WASHINGTON – I have already noted in an earlier piece the baffling inability to properly cover the story of immense shale gas deposits in the US and the strategic impact for the US economy of all this additional natural gas reserves, most of them located in the heavily populated North East. Well, another opportunity to focus on this real “game changer” came and went when FORTUNE recently interviewed Patricia Yarrington, Chevron’s CFO and thus one of the top executives in the US, (and indeed global), oil and gas industry. (C-Suite Strategies, Interview by Geoff Colvin, December 6, 2010).
Is gas a “game changer” for America?
What is rather peculiar, reading this FORTUNE interview with one of the key leaders of the number 2 American energy company, is that the question as to the relevance of all this new gas was actually posed and Yarrington, in her reply, stressed that shale gas for America is indeed a “game changer” and a “gift” to America. If it is indeed so huge, then how about going a bit deeper? Well no. No follow up question. No interest in exploring this any further. Here is the exchange:
Q. FORTUNE: “Will natural gas be, as some predict, a real game changer?
A. Yarrington: “It is [a real game changer] in the US for certain. You need to look at natural gas market-by-market because it does not have the fungibility of oil. But all the new technology that’s been applied broadly for shale gas has changed the amount of supply the US has. It’s a tremendous gift to the US economy (emphasis added), because it’s indigenous supply, very economic, and it should do an awful lot to promote economic growth in the US…….”.
So we get from a top US oil multinational executive that –yes— these new shale gas discoveries amount to a “game changer”. We get from her that this is a “tremendous gift to the US economy”. We get that all this gas is great because it is an indigenous supply, (“Yes, folks it is all right here in America”!), and very economic.
Can you do better than that in terms of “official industry endorsement” of the viability and economic significance of huge, new, marketable discoveries of a cheap, low emission, multi-purpose fossil fuel in a country that consumed most of its oil? (And Chevron, by the way, is not just saying this. In November 2010 they announced the acquisition for 3.2 billion of Atlas Energy, a company heavily invested in the “Marcellus shale” gas basin in Pennsylvania).
But, if indeed this is a game changer for the American economy as Yarrington indicates, then it would make sense for FORTUNE to follow on, and to ask about the impact and ramifications of all this new energy supply for the industry and of course for the broader US economy, perennially saddled with huge and growing oil imports, costing now in excess of 350 billion a year, (and this was before the recent oil price spike), because of the depletion of America’s once vast domestic oil reserves.
No follow up
Well, no. You do not get any of that from FORTUNE. The strong reply did not invite any follow on. The next question by the interviewer –who obviously did not appreciate the incredible importance of the answer he got– is about the role of environmental protection for the energy industry; and this was followed by other issues. All relevant topics, of course; but not even remotely as important as going further in the analysis of what vast new gas reserves will mean for America.
If this new gas is indeed in such quantities that it warrants a “game changer” labeling by a top industry executive, wouldn’t it be interesting to explore “how” the game will be changed? Which sectors will be affected, and so on? Well, apparently not. And so, for the casual FORTUNE reader this is just a blip, (“OK, so we’ve got some more gas, that’s interesting“), that may or may not register, without an opportunity to appreciate what this all this new gas may mean in a strategic sense.
Other media: same treatment
By the same token, a more recent story in The Wall Street Journal focused on shale gas as a “local economy story”. The piece focused on “What is the impact for Pennsylvania and for the communities affected by the discoveries of all this drilling?”–and so on. Basically local color stuff. Not much discussion about the strategic, national implications of all this new gas.
Why is it that we do not celebrate these huge discoveries and open up a national forum in which we can discuss the best possible use of all this relatively inexpensive fuel? I have no idea.
Shale gas is not problem free
True enough, in assessing this new way to extract gas trapped in rock formations some caution is in order, as this whole shale gas exploration/extraction business is not problem free. There are real, hardly settled environmental issues, mostly related to the huge amount of water used in “hydraulic fracturing”, the process necessary to free the gas from the rock deposits. This relatively new process creates legitimate concerns about possible pollution of the water table, should all this processed water, laced with chemicals and other contaminants, become mixed with drinking water supplies.
Environmental concerns
These are serious matters and they should be properly addressed. But, so far at least, none of these concerns has prompted any public authority in Washington or at the state level to put a stop to shale gas exploration on grounds of public safety and environmental protection. Again, the fact that Chevron, a major energy multinational with a decent environmental and social responsibility record, went ahead and bought a sizable piece of the “shale gas” action for a hefty 3.2 billion price, would indicate their confidence in the long term viability of this business. And, of course, all the other industry giants, domestic and foreign are now invested in US shale gas.
Is gas “too cheap”?
Funnily enough, one of the main “negative” points about gas in America, according to prevalent business media coverage, is that gas is really cheap. Well, of course, if gas were truly overabundant so that prices would stay forever depressed, then it might be problematic to make a case for the economic viability of gas exploration and commercialization, if market prices would not even cover extraction costs. But obviously all the energy companies do not think that this is going to be an issue.
Gas for power generation
The upside deriving from large gas discoveries is indeed impressive. Long term, abundant, cheap gas is great for meeting additional power generation demand without the huge environmental downside tied to still dirty coal. Investing in new gas fired power plants will become a more attractive alternative to coal. In the long run, older, highly polluting coal plants may be more easily retired, as low gas costs will make it more economically attractive for utilities to switch to gas. And, to date at least, gas is certainly more cost effective than most tried renewable sources, from wind to solar.
The novelty: gas as transportation fuel
And, of course, there is the whole neglected sector of natural gas as transportation fuel for America. While popular in Pakistan, India, Brazil and elsewhere, gas as fuel is in its infancy in the US, mostly because until recently we have had relatively cheap gasoline/diesel and nobody felt motivated to seriously invest in alternatives.
But now, with oil climbing again to about $ 90 a barrel, cheap, abundant and domestically produced natural gas certainly deserves a fresh look as cost effective transportation fuel. Clearly, any large scale vehicle conversion from gasoline to liquefied or compressed gas is going to be complicated and costly, as it would include engines retrofitting and the creation of a vast new network of refilling stations nationwide.
But, going forward, producing new vehicles with engines that can burn either gasoline or natural gas is not complicated. The favorable numbers, in terms of the relative cost of compressed/liquefied gas versus gasoline, should provide the incentive to switch vehicle production and to progressively invest in refilling equipment. The case for new natural gas powered vehicles is not difficult to make.
Advantages for large fleet operators
As for existing vehicles, the easiest savings are in converting trucks/heavy vehicles fleets. We already see that some corporations operating large fleets, such as Verizon and AT&T, see the economic benefits of converting to gas their existing trucks. Other large companies operating large numbers of vehicles that are refilled in centralized locations will go ahead and switch them to gas, because long term it makes economic sense. And the progressive opening of this new sector in terms of gas usage would help to increase demand and stabilize prices at a level that will still be much lower than diesel.
The website of America’s Natural Gas Alliance, www.anga.us, describes some of the reported economic and environmental benefits of converting fleets from diesel to gas:
“Businesses and cities have found that natural gas vehicles pay for themselves in fuel savings. Many fleets report 15-28% savings compared to diesel fleets. (emphasis added)
The lifecycle costs of natural gas trucks already are competitive with traditional fuels, and many companies have found that these vehicles are cheaper to maintain.
Reducing Dependence on Foreign Oil
Replacing 3.5 million medium and heavy-duty trucks and buses with CNG-powered [Compressed Natural Gas] counterparts by 2035 would save at least 1.2 million barrels of oil per day.
Natural gas has the potential to reduce transit and school bus oil use by 80,000 barrels a day. If 420,000 diesel buses are replaced with NGVs by 2035- then natural gas transit and school buses could eventually displace half of the oil used for all buses by 2035. – Source: Center for American Progress
Improving Local Air Quality
The EPA notes that these natural gas vehicles emit about 25% less carbon dioxide than their diesel or gasoline counterparts. A CNG school bus is 223.5 times less toxic than an average, diesel-powered school bus. Source: Coalition for Clean Air
Converting one heavy-duty truck from diesel to natural gas is the equivalent of taking 325 cars off the road in terms of pollution reduction”.
There you have it. Plenty of good developments come along with all this new gas. But, for some reasons, neither the media nor policy makers seem to realize how good this is. Hopefully markets and consumers will get it on their own.