Carter Administration’s Role in Natural Gas Boom

In his State of the Union address, President Obama cited federal support of shale gas technologies to defend his spending on green energy. Around the same time, an organization called the Breakthrough Institute published a study claiming that the federal government, not private industry, should get credit for the shale boom. These combined announcements provoked a debate among energy analysts and others about the contributions of government energy related R&D programs.

One valuable insight into this debate can be found in The Quest, the latest book by Pulitzer Prize winning energy historian Daniel Yergin. His chapter on “The Natural Gas Revolution” makes clear that the vision and persistence of one Texas businessman paved the way for our current shale boom. Yergin share some of these details in a 2011 Wall Street Journal column:

In the early 1980s, George P. Mitchell, a Houston-based independent energy producer, could see that his company was going to run out of natural gas … Mr. Mitchell had a strong hunch, however, piqued by a geology report that he had read recently.

Perhaps the natural gas that was locked into shale—a dense sedimentary rock—could be freed and made to flow. He was prepared to back up his hunch with investment. The laboratory for his experiment was a sprawling geologic formation called the Barnett Shale around Dallas and Fort Worth. Almost everyone with whom he worked was skeptical, including his own geologists and engineers. “You’re wasting your money,” they told him over the years. But Mr. Mitchell kept at it.

The payoff came a decade and a half later, at the end of the 1990s. Using a specialized version of a technique called hydraulic fracturing (now widely known as “fracking” or “fracing”), his team found an economical way to create or expand fractures in the rock and to get the trapped gas to flow.

Today, in an age that craves innovation in energy, George Mitchell’s breakthrough in the Barnett Shale has opened the door to a potentially profound change in the global energy equation.

Does that mean that the federal government had no role? Of course not. Questions involving the federal role include:

  • did federal money substitute for private capital;
  • did federal R&D address areas that would not have been addressed by private companies; or
  • did federal participation with private companies provide a needed incentive/a way to lessen its risk?

The answer to each of these is probably yes to a degree. However, a casual reading of the literature on shale gas leads to a reasonable conclusion that the Breakthrough Institute overstated the role of the federal government. Consequently, its implications about government energy R&D could easily mislead.

Hydraulic fracturing was first developed by private industry in the 1940s. The same is true of directional drilling. In the 1970s after the first oil embargo, the federal government created institutions intended to address declining natural gas reserves and energy technologies to reduce U.S. reliance on foreign oil. Most assessments of these efforts are critical of government sponsored projects and spending. Still, that doesn’t mean that it was all a wasted effort, especially the basic research initiatives.

According to Yergin, Section 29 was “a provision in the 1980 windfall profits tax bill that provided a federal tax credit for drilling for so-called unconventional natural gas” And it “stimulated activities that would otherwise not have taken place.” But shale gas proved too difficult and uneconomic, and almost all companies tackling the issue dropped out.

Yet, Mitchell persisted.

During two decades of effort, he lost a quite a bit of money.” Because of his belief in the potential of shale gas, Mitchell was able to interest the Gas Research Institute—a private-public not for profit organization—and the DOE to allocate research dollars to new technologies. There is evidence that federal R&D dollars contributed to making shale gas commercially viable, earlier rather than later in the process.

According to Dr. Terry Engelder from Penn State, DOE research “helped expand the limits of gas shale production and increased understanding of production mechanisms.” George King, a consultant with Apache Corporation, wrote that technology developments responsible for fracking can be attributed to “a loose alliance of the U.S. Department of Energy, the Gas Research Institute and numerous operators.”

Yergin echoes these insights, noting that when George Mitchell put Mitchell Energy on the market in the late 90s, three companies passed on acquiring it after concluding that fracking was a commercial flop. Few years later, one of those companies, Devon Energy, acquired Mitchell after it starting producing shale gas.

The conclusion that can be drawn from this history is that President Obama greatly overstated the government’s role in making shale gas commercially viable. Politicians do that all of the time and regrettably. The President uses excessive rhetoric far too often. Second, government R&D funding contributed to the development of shale gas technology. What is unclear is how much filled a void in funding how much displaced private funding.

One example of value added by government R&D is not a reason to generalize about government sponsored R&D. The shale gas revolution could be a useful case study for better understanding where government funding is appropriate, where it merely replaces private sector funding, and why other firms did not share George Mitchell’s vision.

Independent of the government’s role in shale gas, there is a rich history of the government wasting R&D dollars attempting to advance an industrial policy and investing in areas best left to the private sector. Government R&D is best focused on basic research and topics on which the private sector would have difficulty establishing property rights.