Big Frackin’ Deal: The Money

Fracking Cleanup CostsThis is Part III of a three-part series. Go here for Part I and here for Part II.

It wasn’t that great a movie, but the one line, “Show Me The Money” has become part of our national conversation.

And now it’s “Show Us The Money” time for fracking. And here we find some surprises.

Talking about the money involved in the fracking equation takes us in three directions: the money it costs to do it, the money to be made from it, and the money it costs to clean up afterwards.

What fracking is not:

To be clear about the subject of fracking. Fracking does not exist to reduce our dependence on foreign oil. It does not exist to help our State Department so we won’t have to keep sending money to governments who don’t like us. It does not exist to keep jobs, which would otherwise be lost. F

racking exists to make the maximum amount of profit for the oil and gas companies. Period.

Consider: Jobs? Green Energy (wind, solar, tidal, geothermal) creates and sustains more jobs than oil or coal. A recent UC Berkeley report noted that, “Across a broad range of scenarios, the renewable energy sector generates more jobs per average megawatt of power installed, and per unit of energy produced, than the fossil fuel-based energy sector. “

Dependence on foreign oil? The United States produces enough oil and natural gas to export some, but we import far more.

Driving down the costs of energy? Oil and gas prices are dependent on world prices at the time of sale. No guarantees on price.

But first let’s look at the costs to get the oil. They vary, as you would expect. Drilling an oil/gas well in the New Mexico plains runs about $4 to $5 million dollars. An offshore well, depending on how deep it is, can run $500,000 a day.

And as we should all know by now, oil obtained from hydraulic fracturing and from Canada’s tar sands is very expensive oil, and will get more expensive. The reason, simply, is that the best spots have already been exploited. Everything from that point on costs more money.

The phenomenon of Peak Oil:

To understand the rationale and costs connected with fracking, we need to take a quick look at a concept called Peak Oil.

Peak Oil is a concept proposed by Shell Oil geologist M. King Hubbert, back in the 1950s. His mathematical model predicted that for any given geographical area in the world, the rate of petroleum production over time would resemble a bell-shaped curve. So if we measured production volume from the beginning of the drilling to the end, it would start slowly, rising to a peak volume, then decline until the petroleum was no longer cost effective to extract; the well would then be abandoned.

In the United States, according to economists and geologists, we have mostly seen Peak Oil. Any petroleum we get from here on will require drilling deeper, and fracking.

And in the United States, according to economists and geologists, we have mostly seen Peak Oil. Any petroleum we get from here on will require drilling deeper, and fracking. The National Petroleum Council estimated that 60 percent to 80 percent of all the wells drilled in the US will require fracking. And the decline in Peak Oil also means that more wells have to be drilled to get the same amount of oil out.

Return on Investment:

Obviously, the oil companies need to make more money than they’re spending. That’s the Return on Investment (ROI). There is also a factor of EROI (Energy Return on Investment) to consider.

Obviously, it takes energy to make energy. The efficiency of the energy production process is known as the Energy Return on Investment (EROI). It now takes more energy put into an oil or gas well to get the same amount of energy out; EROI has been falling for several decades.

It’s worth noting that while the EROI of fossil fuels such as oil, gas, and coal have been falling, the EROI for renewables such as wind and solar are rising; currently they are five to twenty times higher than their fossil fuel counterparts. So what drillers are facing is less oil and gas available, and higher costs to get what they can.

And, now two more revelations enter, just to complicate the picture some more.

Fracking’s true Return on Investment is largely a myth.

This observation comes from Canadian Geoscientist J. David Hughes, who claims that production estimates are historically overestimated; sometimes by governments looking to boost their Gross Domestic Product figures; and sometimes by energy and oil-producing companies looking to attract investors.

Both sides tend to ignore the rate of production (how long will it take to get the oil or gas out), and the world price of petroleum on the day of the sale.

Fracked wells leak.

A lot of wells, leaking a lot.

Nationally, 6% to 7% of the wells leak soon after they’re brought on line. Considering over 100,000 wells in the US, that’s a lot of leaky wells. Further, nearly 50% of the wells will leak during their lifetimes, including those that have been abandoned. Abandoned wells may be no longer any good for making money, but they’re still under pressure. Recall that in 1963, the dam containing the Baldwin Hills Reservoir collapsed, flooding the area below. It killed five people and destroyed 60 homes. Geologists concluded that decades of extraction in the neighboring oil field led to the rupture in the dam. The dam and reservoir were part of what is now the Kenneth Hahn Recreation Area, mentioned in the second part of the story.

The costs to clean up.

This brings in the third factor: cleanup cost. This includes wear and tear on our roads (recall the 400 trucks hauling water and equipment for each well); air, water, and soil contamination cleanup; species extinction; ozone depletion; climate change; treating residents for asthma, cancer, immune system diseases, cognitive deficiencies, and birth defects.

And while the profits from fracking go to the oil and drilling companies, the cost and consequences of fracking are borne by the communities.

So you would think that after putting up with the earthquakes, the mess, the poisoned air and water, the sick people, that fracking is really worth it because we can finally become self-sufficient for the natural gas we need.

You would think. But, the US is still a net importer of natural gas. The Government Energy Information Administration predicts that we will be self-sufficient by about 2017. In the meantime, we import to meet our needs. john-macmurray

And so it seems odd, since we need to import so much, that we export a lot of the natural gas we produce. Last year US companies exported 1,572,413 mcf (million cubic feet) of natural gas, at an average price of $4.06/tcf (thousand cubic feet). After all, the gas belongs to the energy companies that drilled for it, so they can do pretty much what they want with it. And what they are doing is building huge facilities in Texas, Louisiana, and Oregon to liquefy the gas so they can export more of it.

A barrel of oil is 42 gallons, 160 liters.

Same picture with oil. Last year the US imported 11.4 MMbd (million barrels per day) of crude oil and refined petroleum products in 2011. We also exported 2.9 MMbd of crude oil and petroleum products, so our net imports (imports minus exports) equaled 8.4 MMbd.

Are we over a barrel?

So, this is where fracking has taken us. Our air and water poisoned, our houses ruined, and all for the short-term monetary gains for the oil and gas companies, so they can get cheaper oil and gas to sell to other countries.

Leaving us, the taxpaying public, to clean up the mess.

And it does all this behind veils of secrecy and obfuscation, in some cases daring the public to do anything about it. Unless we speak up.

And if we don’t, in the words of David Letterman: “Ladies and gentlemen—we’re screwed!”

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John MacMurray  

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Comments

  1. harry says

    How is it a person who taught in our primary school system knows so much about oil production? If you truly know that field so well, why are you not employed in that area? Reading your BIO leads me to think this is just your political opinion and you are welcome to it. I do think you should do some research getting data from the USGS and others. I can remember others saying we were almost out of oil just a few years ago and what would we do when it happened. Well, it is past time for that to happen and we have more oil now than then. I looked up the facts then and I am not surprised it did not come true now.

    • JoeWeinstein says

      Contrary to your implication, these facts don’t really amount to ‘knowing so much about oil production’ in any special (e.g. engineering) detail. The author, commendably and usefully, was simply willing to do a certain amount of look-up research and putting two and two together – as could you or I. Anyhow, for purposes of public policy, sometimes the most obvious or accessible facts about a topic are the most relevant ones for policy – and it can be important to NOT get carried away by the extra details.

      Yes of course we have ‘more’ oil now – in the sense of ‘reserves’ that are deemed economical to exploit. You can thank fracking and related technologies for that – plus the fact that, because society and its industry and transport, etc., have remained addicted to oil, the temporary relative scarcity in oil has supported and raised oil prices and thereby made a lot more oil economical to extract.

      All that said, I would note that various factoids in the article are irrelevant to the bottom-line message under the last heading (‘Are we over a barrel?’) The theory of ‘peak oil’ is irrelevant. It doesn’t matter whether the graph of fluctuating production over time has one or many peaks. All that matters for purposes of production and pricing of oil is that, so long as there is demand for oil at a given price (which may fluctuate), extra oil can be profitable to extract if the price is high enough to cover the extraction costs (to the extractor, not necessarily eventually to society).

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