Shale Gas Uncertainty: How an Industry Talking Point Misses the Mark

When oil and gas executives gathered in Pittsburgh, Pennsylvania to discuss the state of the industry shortly after Obama won re-election, they raised a recurring complaint.

“We now face four more years of regulatory uncertainty,” said Randy Alpert, an official with Consol energy told gathered shale gas executives.

Penny Seipel, Vice President of the Ohio Oil and Gas Association hit a similar note the very next day.

“Unfortunately, we have had quite a bit of uncertainty regarding our fiscal situation,” she said as she described proposed regulation and taxation of drilling companies in her state.

This uncertainty mantra has been trotted out by many industries facing potential oversight and is now being picked up by oil and gas: “We are not against regulation, we are against regulatory uncertainty,” the line goes. “We don’t care what the rules are,” companies say, “just tell us ahead of time and then we will follow them gladly.”

This well-worn trope gives the impression that drillers do not view regulators as adversaries. All they’re asking for is common-sense fairness. Who could be against someone asking to know what the rules are? Predictability is a reasonable request.

It's a shrewd position for the shale industry. But it’s also deeply misleading and worth flagging now since it is likely to get amplified in coming months as more attention turns to whether federal officials should step up their oversight of oil and gas drilling.

Two thirds of Americans now favor increased regulation of fracking, a recent Bloomberg National Poll found. Even Carol Browner, the former EPA administrator who helped to keep fracking deregulated under the federal Safe Drinking Water Act, is now calling for federal fracking regulation.

And in the coming months, several federal agencies are likely to make some of these important decisions.

The EPA is in the midst of conducting a major study on fracking’s impacts on the nation’s drinking water supplies, which will probably determine the fate of new restrictions on the environmental impact of drilling companies. Its final report is due in 2014.

The SEC is investigating several companies over information never disclosed to their investors and demanding more information about how shale wells production projections are created.

OSHA is taking a close look at what to do about alarmingly high levels of silica at fracking sites, where workers are at risk of permanent lung damage from this deadly dust.

With the potential for oversight rising, a growing chorus of executives are sounding a somewhat conciliatory note and saying that they are not opposed to regulation. But, they say, what they need to operate is regulatory certainty and clarity.

 “Regulations should provide a clear, efficient roadmap for how to get things done, not a complex tangle of rules that are used to stop things from getting done,” Exxon CEO Rex Tillerson said at the World Gas Conference this summer, warning that regulatory uncertainty could stifle the shale gas revolution in the U.S. as well as abroad.

What makes this type of rhetoric dangerously misleading is that it conceals where the uncertainty in the current drilling boom actually lies.

What is truly uncertain is the energy business itself. The oil and gas industry is infamous for its booms and busts. Shale wells especially have unknown long-run prospects and sharp decline rates. The climate impacts from fracked wells are uncertain at best compared to coal. The probability of eventual groundwater contamination, especially as wells stop producing commercial volumes of hydrocarbons and are abandoned, is hotly debated. There are many potential downsides on the horizon for shale drillers, not simply regulatory risk.

Mr. Tillerson himself has been learning the hard way about these risks. He admitted this past summer that the industry was “losing our shirts” on shale gas.

This, of course, is for reasons that have nothing to do with lawmakers and everything to do with the market’s fickle nature. The price of natural gas has plunged dramatically from the pinnacles it reached as the shale boom was emerging.

If you want to see real uncertainty, take a look at natural gas prices over time. Within the past decade, the price of gas has spiked four times, each time more than doubling within a year.

By comparison, the price of energy generated by wind and solar has been steady – steadily falling.

Add to that the fact that if the US starts exporting the gas, prices will be hooked to the foreign (read: more expensive, more volatile) market.

The shale industry promises that fracking has changed everything and this time, we can count on continued technological innovation to keep prices consistently low. But independent analysts remain skeptical.

In its most recent Annual Energy Outlook, the Energy Information Administration once again pointed out that “there remains considerable uncertainty regarding the size and economics of this resource. Many shale formations, particularly the Marcellus … are so large that only a limited portion of the entire formation has been extensively production-tested. Most of the shale gas wells have been drilled in the last few years, so there is considerable uncertainty regarding their long-term productivity.”

It’s true that the possibility of federal rulemaking does create a degree of uncertainty for the industry. But its small potatoes compared to all of this.

After all, if the shale industry was truly concerned that the rules they play by might vary from place to place or could change underneath their feet, the industry would strongly oppose states being in charge of drilling oversight. It is the states that have created a highly variable and uncertain patchwork of regulation. (Just take a look at this report from the Oil and Gas Accountability Project highlighting this drastic variability with regards to how law are enforced.)

In truth, who better than the federal government to impose consistent rules and provide more uniform enforcement? But the oil and gas industry has spared no expense in resisting any federal oversight.

The truth is that the drilling industry’s wildcatters are well used to risk. Take, for example, Chesapeake CEO Aubrey McClendon, who even put his own personal fortunes at stake by buying his company’s shares on the margin – then was nearly wiped out when the stock market dropped in 2008. For gamblers like that, a bit of uncertainty is hardly a real deterrent – they thrive on it.

For the rest of us, who may not want to take big gambles with our drinking water, air, homes or the climate, federal oversight could help improve the odds. And ultimately, that means less uncertainty, not more.

Photo credit: EcoFlight