Thursday, January 19, 2012

Keystone XL, Fracking, and the Price of Natural Gas

Last year, New York placed a moratorium on hydro fracturing in the New York portion of the Marcellus Shale while it assessed the effects of fracking. New York Department of Environmental Conservation’s draft environmental impact statement (EIS) on drilling was released almost four months ago and recommended that drilling be permitted, but with conditions. The comment period was scheduled to end on December 12, 2011, but was extended to January 11, 2012 and closed after having received more than 20,000 comments. In their press release at the close of the comment period the New York Department of Environmental Conservation stated: “Public input is an important part of establishing responsible conditions for high-volume hydraulic fracturing as well as determining whether it can be done safely. Many significant improvements were made to the 2009 draft based on comments DEC received. We expect additional improvements will be made to the 2011 draft based on the comments submitted during this comment period." The pressure is off on immediately ending the ban on hydro fracking in New York because the price of natural gas has hit a two year low, but the ban will be lifted. There is really no way to permanently prevent drilling to access the shale gas. Sooner or later it will be done, hopefully in a safe and environmentally sensitive manner.

The race to lock up leases on shale gas and a mild winter (so far) in significant parts of the United States has resulted in an oversupply of natural gas. Despite the fall in natural gas prices fracking will continue, not because it is profitable at this price, but because drilling leases and agreements made when gas prices were higher required drilling within a certain period of time. If a company fails to drill they will lose the lease and the money paid for those leases. So, for the next two years or so, no matter the price of natural gas, they will drill where permits are available. In addition, natural gas is often a by-product of much more profitable oil drilling. With oil prices topping $100 a barrel, oil companies in Texas continue to produce natural gas. In Texas where gas is often a by-product of oil production about 40 billion cubic feet of natural gas is flared off each year for the past several years as drilling has expanded. Texas requires oil wells to hook up to gas pipelines eventually which will increase the supply of available natural gas as the hookups catch up with production.

The high oil prices driving the Texas tight oil boom are also making the crude bitumen contained in the Canadian oil sands highly profitable. The current price of oil combined with threats from Iran to close the Strait of Hormuz and block oil shipments from the Middle East have made the oil sands even more attractive. A provision that was attached to the recent payroll tax bill signed by President Obama requires a decision by February 21st 2012 on the construction of the controversial Keystone XL pipeline from Canada to the U.S. The proposed Keystone XL, is an approximate 1,660 mile, 36 inch crude oil pipeline that would begin in Alberta and extend southeast through Saskatchewan, Montana, South Dakota and Nebraska continuing through Oklahoma to an existing terminal not far from Port Arthur, Texas. The oil would arrive at the Texas refineries and ports for American market and export. The U.S. State Department is the lead handling the issue because the pipeline crosses national boundaries, but President Obama has made it clear would make the final decision on whether to approve the pipeline, and the recent tax bill has forced a decision the issue that had been delayed until 2013.

As expected the State Department declined the Keystone XL Pipeline that would have provided a guaranteed oil supply from Canada. The project's critics argue that the mining and refining of oil sands would increase greenhouse gas emissions, pollute water and destroy the Canadian forests. Many Nebraska residents also opposed the Keystone XL pipeline because it originally would have crossed the Ogallala aquifer, the main source of drinking water in the upper Midwest. The administration decided in November to require bypassing the aquifer, but the increased carbon dioxide load associated with tapping the oil sands is a problem to the administration. Proponents of the project worry about lost jobs and energy security and that rejecting the Keystone XL project will push the Canadians to build the 730 mile Enbridge pipeline to a new port in British Columbia and ship the oil to China. However, building a pipeline through British Columbia's northern wilderness faces British Columbia environmental regulations, the stronghold of Canadian environmental regulations, and that project is also experiencing resistance from an existing decades-old moratorium on oil tanker traffic on the British Columbia coastline. The rejection is about the carbon content of the fuel.

Like all petroleum production, oil sands operations can adversely impact the environment. In the past open pit mining of oil sands projects have impacted the land when trees, brush and overburden have been removed for the mining site. As a condition of licensing, projects are required to implement a reclamation plan, but reclamation is a slow process. In addition, large amounts of water are used for oil sands operations for the steam in the current method of extraction. Despite recycling, most of the water ends up in tailings ponds, but newer treatment methods have reduced the treatment and recovery time for tailing ponds as environmental regulations evolve with advances in technology in both oil sand extraction and refining techniques that have allowed the profitable extraction of this oil. These advances and rising oil prices have altered the economics and have made the extraction of oil sand possible and inevitable. Still the energy required to heat the oil sands so that they will flow results in increase the carbon footprint for each barrel of oil. The politics of energy security are not consistent with the overall goal of reduction of greenhouse gas emissions since the extraction and refining of oil sands reportedly produce more greenhouse gases than the extraction and refining of Iranian oil. The President has pledged to reduce U.S greenhouse gas emissions to 17% below the 2005 levels by 2020 and all regulatory and policy decisions have been consistent with that goal. The United States thirst for oil is not going to abate and the Middle East is becoming increasingly unstable. Given his consistent record in reducing greenhouse gas, it is likely the administration will choose the geopolitical risk over the environmental risk of oil with a higher carbon footprint.

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