The energy pressure cooker

Could natural gas drive the US to energy independence within the next ten years? Breitling Oil and Gas Founder Chris Faulkner, says the nation has nearly everything at hand

Having set a target of energy independence by the end of the decade, the US government hopes to cut its reliance on overseas energy. However, with unsuccessful attempts to kick-start a meaningful renewable energy industry, the Obama administration has come under pressure to open up the country to more oil and gas exploration.

Look at McDonald’s, they’re paying $25 an hour to work the register. Some restaurants are saying they’re so busy they have to close the inside, and can only work the drive-through, to allow them to line up, because the wait to get in is two hours

Much of the attention has focused on the mining of natural gas, which has been described as the cleanest form of fossil fuels. However, the process of extracting that gas, known as fracking, has come in for much criticism because of the harm it can do to the local environment. One of the industry’s leading firms, Texas-based Breitling Oil and Gas, has been successfully exploring such opportunities since 2004. Its founder, Chris Faulkner, talked to us about how he sees the industry developing, what challenges it faces and how energy policy needs to change if the US is to become self-reliant within 10 years.

What sort of opportunities are you seeing at the moment?
I think the industry, especially in North America, is shifting away, temporarily, from dry gas into these oily plays. There’s a liquid component of the Eagle Ford Shale in South Texas, so as you migrate north the Eagle Ford actually outcrops, and so shallower deposits are not heated enough to become gaseous, they’re actually liquids. So what we’ve done now is apply the same tools, the horizontal drilling with hydraulic fracking, so we can unlock these trapped oil deposits. The industry is delighted because natural gas has plummeted from a high of almost $15 to a low of under $2 in a short amount of time. Now why is that important? Well, the breakeven point of most of these areas, for us, is about $3, so we look at a $3 per million BTU (British Thermal Unit) gas price. If we’re under that, we’re losing money by bringing it out of the ground, and if we’re at that level, then we’re just breaking even, and nobody wants to just break even.

So, the industry has shifted towards oil plays, and we’ve found some major, major discoveries in the Eagle Ford Shale. We’ve water flooded and CO2 flooded the Permian back in West Texas, which has been in heavy decline for the last 100 years, trying to revitalise it. In the last year, because of some of these shale oil deposits, the Permian is back on track to be as big as it was in the early 1900s.

This is where you have a lot of intangible items, the costs that go into making something, those intangible costs can be written off, as a deduction off of our income taxes

Go up to North Dakota and look at what’s happening in the Bakken Shale, the Three Forks, and underneath the Bakken. Look at the economic impact of the Williston Basin, which is the area where the concentration of the Bakken exists. Unemployment, in that area, is under one percent. So many people are moving there to get jobs, because there are still some open jobs, we can’t fulfil them. There are no places to live, so we’re trying to build homes, continually.

The potential is huge. Look at McDonald’s, they’re paying $25 an hour to work the register. Some restaurants are saying they’re so busy they have to close the inside, and can only work the drive-through, to allow them to line up, because the wait to get in is two hours. So, if you look at that in a fish bowl, what the industry has created there, if we create that in other areas of the US, it’d be fantastic. So, there’s definitely opportunity in the US in various areas, because of these new discoveries.

There are also opportunities in the North East, in the Utica shale near Ohio. It’s next to the Marcellus shale, and the Marcellus is mostly gas, and the Utica is natural gas liquid, so oily liquids, and as that area has now heated up, we’re drilling there too. So, I think the future’s bright, the opportunities are great, and I hope our current President and the current administration just continues to allow the industry to thrive, and not throttle us back.

How do you find the regulatory situation at the moment? It’s obviously going to be discussed in the forthcoming presidential election.
I think it’s important to know that the industry has been regulated from day one. A lot of people think it’s not, which is ludicrous, because it is. The second thing to know is that the current administration is signalling that the EPA (Environmental Protection Agency) could, for the first time, dictate federal regulation of the industry, across the blanket of the US. That’s unprecedented.

Now you ask yourself, ‘What regulation are they going to put on us? Is it going to be duplicative of what’s already happening at state level?’ Now you’ve got to go and get a permit from the state, and then go to the federal government; you’re going to add cost and time; all those things are going to just shelve the idea that America can be energy-independent within a decade.

For the first time, that conversation is starting to actually have some legs, because the Bakken Shell, the Permian Basin, the Eagle Ford, all these new emerging oil basins are putting America on the pathway to being energy-independent, within a decade, potentially. Now, that’s without unforeseen challenges of the current administration saying, ‘You can’t drill on federal land, you can’t drill off-shore, we’re going to regulate you, even at a higher level.’ That will slow it all down, and that won’t be possible anymore, so I hope it doesn’t happen.

Now, I can tell you that President Obama has said numerous times that he is for what he calls, ‘all the above energy’. My definition of ‘all the above’, though, includes oil and gas. I think his definition of ‘all of the above’ may just be what’s above ground, which is wind and solar, because he says one thing, but does another, like investing in companies like Solyndra. All these solar companies have filed bankruptcy, all have taken billions of dollars in taxpayer money. He’s not invested a dollar in anything to do with oil and gas.

He’s fought hard to remove our tax treatments, but we have the same tax treatments as other industries, like the movie industry or the video game industry. This is where you have a lot of intangible items, the costs that go into making something, those intangible costs can be written off, as a deduction off of our income taxes. Well, we’re using the same ones as a lot of other industries, but he’s targeted us, so you can no longer write off those costs, but the other industries still can.

So, that’s what he’s doing to oil and gas. On the flip side, he’s handing out tax subsidies worth  billions of dollars in investment to companies that don’t work.

There are also a lot of on-shore lands that we are not really allowed to drill on, because we can’t get permits. Also, we can’t really drill actively in the Gulf, off the Eastern Seaboard, off the Western Seaboard, in the Pacific; all of those waters contain huge amounts of oil. We’re importing 13.5 million to 14 million barrels of oil a day into the US and we’re producing 5 million. There’s still a big gap between what we need and what we’re producing.

President Obama has tried to support the renewable energy sector. Do you think it can play a major role in the US energy market?
Am I going to sit here and say that renewable energy is going to be zero percent of the energy mix? No, I’m a realist. I think it will be an eight to 10 percent mix long-term, but I don’t think it’s ever going to contribute 64 percent, which is what oil and gas provides, to the US energy model. That’s just not going to happen.

I think what’s even more unrealistic is the fact that the current technology around solar and wind does not work, they’re not ready for prime time. For example, 56 square miles of side-by-side solar panels are needed to run one community of 50,000 people. Nobody wants those solar panels in their back yard and nobody wants a windmill in their back yard, either.

He thinks that handing out $2bn is going to magically fix the inherent technology deficiencies of wind and solar. That’s not going to get it there by tomorrow. In fact, he couldn’t carry those companies for six months, when they file bankruptcy, shut down, take the money, and say, ‘Well, sorry about that.’ The reality is, we don’t have the money to support these companies.

We have a $16trn deficit that continues to grow. I think we need to be looking at industries that are not taking subsidies, that are proven, that are benefiting America.

The point I want to make is that energy comes at a cost, it comes with risk. It cannot pop out of the ground and magically appear without something taking place. Drilling, windmills going up, solar panels being scattered across the US, something has to take place if you’re going to have energy. Unfortunately, it powers the entire world, so to think solar is going to go from a four percent piece of data to 64 percent tomorrow, it’s not going to happen. It won’t happen in my lifetime, the President’s lifetime; it just doesn’t make any sense. That’s how unrealistic he is, and I think that’s a concern, because do I know where the oil and gas is? Yes. Will I be able to get to it? That’s unknown, with the current President.

Is Governor Romney more receptive to the industry?
I think Mitt Romney and Paul Ryan have a more realistic energy plan. Do I say that they are pro-oil and gas? Sure. I think they’re pro-energy, and I think they’re pro-reality, and the reality is that if solar and wind are receiving subsidies then oil and gas, and all other energy forms, should receive a similar type of subsidy, even though we’re not today. We don’t need them and haven’t asked for them, so I don’t care if solar and wind get some kind of special subsidy because they need help getting off the ground, because the technology’s not ready for prime time, and they need to get it there, if they’re going to be a piece of that mix, long-term.

I think that to punish an industry – that employs nine million people, which is going to add 500,000 new jobs just in the Marcella Shale alone, is the most efficient, and provides natural gas, the cleanest burning fuel that we have in America – is crazy. Why are we not harnessing that gift? America’s gift is natural gas. America needs it. Lowering that cost of gasoline is essential.

For example, truck stops in Texas have started adding natural gas to their refuelling capabilities, so right now in the US the average gallon of gasoline is about $3.50, which is quite cheap compared to Europe, but still a high price for most Americans. The equivalent of natural gas is about $1.09, about a 65 percent decrease, or cost saving. Our long haul trucks deliver goods we consume. So the transportation of those goods is a huge component of the overall cost those goods are sold at. If the transportation was decreased by 65 percent, there would be a ratio of cost decrease of those goods, that I can consume, and that Americans consume, and they could save money that way.

It would help boost our economic conditions in this country, because we’d have more disposable income, because our groceries go down, the cost of gasoline goes down, because there’s less demand, because now people are using natural gas. So, the whole thing begins to assist us in getting our GDP back to where it was pre-2008. That’s not going to happen unless something changes in the US, and the President needs to get behind that.

So, will Mitt Romney and Paul Ryan get behind it? I think they will, and I think that they see the energy mix in a much clearer light than the President does. Now, if President Obama was President in 2040, then maybe he could invest more in solar and wind, because that is the amount of time required to get the technology to where it needs to be.

Many have claimed that the US needs to gain energy independence. Do you see it happening in the next decade?
We need to rebalance that, so let’s stop writing cheques to the Middle East, and let’s stop telling Canada, ‘Send the oil to China’. Let’s take the oil that we can get from Canada, at a much cheaper price than transporting the oil from the Middle East, let’s get our domestic oil to produce enough, to where we need. Now, in 2008, we were using 22 million barrels a day, so the economy, and the impact it’s had, has reduced our consumption by three million barrels. When the economy turns back around and we start growing again, we’re going to need 22 million barrels, and we’re not there yet.

I think it’s possible, that without any unforeseen additional regulation and change, we could be a country that’s energy-independent within 10 to 15 years. I don’t think that will happen if the next four years are under the control of President Obama, because I think that he will do everything he can to try to push on us as hard as he can. We found the Bakken Shale in spite of the President, we found the Northern Eagle Ford Well in spite of the President, and we found the Permian Basin, the key to turning it back on, in spite of the President. We’re doing all these things in spite of the administration.

If you look at North Dakota, like I talked about, that vacuum that’s occurring up there, if he could take that, and every major oil and gas state could have an economic growth like North Dakota, think about how well America could be doing in short order. He could take full credit for that, if he wanted to, but he has stymied that ability, to do that. North Dakota, they’re behind it 100 percent, of course, because the growth boom that’s happening there has been unprecedented in the last 100 years.

The same applies to Texas, our economy is really starting to boom again, because of the Eagle Ford, the Permian, they’re both within our state’s borders. The Barnett Shale was the first shale gas discovery, back in the late 80s, early 90s. So, Texas has a rich heritage in oil and gas, that’s why our economy’s been one of the best, even through the 2008 bust. We’ve had a better economy than most people, so I really feel like the industry could be an integral part of America’s future, and the road to energy independence, we’re on it.

It’s not going to happen. It won’t happen in my lifetime, the President’s lifetime; it just doesn’t make any sense

However, it depends on the next four years. If we’re controlled by President Obama, I think that we’re going to have to wait it out, and not make much progress in those four years.

What would you say to those that are concerned about the environmental impact of fracking?
I’d say the industry has a few comments. Number one, the first well was fracked in 1941 in Kansas. To date, 1.2 million wells have been successfully fracked. I will tell you, as an industry, safety is our number-one concern, and when we drill through a water aquifer fresh water occurs close to the surface. So, you don’t drill half a mile down to encounter fresh water, you encounter fresh water 300-500ft below the surface, and if you go much further, you start encountering salt water, brackish water, and you’re not going to drink that. So, when I drill through that aquifer, I have to go out of the hole, and set surface casing, which is steel pipe. I set that casing all the way through the aquifer, and below it. I then shroud it in cement, encase it in cement, and that pipe stays there permanently. It becomes a shield, which I can drill my well into, and down through to my target zone.

More importantly, there are no formations in the US that are shallower than a mile and a half below the water aquifer. A mile and a half of rock, limestone, sand and earth between the aquifer and the hydraulic fracture is now taking place. The sheer distance and volume of rock between you ensures there’s no connectivity, and they say, “Well, what if you’re fracking, it’s two miles in length?” The reality is that we use micro-seismic monitoring to monitor the fracks, and there has not been a case, that I’ve ever seen, where a frack has been more than 600 feet in lateral length. So, if you take a pin, in any direction that you turn it, in the 3D sphere, it wouldn’t be more than 600ft. So, there’s no way to connect that 600ft, in 3D, to the mile and a half or more of rock that you have between you and the aquifer. So, those would be my statements as to why I think it’s safe.

Now, what can the industry do better? We can use a technique that we started using last year, called ‘closed loop fracturing’. It’s where our frack fluid, once it comes back to the surface, once we’ve fracked the well, the well flows back, and it flows the fluid back out. Instead of capturing that in big pools, what they call reserve pits, we actually catch the fluid in steel frack tanks. So, I put the frack fluid in these big steel tanks, I separate the totally dissolved solids, or the partially dissolved solids in the liquid, so that I can reuse my frack fluid on the next well. So, one, the fluid is not set near the surface, it’s in a steel tank, so it’s protected. Because I feel like if an issue is going to occur, it’s going to occur at the surface, through a spill, while you’re loading or unloading a truck, something may happen there. So, we put ours in steel tanks.

Do I know where the oil and gas is? Yes. Will I be able to get to it? That’s unknown, with the current President

The second thing we can do as an industry, which we’re working on, is evaluating the chemicals we use. Taking the 64 components of our frack recipe, evaluating each one of those, and finding a replacement additive that’s food grade safe. ‘Food grade safe’ means you and I can consume it or drink it, without any kind of harm to our health. So, even if you came in contact with it, it would not matter.

For example, we’ve found a way to remove one of the additives that we have, a bacteria that goes in and cleans up the well bore. We found bacteria in an apple that will do the same thing. When you consume it, it’s not poisonous. Now, in our research lab, we can take those components and try to find a way to remove them, because I understand people do not want some of these frack fluid components in their water. We do everything we can to ensure that it doesn’t happen, but I want to go back one step beyond that, and say, “Well, what if it does happen? So what? Let’s pour it in your water, it won’t do anything.” That’s how we get the public perception of the industry back, at least, on a targeted track of neutral. Right now, we’re so far in the negative zone, because the public has read misinformation, they have let other people speak for the industry, who have done a bad job, who have made misstatements, mistruths, and people believe that.

Everything you read on the Internet or see in a movie is not true, and so that has been a hindrance to us. Now, I can’t go and say, “Okay, I’m from the industry, and this is all lies” because they’re going to think, “Well, you’re lying!”