Guar: Shovels in a gold rush?

The analogy of selling shovels in a gold rush immediately came to mind when I read this:

U.S. companies drilling for oil and gas in shale formations have developed a voracious appetite for the powder-like gum made from the seeds of guar, or cluster bean, and the boom in their business has created a bonanza for thousands of small-scale farmers in India who produce 80 percent of the world's beans.

"Guar has changed my life," said Shivlal, a guar farmer who made 300,000 rupees - five times more than his average seasonal income - from selling the beans he planted on five acres (two hectares) of sandy soil in Rajasthan. "Now, I have a concrete house and a colour TV. Next season I will even try to grow guar on the roof."

In Jodhpur, under the shadow of an ancient fort, traders buy guar seed at 305 rupees a kg, a 10-fold increase from a year ago.

How big a deal is guar? Up to 30% of fracking cost and enough to send Halliburton shares down 5%, apparently.

With gas barely above $2/MMBtu, iconic producer Chesapeake shedding attractive assets to plug a cash gap, and even the oilfield services companies who do the drilling vulnerable, it seems the winners here are the farmers. But two cautionary notes. First, supply response can be rapid in agriculture - a single season - and such lucrative price fly-ups are seldom long-lived. And second, since guar grows in the desert and is susceptible to drought, I would not be surprised to find (once the dust settles) that guar is a water-hog like jatropha and hardly (like most other cash crops) a panacea for sustainable development.

Issues with Howarth paper

Open season has opened on Robert Howarth's paper claiming that shale gas emits more GHGs than burning coal; I like CFR's Michael Levi's take:

Howarth’s basic question is an important one: what happens to the claimed emissions benefits of natural gas once you include the methane leaked in its production and transport? Alas, his analysis is based on extremely weak data, and also has a severe methodological flaw (plus some other questionable decisions), all of which means that his bottom line conclusions shouldn’t carry weight. But someone else, with better data and more careful calculations, ought to address this important set of questions that he raises properly.

He cites four main issues; the first three are:

First, the data for leakage from well completions and pipelines, which is where he’s finding most of his methane leaks, is really bad.

Second, Howarth’s gas-to-coal comparisons are all done on a per energy unit basis... Here’s the thing: modern gas power generation technology is a lot more efficient than modern coal generation, so a gigajoule of gas produces a lot more electricity than a gigajoule of coal. The per kWh comparison is the correct one, but Howarth doesn’t do it. This is an unforgivable methodological flaw; correcting for it strongly tilts Howarth’s calculations back toward gas, even if you accept everything else he says.

Third, the problems with gas that Howarth flags have cheap technological fixes (green well completion techniques, better pipeline care), though there may be institutional barriers to implementing them. If we scale up gas and realize we have an emissions problem, there are things we can do. The only technological fix for coal, in contrast, is CCS, which isn’t commercial yet; if we decide we want to fix our coal problem, it’s not clear we have any options.

The fourth is around the time horizon used - a 20-year horizon makes methane look worse than a 100-year horizon, because it decays much faster than CO2. This one is really more of a judgment call than a serious flaw in the paper (at least it is transparent). But well said, Michael Levi - you've earned your RSS feed entry into my closely guarded Google Reader.

Study says fracking emits GHGs

More ammunition for those who oppose the recent explosion of shale gas exploration and production (e.g. local environmentalists, coal companies):

Cornell University professors will soon publish research that concludes natural gas produced with a drilling method called “hydraulic fracturing” contributes to global warming as much as coal, or even more.

The study concludes that shale gas developed through fracking carries a higher greenhouse gas footprint because the “fugitive” methane emissions at the fracking sites are greater than releases from conventional gas wells.

I'm not really in a position to evaluate the credibility of the study, although one might read into the fact that industry groups are pushing back on the study's assumptions about the GHG potency of methane (the range is fairly well-established), whereas I would have thought that the quality of measurement of "fugitive methane emissions" would have been much more suspect.

Dan Rather on fracking gas

I just got around to watching a Dan Rather Reports piece on fracking, which aired a few months ago (now available on iTunes). It doesn't have any revolutionary new information, but is an interesting and serious journalistic piece on both the energy potential of shale gas and recent claims of groundwater pollution from fracking across the U.S. Features extended interviews with Chesapeake CEO Aubrey McClendon and a Wyoming farmer whose wife began suffering neurological problems after a gas well was drilled into the Bakken shale below their property. Recommended.

This also brought me back to Geoff Styles' post on shale gas and water safety, which has since generated a somewhat contentious body of comments. Geoff originally concludes that there isn't anything to worry about since fracking generally occurs at great depth and is isolated from surface water by thick layers of impermeable rock. Commenter Bartman then narrows down to two plausible pathways for surface water contamination - poor well casing/cementing and disposal of resurfaced frac water.

What doesn't look good to me is the industry's apparent attempts to obstruct further scientific testing of claimed contamination. Bartman's selection of plausible pathways sounds right to me, but I'm hard-pressed to think of a reasonable argument for not testing groundwater to see if fracking chemicals are in fact surfacing there. If they are, there is clearly a problem that requires further investigation. And if there is really nothing to hide, I wonder whether fighting against scientific inquiry and transparency is really the best PR strategy for shale gas interests in the long run.

North American shale: game-changer?

Attractive graphic of shale gas reserves in North America, along with an article on where gas from the massive Marcellus Shale will go, who is building new pipelines, the importance of transparency and proactive communication on the environmental impact of fraccing, and how the Marcellus Shale could change the game:

Van Atta said that ideally it will not be a zero-sum game for the natural gas industry... "Marcellus will be a true game changer if its vast apparent wealth can be leveraged into much higher penetration of natural gas in the overall energy mix in the Northeast market. To accomplish that may require a unity of purpose beyond that which the fragmented natural gas industry can produce."

Fraccing videos

Speaking of unconventional gas, here are some good videos from API illustrated the hydraulic fraccing process. Via Geoff Styles, who explains why we shouldn't worry about fraccing contaminating our drinking water.

First reactions to Exxon’s big play

Exxon’s $41bn deal to buy XTO energy is the big news of the day. I’m sure there will be much analysis forthcoming from every corner on this one, but here are my quick-hit thoughts from afar:

1. Great timing by Exxon. Everyone is worried about a gas glut from shale and LNG this summer, and while the price isn’t exactly distressed, this is probably about the best moment to pick up a premium large asset like XTO. I continue to admire Exxon’s countercyclical investment strategy, which they execute perhaps better than any other company on earth.


2. Great synergy between XTO’s capabilities in unconventional gas and Exxon’s global reach. Shale gas is still largely a North America story – see for example this WSJ article from tow weeks ago – and clearly has massive geological potential in many other parts of the world.


3. Related to the first two – there may be substantial balance sheet synergies, in that there are attractively priced unconventional gas opportunities out there, but with low gas prices in the near future, XTO lacks the capital and cash flow to take full advantage of them. Exxon, of course, does.


4. I think of Exxon as carrying an enormous cash hoard, so found it fascinating that they chose to do an all-stock deal. Then I looked and saw that they have burned through almost $25bn (net of income!) in the last 12 months, mostly on capex and stock buybacks. Once again… I am hard-pressed to find another company that plays the cycle better.

Update on #4: Cyrus Sanati makes the good point that Exxon did this deal with the treasury shares it bought back - much like it did for its transformative $80bn acquisition of Mobil a decade ago.

Update 2: An eagle-eyed analyst picks out an interesting condition:

Buried deeply in the 76 pages of legalese that is the Exxon Mobil-XTO $31 billion merger is a clause that basically says: If Congress regulates hydraulic fracturing, aka fracking, Exxon gets to back out of the deal.

Exxon is ever conservative, and maybe more of the value is in the U.S. than I thought in #2.

The same analyst doesn't believe this is a concern in the short term, although more for feasibility than because the underlying science is settled:

“It is our understanding that the EPA is already investigating some reports of contamination. We believe congressional leaders will wait to act until more information is available from the EPA and it is unclear when EPA would be able to complete a study,” he says.

I wonder if/how the deal gets unwound if this regulation passes a few years down the road?