published a lengthy response titled The New York Times and natural gas: Don’t facts matter any more? that starts off with a whine:

You really have to wonder why the New York Times is campaigning against cleaner-burning, domestically produced natural gas.

Translation: Why is the NY Times out to get us? We are just trying to produce energy here in the United States.

Pay attention. It gets more interesting:

What does the Times have against an industry that supports more than 2.8 million American jobs and contributes $385 billion annually to the U.S. economy? In Pennsylvania alone, more than 48,000 jobs were created in 2010 because of the development of the Marcellus Shale resources there. U.S. natural gas production in 2010 was at its highest level since 1973 thanks to industry breakthroughs in shale gas production – facts which the Times fails to mention.

Forgive me for being cynical, but does this statement mean that the natural gas industry was even better for America when it was capturing two or three times as much money each year in 2008, when prices touched $14.00 per million BTU? Did the natural gas industry contribute more to the US economy when its excessively profitable prices drove chemical manufacturersfertilizer producers and other energy intensive industries off shore, seeking lower cost alternatives?

It is also amusing to note that ExxonMobil is bragging about the fact that natural gas production in 2010 reached 1973 levels for the first time in almost 40 years. (I started high school in 1973, but I am now a grandfather.) By way of comparison, nuclear electricity generation in the US in 2010 was 807 billion kilowatt hours, the highest level ever. In 1973, the total nuclear generation in the US was just 83.4 billion kilowatt hours. Nuclear energy, despite concerned opposition, has increased its production by a factor of 9.7 (nearly a full order of magnitude) in the same time that US natural gas production has been less than flat.

There is more to the ExxonMobil blog post that should encourage critical thinkers to pause. I am personally wondering if now is a good time to buy into the stock of companies like Exxon, Chevron, Shell, and perhaps even ConocoPhillips that have large, conventional resources of natural gas that are not dependent on hydraulic fracturing. Here is what Ken Cohen said on Exxon’s blog post:

If the writer had bothered to call us, we would have told him that ExxonMobil’s investment approach is disciplined and based on a long-term view of global market conditions. We invest through market cycles and are not driven to hasty decisions because of day-to-day commodity market volatility. It was this long-term vision that led to the acquisition of XTO and subsequent shale gas ventures.

There are a number of posts here on Atomic Insights that attempt to explain why a company like Exxon might be spending a portion of its capital budget to buy a drilling company that is only marginally profitable. (See the related items below.) In the last quarter of 2010, for example, the XTO business units of Exxon provided just $35 million in net income. Exxon invested $41 billion in that purchase, so the annualized rate of return on investment was an anemic 0.35%. However, as Exxon’s blogger honestly stated, he works for a patient company that has a long term vision. That XTO purchase will be far more profitable when demand exceeds supply and natural gas prices inevitably climb to a level that is profitable for Exxon but painful for its customers.

Another arm of the multinational oil and gas industry’s press relations corps works at the Council on Foreign Relations. (I know that some will resist that characterization of the CFR, but a hard look at the history of the organization will reveal how it was formed by people interested in multinational trade in oil and gas and how it continues to remain focused on the geopolitics/economics that is largely defined by the oil and gas trade around the world.)

CFR’s Michael Levy published a response piece titled Is Shale Gas a Ponzi Scheme?

For the record, I do not believe that shale gas is a Ponzi scheme. I believe it is a loss leader designed to encourage further fossil fuel addiction. It is doing that by discouraging the near term construction of new nuclear power plants that can take away some of the gas industry’s market share and profitability. I can read the numbers and agree that there is a lot of gas in shale. It is not enough, though, to make a serious impact on useful energy supplies for much more than a few decades. I also do not believe that very much of the gas is accessible at the low prices that the gas industry is promising – but not contractually – to electric utility companies.

Levy admits as much, but in words whose meaning is not quite as easy to parse.

The first bit of context worth noting is that the story relies heavily on geologists’ concerns about shale gas economics. That should be a red flag. There are very few emails from industry accountants or economists in the story. The geologists’ critiques follow an irritating pattern: most of them basically say that projected levels of gas production are implausible at current natural gas prices. This, of course, is beside the point: no one serious think (sic) that today’s gas prices are going to hold forever. (If this technique sounds familiar, that’s because it is: it’s the way that some of the more simplistic arguments for peak oil operate.) The question is whether production can continue at large volumes at reasonable prices. I don’t see anything in the emails that argues against that.

What Levy does not admit is that electric utility companies have been lulled into believing that today’s low prices are sustainable. That belief has been reinforced by statements like those of Secretary of Energy Steven Chu, who I personally heard tell a group of senior power company decision makers that his agency expected gas prices to remain near their current levels for the next 20 years.

By their definition and economic models that make gas seem like the right choice, today’s prices are the standard by which power company decision makers judge the word “reasonable”. If the gas industry needs substantially higher prices in order to profitably extract gas from tight shale formations that require the encouragement of vast quantities of high pressure water and secret chemical concoctions, then perhaps the shale gas revolution really is not such a “game changer” after all.

Do we have a world of four dollar gas in our future? Or will prices rise to six or seven or eight dollars in a few years, once acreage is consolidated under bigger players who can finance lease costs through their balance sheets and hence might have less incentive to pump out ever more gas in the short term? These questions matter: they have important implications for natural gas policy, climate policy, and for decisions regarding natural gas exports.

Though Levi does not use the word “nuclear” at all in his post, the important issue that utility decision makers (and their public utility commissions for those utilities that are still under rate regulation) need to address is whether or not the potential for substantially higher natural gas prices means that they should be hedging their bets by investing in a more balanced generation portfolio.

If the electric company herd mentality results in a continuing dash for gas, future prices are almost guaranteed to be much higher than they are today. Wind and solar provide no hedge against higher gas prices – both of those unreliable sources increase the industry’s already growing dependence on a vapor that has demonstrated time and again that its economics are as volatile as its physical form.


June 28, 2011 by Rod Adams

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