By Shelley Goldberg
The technology of fracking for oil and gas (O/G) has been around for almost 70 years. While traditional wells bore vertically, today’s technology allows for shale O/G extraction by drilling horizontally across rock formations to release trapped fuel. The advancement of horizontal drilling paired with hydraulic fracturing - injecting water, sand and chemicals deep underground to fracture the rock and liberate the fossil fuels that are then pumped to the surface - has remarkably changed the landscape of O/G extraction in the U.S., and provides tremendous global potential due to the discovery of large shale beds worldwide. Before horizontal fracking, U.S. crude oil production was in steady decline for 25 years but is now up to its highest level since 1988. The U.S. is also producing record levels of natural gas and is expected to become a net exporter by 2018, according to the Department of Energy (DOE). Furthermore, fracked O/G not only has lowered energy costs, but has generated new jobs, revived parts of the manufacturing sector, and has created an impressive dynamic in international security.
The business of fracking, unlike the mega-cap global E&P sector, is dominated by smaller, independent companies and flexible contractors that can provide specialized technologies and services at various stages of the O/G extraction process. When the energy boom began a decade ago, the land grab approach was a popular strategy. Today, smaller and leaner companies are not only focusing on the quality of property rather than quantity of land, but also addressing the need for next generation shale extraction systems. Today’s technologies aim to provide stable, lasting and higher O/G yield from shale fields with improved economic an environmental conditions and little or no infrastructure damage or distortion. The industry continues to mature with better results and prospects for well integrity.
Fracking Opposition Creates Investment Opportunity
Natural gas emits about one half of the carbon dioxide of coal when burned in power plants, making it a better energy source environmentally. Electrical power plants have converted from coal to less expensive natural gas with major reductions in greenhouse gases. Furthermore, the average cost of a well, approximately $7.6m including land acquisition, is far less expensive than constructing a large nuclear plant (estimated at $6-$8b). Nevertheless, fracking is controversial. New York became the first state to impose a moratorium on hydraulic fracking, even while it is one of four states that sit on the Marcellus Shale, the nation’s most productive natural gas field. More recently, Illinois, Colorado and California have enacted legislation to govern fracking or eliminate it in specific cities.
Opposition to hydraulic fracking stems from legitimate concerns about the massive quantity of water used in the process. Furthermore many fleets of trucks and rail cars are required to deliver fresh water to the site and haul away contaminated water, damaging our roads and infrastructure and creating the potential for toxic spills. There is also concern surrounding the risks of acids, salts, and chemicals seeping into our aquifers along with the release of methane and other naturally occurring low-level radiation into the air creating smog and contributing to global warming. Finally, it has been shown that hydraulic fracking has caused tremors near geological faults. As such, these issues are being addressed on many fronts and as a result, new businesses are emerging that are offering new technologies and services with the goal of making fracking a viable and environmentally responsible business. Some of these technologies are in the venture capital or private equity stage of development; however, the number of listed names is increasing particularly in light of robust equity markets.
New Technologies – Water Sourcing and Treatment
The issue of water- both quantity and quality - remains at the forefront of fracking concerns. Wyoming, where water tends to be scarce, has set strong requirements for water testing at the pre-drilling phase. Some frackers aim to reduce the quantity of water used by means of fluid adjustment. Legislators are requiring that frackers seek more sustainable water sourcing, enforce better wetland restoration and improve the effectiveness of sedimentation and erosion control from deposited water and underwater waste disposal wells. The manufacturing of non-portable water sources, such as mobile water treatments machines, can reduce the amount of water in transport, which in turn reduces road damage and pollution from trucks. Additional improvements in water treatment and water recycling technology include electrical charges to wastewater in order to coagulate and remove suspended mater.
Chemicals – Toxic Cocktails
In addition to the concerns regarding water usage are the affects of a largely proprietary laundry list of chemicals used in tandem with water in hydraulic fracking. The substances released are not only those that mankind injects in the fracking process but those that exists deep underground. Technology is working to eliminate some of the legacy chemicals with “food-grade” thickening agents (gums/sugars) or by adding brine to prevent clay swelling, which can block the flow of water. Biocide reduction technologies work toward the elimination of bacterium, which have detrimental impacts on production. In response to the Obama administration’s methane-reduction strategy, effective 2015, companies are developing ways of better servicing and securing pipelines and wells to reduce or eliminate the release of methane and other naturally occurring gases. Finally technology is now working to capture the lost gas released from the wellhead’s flare.
Dry Fracking - What if water and chemicals could be eliminated?
Much of the technology discussed has focused on the reduction of water, sand and chemicals used in hydraulic fracking by substituting other materials. In some types of “dry fracking”, water is replaced with propane. The effects are still being measured. But what if technology could eliminate water and chemicals from the fracking process entirely? The good news is that this technique is progressing. An alternative form of dry fracking does just this, through the application of heat, whereby sensors and controls gradually heat large module blocks of underground material. The tests show that precise control of pressurized conditions releases O/G from large pay zones over long periods of time and can be modeled to reduce life-cycle operating costs and lower the greenhouse-gas footprint. Furthermore, the energy needed to heat the modules can be partially fueled by wind or solar panels or by the energy produced from the well itself. Studies show that the application of heat technology allows for the continuous flow of product, recovering a much higher percent of O/G from the rock. This point is critical because output from shale wells using hydraulic fracking shows significant depletion, typically 70% after first 12 months of operation, according to the DOE. As such, the U.S. needs a larger number of new wells and re-fracking stimulation of mature wells, typically 5-7, times just to sustain US production levels. Finally, by eliminating injected water, heat technology addresses the issue of methane and other gases, which typically are released during the water “flowback” period.
Looking beyond our borders
Beyond U.S. borders shale O/G extraction opportunities abound. In addition to the varying degrees of economic and geological advantages throughout the global shale landscape, are the political and regulatory influences both nationally and regionally. Europe looks to be the next best geographic play as the European Union has a long history of being vulnerable to energy imports. The cost of crude oil extraction in the North Sea continues to increase. Meanwhile, Russia’s Gazprom not only dominates the gas business across the CIS, but also enjoys considerable clout inside the EU, which gets roughly one third of its gas imports from Russia. The situation in Ukraine only serves to exacerbate Europe’s energy vulnerability. Shale beds from the U.K. to Poland and Romania offer opportunities for sustainable fracking technologies, particularly in light of strong opposition to hydraulic fracking in regions of Europe, with Germany having banned it entirely.
Mexico too offers economic potential. The Eagle Ford shale bed of Texas is believed to continue hundreds of miles south into Mexico’s Burgos basin where to date, only a minute number of wells have been drilled in comparison to the thousands on the Texan side. After a long history of state control of the energy sector, President Enrique Pena Nieto has opened his country to foreign petroleum investment for the first time in 75 years. Sizable international shale O/G reserves have also been discovered in China, Argentina, Algeria and Canada, as well as India, South Africa, Brazil, Australia and Libya.
The US and China among others have vowed to reduce greenhouse gas emissions over the next two decades, while the EU proposed cutting carbon dioxide emissions to 40% below 1990 levels by 2030. These actions are opening the doors for new technologies in sustainable and responsible fracking. Rather than placing a moratorium on fracking, we can work to fix it. With that comes opportunities to financially reap the rewards of these endeavors by investing in businesses that work toward bettering the O/G extraction process while reducing the cost of our energy consumption, and being mindful of our environment and our planet.
Editor's Note: Shelley Goldberg is an investment management consultant in global resources, commodities and environmental sustainability.
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