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Is Fracking a Happy Solution to our Energy Needs?
By Richard Vodra, JD, CFP
January 2, 2013


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So is fracking of shale.

Shale is a very solid rock that forms numerous thin layers.  When gas is present, it is found in pores barely larger than a single gas molecule.  Oil engineers have combined several technologies developed over decades to drill horizontally along a shale layer, rather than vertically through it, and to apply a high-pressure mix of water, chemicals and sand through holes in the drill pipe to shatter, or fracture, the shale, allowing the gas or oil to move to the pipe and up to the surface.  Fracked wells in oil country commonly produce a mixture of oil, gas, and natural gas liquids.  (Some wells target gas alone; these are called “dry gas” wells.)  It turns out there is a lot of oil and gas in those rocks, if you’re willing to invest the money and energy necessary to get it, and, with technological changes, what couldn’t be extracted economically a decade ago can be today.

Fracking today

So how is this working out in the real world?  Let’s look at some of the impacts.

Oil and gas are priced on a spot basis, based on today’s mix of supply and demand, and prices are very volatile.  Because natural gas is hard to transport globally, the American price is independent of the world price, and currently is much lower.  Oil, in contrast, is traded around the world and normally has a much more uniform price globally.  The large increase in US gas production caused US gas prices to collapse from over $13 per thousand cubic feet in 2008 to under $2 briefly this year, and they remain under $3.50.  At such low prices, gas is cheaper than coal for use in electricity plants, and companies are replacing old coal plants with new gas-powered plants.  Even a nuclear plant in Wisconsin was shut down in favor of gas generation.  If gas prices go up, however, such decisions could prove hasty and shortsighted

The problem is that no one can make money producing gas at $3 per thousand cubic feet.  The actual break-even price for shale gas production is estimated to be in the $6 to $8 range.  The shale boom started when gas was higher than that, so companies eagerly paid for leasing rights and access to drilling rigs.  Leases commonly require drilling to start within a few years or the lease is void, so there was a strong incentive to start production and secure the well rights.  When everybody did that at once, a surplus of gas hit the market, prices collapsed, and drilling for dry gas abruptly slowed. 

Two aspects of shale production make it radically different from conventional production.  First, it takes a lot more energy (including many miles of steel tubing per well, for example) to extract energy out of these wells.  Traditional wells have a ratio of energy returned on energy invested (EROEI) of 10- or 20-to-one, or an energy cost factor of 5 to 10%.  The EROEI with fracking is in the range of 5- or 10-to-one, or a cost factor of 10 to 20%.  Professor Charles Hall of the State University of New York, a recognized expert in the field, claims that modern civilization will have trouble functioning with an average EROEI under 10-15, so shale oil and gas alone could not support our civilization at its current standard-of-living.  EROEI roughly correlates with financial cost, and a typical fracking oil well in Texas now costs over $10 million to drill, compared to less than $1 million for a conventional well.

The other thing about extraction from shale is that it ends quickly.  A conventional well’s production declines at about 5-8% per year, and it can remain productive for decades.  By contrast, the first-year decline in shale wells is over 60%, and about 90% of a well’s production occurs in the first five years.  That creates a “drilling treadmill,” as new wells are needed simply to replace production from wells drilled a few years before.

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