The Natural Gas Revolution
August 15, 2011Less than a decade ago, the United States appeared to be running out of natural gas. It looked like those who had been predicting calamity from the depletion of scarce fossil fuels would prove to be correct this time. In 2004, energy industry veteran Matt Simmons gravely warned that “the United States faces a serious natural gas crisis that could have a devastating impact on the national economy.” U.S. government officials traveled around the country to talk about how potential natural gas shortages might impact individuals and businesses. Exxon Mobil’s CEO told reporters at a 2004 Energy Summit, “[Natural] Gas production has peaked in North America.” Soaring natural gas prices hit consumers and businesses hard.
Now, just a few years later, instead of facing a serious natural gas crisis, it appears the United States has a 100 year supply of natural gas. Consumers and businesses are benefiting from significantly lower natural gas prices. What caused this dramatic turnaround in natural gas? Could this happen with other energy sources such as oil? This is a classic American success story of an entrepreneur who persisted when others said it couldn’t be done. In solving a problem, he revolutionized the natural gas industry and dramatically improved the U.S. energy outlook.
Entrepreneur’s Persistence Finally Pays Off
George Mitchell started a small oil and gas producing company in the 1940s. After 40 years of successfully drilling natural gas wells in Northern Texas, his company started to deplete their conventional reserves
in the early 1980s. Mitchell sought a new source of natural gas from shale, a dense sedimentary rock that was in huge supply in the Barnett Shale formation near Dallas and Fort Worth. Although the shale rock contained natural gas, its thick, impermeable nature prevented the gas from freely flowing and being recovered economically. His company engineers told him it was a waste of time and money to try to extract natural gas from shale. The industry consensus was that it was impossible. But George Mitchell stubbornly persisted. Over the years Mitchell’s engineers experimented with countless different options trying to find a way to economically recover the gas. Finally, after 17 years of experimenting, his determination paid off.
Mitchell’s breakthrough was to use a specialized type of hydraulic fracturing (fracking), a technique that pumps water, sand and chemicals under high pressure into the well to open small cracks in the shale rock. This unleashes the trapped natural gas at an economically feasible cost. After Mitchell’s company merged with another independent energy producer specializing in horizontal drilling, their production of natural gas in the Barnett Shale formation soared by combining the two techniques. Other energy producers took notice and began to use and refine these techniques at other shale formations. Shale gas, which had made up only about 1 percent of natural gas production in the United States in 2000, has grown dramatically to about 25 percent of U.S. production today. As a result, natural gas prices today are about half of what they were just three years ago [see Chart 1].
The potential natural gas that can be recovered from shale is enormous, as there are significant shale formations across the country and around the world. After declining from 1970 to 2000, natural gas reserves in the United States have skyrocketed [see Chart 2]. According to Daniel Yergin, the former chairman of Cambridge Energy Associates, “George Mitchell’s breakthrough in the Barnett Shale has opened the door to a potentially profound change in the global energy equation.”
Natural gas currently makes up about a quarter of America’s total energy demand. Shale gas is an abundant new source of cheap, low emission, energy produced in America. The Wall Street Journal reported an estimated 72,000 new jobs were created in Pennsylvania alone over the last year and a half as a result of shale gas. Th at is great news in a tough economy, especially in light of concerns about energy sources because of unrest in the Middle East and the nuclear tragedy in Japan. The rapid expansion of shale gas has not been without controversy as it has raised concerns over regulation and the potential for water pollution. These concerns need to be addressed and the industry should be sensibly regulated. It is important that politicians don’t strangle this promising new energy source with onerous taxes and regulations.
Conclusion
Mitchell’s persistence resulted in an abundant supply of cheap domestic shale gas, which should help to lower energy costs for years to come. It also shows the fallacy of the scarcity extremists who continually predict catastrophe from the depletion of energy resources. Oil and natural gas are fi nite and we should do everything we can to conserve, use wisely and develop alternative energy sources. Much of the easy, conventional oil and natural gas reserves are being depleted. However, as the story of George Mitchell shows, human ingenuity and technological developments can dramatically change the supply and demand equation for energy and other commodities. Just look at the case of oil and natural gas over the last 30 years. Despite all of the oil and natural gas that has been consumed around the world over the last three decades, global oil and natural gas reserves are higher today than they have ever been—more than double what they were in 1980.1 And that doesn’t even include unconventional oil sources such as the Canadian oil sands, oil shale and heavy oil. Unconventional oil sources are believed to be several times larger than conventional sources,2 although the majority of these cannot be economically recovered using existing technology today. The good news is that entrepreneurs like George Mitchell are continuing to work on new technologies to help us consume less oil and to tap into new sources of energy. One day they will succeed.
1 BP Statistical Review of World Energy, June 2011.
2 World Energy Outlook 2010.
