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The Path to Energy Abundance

An Aggressive Exploration Strategy is Paying Off for Maverick Anadarko CEO Jim Hackett.

Bullish about energy prices, Anadarko Petroleum CEO James Hackett, educated at the University of Illinois and Harvard Business School, is pushing ahead with aggressive plans for drilling and finding new sources of oil and natural gas. The latter, he argues, is – in its compressed form known as CNG (CNG) – an ideal substitute for oil based gasoline as a transportation fuel. (Sixty-two percent of its production is U.S. natural gas.) The Woodlands, Tex. – based company he has headed since 2003 is one of the largest independent E&P companies, with 2.3 BBOE of reserves, 86 percent of which are in the U.S., and a strong balance sheet. Its 2010 capital expenditure will be at least $4.5 billion, much of which will be spent in megaprojects in the Gulf of Mexico, Ghana, Sierra Leone and Algeria.

The $11 billion company has interests in more than 25 exploration prospects across the world, any one of which could significantly move the needle for its stock, according to BoA/Merrill Lynch reports. It has identified 30 deepwater projects in 2010 – areas where oil and gas are estimated to exist in significant quantities. Twenty-five years ago, oil companies struggled to find oil in seas deeper than 600 feet. Today, companies like Anadarko can extract crude in waters 6,000 feet deep. The company’s Venus discovery off Sierra Leone was drilled in waters more than a mile deep.

If only a fraction of the natural gas exploration pans out, it could result in a transformation in the struggle against carbon pollution, threatening coal’s dominion over electricity generation as well as oil’s stranglehold on transportation fuel.

The Barnett Shale in Texas alone accounts for 7 percent of U.S. gas supplies. Geologists expect that the Bakken and Marcellus Shale regions could add many multiples of this to the country’s supply. In 2008, only Russia topped the U.S. as a natural gas producer.

The challenge, as Hackett, who teaches at Rice University in his spare hours, sees it, is that Washington’s energy policies like cap and trade could derail the economy, particularly with what he feels are the false choices between aggressive domestic exploration and preserving high environmental standards. Recently, CE’s J.P. Donlon caught up with him in New York City.

You reckon America’s energy policy has been ineffective if not completely counterproductive to national interests. What should be changed and why?

For starters, we should have a Secretary of Energy who cares about the science and understands that 93 percent of what we produce is not lab based technology, like solar or wind, but massive sources of energy. It’s not about placing Nobel Prize winners at the head of DOE, but people like Jim Schlesinger and Sam Bodman, who understand that energy is an infrastructure business – the biggest business in the world.  Nobody seems to care that perhaps you need to know how it really works. Instead they apologize for the oil and gas industry, but that’s only one piece of it. Get somebody who has first-hand experience and give him the leeway to set policies that can continue regardless of political whims of different administrations.

We need enough vision to say it doesn’t matter if gasoline is selling for $2 a gallon or $5 a gallon. This is our policy, and we’re sticking to it.  We’re not going to change it every two or three years. And we’re going to open up everything we can domestically. There’s no reason a country like America, with its abundant blessings, should be different than Norway. Last time I checked, Norway was just as environmentally conscious as we are. And guess what? They need oil and gas less than we do, because they’ve got so damn much hydro. But Norway produces everything it can from every source.  Why the hell aren’t we doing it, when we depend more on imported energy? It just blows your mind. It’s because people still have this quaint Wild West image where derricks spew oil as in the old James Dean film.

That’s not the way this business works anymore; it hasn’t for decades. Visit an offshore rig and see what happens. I had to fly an hour-and-a half on a plane to even see one of our offshore platforms, which, by the way, has an environmental footprint smaller than that of the hotel building in which we’re talking. How much better does it get than that? Yet we’re not encouraging the industry to do all it can east of the line between Florida and Alabama, and anywhere up the coast on the right side,[NOTE: President Obama opened the East Coast for drilling in March.] and anywhere up the coast on the left side, or anywhere in Alaska. We’re just not doing any of that. And that’s not right. By all means, build wind and solar, but be realistic about it, too.  Don’t bullshit us about its capabilities. Get us some transportation fuels.

So just how should the country pursue alternative energy?

The DOE was created under Carter to get us less dependent on oil.  Nothing has been accomplished apart from having a huge bureaucracy in Washington that does nothing to get us less dependent on oil.  One reason for this that we fund research in fits and starts, trying to figure out the next generation of technologies that really work, the latest fad being biofuels.

Instead we should set up a challenge grant. Pilot any number of projects, but hold back the majority of the budget to spend only when researchers come up with something that has true commercial potential – when the big bucks really become necessary.

For example, CNG is a proven technology. It’s been around for 20- plus years. All we have to do is provide some basic seed capital, instead of spending $30 billion on stuff we don’t even know will work, like wind, solar or biofuels. Today it’s CNG. Tomorrow it could be ocean temperature differential.

Why do you reckon natural gas is important to our future economy?

The most important question we face is how do you have an economy that survives and can actually fuel a cleaner environment? The great blessing America and Europe have had is wealthy economies. This allows us to afford environmental controls. The moment you inject political forces that crush that economy to achieve so-called environmental quality, you fail in your mission to improve environmental quality, because it becomes less affordable.

Most people forget this. They argue that controls should be imposed regardless of cost. But that will defeat the principal goal. In order to keep the economy going, alternative fuels need to be affordable. They may cost a little more, but they can’t cost a lot more. For example, unsubsidized wind and solar cost a lot more.  Natural gas, on the other hand, is both a reliable and cost-effective alternative fuel. The modeling we’ve done over the past 30 years shows that it’s going to trade somewhere between $5 and $8 a decatherm for the foreseeable future; $8 when you cut back drilling. As soon as it goes towards that number, you start drilling again and you bring the price back down, and/or LNG [liquefied natural gas] comes in.

This creates a virtuous cycle, if you will, from a consumer standpoint where you’re in an oil equivalent between $30 and $48 a barrel. That’s $5 to $8 gas.  Now that seems volatile, but when you think about it in terms of $30 to $48 oil, it seems like nothing. Importantly, that means you’ll never spend more than $2.50 per gallon for a gallon of diesel if it’s $48 on the high side.

The great advantage of oil has been its safe transportability. How with natural gas replacing it as a transportation fuel will this change?

It is just as safe. You have the same kind of storage container capability. In fact, I drive a CNG car. I’ve driven one twice in the last 12 years. So I’m fairly familiar with the technology. It will require more pumping facilities and you need to convert your tank and injection system to be able to run off of natural gas. That’s what I have.

In places like California, where there is enough infrastructure, you can have an OEM vehicle such as a Honda Civic that will use only natural gas. The problem in Houston is that the distances are too great that if you only have two or three stations you’re going to run out of gas, because the physics behind the tanks is still not changed enough to make that practical for passenger cars. The question is, to be competitive with the gasoline retail market, how do you make the natural gas option readily available? Take seat belts. No car company was going to put seat belts in their vehicles if they were the only one to do it. They had to be regulated or incentivized to do.

The way to do this is to work through the trucking companies who operate on razor-thin margins.  While we’re doling out all this money on renewable with dubious payback, we could offer trucking companies a repayment plan for converting trucks to burn natural gas, or let them buy a new ones that do. Then provide a mechanism for paying back taxpayers on that investment on the savings, if any, between the cost of diesel and natural gas.

What about trying to convert big fleet users like UPS, FedEx and all the others who have homing pigeon fleets?

It’s already started. UPS and AT&T are doing it. [Fedex’s] Fred Smith is in favor of doing it for his fleets. The U.S. still has one of the least gasified transportation sectors in the world. Everybody, including the Chinese, is doing it, because they know it’s the right answer environmentally. The geology is transitioning to natural gas. If you convert the heavy-duty fleet vehicle market, which is 6.8million vehicles, you can actually decrease OPEC imports by half. Remember that gasoline and diesel both come out of the same barrel of oil; they are just distilled and refined differently. So when you decrease demand for diesel, it affects the price of crude oil, meaning gasoline becomes cheaper.

Environmental groups fault the “fracking” method used in natural gas drilling in places like the Marcellus Shale in Pennsylvania/ New York and the Bakken Shale in North Dakota where Anadarko is involved. Riverkeeper, to cite one such group, maintains that this method injects a “cocktail of 30 different chemicals,” which according to them, the industry does not identify, and are therefore potentially harmful to the water table. Additionally, New York Democratic Sen. Charles Schumer has introduced legislation to control this technique. Will such developments frustrate future drilling of natural gas?

First, that is completely inaccurate. The EPA has delegated the authority for fracturing fluids to the states. The states actually control all of the permitting for wells, which includes the design of that well, including hydraulic fracturing, so that you have a regulatory body looking at all of the fluids. Drillers must file the fluids, including every ingredient involved with the regulatory authorities of the state in which drilling takes place.

The reason why the specific chemicals are kept confidential is not because drillers are trying to hide it from the public, but rather to protect their proprietary interest in not revealing to the other guys what their mix is. But the state can always look into each mix and say, hey, there’s something we don’t like here. The implication is that just because every American can’t see the data, as opposed to state regulatory bodies, that somehow we should mistrust the state regulatory body for not doing its job, whereas if you somehow gave it to the EPA, it would magically get better.

For 60 years this industry has been employing hydraulic fracturing, just in different ways every year. We’ve never had one single verified case of any water being contaminated by our drilling fluids at all. Former Clinton EPA chief Carol Browner, no friend of the industry, studied this issue and did not find a single case of hydraulic fracturing ever contaminating the water supply. The reason for this is simple: The water zone is something like 600 feet to 1,000 feet deep.  We’re drawing wells at 7,000 feet.

We case off the area between the water zone and where we’re actually completing a well. By state law, we have to pressure test the pipe, where you cement the pipe to the formation as you’re drilling through it. There are no instances where that fracturing fluid has actually flowed back into a water zone, because of the steel barrier and multiple levels of impermeable layers for almost a mile in between; 99.5 percent of the fluids are sand and water and the most prevalent ingredient is gum – the same that you and I eat in ice cream.

Another issue has been the use of benzene, which is used as a holding agent for the sand. This is supposed to be horrible, but what’s the concentration? We have engineers who will sit in front of you and drink this stuff on the spot – there is less benzene in it than in canned Coca-Cola!

This is typical of the discourse about the environment in America. We don’t worry about the science; we just worry about the religion.

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