Magazine | October 28, 2019, Issue

A Shale-Gas Revolution, If We Can Keep It

A small natural-gas facility near Carrizo Springs, Texas (Carol M. Highsmith/Buyenlarge/Getty Images)
The boom, fostered by markets, is now threatened by politics

Living conditions in the early Industrial Revolution were often atrocious, and Marx and Engels thought they saw a trend. They predicted in Capital that as capitalism evolved, the living conditions of workers would deteriorate. Instead, as King Coal began powering the machines of the Industrial Revolution, living conditions soared the world over. 

Things in which only the wealthy had ever been superfluous — clothing, food, shelter, health care, education, the ability to travel — suddenly became accessible and affordable to everybody. Natural gas brought lights to our city streets at night, hot water to our bathrooms, and warm radiators to even the poorest households. Along with coal, it soon electrified the world.

And yet the resistance to industrial development, on the part of both socialists and their new environmentalist allies, only grew. Incited during the 19th century and most of the 20th by the seemingly losing struggle against pollution, environmentalists often went far beyond the laudable effort to control industry’s “negative externalities” and saw industrial growth and environmental protection as conflicting priorities. Thus were born decades of sometimes fantastically counterproductive regulations. 

Unfortunately for the environment, these regulations proved particularly inhibiting for the development of natural gas. Natural gas is by far the cleanest fossil fuel in terms of real pollutants, and it has the lowest carbon emissions as well. But because it is significantly more complicated to transport natural gas than coal or oil over long distances, it had never been a global commodity, so natural-gas companies never become globally big and politically powerful. Electricity regulators favored coal well into the 1970s.

So it turned a lot of heads when a brash new company emerged from Houston’s oil bust in the 1980s to argue that the potential of natural gas — economic, strategic, and even environmental — was virtually limitless. 

Enron set out to create a global market for natural gas. But as Robert Bradley Jr. has persuasively argued in his Political Capitalism trilogy, its CEO, Ken Lay, succumbed to the allure of using political influence for commercial advantage, often at the expense of Enron’s competitors. Enron loudly embraced corporate “social responsibility,” including the nascent angst over climate change, and used it as leverage against both oil and coal. Jeremy Leggett, the former head of Greenpeace, once noted that Enron was “the company most responsible for sparking off the greenhouse civil war in the hydrocarbon business.” 

Enron is seen in popular culture as a failure of unbridled capitalism. But political capitalism, with its lobbyist backroom deals and government-influence campaigns, is a corruption of competitive markets, not a natural outgrowth of them. So is fraud, and under CEO Jeff Skilling, Enron engaged in accounting practices that amounted to fraud on an epic scale. Its bankruptcy in 2001 was the largest in American history at the time. 

But Ken Lay wasn’t wrong about the potential of natural gas. The very day before Lay was convicted of securities fraud in May 2006, Al Gore released An Inconvenient Truth, and history’s most galvanizing and ideological environmentalist movement was born. For climate activists, saving the planet would eventually require the elimination of natural gas, but for the moment, a tactical alliance with natural-gas producers might help kill coal. 

Obama came to office frankly promising that, under his climate plan, electricity prices would “necessarily skyrocket.” He started by restricting oil and gas leases on federal lands. In 2010, he took advantage of the months-long BP oil spill to virtually shut down all new deep-sea drilling projects in the Gulf of Mexico and on Alaska’s North Slope. In 2014, Obama’s EPA proposed a radical reorganization of America’s electricity sector, the “Clean Power Plan,” which would have killed coal once and for all, by requiring power utilities to switch to energy sources with lower carbon emissions. With half the carbon emissions of coal, natural gas would be the biggest immediate beneficiary, and though it was also set up to be next on the chopping block, too many natural-gas companies seemed willing to go along. 

A catastrophically costly intervention in America’s energy markets was taking shape. The new rules would have been particularly devastating for Texas, by then the industrial engine of the American economy. But fortune seems always to smile on Texas, and this was no exception.

Most of the oil and gas fields in the continental U.S. had been declining since the 1970s. Most of the known deposits seemed exhausted, especially in Texas. Other geological formations — particularly shale — were known to contain untold amounts of oil and gas, but because shale is not permeable, these reserves were not even theoretically recoverable. 

But one wily old Texas engineer, George Mitchell, had long believed that because shale is easily fractured, it could be made permeable enough for oil and gas extraction. He put together two old technologies, hydraulic fracturing and directional drilling and, after much trial and error, finally started producing oil and gas at higher and higher rates from shale. Other producers began to take notice. Before long, federal experts officially designated the shale reserves as recoverable. 

The new numbers beggared belief. Official estimates had put North America in its last decades of recoverable oil and gas. Suddenly the U.S. and Canada each had 500 or 600 years or more of recoverable reserves. It was like discovering the huge Texas fields of a hundred years ago all over again. By the time Obama’s Clean Power Plan was released, the fracking boom was already on its way to creating a million jobs in U.S. manufacturing as a result of much cheaper electricity, a boon for which Obama promptly took credit. Last year, America surpassed every country in OPEC to become the world’s largest producer of oil and gas. 

In a comical irony, fracking may be reducing carbon emissions more than all the world’s climate policies put together. According to the Energy Information Administration, U.S. carbon emissions from energy production are down 11 percent from the historic peak of 2007, largely thanks to the displacement of coal by natural gas in electricity generation. By contrast, Europe’s draconian climate measures have reduced carbon emissions by only about 8 percent in that time, while in the Asia-Pacific region carbon emissions have jumped more than 40 percent.

But shale formations brimming with oil and gas can be found all over the world. So why did the fracking boom happen only in North America? The answer is simple: Canada and the United States are the only countries whose energy producers are private companies, and the only ones where subsurface minerals can be privately owned. So North American companies have an incentive to innovate that no government could have: competition. 

By tapping into shale, fracking has unleashed a historic revolution. And American natural gas can reshape the world energy market — if we can transport it. Besides rapidly tilting the trade balance in America’s favor, exports of liquefied natural gas (or “LNG”) from the United States will make Europe and Asia less dependent on Russia and the Middle East for natural gas, increasing America’s global influence.

Alas, the technical challenge of extracting the new bounty of natural gas has proven far easier to overcome than the regulatory challenge of transporting it. Though the Clean Power Plan was a casualty of the 2016 election, regulators have been slow to accommodate the boom in natural-gas production, particularly gas released as a by-product of oil production. There is little that companies operating in the major shale fields of Texas and North Dakota can do with the large volume of natural gas that is released as oil is extracted, so they flare it, wasting enough natural gas every day to power 4 million homes. Regulators have begun to take notice, and environmentalists see an opportunity to limit both oil and natural-gas production.

Meanwhile, energy firms are moving rapidly to develop the pipelines and LNG-export facilities needed to move the gas. But they face daunting political and regulatory obstacles. To have bankable pipelines, you have to be plugged into the facilities of both your suppliers and your customers, with long-term supply contracts if possible. Companies expend considerable effort securing the commitments necessary for economical supply chains, including, in the case of pipelines, rights-of-way that have to be negotiated with individual landowners along a pipeline’s entire route. 

With dozens of federal and state agencies empowered to authorize or deny them, obtaining the needed permits is often a needlessly prolonged and unpredictable saga, not least because in the government, one isn’t generally penalized for wasting everybody’s time. In many cases, agencies simply haven’t reallocated resources to those offices where the volume of permit applications has grown fastest. And once those obstacles have been overcome, environmentalists show up to bind the project in endless litigation, which activist courts have bent over backward to facilitate. Companies have to be prepared to lose hundreds of millions and even billions of dollars merely because of red tape and regulatory risk. 

Because Obama’s push for renewable-energy projects ran into the same patch of nettles, streamlining the process for federal permits and environmental-impact assessments is one of the few areas of environmental regulation where we’ve seen some bipartisan consensus. Hence, the Trump administration has tried to build on Obama-era reforms in crafting commonsense policies, such as “One Federal Decision,” which requires agencies to coordinate and complete their reviews of major infrastructure projects in less than two years. 

America’s energy future may depend on the success of these efforts. Our labyrinthine regulatory system threatens to neutralize the advantage of our amazingly innovative private sector. Shale gas is everywhere, and America has only a brief head start if it wants to become the world’s dominant supplier.

Mario Loyola — Mr. Loyola, a former foreign-policy adviser at the Pentagon and in the U.S. Senate, is a visiting fellow at the National Security Institute at George Mason University’s Antonin Scalia Law School.

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