Snake Oil: How Fracking's False Promise of Plenty Imperils Our Future (12 page)

As gas drilling expands throughout the nation, production is moving closer to populated areas, with wells in some states now being drilled within a few hundred feet of schools and homes.

Expect bad air.

Land

Suppose you own farmland, and you also own the subsurface mineral rights to your land.
18
A petroleum company offers you money for the right to drill on your property. Drillers promise to rehabilitate the acreage when they’re done. You need the money. What should you do?

Your answer may depend on how badly you need the money. But it will also reflect your philosophy—whether you see the land merely as a speculative investment, or whether you have a sense of obligation to its welfare. That’s because drilling for shale gas or tight oil can seriously impact land—whether through water, air, or soil pollution; damage to vegetation, livestock, and wildlife; or erosion and induced earthquakes.

Heavy metals such as lead, mercury, cadmium, chromium, barium, and arsenic have been found in soils near natural gas drilling sites. And when fracking leads to increased ground-level ozone, plants are damaged by inhibited photosynthesis and root development.
19

Livestock and wildlife, attracted by the salty taste of fracking fluids and wastewater, can be poisoned—either dying outright or suffering loss of reproductive function, stillbirths, birth defects, and other maladies.
20
Light and noise from fracking and related traffic can also increase animal stress. A peer-reviewed study in 2012 by professor of molecular medicine Robert Oswald and veterinarian Michelle Bamberger found significant adverse health links between fracking and livestock exposed to the air and water by-products of drilling. Animals were found to suffer neurological, reproductive, and gastrointestinal disabilities.
21

Colorado Division of Wildlife officials have observed both indirect effects leading to population declines and direct mortality in wildlife, in areas of intensive natural gas drilling. Waterfowl are most directly impacted, as they can land in wastewater pits near drilling pads. Industrial activity too near an area where a raptor pair is engaged in courtship behavior may discourage mating, and stress can cause the adult birds to abandon eggs or even young; the loss of a breeding season reduces population over time. Deer and elk populations decline when areas of unbroken habitat are reduced by land fragmentation from road building and well pad construction. Wild fish populations are threatened by spills of industrial materials or toxic chemicals.
22

In mountainous regions of the Marcellus shale formation, drilling leads to erosion. Loosened sediments quickly enter surface streams, contaminating coldwater fish habitats and drinking water sources.
23

Most earthquakes triggered by hydraulic fracturing are too weak to be felt or cause significant damage—though the number of quakes in normally seismically quiet parts of fracking country in Arkansas, Texas, Ohio, and Colorado is on the rise. Indeed, according to a USGS study, in the last four years the number of quakes in the middle of the United States jumped elevenfold from the previous three decades. The largest yet measured, in central Oklahoma on November 6, 2011, was a magnitude 5.7 temblor tied to the injection of fracking wastewater. It was the biggest quake ever recorded in Oklahoma, destroying 14 homes, buckling a highway, and leaving two people injured.
24
Earthquakes are an especially serious issue in California, a state riddled with seismic faults, yet also contemplating whether to allow drillers to increasingly exploit the Monterey shale formation.

The various forms of land damage from fracking often result in decreased property values, making resale and farming difficult, and also making it harder to acquire mortgages and insurance. Properties adjoining drilling sites are often simply unsellable, as no one wants to live with the noise, the bad air, and the possibility of water pollution.
25

All of these problems are once again multiplied by fracking’s need for heroic rates of drilling, and therefore for enormous numbers of drilling sites. Consider just the state of Colorado: at the start of 2012 approximately nine thousand square miles of public land in Colorado had been leased to the oil and gas industry for drilling—roughly 10% of the state. The amount of private land under lease is probably greater, though exact figures are harder to come by. Thus, it is likely that roughly a fifth of the land area of Colorado is currently leased by the oil and gas industry.

Finally, fracking can affect land far away from drilling sites. Sand is being mined in Wisconsin, Minnesota, and Iowa for fracking in Pennsylvania, Texas, and North Dakota. The round, fine-grained sand in these regions, left over from the grinding of glacier upon rock during the last Ice Age, is ideal for use as a fracking proppant, but mining operations destroy farmland, impact wildlife, and degrade streams.
26
Moreover, when winds take up the tiny silica particles dislodged by mining, higher rates of silicosis and cancer result.
27

Climate

Considering emissions only at the point of combustion, current US natural gas power plants produce 56% less carbon dioxide, per kilowatt-hour, than existing coal plants.
28
Therefore, as the world gradually transitions toward renewable energy sources, it might seem prudent to replace coal-burning power plants with natural gas burners as a stopgap measure. That way, natural gas could serve as a
bridge fuel
to reduce carbon emissions while society makes the investments and builds the infrastructure to eventually power itself with wind and solar. This line of reasoning has been so appealing to the Environmental Defense Fund, as well as to former Sierra Club Executive Director Carl Pope and New York City Mayor Michael Bloomberg, that all have gone on record as supporting fracking for natural gas. (The Sierra Club now opposes fracking.)

However, recent research challenges the assumption that shale gas is better for the climate than coal. In 2011, Robert Howarth, professor of marine ecology at Cornell University, led a study published in
Climatic Change
concluding that as much as 1.9% of the gas in a typical well escapes to the atmosphere during fracking, compared with 0.01% in a conventional gas well.
29
This turns out to make an enormous difference: over short time frames, methane is 20 to 100 times as powerful a greenhouse gas as carbon dioxide. If Howarth’s figures are accurate, this means that life-cycle greenhouse gas (GHG) emissions from shale gas are 20% to 100% higher than those from coal on a 20-year time frame basis.

Howarth’s conclusions were reported in the
New York Times
30
and immediately triggered a firestorm of vitriolic criticism from the industry—and from a few environmental organizations. A
Forbes
article later noted that “almost every independent researcher—at the Environmental Defense Fund, the Natural Resources Defense Council, the Council on Foreign Relations, the Energy Department and numerous independent university teams, including a Carnegie Mellon study partly financed by the Sierra Club—has slammed Howarth’s conclusions.”
31

The critics insisted that Howarth had greatly overestimated leaks from fracked wells. National Energy Technology Laboratory (NETL) scientist Timothy Skone provided evidence for this view in a lecture at Cornell titled “Life Cycle Greenhouse Gas Analysis of Natural Gas Extraction & Delivery in the United States”; soon afterward, Lawrence Cathles, a Cornell geology professor, similarly argued—in a commentary published in
Climatic Change
—that Howarth’s fugitive methane figures were
10 times
too high.
32

How could scientists analyzing the same phenomenon arrive at such starkly different conclusions? Three main variables are keys to understanding the discrepancy. The first is the actual level of methane emissions during the drilling and fracking of a typical shale gas well. This number must be amortized over the total lifetime production of the well in question, as most of the “fugitive” methane escapes during drilling rather than during later production. Hence the second variable: the actual lifetime cumulative production figure for a typical well in the given formation. The third significant number indicates the amount of natural gas that leaks from pipelines on its way to the end user. The
total
amount of gas leaked to the atmosphere (from all phases of production and distribution) must remain below about 3.2% of all gas produced if natural gas is to have a climate advantage over coal over the next few critical decades, during which society must avert catastrophic climate change.
33
In 2012, my colleague at Post Carbon Institute, geologist David Hughes, helped clarify issues in the dispute in a report titled “Life Cycle Greenhouse Gas Emissions from Shale Gas Compared to Coal: An Analysis of Two Conflicting Studies.”
34
Hughes found that Howarth’s critics were lowballing per-well methane leaks during drilling
and
overestimating likely lifetime per-well production figures. He concluded that if these numbers are corrected, “
the result is not significantly different from the conclusions of Howarth
et al
.”

Some recent measurements of actual methane emissions during drilling have come down strongly on Howarth’s side. A study by the National Oceanic and Atmospheric Administration (NOAA) reported that fully 4% of the methane gas being produced in the Wattenberg field in Colorado was leaking to the atmosphere; in a subsequent study, the same NOAA team found that 9% of produced gas was leaking to the atmosphere in a large natural gas field on mostly Indian land in north central Utah.
35
On the other hand, the research arm of ExxonMobil has published a study insisting that fugitive methane leaks from fracking are less than 1% of the gas produced, though this was based on a generous estimate of lifetime production from a typical Marcellus shale gas well.
36
The US Environmental Protection Agency recently downgraded its estimates of methane leaks in America’s natural gas production and distribution system, but this action was based on industry-funded studies (like the one just mentioned) rather than new direct measurements, and it did not take into account the recent NOAA data.
37

Fugitive emissions of natural gas from pipelines (the third significant number) are still relatively poorly understood. A recent study of leaks from gas pipelines under Manhattan streets yielded numbers well above previous estimates for distribution leakage; the subsequent report estimated, on the basis of measured pipeline leaks, that the total of production losses and transmission losses for natural gas used in New York City must be above 5%. 

Can drilling, production, and transmission leaks be plugged? Yes, in principle.
38
And of course, industry
should
do everything in its power to reduce fugitive methane emissions. But recent data suggest that both drillers and pipeline operators have a big job on their hands.

Meanwhile, for the time being, the evidence is strong that current full-cycle greenhouse gas emissions for natural gas—
especially from fracking
—are worse than those for coal over the first 40 years. From the standpoint of climate stabilization, fracking for gas may be a bridge to nowhere.

* * *

We’ve been told that the economic and climate benefits of fracking (the latter in the case of natural gas, not oil) outweigh the risks to the immediate environment and to human health. But if evidence we’ve surveyed in the last two chapters is credible, then the real benefits of this technology have been exaggerated, and the risks substantially downplayed.

When benefits are systematically hyped and risks are unrealistically minimized, the results are bad investments and bad government policy.

SNAKE BITES

1. THE INDUSTRY SHILLS SAY:

Fracking creates a huge number of jobs.

THE REALITY IS:

The industry has massively oversold its jobs record. Since 2003, oil and gas jobs account for less than 1/20th of 1 percent of the overall US labor market. Numerous industry-funded studies count strippers and prostitutes as “new” jobs created by the spread of fracking.

2. THE INDUSTRY SHILLS SAY:

Shale gas promises continued economic benefits for decades to come.

THE REALITY IS:

A peak in US shale gas production
within this decade
will prove those promises to be purposefully deceptive lies.

THE WALL STREET CONNECTION:

Investment bankers love to inflate bubbles. When they deflate, it’s not the bankers’ money that’s lost—
it’s more likely yours
. The fracking industry shows all the classic signs of a bubble, including a heavy reliance on debt with revenues from production failing to cover operating costs.

Chapter Five

The Economics of Fracking: Who Benefits?

I
n the 1980s, two Oklahoma twentysomethings, named Aubrey McClendon and Tom L. Ward, pooled $50,000 of investment capital and started a natural gas company. They decided to call it Chesapeake Energy, since McClendon (who emerged as the company’s moving force) was particularly fond of the Chesapeake Bay region of Maryland and Virginia. From the start, McClendon focused the business on unconventional gas plays and cutting-edge drilling technologies.

Fast-forward to the mid-2000s. As the fracking frenzy was starting to sizzle in Texas and Oklahoma, Chesapeake was there turning up the heat. With the Barnett, Fayetteville, and Haynesville plays yielding shale gas in ever-greater amounts, Chesapeake Energy quickly became America’s second-biggest natural gas producer, and a Fortune 500 company with over 13,000 employees. By 2008, Aubrey McClendon was the highest-paid of all CEOs of S&P 500 companies.
1
In 2011,
Forbes
named him “America’s Most Reckless Billionaire” in a cover story detailing his lavish and highly leveraged lifestyle.
2
He owned homes in several states, a mansion on “Billionaire’s Row” in Bermuda, and 16 antique boats worth nine million dollars. He also had a habit of using his property as collateral in order to borrow money with which to buy still more.

Critics began drawing comparisons between Chesapeake and Enron, the energy giant whose infamous bankruptcy in 2001 made it synonymous with galactic-scale accounting fraud. On the surface, they were very different entities: while Enron was a labyrinthine organization with a black-box trading operation and a flotilla of off-balance-sheet shell subcompanies, Chesapeake had real assets in proven and unproven gas reserves and a real product to sell. Still, Chesapeake’s business practices were opaque even to some of its biggest investors, and its cash flow from operations was insufficient to cover exploration and development costs and acquisitions in any of the last 10 calendar years.
3

How was Chesapeake making money? Early in the shale boom, the company bought drilling leases at a pace unrivaled; later, it sold bundles of these leases to other operators, many of them European or Chinese, and usually at a profit. Chesapeake was also adept at entering into partnerships and joint ventures. And it used Byzantine financing methods pioneered by Enron in the 1990s—including derivatives, synthetic credit default swaps, and deals financed with little or no equity.
4

Eventually, crony dealings led to Aubrey McClendon’s resignation as CEO of Chesapeake. News emerged that he had been logging family vacation trips to Europe on one of the company jets as business travel, while Chesapeake employees were doing millions of dollars’ worth of personal work at McClendon’s home. He had put longtime friends on the Chesapeake board and showered them with compensation. He maintained personal stakes in company wells and used these as collateral for $1.55 billion in loans; at the same time, he was borrowing money from a company board member and running a private two hundred million dollar hedge fund from Chesapeake offices.
5

Disgrace couldn’t keep Aubrey McClendon down for long. Since his formal departure from Chesapeake Energy, he has formed a new company called American Energy Partners, with headquarters down the street from his old Chesapeake office in Oklahoma City.
6

Clearly, not all oil and gas companies specializing in fracking mimic Chesapeake’s extravagance and opacity. However, if the analysis in Chapter 3 is even approximately correct, then the shale industry is on shakier ground than many believe. Perhaps the fracking companies’ business model simply reflects the problematic nature of the resources they pursue, and the price and investment structures needed to get those resources out of the ground and to market.

Chesapeake and other shale gas and tight oil companies have made extravagant claims about how communities, households, and the nation as a whole benefit economically from fracking. There’s no question: a lot of money has changed hands as a result of shale gas and tight oil development during the past decade. Billions of dollars have been spent in drilling, and billions have been returned in sales of oil and gas. In this chapter, we’ll try to answer the question:
Who really benefits?

Communities

The boomtown syndrome is as old as the petroleum industry itself. Once commercial deposits of oil or gas are confirmed, drillers and speculators arrive by the truckload, driving up prices for just about everything. Prostitution and motor traffic proliferate; peace and quiet disappear. Years later, after local citizens have spent their money from drilling leases, the oil or gas begins to peter out. High-paid workers leave town, and the local economy deflates.

This predictable syndrome tends to characterize fracking operations even more than conventional oil and gas development, because shale gas and tight oil per-well production rates tend to decline so steeply (making the boom briefer and the decline steeper), and also because damage to the environment and to local roads, public health, and community solidarity can be much more serious.

Here is a typical assessment of the economic boon from fracking, lifted from an industry-funded website:

Hydraulic fracturing has . . . boosted local economies—generating royalty payments to property owners, providing tax revenues to the government and creating much-needed high-paying American jobs. Engineering and surveying, construction, hospitality, equipment manufacturing and environmental permitting are just some of the professions experiencing the positive ripple effects of increased oil and natural gas shale development.”
7

There’s definitely some truth here. Consider the example of Bradford County, Pennsylvania. In recent years its economy had been in decline as manufacturing jobs moved to China. But now, as Chesapeake Energy and other operators are fracturing the Marcellus shale beneath the county to release billions of cubic feet of natural gas, the economy is flourishing. The county has retired five million dollars in debt and has lowered real estate taxes by 6%. A Bradford County Commissioner has called fracking “an economic game-changer for the entire area.”
8

However, studies that look at the bigger picture reach more nuanced conclusions. A report by the Keystone Center in Pennsylvania found that “the Marcellus Shale is making a small positive contribution to recent job growth in Pennsylvania.”
9
New (and often temporary) jobs are being offset by damage to existing industries, including tourism and the Pennsylvania hardwoods industries. In Bradford County, cited above, the Pennsylvania Department of Environmental Protection has recorded upwards of six hundred environmental violations from fracking, and the consequences for farmers have been severe—including contaminated water, plummeting property values, and sickened livestock. Many farmers have simply given up in the face of these challenges. Meanwhile, Pennsylvania research has also found that many of the new jobs go to skilled out-of-state workers who fly in, drill, and fly home. The jobs for locals generated by fracking typically last for only about two to three years.
10

All of this should be fairly predictable and unsurprising. Historically, regions that rely on resource extraction as an economic pillar often underperform when compared to other regions, especially when viewed over the long term. More wealth is typically created in places that
use
energy and minerals for manufacturing and trade than in ones where resources are mined. For example, coal areas in West Virginia continue to be pockets of poverty despite decades of mining activity. The long-term jobs created there often pay little, and other industries—including agriculture—are driven out by the ensuing environmental damage.
11

In both Pennsylvania and New York, drilling companies are moving into the poorest counties first—and not just because that’s where the shale resources are located. Economically struggling areas are often targeted because the locals are less likely to engage in anti-fracking activism. People who desperately need leasing money or temporary employment may be willing to overlook environmental damage, even if it impacts their own land and homes, and they can also be counted upon to take the industry’s side when community disputes arise over air or water quality.

Meanwhile, people subsisting on fixed incomes (such as elderly renters) who
don’t
receive income from drilling leases or truck-driving jobs may have to move out because they can’t afford soaring rents and food prices.

Local governments benefit temporarily from increased tax revenues during drilling booms. But costs to repair road damage—sometimes running into the millions of dollars—may outweigh that short-term bonus. In 2012, the State of Texas received about $3.6 billion in severance taxes from all oil and gas produced in the state (from conventional wells as well as those in fracked shale). But during that same year, the Texas Department of Transportation estimated damage to Texas roads from drilling operations at $4 billion. Arkansas has taken in roughly $182 million in severance taxes since 2009, but costs from road damage associated with drilling are estimated at $450 million. Roads designed to last 20 years are requiring major repairs after only 5 years due to the constant stream of overweight vehicles ferrying equipment and water to and from fracking sites.
12

The influx of workers also puts pressure on schools and hospitals. Yet it makes little sense to expand these facilities permanently, given the temporary nature of drilling booms. Meanwhile, police have to deal with increased crime rates, including (in Colorado, for example) high rates of methamphetamine usage among drill crews.
13

Disputes about fracking within communities can also strain the very process of democracy. When the city of Longmont, Colorado, enacted regulations to make residential neighborhoods, schoolyards, and the city’s open spaces off-limits to drilling, Governor John Hickenlooper sued, contending that more lenient state regulations took precedence. In response, Longmont citizens launched an initiative to ban fracking altogether within the city. Though overwhelmingly outspent by industry money, the ban initiative carried by a remarkable 60/40 margin. Industry, backed by the state, has sued to overturn the ban.

As Deborah Rogers points out in her report, “Shale & Wall Street,” the oil and gas companies “are not in business to steward the environment, save the family farm, or pull depressed areas out of economic decline. If these things should by chance happen, they are merely peripheral to the primary mission of the companies.”
14
Yet the
promise
of benefits to communities helps these companies achieve their real primary goal—which is to extract hydrocarbons as cheaply and efficiently as possible and to sell them at the highest price that can be realized. Expectations of jobs and tax revenues can deter investigations into environmental and health problems, and delay regulations.

For communities that have endured environmental insults, human health impacts, and costs to road infrastructure, all for the sake of income from fuel production, it is perhaps the bitterest of ironies when oil and gas companies simply refuse to pay promised royalties. This is by no means standard operating procedure within the industry, but it does happen.
15
To mention just one example: in 2012 Chesapeake Energy paid five million dollars in settlement of a lawsuit brought by Dallas/Fort Worth Airport over significant underpayment for gas produced from horizontal wells beneath airport property.
16

The Nation

In their many opportunities to testify before Congress, oil and gas industry representatives have repeatedly painted a glowing picture of how America is benefiting from expanded shale gas and tight oil development. Here is Daniel Yergin speaking on the topic of shale gas in 2011:

This abundance of natural gas is very different from what was expected a half decade ago. It was then anticipated that constraints on domestic natural gas production would result in high prices for consumers and the migration of gas-using industries—and the jobs that go with them—out of the United States to parts of the world with cheaper supplies. The United States was also expected to be importing substantial amounts of natural gas in the form of liquefied natural gas (LNG). That would have added as much as $100 billion to our trade deficit. None of that has occurred. Instead, the United States has become, except for imports from Canada, mostly self-sufficient. . . . Gas prices have fallen substantially, lowering the cost of gas-generated electricity and home heating bills. Several hundred thousand jobs have been created in the United States. Gas-consuming industries have invested billions of dollars in factories in the United States, something which they would not have expected to do half a decade ago—creating new jobs in the process. The development of shale has created significant new revenue sources for states—for the state of Pennsylvania and localities in that state, for example, $1.1 billion in revenues in 2010.
17

All true. But the implication is that with expanded drilling we can expect much more of the same. Not so true.

As for tight oil and its impact on America’s petroleum production and imports, here is Yergin speaking to Congress in 2013:

Net imports of crude will continue to decline. . . . [W]e will see the Western Hemisphere, and North America in particular, moving towards greater self sufficiency. At the same time, the very large, technically advanced refining complex on the Gulf Coast—along with the shifting domestic product demand—will put the United States in the position to continue to expand exports of refined products. . . . [E]xpanded domestic supply will add to resilience to shocks and add to the security cushion. Moreover, prudent expansion of US energy exports will add an additional dimension to US influence in the world.
18

The impression we are left with is that it’s all good news in the oil and gas world, and America should be cheering. Yet that’s far from being an accurate portrayal. What’s most objectionable is the reassuring sense of permanence that characterizes Yergin’s description of our national energy picture. Domestic supplies of oil and gas will increase . . .
but for how long?
A “prudent expansion” of US energy exports could only be based on the assumption that the current spate of growing production will continue for decades. Yet, as we have already seen, the EIA anticipates a peak in Bakken tight oil extraction in 2017. And if the analysis in Chapter 3 is accurate, US shale gas production will begin to taper off at roughly the same time.