Natural gas has a reputation of being a reliable and clean fuel, but purchasing this energy source isn’t always easy. Natural gas prices can be extremely volatile for reasons that are often unclear. Energy industry experts point to a variety of reasons for changing natural gas prices, including shifts in demand, weather, supply excesses, or constraints and the amount of gas in storage. Many operations managers pay close attention to natural gas price swings because of the direct correlation these prices have on their businesses.
Energy managers in the manufacturing sector are excited about the impact that shale gas is having on the natural gas market, both in terms of increased supply and level prices that have resulted. In general, the cost of energy is an important factor in production costs.
Within the past year and looking forward to the upcoming year, natural gas prices have smoothed out to a relatively constant $3.60-$5.80/dekatherm at the commonly traded Henry Hub pricing point in Louisiana, which is used by the New York Mercantile Exchange (NYMEX). The primary reason for this consistency in pricing has been the introduction of significant volumes of shale gas into the North American energy supply.
What is shale gas?
Shale gas is natural gas that is trapped within the sedimentary rocks on the Earth’s surface and in water. Until recently, it has not been possible from a technological or economical standpoint to collect natural gas from shale. But with breakthroughs such as horizontal drilling, shale gas is now entering the gas supply pool in relatively large amounts.
In its Annual Energy Outlook for 2011, the U.S. Energy Information Administration states that the U.S. has 2,552 trillion cubic feet (Tcf) of potential natural gas resources. Of these resources, 827 Tcf come from shale gas. Production estimates for shale have increased significantly in the past year alone. With this increased supply along with the depressed economy, natural gas prices have been flat as compared to earlier in the decade.
Shale is found in “plays”
Shale gas formations — known as “plays” — are being discovered across the world. Two of the most well-known plays in the U.S. are the Marcellus Shale Play in the eastern U.S. and the Barnett Shale Play in Texas, which has been yielding shale gas now for a decade. Other important shale plays are Utica in the east, Haynesville in Louisiana, and Fayetteville in Arkansas, while more have been identified in Canada, the United Kingdom, and Argentina. There is no question that shale gas is having a major impact on the global energy landscape.
Hydraulic fracturing is used to extract shale
“Fracking” is the typical technique used to extract shale. With this technique, water, chemicals, and sand are pumped into the shale formations. The pressure causes cracks to form in the rock which then releases the natural gas. The gas is collected in a well.
Horizontal drilling is often used in conjunction with fracking. This allows more gas to be accessed than would otherwise be possible. The combination of fracking and horizontal drilling make the extraction of shale gas economically feasible; without these technologies, the gas would flow too slowly.
Environmental concerns are mounting
The environmental effects of fracking are gaining increasing concern in states where shale gas is produced. One of the major concerns involves drinking water. In 2005, the Bush/Cheney Energy Bill exempted natural gas drilling from the Safe Drinking Water Act. This means that companies do not have to disclose the types of chemicals they use during fracking. There is action in Congress to repeal this exemption, also known as the “Halliburton Loophole.”
The wastewater that results from fracking is the source of the drinking water concern. When the gas is extracted from the well, it must be separated from wastewater, which can be very toxic. This wastewater is typically trucked to water treatment facilities, which are not always equipped to do a thorough job cleaning the wastewater. The wastewater is often dumped into rivers and other drinking water sources.
The economic feasibility of shale gas production may be a question
Large opportunities abound for the U.S. and other countries if the amount of shale gas estimated is truly available. However, a topic that doesn’t get a lot of attention is the economic threshold that producers need to reach in order to incent them to invest in the production in the first place. Some experts suggest that natural gas prices need to be at least two dollars higher than they are today if the production is to continue to accelerate. Others argue that the technology costs to drill are dropping and that the economic threshold will more easily be met as this reduction in costs continues.
In spite of the environmental, economic and political concerns that face the U.S. today, the presence of shale gas—and the ability to extract it—is a big plus for manufacturers. Vigorous production of natural gas helps make manufacturers more competitive. The concerns being raised are likely to be resolved over time, leading to continued ample supply of natural gas for the food industry.
Gail McMinn is Executive Vice President of Commercial Services for U.S. Energy Services, Inc., based in Minneapolis, MN. U.S. Energy Services is an energy management company providing a portfolio of energy-related services to industrial, commercial and municipal clients.