Category Archives: Energy

Early Rhinestreet Shale Completions

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In an earlier post I described some examples of Marcellus wells drilled in Pennsylvania during the early 1980s, and speculated that these wells may be liable for impact fees under Act 13.

In particular, the language of Act 13, CHAPTER 23 § 2302, is quite unambiguous. Regardless of when spudding occurs, an impact fee is to be imposed on every producer of unconventional gas wells, which the Act defines as wells targeting “a geological shale formation existing below the base of the Elk Sandstone or its geologic equivalent stratigraphic interval…”

Considering the potential magnitude of the impact fees related to such “legacy” unconventional wells, yesterday I inquired about this issue with a Deputy Counsel at the Pennsylvania Public Utility Commission. He concurred with my interpretation of Act 13 — any wells targeting shale formations stratigraphically below the Elk Sandstone are liable for impact fees, regardless of when they were drilled — and indicated he would bring the matter to the attention of the Commission at its next meeting.

The Marcellus is not the only unconventional shale formation that oil and gas companies have targeted in Pennsylvania. The Rhinestreet shale is also stratigraphically below the base of the Elk Sandstone. An early example of such a well is the L. B. Southwick No. 1 well. This well was part of a larger project funded by the Department of Energy and the Morgantown Energy Technology Center, and contracted to BDM Corporation. Located in Rome Township, Crawford County, Pennsylvania, the Southwick No. 1 well was drilled in July 1985 by the Wainoco Oil and Gas Company, and the Rhinestreet interval was stimulated in February 1986. During this same time period, Wainoco drilled at least 105 other wells to the Rhinestreet Formation, though how many of these wells may have specifically targeted shales below the Elk Sandstone is not discussed.

Note: Wainoco Oil and Gas Company was incorporated in 1949, and changed its name to Frontier Oil Corporation in 1998. In 2011, Holly Corporation and Frontier Oil Corporation completed a merger of equals, at which point the combined company was renamed HollyFrontier Corporation (NYSE: HFC).

Some Early Marcellus Completions

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As part of my ongoing research into hydraulic fracturing I have been reading about the history of oil and gas exploration and development in Pennsylvania.

Recently, I encountered this interesting tidbit in Douglas Patchen, et al., Oil and Gas Developments in Mid-Eastern States in 1983, AAPG Bulletin, October 1984, 68: 1383-1399:

Upper and Middle Devonian black shale activity picked up at a near furious pace in 1983, with 85 wells reported during the year. These wells are primarily domestic wells, less than 1,500 ft deep, and drilled within 5 mi of the Lake Erie shoreline in Erie County. Most wells produce from the Upper Devonian Huron and Rhinestreet shales, but a few were drilled to and produced from the Middle Devonian Marcellus formation as well. Four new-pool discoveries, including 3 in the Ohio Shale of Erie County and 1 in the Marcellus Formation of Washington County, were reported in 1983. The Washington County discovery, Garrett Hill pool in Buffalo field, was not a large one. The discovery well, Gary Schodorf 1 Anna Johnson, was originally drilled to the Huntersville Chert, but was unresponsive to stimulation. After restimulation in the Marcellus, the well flowed only 15 MCFGD, but was put on line. Two other Marcellus wells drilled in the vicinty provided somewhat larger open flows, but the potential for economical Marcellus production does not appear to be encouraging.

Two questions immediately come to mind: First, are these wells also subject to the recent unconventional well impact fee? As I understand Act 13 of 2012, these and any similar wells may in fact be subject to the impact fee, even though they were drilled nearly 30 years ago.

CHAPTER 23 § 2302.  Unconventional gas well fee. (b)  Components.–The fee adopted under subsection (a), (a.1) or (a.4) is imposed on every producer and shall apply to unconventional gas wells spud in this Commonwealth regardless of when spudding occurred. Unconventional gas wells spud before the fee is imposed shall be considered to be spud in the calendar year prior to the imposition of the fee for purposes of determining the fee under this subsection.

The language above seems quite unambiguous, regardless of when spudding occurred, an impact fee is to be imposed on every producer of unconventional gas wells, which Act 13 defines as wells targeting “a geological shale formation existing below the base of the Elk Sandstone or its geologic equivalent stratigraphic interval where natural gas generally cannot be produced at economic flow rates or in economic volumes except by vertical or horizontal well bores stimulated by hydraulic fracture treatments or by using multilateral well bores or other techniques to expose more of the formation to the well bore.”

Second, in that case, just how many wells have met these criteria over time? Given the many known data quality problems with the Pennsylvania Department of Environmental Protection’s information technology systems, this is a non-trivial question. However, there is ample evidence to suggest that a significant number of previously completed wells meet the definition of an unconventional well stipulated by Act 13. For instance, according to a recent report, more than 275,000 wells have been drilled within the area of the Marcellus formation, though just how many of them penetrated the Marcellus is not known. However, at least 16,894 wells had log curve data sufficient to map the area and thickness of the Marcellus. The number of these wells located in Pennsylvania was not reported, but appears to be significant.

In short, it appears that the wells drilled in 1983 (and presumably others before and after this date) meet the criteria specified by Act 13 and should therefore be liable for the unconventional well impact fee. Moreover, even a cursory inspection of the issue suggests that the number of past wells subject to the fee may potentially number in the thousands.

Of Markets, Regulated and Deregulated

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I’ve been studying the history of nuclear power for some time now. With that in mind, I found Fortune’s November story on “Southern’s Big Nuke Bet,” in which Geoff Colvin interviewed Tom Fanning, CEO of Southern Company, to be quite interesting. In the article, Fanning responds to the following question from Colvin:

[Geoff Colvin:] A couple of other utilities have decided to get out of nuclear. Constellation got out of plant development earlier this year, and NRG pulled out of its nuclear project in Texas. Is this just a case of differing business judgments, or is there something else?

[Tom Fanning:] It goes back to scale, credit quality, and credibility. When you think about the challenges that a small company will face building a $14 billion deal, that gets rather daunting.

The U.S. really is divided into two electricity markets. Some years ago many states deregulated, and they have what’s called merchant markets, where the price for electricity is largely set a day ahead or week ahead or month ahead. Remember this is going to take 10 years to build, and it’s going to be the largest capital asset in your portfolio, and you’re going to need to run it 30 to 50 years to earn that money back. Putting that magnitude of capital in a deregulated merchant market is exceedingly risky. Thankfully, Georgia Power operates in a vertically integrated regulated market where legislation and regulation are stable and constructive and will support this over time.

In other words, the major reason Southern Power is able to undertake the construction of a new nuclear power plant is because it operates in what looks a lot like a planned market. This is a point that some in the U.S. seem to ignore. For instance, in an article for the Heritage Foundation, Jack Spencer claimed that federal loan guarantees were not essential to the continued development of nuclear power in the United States, but that instead, free markets could be counted on to intervene in the government’s place.

But rather than being driven by “market” forces, history reveals time and again that the construction of nuclear power plants depends almost exclusively on state intervention. For instance, in recent years, EDF, Rosatom and China have been three of the most active developers of nuclear power projects worldwide. All are essentially state entities. As of January 2010, the French government owned 84.48% of EDF. While Rosatom and the Chinese nuclear industry are entirely owned by their respective governments.

Meanwhile, in the US, the nuclear “renaissance” is now essentially limited to Southern Company’s planned Waynesboro, GA facility. Of the other approximately two dozen applications submitted over the past few years, none are being actively being pursued at this time. By comparison, not only has Southern Company received $8.2 billion in loan guarantees from the federal government, as the interview above makes plain, the economic viability of the project additionally hinges on the fact that Georgia remains a regulated energy market, meaning that the ultimate costs of the project (whether the currently projected $14 billion, or more) will ultimately be borne by Georgia electricity ratepayers. This effectively offers the company a state-level guarantee on top of its federal loan guarantee.

In short, the preponderance of the evidence from both the US and the rest of the world suggests that heavy governmental subsidies, loan guarantees and/or liability exemptions — either explicitly or de facto — are essential to the development of nuclear power. By comparison, all of the literature I have read on the topic suggests that the market has yet to build a single nuclear plant.

Natural Gas and the State of the Union

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In his latest State of the Union address, President Obama announced that:

We have a supply of natural gas that can last America nearly 100 years… The development of natural gas will create jobs and power trucks and factories that are cleaner and cheaper, proving that we don’t have to choose between our environment and our economy. And, by the way, it was public research dollars — over the course of 30 years — that helped develop the technologies to extract all this natural gas out of shale rock, reminding us that government support is critical in helping businesses get new energy ideas off the ground… Our experience with shale gas, our experience with natural gas, shows us that the payoffs on these public investments don’t always come right away. Some technologies don’t pan out; some companies fail. But I will not walk away from the promise of clean energy.

In addition to upsetting those concerned about the dangers of hydraulic fracturing, this part of his speech has also provoked criticism for “exaggerating” the role of the federal government in fostering the emergence of the natural gas boom.

For instance, a US News and World Report article entitled “Obama Exaggerates Role of Federal Government in Natural Gas Boom“ by Daniel Kish, senior vice president for policy at the Institute for Energy Research, asserts:

The president’s claim that the federal government helped create the hydraulic fracturing boom is specious at best.

However, even a cursory look at the historical record reveals that the government’s role in oil and gas technologies generally and hydraulic fracturing related technologies specifically is far more involved and complex than acknowledged by Kish’s article. For instance, despite his claims to the contrary, the government played an important role at many points in the last 30 years, including in the case of Mitchell Energy. According to one recent article:

Mitchell Energy’s first horizontal well was subsidized by the federal government, according to former geologist and Vice President for Mitchell. “They did a hell of a lot of work,” said Steward, “and I can’t give them enough credit for that. DOE started it, and other people took the ball and ran with it. You cannot diminish DOE’s involvement.”

Rather than an isolated example, this vignette is indicative of the substantial role played by the government in a variety of oil and gas technologies, many related to hydraulic fracturing as it is now practiced. For instance, during the 1970s the Department of Energy invested more than $92 million in research related to the extraction of natural gas from shale reservoirs.

This is not to say that private organizations have not played an important role as well. My point is not to declare a winner between government agencies and private industry, but simply to note that any thoughtful consideration of the record will show that both private organizations and government agencies were significantly involved in the process over a large period of time. In actor-network terms, innovation implicates heterogeneous social and material actors, and is likely to result in hybrid forms of organizing. As a result, framing the problem up as either private innovation or government support are likely to be dead on arrival as a practical matter.

Further, on top of its direct involvement in technology research (such as through the Department of Energy), a reasonable accounting of the government’s role would also consider the role of tax incentives (without which operators such as Mitchell would have been unlikely to have drilled wells), the role of favorable regulations such as the Energy Policy Act of 2005 (without which operators would not be exempt from the liabilities of hydraulic fracturing), and the important role played by agencies such as the EIA and USGS in quantifying available reserves (without which operators would have difficulty raising the capital necessary for drilling).

In short, consistent with President Obama’s claims, and contrary to the assertions of US News and World Report, it is difficult to conceive of the oil and gas industry as we now know it without significant support and involvement by the US government.

Recycled Wastewater

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Hydraulic fracturing consumes million of gallons per well. Recently, much has been made of the recycling of the “produced water” (aka, toxic waste). Turns out, far less wastewater is being recycled than originally reported.

From 57% to 17% recycled

From 57% to 17% recycled

Hydraulic Fracturing and Marcellus Shale

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Yesterday, hydraulic fracturing and Marcellus shale were front page news — both locally and nationally.

The top story in the Centre Daily Times was “Forest Leases Under Fire.” Already, the Commonwealth of Pennsylvania has issued leases to gas companies for nearly half of its 1.5 million acres of state forest. At issue are concerns that current Governor Tom Corbett will over turn a moratorium enacted by outgoing Governor Ed Rendell. According to a study by the Department of Conservation and Natural Resources (DCNR) there remain ”zero state forest land acres suitable for gas leasing involving surface disturbance.”

In an interesting twist, the article reported that further development would threaten the sustainability certification of Pennsylvania’s forests. In particular, the Forest Stewardship Council (FSC) has certified that the Commonwealth’s state forest operations are sustainable, based on factors including a 2 percent rate of conversion of forests over any five-year span. However, even without further leasing, several state forests are projected to lose more than 2% of their acreage to conversion by 2020, jeopardizing their certification. Some 35 wood-industry related companies have attained FSC certification for adopting sustainable practices in Pennsylvania, which they use as a selling point for their products. They stand to forfeit their certification if their harvests come from forests deemed to be losing acreage unsustainably. An expansion of drilling in state forests — as Corbett has suggested — would exacerbate the problem.

In another front page story, the New York Times continued its Drilling Down series which examines the risks of natural-gas drilling and efforts to regulate this rapidly growing industry. The latest installment announced “Wastewater Recycling No Cure-All in Gas Process.” Lately, the oil and gas industry has been touting innovations in wastewater recycling. But apparently the rhetoric and reality don’t match up. In Pennsylvania, for example, natural gas companies recycled less than half of the wastewater they produced during the 18 months that ended in December, according to state records.

According to Brent Halldorson, chief operating officer of Aqua-Pure/Fountain Quail Water Management, a drilling wastewater recycling company: “No one wants to admit it, but at some point, even with reuse of this water, you have to confront the disposal question.” He added that the wastewater contains barium, strontium and radioactive elements that need to be removed.

Data posted by the commonwealth on Tuesday, show that operators produced more than 680 million gallons of wastewater in the year and a half that ended in December 2010. Of this amount, well operators reported recycling at least 320 million gallons. At least 260 million gallons of wastewater were sent to plants that discharge their treated waste into rivers. Another 50 million gallons or more of wastewater is unaccounted for, according to state records.

US Energy Flow

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While I’m on the subject of flow charts, I thought this visual from the Lawrence Livermore National Laboratory brings into relief the changes we are facing in terms of energy supply.

First, there is the sheer inefficiency of the overall system — of 105,000 petajoules (PJ) of energy consumed, some 57,943 PJ are wasted. Second, despite all the debate about nuclear, wind and solar, together they amount for very little of our energy supply. It is a world of coal, natural gas and oil. According to the analysis:

The national energy balance sheet reveals a number of pertinent facts. First, coal-fired power plants generate almost half of our electricity and are responsible for nearly 2 billion metric tons of greenhouse gas emissions per year—equivalent to the emissions of the entire transportation industry. Greenhouse gas emissions from coal, and to a lesser extent natural gas and oil, explain why the electric power industry is the single largest contributor to U.S. greenhouse gas emissions. Second, although there has been explosive growth in solar, wind and biomass power in recent years, renewable generation still provides a small amount of our generating capacity. Third, the current electricity system, from generation to end-user, wastes vast sums of energy; for example, a light bulb receives less than half of the energy contained in a piece of coal. Finally, the U.S. transportation sector is almost wholly reliant on oil, more than half of which is imported.

United State Energy Flow (Petajoules, 2007)
United State Energy Flow (Petajoules, 2007)