Fracking Bans Only Hurt at Home – March 8, 2015

Today we talk about five things that happened the week of March 2, 2015:

  1. Gov. Wolf Proposes Natural Gas Tax in Budget Address
  2. Mitch McConnell Joins the “Just Say No” Club
  3. Dodge Expands its CNG Offerings
  4. Distributed Generation with Fuel Cells
  5. Forced Pooling Moves in West Virginia

Our interview this week is with Ken Medlock, the Director for the Center for Energy Studies at the Baker Institute at Rice University.  We discuss his new paper on the market impacts of proposed changes in natural gas policy.

Click below to listen or find us on iTunes or Stitcher.

1.  Gov. Wolf Proposes Natural Gas Tax in Budget Address

This week, Pennsylvania Gov. Tom Wolf (D) gave his first budget address and laid out his vision for state spending.  As expected, he sees a bottom line heavily bolstered by the new natural gas severance tax he hopes to put in place.

The Governor received warm applause for proposing a 5% severance tax on natural gas.  He was clear, for the first time, that the current impact fee dollars “would be preserved,” but “the rest of the funds” would be used for public education.  Gov. Wolf argued that Pennsylvania residents are already paying a severance tax to other states each time they fill up their gas tank.  He also sees the severance tax as reducing property taxes.

Gov. Wolf also talked about other opportunities being created by shale gas.  He wants to increase funding for community college, allowing Pennsylvanians to get the jobs in the shale fields.  Natural gas, he said, can also be a feedstock for a range of manufacturing jobs.

2.  Mitch McConnell Joins the “Just Say No” Club

The President’s proposed Clean Power Plan will require states to create plans to reduce carbon intensity from powerplants by certain amounts by 2030.  If states refuse, the EPA will impose a federal plan.  If states refuse to go along with the federal plan, it is a little bit unclear what the federal government would do about it.  Those answers will largely be answered by future Presidents, so some states may decide to just ignore the rule and fight future Presidents on the idea.

This week, Senate Majority Leader Mitch McConnell (R-KY) became the most high-profile proponent of the just-say-no approach.  In an editorial published in Kentucky.com, he argued:

The regulation is unfair. It’s probably illegal. And state officials can do something about it; in fact, many are already fighting back.

And yet, the Obama administration is still threatening to impose its own — presumably more draconian — plan on any state that doesn’t do as it’s told. It sounds like a scary outcome. But states shouldn’t be frightened, nor should they allow themselves to be bullied.

For starters, the legal basis for this regulation is flimsy at best. As iconic left-leaning law professor Laurence Tribe put it, the administration’s effort goes “far beyond its lawful authority.” And even in the unlikely event that the regulation does pass legal muster, it’s difficult to conceive how a plan imposed from Washington would be much different from what a state might develop on its own.

So what are governors and state officials who value the well-being of the middle class to do? Here’s my advice:

Don’t be complicit in the administration’s attack on the middle class. Think twice before submitting a state plan — which could lock you in to federal enforcement and expose you to lawsuits — when the administration is standing on shaky legal ground and when, without your support, it won’t be able to demonstrate the capacity to carry out such political extremism.

Refusing to go along at this time with such an extreme proposed regulation would give the courts time to figure out if it is even legal, and it would give Congress more time to fight back. We’re devising strategies now to do just that.

So for now, hold back on the costly process of complying. A better outcome may yet be possible.

Kentucky’s Democratic Governor Steve Beshear does not seem interested in that advice.  According to the Kentucky Courier Journal, the Governor put out a statement saying:
It is important that we plan for that eventuality by working with energy stakeholders to craft a road map from which to navigate,” the statement said. “We also feel an obligation to create a transition document that can be handed off to the next administration in December.
It went on to say that “the overwhelming majority of our stakeholders are telling us to make preparations to submit a plan. Failing to follow through with creation of that plan means Kentucky would most likely have to abide by a federal implementation plan that would cause harm to Kentucky’s economic future and burden the next administration with challenges not of its making.

3.  Dodge Expands its CNG Offerings

The truck formerly known as the Dodge Ram (apparently now just called Ram, a brand owned by FCA US), is expanding its natural gas vehicle line, according to the Detroit Free Press.  The Ram will include compressed natural gas (CNG) options for its regular cab and two-wheel-drive versions of its 2500 pickups next year.  These new trucks will join the crew cab and four-wheel drive CNG configurations already available.  Ram sold 1,000 CNG trucks last year.  These vehicles are great for fleets that drive a lot of miles but stay close to a home base with a CNG refueling station.

Ford and GM also sell CNG trucks, but theirs are actually converted to CNG after being completed.

4.  Distributed Generation with Fuel Cells

Last week, researchers at the Department of Energy’s Pacific Northwest National Laboratory, issued a press release regarding findings in a recent study called “The Case for Natural Gas Fueled Solid Oxide Fuel Cell Power Systems for Distributed Generation.”  The release said:

Instead of drawing electricity from the power grid, facilities could use natural gas-powered solid oxide fuel cells to lower their electric costs, increase power reliability, reduce greenhouse gas emissions, and maybe even offset costs by selling excess fuel cell-generated power back to the power grid. Such an energy future could be possible — assuming fuel cell lifespans are improved and enough systems are produced to reach economies of scale — according to a cost-benefit analysis published in the journal Fuel Cells.

5.  Forced Pooling Moves in West Virginia

The House of Delegates in West Virginia moved a bill, H.B. 2688, which would allow forced pooling.  The bill is meant to address the situation where a group of landowners want to allow drilling, but a few holdouts prevent it from happening.  As this bill was summarized by the WV Metro News:

A driller who gets permission from 80 percent of the mineral rights owners on a tract of land can petition the seven-member Oil and Gas Commission to force the holdouts into the pool. Currently, a single holdout can block horizontal drilling into the Marcellus Shale….

Not everyone is happy. Among the 40 opponents in the House—the bill passed Wednesday 60-40—was a coalition of conservative Republicans and liberal Democrats. They argued forcing a property owner into a deal he objects to amounts to an illegal taking of property.

The situation is not too different from the famous “I drink your milkshake” line in the movie There Will Be Blood.  Essentially, the government would allow homeowners surrounding a holdout to produce the oil and gas underneath that holdout’s land.  In this situation, however, the holdout would be given many environmental protections and be compensated.  I assume that was not the case in the movie:

Interview with Ken Medlock of Rice University (Starts at 17:36)

Dr. Medlock grew up in Texas, but was not involved in the energy industry until graduate school.  At that point, he became interested in monetary theory and international trade.  He was especially interested in the relationship between economic development and energy demand, and that eventually led him to studying natural gas markets.  He feels that natural gas has a very unique set of regulatory institutions that have created an incredibly efficient market.

Dr. Medlock is the Senior Director of Rice University’s Baker Institute Center for Energy Studies.  The Baker Institute is a nonpartisan think tank that covers several topic areas, but the energy program is its largest.  Dr. Medlock also teaches an upper-level course in energy economics.  With Houston being a center of gravity for the oil and gas business, he says that Rice prepares students well for the energy business.  Rice students are heavily recruited by the industry, and his students primarily go into academic, consulting, or corporate appointments.  Dr. Medlock said that the energy business is full of opportunities, but everyone needs to recognize that it is cyclical.  The last couple years have spoiled some folks and made them forget that downturns happen.

Dr. Medlock recently released a new paper called “The Market Impacts of New Natural Gas-Directed Policies in the United States,” which took a look at the potential market impacts of new natural gas policies in the United States.  The study was a culmination of a variety of past research funded by the Alfred P. Sloan Foundation.  The foundation has funded research on a number of shale issues including well performance, local fiscal impacts, political movements, and environmental issues.

The first step in the study is a status quo case.  Dr. Medlock explained that as taking the current policy framework and assuming that it stays the same forever.  Perhaps the biggest takeaway from the status quo case is that natural gas prices in the United States stay relatively cheap, despite the U.S. becoming a leader in liquefied natural gas (LNG) exports.  The status quo is used as a benchmark and then the study looks at the impacts of changes in policies as shown by Rice University’s own “World Gas Trade Model,” which is built into a software platform by Deloitte MarketPoint.

Fracking bans are the first policy changes examined by the study.  Dr. Medlock pointed out that one issue the study discussed is that fracking bans are unlikely once shale-directed activity has started.  In other words, fracking bans tend to be enacted in areas where nobody is experiencing economic benefits from fracking.  Denton, Texas and New York State come to mind.

The study found that a federal fracking ban would be “game changing.”  It would remove a huge resource from development, and the U.S. would return to the import-dependent path it was on before shale production took off.  Widespread local bans would have similar impacts, though perhaps not as bad.  Local bans that are not wide spread really only have local impacts.  Or as Dr. Medlock put it, local bans do not have a material impact on the North American natural gas market.  Even something as large as a complete ban on fracking in Colorado would not have national impacts because of the enormous amount of additional resources available in the county.

Another scenario in the study looked at a “flaring prohibited” scenario, which bans producers from burning off excess natural gas.  Dr. Medlock made the point that flaring is not really occurring in gas-directed drilling.  That would not make sense.  Flaring is occurring in oil-directed drilling where the cost of gathering the natural gas is more than its value.  Banning flaring would simply force oil-directed producers to put in gas gathering equipment.  That would raise their costs and slow some oil development while putting some new natural gas supplies onto the market.  Ultimately, the real impact is on oil producers and not gas producers.  Personally, Dr. Medlock feels that the market could easily handle a flaring ban.

The last two scenarios the study looked at were an LNG-export ban and costly coal regulations.  An LNG-export ban would seriously harm natural gas producers, while slightly helping natural gas consumers in the United States.  Conversely, harsh regulations on coal power plants would increase the use of natural gas in power generation.  That would drive up domestic prices while increasing production.

Be sure to keep up with the Baker Institute’s work at www.bakerinstitute.org.