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Wednesday, May 30, 2012

Seeing green in IEA’s Golden Rules

The International Energy Agency’s Golden Rules for a Golden Age of Gas report has laid out a set of “must-dos” for the unconventional gas industry if it is to maintain its social license to operate and surpass coal as the world’s second largest source of energy after oil.  The must-dos involve substantially tighter regulations and industry practices to minimize or avoid the environmental and social impacts of gas development. 

The typical industry response to calls for more oversight is to issue dire warnings about halting investment or price increases that will be passed along to consumers. But those warnings – should they be issued this time – should be dismissed.

The industry can well afford tougher requirements on such issues as methane capture, for – to paraphrase Royal Dutch Shell CEO Peter Voser -  it’s in the industry’s interest to capture as much gas as possible. But what about other, tougher environmental standards?

IEA has calculated that the adoption of its proposed “Golden Rules” for shale gas development would add about seven percent to the cost of each well.  But adding to the cost of each well doesn’t necessarily add to the price of gas – or, for that matter, decrease corporate profits - because of very favorable tax treatment of gas extraction

The market price of gas as I write this is priced at about $2.50 per thousand cubic feet. So IEA is saying that its “Golden Rules” would add less than eighteen cents to that price. That would still place the price of gas well below the tipping point - $2.75 per thousand cubic feet - where some analysts claim that gas will stop displacing coal as the preferred fuel for electricity generation.

But the calculation isn’t complete.  There is green in the Golden Rules for gas companies.  IEA estimates that applying the Golden Rules across the board – not on a per-well basis – would allow the industry to plan better, minimize or eliminate environmental risk,  improve efficiency, optimize drilling and infrastructure, , and take advantage of economies of scale.  Taken together, these benefits could yield overall cost savings of 5 percent. So IEA’s 7 percent cost increment is slashed by 70 percent to about 2 percent; again, subject to most of those remaining costs still being eligible to be written off companies’ Federal tax bills.

The cost of maintaining an untenable status quo will be far higher to the gas industry.

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