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Frackonomics


Nick Flores[1] is an economist who knows the oil-and-gas industry from the inside, having been in the merchant marines hauling platforms and rigs to sundry locations in the Gulf.  Industry exposure didn’t end there; he was in grad school six months after the Exxon Valdez sullied the Arctic shore and studied first-hand the economics of accidents.  He was not dismayed.  In his words, “Shale gas is a revolution.  It has transformed energy in America.  What we’re seeing now is but the tip of the iceberg.”  He didn’t say from which dwindling sheet it might have been calved.

Eliding Externalities

Yet Flores is not utterly enchanted by the industry.  There is what he terms a problem of externalities, meaning that the full cost of the venture is not appreciated when such “routine” risks as methane leaks and pollution of ground or surface water, and “high-priority” risks such as cement, drill-casing, and wastewater-impoundment failures, are not factored into the economic analysis.  Such externalities are often expensive and not easily addressed, and should be internalized to reflect real costs.

Having lived in San Francisco, which receives water from the Hetch Hetchy water system, a system so pristine it is one of the few for which the Environmental Protection Agency requires no filtration, Flores comprehends the preciousness of pure water.  He wonders what will happen if in our zeal to poke the earth we should inadvertently pollute a major aquifer such as the Ogallala, which underlies eight states and once contained water equal in quantity to Lake Huron.  (It too is dwindling.)  If such an integral resource should be fouled by whatever means, what then?    Part of the damage hits the pocketbook.    In heavily fracked Washington County, Pennsylvania, property values have declined almost 25 percent in places overlying aquifers through which drillers cement their casings.  Is it “right” that property values have declined, or is it just perception?  The answer is unimportant; all that matters is perception’s effect on the market.

Flores notes EPA’s limp-wristed governance of greenhouse gases.  Methane, the major component of natural gas, is utterly ignored.  (Oh, there are voluntary programs.)  EPA may have downsized its prior estimate of how much methane leaks from fracking wells, but that puts it at odds with NOAA‘s recent study.  Who is right?  In any case, geologists and EPA agree that, compared to conventional drilling, hydraulic fracturing leaks more methane.  Fracking fluid is injected and then pumped out (or a percentage is), but it returns laden with natural gas and other disinterred volatile chemicals that if released foul the air around drill sites.   An estimated 90 percent of this “burping” can be captured in a “green-completion” process that caps the well and separates the petrochemicals for later sale.   Even though this is of economic benefit of drillers, however, it is by no means always done; old fields may lack technology while new fields may have neither pipelines nor storage facilities built, and meanwhile methane seeps away.   As you may know, methane in the atmosphere is a serious contender in atmospheric warming.   Atmospheric methane gradually converts to carbon dioxide so it is over the short term that it does its damage.   In its first 20 years, methane’s ability to capture heat in the atmosphere dwarfs that of carbon dioxide 70 times over.

Much like spent rods from nuclear plants and almost as dangerous, wastewater is a facet of fracking often overlooked and underfunded.  Current options include dumping it into often-open holding pools, forcing it into injection wells, or recycling.  Dumping it anywhere presents obvious problems including, with injection wells, persuasive evidence of earthquakes.  Recycling would be great, but it’s not easy to clean water laced with not only heavy metals and radionuclides but dissolved salts, which require reverse osmosis or other exotic means to treat.  (If desalinating salt water were easy, the world would have no freshwater problem, at least not yet.)

Options for dealing with wastewater are under creative review.  Why not ship it away?  (What do you mean there is no away?)  Last March the Coast Guard “quietly” sent to the White House a proposal to put fracking wastewater on barges, said to be safer for transport than trucks and trains.  The toxic brew will be shipped to someone else’s back yard for disposal.  Yucca Mountain anyone?  Frio County, Texas, which is not among the state’s top gas producers but that nevertheless has more disposal wells than the three top gas-producing counties combined, is evaluating a penny-a-barrel fee on disposed wastewater.  The compensation is expected to bring the county over a million dollars a year, which would feed a fund to combat environmental damage.

We have such faith in compensation.  While it comforts the aggrieved and pains the aggressor, that’s often as far as it goes.  And the aggressor’s pain may be tiny indeed.  Caps on damages provide a well-trod path for industry to escape real consequence for their sins.  (Caps can zap citizens on the other cheek when they limit damages for civil suits.)  In the end, let us not forget that no amount of compensation will restore what is irreplaceable.

Subterranean Aquifer Blues

Although groundwater property rights vary widely by state, they generally emphasize water quantity over contamination.  Some landowners may use as much groundwater as they wish without regard for impacts anywhere else.  This is called the Absolute Dominion Rule, and it is codified in 11 states, including Texas.  “Use” in this case would include, I suppose, the right to pollute the groundwater.  Colorado and other western states have adopted a doctrine of Prior Appropriation–the first landowner to “beneficially” use or divert water from underground is given priority over later users.  Now many states have updated this doctrine with a permit system.  Available permits are in hot pursuit; you can guess by whom.

When your well-water starts fizzing, fingering the culprit isn’t easy.  Contaminants act differently underground, like senators behind doors.  How do you prove who polluted the water, and when, and how?  Equally important, what is to be done?   EPA says that much progress on cleaning polluted aquifers has been made.  Wells can shlep contaminated water to the surface for treatment.  This intensive technology works if contaminants contain neither solvents nor oil and so long as the contamination has not spread.  Since fracking fluid and wastewater are excluded and aquifers tend not to be contained, EPA’s assertion seems delusional.

Market Memes

Small producers lose their shirts in these times of low gas prices, so one might wonder why they keep drilling.  Two reasons.  Leases may mandate that lessees use their drilling rights or lose them.  And prices may be low now, but just wait.  Prices for natural gas in other areas–Japan, Europe–are much higher.  It costs to convert gas to liquefied natural gas for long-distance transport, but producers have their eyes on the prize and preparations are being made.  US prices will then rise; it won’t go the other way around.

It wasn’t so long ago that energy prices were rising in the face of looming energy scarcity.  Very quickly shale-gas production has reversed that.  In the first decade of this century, US gas production went from almost none to more than 10 billion cubic feet per day.  In 2012, shale gas was 50 percent of the gas market; by 2035, Flores says, the percentage should swell to three-quarters.  If oil imports diminish and “petro dollars” remain in the US, the dollar should be fortified and economic growth fueled by this bonanza.  That is, to the extent that the bonanza remains both at low prices and here.  And to the extent that climate change does not rudely intervene.

Natural gas may burn cleanly but it remains a fossil fuel.  Our dependence on fossil fuels is irrevocably changing our world while we tend to our piquant concerns.  Even if less is escaping at wellheads, incalculable amounts of methane now erupt from thawing Arctic tundra and waters.  Will depleting a new fossil fuel will be our salvation?

via OpEdNews – Article: Frackonomics.

via OpEdNews – Article: Frackonomics.

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