Shell Bullish on Fracking, Invites Tougher Regulation
Marvin Odum, the president of Shell Oil, made a revealing and insightful observation at the "Shell 2011 Energy Summit" last week in Houston.
"You are only as good as the worst operator in your industry," he said.
He could have been talking about BP. Shell wants to drill offshore in Alaska, home to some of the richest undeveloped oil and gas reserves in North America, but there's little chance of that so long as memories of the BP Deepwater oil spill remain fresh.
Or he could have been talking about the Tokyo Electric Power Co. Last month's accident at Fukushima has cast a cloud over hopes for a global nuclear renaissance, fueling opposition to nukes from India to Germany to Minnesota.
In fact, he was talking about hydrofracking -- the technology that will allow vast amounts of natural gas to be tapped from fields around the U.S., creating a boom in the shale fields of Wyoming, Texas, Louisiana and Pennsylvania.
But fracking, as it's called, is controversial. When wells are improperly drilled, water supplies can become polluted. Some gas drilling companies won't say what chemicals they are injecting into the shale to drive out the gas. Just last week, an unpublished study challenged the conventional wisdom that natural gas is a cleaner fuel than coal, arguing that the release of methane during drilling could aggravate global warming.
To head off the criticism, and clean up the highly-fragmented natural gas drilling industry, Shell wants strong regulation of hydrofracking. The company says it will monitor its own wells carefully and disclose the chemicals it uses in its fracking fluids. The goal, it appears, is to engage with critics and demonstrate to them that when well managed, fracking has benefits that far outweigh any harm.
"There is no doubt in my mind that (fracking) can be done in the right way," Odum said. He says the way to demonstrate that is to engage with critics and regulators. "The industry has completely missed the boat on not being more transparent," he said.
As Odum sees it, the natural gas bonanza will be good for climate change because utilities can switch from coal to gas to generate electricity; good for the economy because it will create jobs and affordable energy; good for the energy security of the U.S.; and, of course, good for Shell.
The Shell exec spoke on a panel with Andy Karsner and Jason Grumet, who know the energy business inside and out. Karsner, a Republican, was U.S. Assistant Secretary of Energy for efficiency and renewable energy during the last years of the Bush administration; he now sits on the boards of Applied Materials and Codexis and is exploring investments in natural gas. Grumet, a Democrat, advised candidate Barack Obama on energy policy and now leads the Bipartisan Policy Center, a think tank that brings political and business leders together to work on tough issues, including energy.
Last year, Shell made a big bet on shale gas, buying a private company called East Resources for about $4.7 billion. ExxonMobil, the biggest natural gas producer in the U.S., made an even bigger investment when it acquired XTO Energy for about $41 billion in 2009. Still, the shale gas industry remains fragmented, including mom-and-pop operators as well as big public companies, such as Chesapeake Energy and Encana.
As a result, there are wide disparities in how gas drillers operate, monitor their wells and engage with local communities. "We have to take steps to drive the industry as a whole to the right level," Odum says. Recently, he told MIT Sloan Management Review:
As Shell starts to take a very large position in natural gas in North America, the question I ask myself leading this business is not what is Shell going to do in terms of our own performance, but how do we set baseline performance and regulatory standards in this business so it becomes attractive to everybody involved and we secure that critical license to operate? How can I help create those standards? Which governors do I need to speak to? Which members of the administration? Collaboration is crucial.
Cynics will say this is merely an effort by the industry to write its own rules. There's good reason for cynicism -- one cause of the BP spill was a failure of federal regulation. Some regulators were literally in bed with the oil companies.
More likely, though, Shell and Odum have come to recognize that in order to succeed, particularly in sensitive geographies, they need to win over the hearts and minds of people in the communities where they want to operate. That's been a hard lesson in Alaska where Shell has spent about $3 billion but has yet to drill.
The proof of Shell's intentions will come when it releases a set of principles for fracking regulation, which it intends to do in a few months. Odum and Russ Ford, an executive vice president who oversees gas exploration and production, say that the company will support disclosure of fracking fluids, baseline testing and then monitoring of water supplies during drilling operations, and the control and monitoring of so-called fugitive emissions such as methane, a potent greenhouse gas. Shell will also set a goal of 100 percent recycling of all water used in fracking, and when it can't meet that goal, it will explain why.
Interestingly, Karsner and Grumet agreed that shale gas can help meet the growing demand for energy while reducing greenhouse gas emissions -- the goal of clean energy entrepreneurs for years.
"This didn't come from MIT or Silicon Valley," Karsner said. "Natural gas came to us like manna from Heaven. Now we've got to put it to use."
But Grumet shot back: "We put drunk drivers in jail." The oil and gas industry, he said, should support strong regulation, if only to begin to regain the public's trust.
I asked them whether cheap and abundant natural gas will curb investment in solar and wind energy, which are more expensive today but will be needed eventually to deal with the threat of climate instability.
They said, in essence, renewable energy can't compete in the market with natural gas, but that the best way to promote clean energy is with a price on carbon, which Shell, Grumet and Karsner all support, but which is for now political non-starter.
In the meantime, the notion of natural gas as a bridge fuel makes sense. Said Grumet: "We need to buy time while we accelerate the future."
Image CC licensed by Flickr user stevendepolo.