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Saturday, January 19 , 2019, 3:33 am | Fair 46º


Letter to the Editor: The Death of Fracking

Eight months ago Santa Barbara County voters rejected Proposition P, the ballot measure that would have banned unconventional oil drilling practices — hydraulic fracturing, cyclic steam injection and acidizing — in our county.

In contrast, our neighbors to the north in San Benito and Mendocino Counties voted to forbid these drilling methods, as did New York State several months later.

For a number of reasons, unconventional oil/gas drilling is much more expensive than its conventional counterpart: well shafts typically require a right-angle extension rather than a simple vertical dig; special materials and equipment are needed to blast or dissolve oil from compressed rock/shale formations; huge quantities of water are needed; massive amounts of toxic substances, used in the process and/or brought up from the earth, must be “safely” disposed of; production from these methods quickly abates, requiring newer and newer wells to be dug to keep the black gold flowing.

Oil/gas producers, who some years ago had begun to worry that the “peak production” predicted by M. King Hubbert was a reality they had to face, later began to think they had found the promised land when they saw that the $100+/barrel oil price they were getting would finance a new era of “tough oil” production via exploitation of shale fields, tar sands and Arctic waters. The “shale revolution” was underway.

But the CEOs of these huge conglomerates made a grave miscalculation: they based their corporate bets — and their investors' money — on a prediction of rising consumption that did not materialize. The demand “curve” did move up, but not at the rate they had relied on; not at the rate they needed for perpetual profit.

So the classic supply/demand principle began to give the industry serious jitters, fed by a number of factors: the US was producing more than people were buying (consumption in Europe and Japan was low, more fuel-efficient vehicles were on the road, renewable energy production was increasing); the prospect of political accommodation with Iran raised the possibility of its oil production contributing to the oversupply; the Organization of Petroleum Exporting Countries (OPEC), notably including Saudi Arabia, refused to play its usual role: cutting production to prop up prices.

The price of Brent Crude oil is a standard used by the world; the price of West Texas Intermediate is a standard often used in the US. In mid 2014, Brent Crude sold for $115+/barrel. In January 2015 it reached a low of $46.41/barrel.

In the past year, commentaries/predictions as to the health and future of the oil and gas industries were everywhere. Some industry insiders said the industry had to “reset,” i.e., adapt its expenditures to the new reality; others believed this was not a practical possibility for unconventional drilling. Great speculation existed as to what price was necessary for fracking and its brethren to survive.

Oil insider sites assured investors that “the worst is over,” and that over time, although slowly, oil prices will recover “with force.”

Knowledgeable sources said earlier this year that oil prices typically achieve their best from March to May. After that, Brent Crude began, and has continued, a steady decline with a steep drop on the day the accord with Iran was announced.

On July 27, as of this writing, Brent Crude closed at $52.93/barrel, just six dollars above its 52-week low, with no obvious sign of recovery. (Fans of Technical Analysis will note that the price broke below the trend line drawn between recent bottoms and that, after bouncing several times off possible support at 62, plunged through that barrier.)

So what, if anything, does all this mean to those who, in November 2014, voted to eliminate unconventional drilling from our county?

It means that, despite the vote result, we may very well have succeeded: at these prices, fracking and its kin procedures can't stay in business: “On April 30, ERG Intermediate Holdings, [A Houston-based oil company that was the largest onshore producer of oil in Santa Barbara County] which owns more than 20,000 acres in the Cat Canyon Field in Northern Santa Barbara County, filed for Chapter 11 bankruptcy protection in the Northern District of Texas, Dallas Division.

“In a declaration filed in a Texas bankruptcy court by the company's chief financial officer, Kelly Plato, the reasons for the bankruptcy seemed to stem from plummeting oil prices, a drying up of needed capital, and an underestimation of the time and money needed to navigate Santa Barbara County's permitting process for oil and gas operations. ...

“At the peak, the company was selling oil at the wellhead for almost $100 a barrel. ... Prices have been depressed, however, and the price for the Cat Canyon production was $38 at the beginning of this year.

“Plato also estimated that full development of the Cat Canyon property would require $1 billion in capital expenditures.

“'The county has not been notified of a sale of the property or a transfer of ownership,' [Planner Errin] Briggs said.” (Noozhawk)

So, as oil industry leaders themselves foretold, highly-leveraged companies — the ones who've borrowed heavily on expectation that high prices would guarantee their success — will be the first to go under.

We can expect more to follow. High fives to “Yes on P!”

William Smithers
Santa Barbara

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