Fracking Regulation And Its Impact On America's Energy Boom

Come the night of November 6 (just a week from now), we’ll likely know a lot more about our nation’s energy future.

Will it be four more years of President Obama? Or will a new captain grab the helm of the U.S. ship of state? And what of the House and Senate races? And the many other state and local elections down the tickets across the country.

In my view, the elections matter. At least, it all matters for resource investing, which is our beat…

On that point, and in the event that President Obama wins a second term, I have it on good authority that the Environmental Protection Agency (EPA) will move aggressively to tighten controls over oil field fracking — the technique of using high-pressure fluids to fracture and break up deeply buried rocks to liberate natural gas and oil.

From what I know, certain EPA regulators are champing at the bit to increase federal regulation over fracking. They have their reasons. And on this topic, there’s none of that oft-mocked bureaucratic lethargy. The spirit of the fracking-control people is like that of horses in the prize race of the Kentucky Derby. They can’t wait to hear the bell and take off at a gallop — after the election, of course.

In fact, many of EPA’s new anti-fracking regulations are already drafted. They’re on the hard drives, awaiting the dawn’s early light of a second Obama term. Right now, it’s only a question of eager EPA myrmidons tweaking the edges of their efforts and then placing new regs into effect. Just thought I’d mention it.

Meanwhile, out in the real world — EPA regulation or no — fracking is a revolutionary, disruptive form of energy technology. Fracking can liberate all manner of hydrocarbon molecules that are otherwise locked up in tight rocks. Done right, fracking can lead to improved energy supply, stable (or lower) energy prices and better security for the nation.

It takes capital and energy to make capital and energy. But basically, fracking yields energy. Energy is power in every sense — which is why some people hate fracking, I suppose.

I’m reminded of something that Pennsylvania Gov. Tom Corbett told me a while back. He said, “It’s good that fracking developed far away, out in the wilds, under the radar screen, with the oil industry paying the costs. Nobody in the political class knew it was there. So nobody thought about taxing or regulating fracking until it became a successful, moneymaking technique.”

Then again, there’s plenty more to understand about fracking. Think of fracking as offering access to oil and gas that you simply could not recover with previous drilling and completion methods. Fracking is a means to create vast new wealth.

But sad to say, fracking is not cheap, low-tech, low impact or in any way “easy.” Indeed, the energy industry drills and fracks complex wells because the “easy” stuff is long gone.

Overall, fracking is expensive. Speaking broadly, a directionally drilled well, with multistage completions, costs five-10 times what you’d pay for an old-fashioned “vertical” well. In other words, what used to be, say, a $1 million well now costs $5-10 million of upfront capex.

Plus, the decline curve of most fracked wells tends to be steeper than is the case with traditional wells. That is, with fracked wells, the volume of gas and/or oil output declines faster and sooner than is the experience with wells of the past.

Drillers have been putting equipment and energy down well bores since the 1860s and the early “Roberts Torpedo Gun” from the historic days of Titusville. Closer to the present, the energy industry has been using high-pressure fluids to fracture formations downhole since the 1940s. Thus, the idea of using high pressure to shatter rock and increase hydrocarbon flow rates from liberated surface area is not exactly new.

But when it comes to the contemporary concept of fracking — fracking as we know it today — the energy industry has less than a decade of experience with widespread use. The history is that modern fracking began in a big way in the early 2000s, with the Barnett Shale of Texas. Right now, a decade into things, it’s fair to say that industry is experiencing decline curves in the nature of two-four times faster than with traditional wells. (Some wells are better than others.)

Even more practically, last week, I saw troubling news from a “frontier” fracking region — Ohio, of all places. According to EnerVest Ltd., the largest oil and gas producer in the Buckeye State, the Utica Formation in central Ohio lacks sufficient reservoir energy to move crude oil from the rocks to the surface.

The Utica is one of the great hopes for new energy development in the U.S. The Utica may hold 5.5 or more billion barrels of oil, according to the Ohio Geological Survey. But this play is based almost entirely on fracking. So with low pressures (possibly) across the region in the Utica rocks, it means that future development will require increased costs for subsurface completions, plus long-term pumping and lifting equipment.

No, it’s not a showstopper if you have to use pump jacks and other specialized well equipment to coax crude to the surface. But the issue adds to the cost and complexity of operations every step of the way. Low formation pressures impact the economics.

I’ll sum up by saying that even the “good” case for fracking ought to make you stop and think. Fracked wells tend to cost five times what wells used to cost, and then your well depletes twice as fast. That makes for a factor of 10 in terms of reduced investment efficiency.

This all gets into the idea of the long-term decline of “energy returned on energy invested” (EROEI), which I’ve discussed before. It means that the Peak Oil idea is still alive and well and remains a useful tool for evaluating energy output and looking toward future energy supplies.

In the end, whether its EPA regulation or basic economics and EROEI, there’s nothing easy about modern energy development. You have to think long term. You have to be willing to let capital flow to the best ideas.

That’s all for now. Thanks for reading.

Byron King

Original article posted on Daily Resource Hunter