The Challenges of Natural Gas Exploration, Extraction, and Exportation

It has long been known that natural shale gas is plentiful in America, but the cumbersome task of finding and extracting it from deep below the earth’s surface proved to be cost-prohibitive for many would-be investors. However, after some 30 years of intense research and development by the U.S. government and private industry, technological advances have eased the exploration and extraction process, giving rise to an energy renaissance in the U.S.

Today, there are two primary extraction processes of natural gas from shale formations: hydraulic fracturing, or fracking, and horizontal drilling. While effective, both processes present their own set of safety and environmental concerns.

In the simplest of terms, horizontal drilling is the process of first drilling vertically down into the earth, and then turning to drill horizontally. This process is used primarily for improved access to hard-to-reach deposits and vastly expands the area of exploration. The downside: some believe the wider the area of exploration, the greater potential for the drill to cross a geological fault line and possibly ignite an earthquake, although this theory has been widely debated.

Fracking involves making fractures in deposits by use of a pressurized liquid, namely water. This process requires quite a large amount of water and, in many parts of the U.S., droughts have driven the need for conservation of this most precious natural resource. Secondly, fracking poses concerns for groundwater contamination and ultimately the surrounding communities’ drinking water supply.

Charles Dewhurst is an international liaison partner and leader of the natural resources practice at BDO USA, LLP, an accounting firm providing audit, tax, and consulting services to clients in the U.S. and internationally. Dewhurst, who was recently named to the “Who’s Who in Energy 2012” by the American City Business Journal, publishes an annual energy outlook that examines the opinions of 100 CFOs at U.S. oil and gas companies on major developments and key issues facing the oil and gas industry. Dewhurst says BDO’s 2013 outlook found that issues surrounding fracking are the biggest environmental concern for U.S. oil and gas companies in 2013, ahead of spills and pollution cleanup by a 44-to-25-percent margin.

“I would have to say that the industry has made great strides in the past few years to really decrease the amount of water that is used in fracking, and to safeguard the groundwater supplies,” said Dewhurst.

The survey also indicated “heightened anxiety over the impact of increased government regulation and impending legislation from the new Congress convening in 2013.” Some 36 percent of respondents view more restrictive regulations as having the biggest impact on how they conduct business in the coming year, while 37 percent said the same for legislative changes. Additionally, half of those surveyed said legislative changes will be “the most important factor inhibiting the overall growth of the oil and gas industry in 2013.”

“I think the industry welcomes sensible regulation as it’s trying to be more efficient and safe in both horizontal drilling and fracking,” said Dewhurst.

Another issue being widely debated by energy executives, regulators and politicians is whether the U.S. should begin exporting liquefied natural gas (LNG), given the current surplus of natural gas in the U.S.

“The upside of that, of course, is that it would be great for the U.S. balance of payments,” said Dewhurst. “The perceived downside of LNG exports on any major scale would be that it could potentially divert some of the benefit of these low natural gas prices away from U.S. manufacturing.”

The U.S. is currently not involved in the exportation of LNG, but a handful of companies are applying for approval by the Department of Energy (DOE) to do just that. In January of 2012, the U.S. Energy Information Administration released a study examining the “effect of increased natural gas exports on domestic energy markets,” which concluded that increased natural gas exports would lead to increased domestic natural gas prices. But, in December of 2012, the DOE released results of a similar study it commissioned by NERA Economic Consultants, which concluded, “Across all scenarios, the U.S. was projected to gain net economic benefits from allowing LNG exports.”

“I think our perspective as a firm would be some sort of balanced approach that allowing some LNG exports under certain specific criteria would probably be a good thing as long as we don’t slow

down this manufacturing renaissance,” said Dewhurst.

Even if exportation of LNG is eventually approved, huge transportation obstacles stand in the way. Domestically, LNG is transported by pipeline but the same can’t be done for delivery overseas. And transportation by tanker is largely perceived as unsafe, given the explosive nature of LNG.

One thing, however, that most people involved in the LNG debate can agree upon is that an energyindependent America would have enormous impacts on the future of the country.

“The potential for the U.S. being energy self-sufficient is very exciting from a number of perspectives,” said Dewhurst. “It would make us less reliant on foreign, sometimes unstable, sources of oil. And it would have a huge economic benefit.”

“The great thing about natural gas is that it gives us as a country and as an economy a very clean and abundant fuel that can ease that transition from some of the less clean fuels like coal, oil even, to a totally clean future somewhere down the line,” concluded Dewhurst. “We’re just very fortunate to have these abundant reserves that can fuel this transition over the 30 or 40 years that it may take.”