205
cost of production, or to be produced at prices that could compete with conventional
gas and oil.
Policy can help influence the economics of various energy options. Synfuels
could have competed with conventional gas and oil if given a significant tax incentive, or if taxes on regular gasoline had been raised to provide parity on cost. Wind
power would be much less economical, and perhaps even too expensive for large
scale investment without government tax breaks for the installation of wind turbines. Likewise, government policies for cleaner air in cities resulted in adding ethanol to gasoline for the reduction of smog and ozone. As a biofuel, ethanol also
lowers the fossil carbon GHG emissions of automobiles by at least 10%. Natural gas
has been used widely for the generation of electricity after the Fuel Use Act expired
in 1987, providing twice the power with half the GHG emissions of coal.
One energy development that definitely considered economics was George
Mitchell’s successful application of horizontal drilling and staged hydraulic fracturing to extract natural gas from the Barnett Shale in Texas. These were existing technologies that Mitchell used in a novel way, so it wasn’t exactly a technological
breakthrough, but more of a new application. Still, it would not have happened
without the favorable economics of sky-high gas prices.
Shortages of conventional gas in the late 1990s had driven natural gas wellhead
prices to historic highs of $11 to $12 per million Btu (MMBtu). These prices made
the development of gas resources from the Barnett Shale economic, even though a
lot of extra cost was involved in drilling the long laterals and stimulating the rock
with staged hydraulic fracturing. Mitchell’s success led to the subsequent development by others of the Fayetteville, Haynesville, Woodford and Marcellus shales
(Soeder and Borglum 2019), but by 2010 shale gas was beginning to saturate the
market. This is the point where simple supply and demand economics was forgotten
as companies rushed to drill wells and get in on what was left of the shale gas boom.
Because nothing had been done to increase the demand for natural gas, the prices
dropped steeply to below $2 per MMBtu as supplies swelled.
Drillers and operators began to optimize drill bits, drilling fluids, and hydraulic
fracturing practices for shale, improving efficiency and lowering costs. They also
began focusing on the parts of shale plays that offered the best economic returns,
such as areas with petroleum and natural gas liquids or condensate. Current lateral
drilling rates routinely achieve a rate of penetration (ROP) of 2000 feet (600 m) or
more per day, which exceeds the total lateral length on many of Mitchell’s early
Barnett wells. Some drillers have even attained an ROP of 1600 m per day on what
are known as “MAD” (mile-a-day) wells. These enormous improvements in efficiency have maintained the economics of shale gas and tight oil, despite the price
drops associated with excessive supply. New markets for cheap and abundant natural gas also became available, such as exporting LNG overseas, and using natural
gas for generating electricity.
Demand for gas began to pick up (along with prices) as power plants started
switching electrical generation from environmentally-complicated coal to simpler
and cleaner natural gas. The technology used in gas-fired power plants turned out to
be twice as efficient as coal plants, further improving the economics. Gas plants
11 Balancing Energy, Environment, and Economics
cost of production, or to be produced at prices that could compete with conventional
gas and oil.
Policy can help influence the economics of various energy options. Synfuels
could have competed with conventional gas and oil if given a significant tax incentive, or if taxes on regular gasoline had been raised to provide parity on cost. Wind
power would be much less economical, and perhaps even too expensive for large
scale investment without government tax breaks for the installation of wind turbines. Likewise, government policies for cleaner air in cities resulted in adding ethanol to gasoline for the reduction of smog and ozone. As a biofuel, ethanol also
lowers the fossil carbon GHG emissions of automobiles by at least 10%. Natural gas
has been used widely for the generation of electricity after the Fuel Use Act expired
in 1987, providing twice the power with half the GHG emissions of coal.
One energy development that definitely considered economics was George
Mitchell’s successful application of horizontal drilling and staged hydraulic fracturing to extract natural gas from the Barnett Shale in Texas. These were existing technologies that Mitchell used in a novel way, so it wasn’t exactly a technological
breakthrough, but more of a new application. Still, it would not have happened
without the favorable economics of sky-high gas prices.
Shortages of conventional gas in the late 1990s had driven natural gas wellhead
prices to historic highs of $11 to $12 per million Btu (MMBtu). These prices made
the development of gas resources from the Barnett Shale economic, even though a
lot of extra cost was involved in drilling the long laterals and stimulating the rock
with staged hydraulic fracturing. Mitchell’s success led to the subsequent development by others of the Fayetteville, Haynesville, Woodford and Marcellus shales
(Soeder and Borglum 2019), but by 2010 shale gas was beginning to saturate the
market. This is the point where simple supply and demand economics was forgotten
as companies rushed to drill wells and get in on what was left of the shale gas boom.
Because nothing had been done to increase the demand for natural gas, the prices
dropped steeply to below $2 per MMBtu as supplies swelled.
Drillers and operators began to optimize drill bits, drilling fluids, and hydraulic
fracturing practices for shale, improving efficiency and lowering costs. They also
began focusing on the parts of shale plays that offered the best economic returns,
such as areas with petroleum and natural gas liquids or condensate. Current lateral
drilling rates routinely achieve a rate of penetration (ROP) of 2000 feet (600 m) or
more per day, which exceeds the total lateral length on many of Mitchell’s early
Barnett wells. Some drillers have even attained an ROP of 1600 m per day on what
are known as “MAD” (mile-a-day) wells. These enormous improvements in efficiency have maintained the economics of shale gas and tight oil, despite the price
drops associated with excessive supply. New markets for cheap and abundant natural gas also became available, such as exporting LNG overseas, and using natural
gas for generating electricity.
Demand for gas began to pick up (along with prices) as power plants started
switching electrical generation from environmentally-complicated coal to simpler
and cleaner natural gas. The technology used in gas-fired power plants turned out to
be twice as efficient as coal plants, further improving the economics. Gas plants
11 Balancing Energy, Environment, and Economics