Digging Deeper into a University of Michigan Report on Shale Gas and Manufacturing

One would think that by now the benefits to our State and Country of shale gas would be conceded by all. However, there are still those folks out there who need more evidence.  Enter the University of Michigan, which recently published a report (based on a daylong symposium it held on March 28 in Washington D.C. at the National Press Club) exploring how shale gas impacts U.S. manufacturing.

It should be noted that nowhere in the title was there reference to what many activists call “mythical” benefits. Indeed, the report itself (and attendees at the end) acknowledged the “game changing” status of responsible oil and natural gas development and its potential to contribute to the manufacturing economy in many ways.  Although there are clearly positive aspects of this report, there are also blatant deficiencies where it appears the “team” regurgitated what many extreme environmentalists have been claiming about the development of oil and natural gas.

Let’s first take a look at some of the benefits of the shale gas boom mentioned in the report.

Lower Energy Costs

“Lower feedstock and energy costs could help manufacturers reduce expenses by as much as $12 billion annually through 2025, creating one million new manufacturing jobs. The American Chemistry Council estimated a potential new investment of $100 billion dollars in new chemical and plastics projects.” (p. 6; emphasis added)

New Industry

“Thomas Kalil of the White House Office of Science and Technology Policy and the National Economic Council raised the prospect that shale gas could not only enhance the competitiveness of traditional manufacturing industries but usher in new industries that use gas as a feedstock.” (p. 6)

Energy Independence

“In 2011, approximately 95% of the natural gas that was consumed in the United States was produced domestically. This is significant, as it means the supply of natural gas is not as dependent on foreign producers as is the supply of other fossil fuels, such as crude oil. Furthermore, the availability of large quantities of shale gas could enable the U.S. to not only consume primarily domestic natural gas, but also to produce more gas than it consumes, and thus become an exporter.” (p. 8; emphasis added)

Industry Consumers

“Numerous analysts expect the petrochemical, long haul transportation, and metals industries to benefit significantly from an increased availability of affordable natural gas. Some in the steel industry predict a possible job growth of up to one million jobs in the steel industry alone.” (p. 9; emphasis added)

Transportation

“The transportation sector also stands to benefit from shale gas, although higher up-front costs for new equipment have thus far been a significant limiting factor. Relative to diesel, the cost of natural gas is, for the moment, drastically lower – which could be part of the reason why orders for natural gas powered trucks have increased by nearly 150% recently.” (p. 11; emphasis added)

Stronger Balance of Trade

“Less than a decade ago, it seemed the United States was poised to become one of the largest importers of natural gas in the world, but with the boom in shale gas production in recent years, the national conversation has reversed course entirely, and now many are discussing the possibility of exporting domestically produced natural gas overseas.” (p. 11; emphasis added)

Manufacturing Investments

More than 200 mostly U.S.-based companies have participated in onshoring during the past four years, a trend in part motivated by the availability of less expensive natural gas. One Fall 2013 survey of $1B-plus company executives stated that over half of those are either already planning for or actively considering moving production back to the U.S. from China – a figure double that from the same survey given the previous year. In May 2013, the American Chemistry Council reported that nearly 100 chemical companies had announced new projects related to opportunities created by the availability and price of U.S. shale gas. The appeal of low cost feedstock, in total, had yielded just shy of $100 billion in promised facility construction.” (p. 14; emphasis added)

Cheaper Fertilizer for Farmers

“The ammonia production industry also stands to benefit dramatically from the shale gas boom. Between 70-90% of the cost of producing ammonia, a key component of fertilizers and other agricultural products, is the cost of natural gas – as both feedstock and fuel. Just three years ago, more than half of U.S. nitrogen fertilizer was imported.” (p. 15)

Aluminum Manufacturing

“Aluminum manufacturing is a similarly energy-intensive industry. In 2008, Alcoa announced an operations reduction, and then closure, at its Port Comfort, TX plant – one of nine alumina facilities the company operates around the globe. The plant, which closed due to high power costs, employed 650 people. Eric Roegner, COO of Alcoa, noted during the March symposium that natural gas prices have enabled Port Comfort to operate at full capacity again.” (p. 16; emphasis added)

The report clearly recognizes the benefits from the recent energy boom as seen in its conclusion: “The U.S. shale gas boom of recent years has enabled domestic job creation and economic growth, and has recast the U.S. role in the global energy landscape.”

However, what the report truly fails to recognize is that this energy boom would not be realized but for continued development of our natural resources. Yes, the abundant supply of natural gas has fostered a resurgent manufacturing sector, but that resurgence relies on continued supply.  The report goes to great lengths to address the benefits of shale gas once it’s been delivered to the end-user, but appears to focus mainly on the risks associated with the actual development and distribution of oil and gas.

Regulations Not Managing Risks?

The report cites a 2013 survey by Resources for the Future to lay out the “perceived” environmental risks with developing shale gas.  Specifically, the report focuses on the need for regulatory reform in wastewater disposal.

“While disposal methods will continue to depend to a large degree on economics and regulations, there is a growing body of evidence suggesting that current practices and regulations do not provide adequate human or ecosystem protection.” (p. 19; emphasis added)

However, many of the “perceived risks” such as water issues, well construction, and waste disposal are already effectively regulated in Michigan.  In fact, according to the Michigan Department of Environmental Quality (MDEQ):

“Michigan has strict rules about how much water can be used for fracturing, how wells are constructed, how they are tested before they are employed, and how the used ‘flowback’ water is contained and disposed of. These are the four top risks from gas and oil development. The DEQ has developed a regulatory structure that has effectively protected Michigan’s environment and public health for decades.” (p. 2)

True, there will always be some risks associated with the development of oil and gas.  However, it should be noted that there are risks with all industrial, agricultural, and residential development.  Frankly, there are risks associated with wind and solar development.  However, the associated risks are being successfully regulated throughout the country.  For example, in Michigan, hydraulic fracturing has been safely done for over 60 years through an environmentally sound regulatory system.  This fact was acknowledged by MDEQ:

“This process has been in regular use by the gas and oil industry in Michigan since 1952. More than 12,000 wells have been fractured in this state, and regulators have seen no instances of adverse environmental impacts.” (emphasis added)

Like other states, the regulators in Michigan are always evaluating ways to protect the environment while simultaneously allowing the successful develop of the state’s natural resources.  Furthermore, the regulatory structure in place is by no means unique to the state of Michigan.  Oil and gas development has been occurring safely in this country since the late 1800s.  Moreover, according to a June 2012 report by the National Conference of State Legislatures, as new technologies develop such as hydraulic fracturing, regulations are correspondingly updated:

“As of May 2012, at least 119 bills in 19 states have been introduced this session that address hydraulic fracturing.” (p. 4)

Last but not least, a recent report from the U.S. Government Accountability Office concluded:

“Class II programs from the eight selected states that GAO reviewed have safeguards, such as construction requirements for injection wells, to protect against contamination of underground sources of drinking water.  Programs in two states are managed by EPA and rely on EPA safeguards, while the remaining six programs are state managed and have their own safeguards that EPA deemed effective at preventing such contamination. Overall, EPA and state program officials reported that these safeguards are protective, resulting in few known incidents of contamination.”

What is clear is that states all over the country have responded to the regulatory needs associated with the safe development of oil and gas.

Reducing Methane Emissions Not Enough?

With regard to methane emissions, the report apparently mistakenly relies on data that do not support their conclusion.  The report claims that:

Recent studies in the U.S. have indicated methane emissions are substantially higher than currently estimates by inventories, but this review notes the under-estimates appears across the oil and gas industry.” (p. 19-20; emphasis added)

The problem is that the 2014 paper cited as a source for this claim actually concludes that, even with the increased methane emissions discussed, the environmental benefit of gas will still outweigh the alternative, as discussed here.  Specifically, the paper finds that:

“…assessments using 100-year impact indicators show system-wide leakage is unlikely to be large enough to negate climate benefits of coal-to-NG substitution.” (p. 733)

In other words, even assuming an increase in emission levels there will still be a net greenhouse gas benefit in using natural gas.  However, this conclusion is surprisingly absent from the report.  The absence is troubling given that as has been previously discussed in multiple scientific analyses, many of which have been peer-reviewed.

Furthermore, the premise that methane emissions are increasing is called into question by the Environmental Protection Agency’s (EPA) recent Greenhouse Gas Inventory.  Even though the report claims “recent studies” indicate methane emission are understated, what is clear from the EPA report is that they have been steadily declining:

“Those [CH4 (Methane)] emissions have decreased by 26.6 Tg CO2 Eq. (17.0 percent) since 1990. The decrease in CH4 emissions is largely due to the observed decrease in emissions from production and distribution. The decrease in production emissions is due to increased voluntary reductions, from activities such as replacing high bleed pneumatic devices, regulatory reductions, and the increased use of plunger lifts for liquids unloading.” (ES-14)

As we have discussed here and here, this decline is even more surprising given that production of natural gas has increased by over 25 percent since 2007.

Although the focus on reducing methane emissions is an important aspect of the development of natural gas, the industry is successfully addressing the issue.

Replacing FracFocus with New Database?

One surprising recommendation is to establish a federal website seemingly to replace FracFocus.  FracFocus is a web-based database used to “provide the public access to reported chemical used in hydraulic fracturing” and “provide objective information on hydraulic fracturing, the chemicals used, the purposes they serve and the means by which groundwater is protected.” Moreover, the use of FracFocus is currently required by a number of states and has support at the federal level.

However, even though FracFocus has this board support, the report specifically recommended:

“Establish a federally administered, information-rich website designed as an impartial source of public data on gas drilling sites, best practices, safety incidents, and rates of reported emissions.” (p. 4; emphasis added)

The report seems to infer that the overriding reason for establishing a federal website is that the public doesn’t trust FracFocus because it relies on industry.  In reference to “information resources such as FracFocus” the report finds that:

“The two perhaps most visible information sources, the natural gas industry and popular films, scored at the low end of trustworthiness with the public. Clearly there is a void to be filled if decisions about responsible development of U.S. shale gas resources are to be made with the participation of an informed public.” (p. 28; emphasis added)

To address the need of a new federal database, it should be noted that FracFocus already provides an “impartial source of public data on gas drilling sites,” as well as “best practices.”  As for “safety incidents,” the EPA already collects this information and is accessible through its web site here.  One area not covered by FracFocus is the “rates of reported emissions” of methane, which, as EID has previously discussed, are declining even as production is increasing.

It would seem that the costs of such a large duplicative undertaking would not be worth the projected benefits, given that FracFocus is already partially funded by the federal government.  As for the public confidence in the current structure, it is worth noting that regardless of which system is in place, both the state and federal government has to rely on industry to provide certain data.  The costs of monitoring all aspects of oil and gas development 24/7 are astronomically high.  Moreover, who is to say that the public would have more confidence in the federal government administering a larger website with data pouring in from all over the country?

Let’s also not forget that FracFocus has been praised by none other than the Obama Administration for providing “transparency to the American people.”

Job Training and Upstream Skills

The report also recommends “training a next generation energy workforce” by assessing:

 “… workforce requirements and develop skills training certificate and degree programs in partnership with community colleges.” (p. 31)

However, in describing what areas of the energy sector should receive training, those involved with the supply of natural gas are seemingly excluded:

“It has been noted that the nature of the jobs at the far upstream end of the supply chain, e.g., well drilling and completion, is migratory. However, the construction, safe operation, and maintenance of the expanded infrastructure at all points downstream will create a far less transient need for a skilled workforce.” (p. 31; emphasis added)

It is a bit puzzling that this recommendation would seemingly exclude providing skill training for new well construction given the finding of the University of Michigan’s 2013 Economics Technical Report:

“New well development requires substan­tially more labor than post-drilling gas production and system maintenance.” (p. 8)

Given that new wells require more labor than the other areas that the report focused on, shouldn’t we focus our training on the areas with the most jobs?

Also, the Technical Report recommended focusing on reworking older wells as new wells require hiring from outside of Michigan.

“[G]as development from reworked wells may use a greater amount of local labor than for new wells, whereas new drilling might demand skills that neces­sitate hiring labor from outside Michigan.” (p. 13)

If we as a state, in partnership with various federal agencies, are going to invest in education at the community college level as suggested in the report, shouldn’t we also focus on training the local workforce in skills that reduce the necessity for companies to have to hire labor from outside of Michigan?

It is clear that the authors of this report want to focus on areas other than development of shale gas, but let’s just keep in mind that none of the boom in manufacturing or energy-intensive industries would have occurred but for the upstream aspect of the industry.  Simply put, if the natural resources aren’t found and extracted from the ground, none of what the report addresses would be possible.

Bridge to Renewables?

The Report’s final recommendation appears to be to move beyond hydrocarbons.  The report states that shale gas:

“is an important domestic resource, sufficient to meet domestic demand for decades, even with exports to other parts of the world. However, it is still a fossil fuel, one whose use as an energy source results in CO2 emissions, and whose leakage adds further to the atmospheric greenhouse gas burden.” (p. 32; emphasis added)

The report goes on to state:

“It is imperative that the ‘bridge’ find a robust ‘pier’ at the other end in a yet more sustainable future.” (p. 32)

It just seems a bit ironic that a symposium on how shale gas has been “a game-changer for U.S. manufacturing” would lead to a report that recommends ending its use.  Furthermore, it seems dubious, from a business stand-point, to suggest that the profits of the shale gas boom be used to research a way to “bridge” the end of hydrocarbons in place of renewables.

There is certainly a case to be made for gas that it can help transition us to an even cleaner energy future. But the fact remains that hydrocarbons will continue to fuel our economy for the foreseeable future, and we should focus on how to more efficacious develop these resources in conjunction with diversifying our energy sources.

Conclusion

In sum, this report touts the advantages of the shale gas boom for manufacturing and other energy-intensive industries, but then chides the industry responsible for the boom and focuses on the risks associated with its development.  The irony is that report posits that the economic benefits of a boom made possible by the oil and natural gas industry should be used to move away from that very industry.  This kind of logic is analogous to the person claiming their electric car is environmentally superior because it doesn’t burn hydrocarbons, but then conveniently dismisses the fact that the electricity to power the car was likely produced by hydrocarbons.

It would be helpful for all stakeholders, when discussing the current energy boom, to acknowledge how and why there is an energy boom — and that we have an abundant supply of natural resources to support our economy.

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