CERAWeek: Nat gas industry faces environmental backlash, pricing fears

The natural gas industry needs to do a better job countering a growing backlash against hydraulic fracturing and convincing power companies that the fossil fuel will be cheap and abundant for years to come, executives and analysts said today.

So far, the industry has been outmatched when it comes to calming public fears that drinking water supplies can be tainted by the hydraulic fracturing process used to unlock natural gas from shale and tight plays nationwide.

“The industry has not historically been very adept” at reaching out to stakeholders, said Guy Buckley, a vice president of corporate development at pipeline, processing and storage company Spectra Energy.

“When you bring in 100 rigs in a state that hasn’t had them in a long time, it does get some attention,” Buckley said. But it also brings jobs, he added — and that’s a message that needs to get to residents in those regions.

The fears are especially acute in New York and Pennsylvania, where communities that haven’t seen drilling rigs in decades are suddenly inundated by them, as companies rush to produce natural gas from the Marcellus shale formation in the Northeast. In New York, a executive order signed by former Gov. David Paterson bars hydraulic fracturing until July 1.

A series of New York Times reports on the subject also recently highlighted the risks posed by companies disposing radioactive wastewater from the fracturing process in rivers that supply drinking water in Pennsylvania or at sewage plants that are not capable of treating it.

“The industry is definitely under attack,” said Stacy Schusterman, CEO of Samson Investment Company, during a panel on the third day of IHS Cambridge Energy Research Associates’ CERAWeek conference in Houston. “But I think the bulk of that is happening in states like Pennsylvania and New York, where the amount of drilling growth is something they haven’t seen before and the system is not really set up to handle the volume of activity from the public’s perspective.”

It’s a far different scene in Texas, where producers are tapping natural gas from the Eagle Ford shale in areas where wells dot the landscape.

“In states where the industry has been active for a very long time, barring the EPA coming in (and regulating), the industry can have a debate, because people know it’s jobs, it’s income taxes and it’s severance taxes,” Schusterman said.

The hydraulic fracturing process involves injecting mixtures of water, sand and chemicals seep underground and under high pressure to break up shale rock and other tight formations to produce natural gas. Environmentalists warn that natural gas can escape out of poorly designed and secured wells, causing risks of explosion and water contamination. And they say that harmful chemicals used in fracturing can taint nearby water sources.

The natural gas industry’s image problem is coming on two fronts. Amid the environmental backlash, the industry also is struggling to shed its reputation as an unreliable source of energy prone to boom-or-bust cycles and volatile prices.

Just a few years ago, energy analysts were forecasting natural gas prices of $8 per million British thermal units — double the current price hovering around $4.

Some power utilities are retiring coal-fired power plants and building new ones reliant on natural gas, but worries that the price could jump again may constrain that transition, Buckley cautioned.

“Long term price is really the key driver to drive people switching over, and it’s going to take a couple years to get demand there,” Buckley said. “People aren’t just going to turn their heaters up to 80 degrees because gas is four bucks . . . and those decisions will get made as people become more secure that the shale gale is real.”

Although lower-than-forecast natural gas prices has freed up capital, there is a downside for producers, Schusterman said. In some shale formations with higher temperatures and pressures, the cost to produce natural gas may be higher than the price it can command on the market. That is particularly true in the Haynesville shale formation in Texas and Louisiana, Schusterman said.

Visit FuelFix this week for the latest news from IHS-CERAWeek. You can also follow @FuelFixBlog on Twitter. Look for the latest updates from our reporters under the #CERAWeek hashtag.