Posted by: bmeverett | October 2, 2012

More on Shale Gas


One of my very best recent graduates from the Fletcher School offers a thoughtful comment on my Cape Cod Times article on subsidized renewable energy. The comment is posted nearby on this site. Herewith my response:

Comment: Cheap is cheap, perhaps too cheap! For this reason all oil companies are moving away from drilling in shale gas formations to aim at tight oil and shale oil formations. You can see this trend in Baker Higes rig counts, the rigs used for shale gas are declining sharply. So I’m not too sure that the “gas revolution” will take place so rapidly with gas prices at $2/3 MMBTU.

Response: It is certainly true that rapidly falling natural gas prices have dimmed some of the enthusiasm for shale gas production. According to the Energy Information Administration, wellhead natural gas prices in the US peaked in October of 2005 at $10.33 per thousand cubic feet (MCF), equivalent to about $60 per barrel of crude oil. With the “shale gas revolution”, prices actually fell below $2.00 per MCF ($11-12 per barrel of crude oil equivalent) last spring. Since that time, prices have inched back over $2.50 per MCF. It is quite possible that we have not yet reached a new equilibrium and that prices will trend upward a bit more. In my personal view, it is most unlikely that prices will return to their 2005 levels.

Oil is mainly a transportation fuel. Natural gas, on the other hand, is used primarily for electric power, home heating and industry. The main growth in natural gas use has been for electric power, based on the highly efficient combined cycle power generation technology developed over the last 30 years. It costs about $1,050 to install one kilowatt (kW) of natural gas combined cycle (NGCC) generating capacity. Once in place, that power plant can run almost continuously except for short periods of maintenance. If the plant runs 90% of the time (a conservative estimate), every kW of capacity can generate 24 X 365 X 90% = 7,884 kilowatt-hours (kWh) of electricity. At today’s prices, the natural gas fuel costs about 2.3¢ per kWh. With maintenance, financing, fuel and capital costs, electricity from this plant would cost about 4¢ per kWh. By comparison, coal-generated electricity costs about 6.3¢ per kWh. For natural gas to break even with coal, natural gas prices would have to more than double from their present level.

Coal, however, involves substantial external costs, so let’s take it out of the equation for the moment. My Cape Cod Times piece was specifically directed at onshore wind and solar, so let’s see how they compare. It’s certainly true that wind turbines need no fuel, so there’s a savings there, but the rest of the economic news on wind power is bad. Onshore wind turbines cost $2,500 per kW – in fact significantly more for the type of small turbine being installed in ones and twos around Cape Cod. (It’s important to remember here that government subsidies – both explicit and implicit – hide this cost and spread it around but do not reduce it.) Unlike a NGCC power plant, which can run almost all the time, wind power is available only part of the time. The average generation for wind power in the US is only 2,450 kWh per year per kW of capacity – equivalent to operating at full capacity only 28% of the time.

Another way of looking at this problem is that it costs about 13½¢ to install enough NGCC generating capacity to produce 1 kWh per year. Wind power costs over $1. That high capital cost overwhelms the fuel savings.

Furthermore, unlike NGCC, which can generate power at any time of the day or night, wind power is available only when nature gives it to us. This drawback is significant in the power industry. With virtually no storage technology, electric power companies must generate power instantaneously to match demand. Remember that primitive man had lots of sources of heat, including the sun, volcanoes and forest fires. The ability to start campfires was important because people could have warmth when they wanted it.

Including capital costs, financing, the debit for interruptibility, and maintenance, onshore wind power costs about 9¢ per kWh compared to 4¢ for natural gas. Offshore wind turbines, such as the infamous Cape Wind project on Cape Cod, costs much more – around 20¢ per kWh.

Well, what about carbon dioxide emissions? NGCC, although clean, still emits CO2, while wind power does not. The economic cost of wind power is very high, however, and we would need carbon taxes of $100 per metric tonne to equalize the cost of onshore wind and NGCC – well above the $25-50 per mt level that even the most green politicians in the US and Europe have been willing to tolerate, believing with good reason that higher carbon taxes would be a severe impediment to economic growth. Equalizing NGCC and offshore wind would require a carbon tax of over $500 per mt.

Solar power is even more expensive. Solar cells cost around $5,000 per kW for an efficient, large-scale installation. Small-scale versions, such as the one being installed at the Cape Cod Community College, are even more expensive. Furthermore, availability is down around 15%. As noted above, NGCC capacity costs about 13½¢ per annual kWh and onshore wind about $1.00. Solar costs about $3.80. All in, solar energy costs about 35¢ per kWh, compared to 4¢ for NGCC and 9¢ for onshore wind. Equalizing costs between solar and NGCC would require a carbon tax of over $1,100 per mt – an economically disastrous level.

Comment: Clean? most certainly not. The use of water for fracking is massive. The use of chemicals and proppants is clearly not beneficial for the enviroment. A gas-fired plant is obviously cleaner than a coal fired one but the process of extracting shale gas is still far from being even remotely clean (everything can be improved of course).

Response: NGCC generating plants emit far less pollution than coal or oil-fired plants. By comparison, the old fuel oil plant on the Cape Cod Canal is an environmental nightmare. Wind and solar are a little better than NGCC, but the cost is prohibitive.

The environmental problems associated with producing shale gas through “fracking” have been much overstated. The movie “Gasland” received a great deal of attention by recounting the story of a Pennsylvania town where natural gas contaminated the local water supply. The iconic image of the movie was a local man setting fire to his tap water.

In almost all circumstances, drinking water is taken from aquifers that are no more than a few hundred feet below the surface. Shale gas formations, on the other hand, are usually several thousand feet underground. The driller’s job is therefore to seal the well carefully where it passes through the aquifer so no natural gas can contaminate the water. Fortunately, this task is easy using simple technology. A cement casing seals the well from the surrounding rock formations except where gas flows into the well. In the “Gasland” case, the operating company simply screwed up. This problem is analogous to airplane travel. Problems can occur if the operation is not done properly, but extremely safe when it is. Lots of bad things can happen to airplanes, but accidents are quite rare. As a result, the benefits of air travel outweigh the occasional problem, tragic though it may be.

Furthermore, it does indeed require a great deal of water to apply this production method, but this problem too can be easily managed. Waste water from fracking operations can be recycled, treated or injected deep underground into sealed rock formations. Most states have in place extensive water regulations that govern fracking.

The one missing part of this equation is a proper price for water. In Pennsylvania, for example, where shale gas activity has been extensive, a property owner is entitled to draw water from below the surface of his property in unlimited amounts without regard for its impact on neighbors. From an economic standpoint, this system is inefficient, since water does not carry a price and is likely to be overconsumed. A mechanism for pricing water would probably lead to more efficient use. This effect, however, is strictly secondary, and is unlikely to seriously impact the economics of fracking.

Thanks to Ferrante for his comments. More are always welcome!

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Responses

  1. Professor,

    I read your comments with great interest, and it is good to see that Ferrante is also still involved in the debate, even though I could not find his comments in full on your website.

    Concerning the environmental risks of fracking though, I would like to add two resources to the debate that shed light on the fact that we simply do not know enough to quantify the risks associated with it. It is quite clear that there are risks, and the Government Accountability Office takes a very holistic view of the fracking process, including how we deal with produced water, the gas that is at times vented or flared and the environmental impacts of the lorries etc etc. (http://www.gao.gov/assets/650/647791.pdf)

    The other is the Website ProPublica (great website, really!), revealing the differences in Fracking regulations across the country (especially loose in Texas) and how often the produced water is reinjected into the ground without much controls. While I agree with you that Fracking can be done safely, it is the responsibility of the companies (or – if they fail – the regulators) to dispose of the waste water properly. Pumping it into the ground without any further control does not seem the most reasonable thing to do to me, even though you might argue that it is highly unlikely that the geological formations will ever allow for the produced water to reach a water aquifer many thousand feet higher than the injection well. Quite frankly, if I lived in a community nearby, I would not like to take even the slightest risk.

    (http://www.propublica.org/series/injection-wells).

    Best regards from Texas
    Christian Schiller

  2. Professor,

    I would also like to add that your price data on installed wind and solar are at odds with the lates reports by the International Renewable Energy Agency (IRENA) from earlier this year. They estimate the price for installed solar (residential, polychrystalline PV) systems between 1020 to 1240 USD/KW, and for Wind at 2000 to 2200 USD/KW, resulting in levellized cost of electricity of 0.65 ct/KWh and 0.11 ct/KWh respectively. Mind you, the capacity factor for wind is very optimistic between 30 to 45%, but the studies do show that the latest investments and economies of scale are bringing the prices for these forms of RE down very drastically. China is again leading the way. I concur with you that the intermittency of RE will always require backup capacity for decades to come, for as long as we have not solved the storage issue. On the other hand, it is impressive to see how the costs of RE are coming down.

    Here are the studies, rather industry surveys really:
    Solar: http://www.irena.org/DocumentDownloads/Publications/RE_Technologies_Cost_Analysis-SOLAR_PV.pdf

    Wind: http://www.irena.org/DocumentDownloads/Publications/RE_Technologies_Cost_Analysis-WIND_POWER.pdf


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