Foreign Policy Realism and the Importance of Shale

Pennsylvania Shale

Just six months after the Chinese Communist leadership massacred hundreds of their own people at Tiananmen Square in 1989, President George H. W. Bush sent his envoy Brent Scowcroft on a secret mission.  When pictures of National Security Advisor Scowcroft raising glasses for a champagne toast with the Butchers of Beijing leaked out, Americans were outraged.  However, Bush and Scowcroft realized that the Chinese relationship was too important and that the Communist leaders weren’t going anywhere.

Today, critics of President Trump, especially the conservatives, wish he were surrounded by international “realists” like Mr. Scowcroft.  Instead, they see Mike Pompeo and John Bolton.  It is curious, however, that the same crew which praised the Bush/Scowcroft team for their “skillful” handling of the aftermath of Tiananmen and the fall of the Soviet Union now criticize Mr. Trump for not immediately taking steps to isolate Saudi Arabia following what appears to be the murder of a Saudi journalist inside the Saudi consulate in Istanbul, Turkey.

For reasons ranging from oil to Iran, the US/Saudi relationship is important.  Trump has to exert a price from Crown Prince Muhammed bin Salman (MbS), but he has to be careful not to risk the overall relationship.  Whatever decision the President makes will affect the energy industry.  Will the Saudis retaliate by withholding oil supplies?  Will they do the opposite?  Will increased Saudi supply of oil be part of the overall “price” that Mr. Trump extracts from MbS for this sordid affair?  We don’t know the answers yet, and we may never know.

What we do know is that the future of many Pennsylvanians will both impact and be impacted by the intrigue playing out over the Saudi journalist.  That’s a remarkable accomplishment when you think about it.  The Saudis will have to consider places like Washington County and Tunkhannock, Pennsylvania in their calculations of how to respond to American anger.  Who would have thought that ten years ago?

While the international situation plays out, elections loom in this country.  Fewer than three weeks before election day, it looks increasingly likely that Pennsylvania Governor Tom Wolf will win a second term.  That will put both the Governor and the gas industry in a bind.  The industry has been loath to engage with the Governor after he bludgeoned them during his 2014 campaign and after they had some dealings with him in the early days of his administration that the industry felt were not up front.  The Governor is bitter that the industry fought him so hard on his extraction tax, robbing him of one of his most important campaign promises.

Both the industry and the Governor may be in a pivotal international position in a few months if things spin out of control in the Middle East or elsewhere.  Pennsylvania gas production may prove to be a critical bulwark against mass economic dislocation that would please no one as much as the Russians and the Iranians.

First comes the approaching winter.  New York and New England are more vulnerable than ever to energy shortages due to their short-sighted policies on pipeline infrastructure and their closing of their nuclear plants.  Will they have to import gas again from Russia?  If they do it will it limit the President’s ability to deal with Russian involvement in the Middle East? What if the Saudis respond to American pressure by just moving closer to Vladimir Putin?  Meanwhile, as this is happening will New Englanders be forced again to go hat in hand to Putin to save them from freezing to death this winter?  It could happen.  By making themselves vulnerable to energy shocks – especially when the answer is five hours away in Pennsylvania, the New Englanders have weakened us all.  Domestic miscalculations often have international implications.

In Pennsylvania we have a separate problem.  Pennsylvania’s shale producers are notorious for their inability to develop common positions.  This limits their effectiveness when dealing with state government.   Assuming he wins, Governor Wolf will owe the industry nothing for his reelection.  Still, the industry provides a critical service at an unsettled time.  There is a lot that can be accomplished on both sides given any willingness to engage based on the new international and electoral realities.  There’s no time like the present.

Questions? Let Dan know.

Daniel Markind of Flaster Greenberg

Daniel Markind is a shareholder at Flaster Greenberg PC with over 35 years of experience as a real estate and corporate transactional attorney. He has represented individuals and companies in the energy industry for over 20 years. Dan is a frequent lecturer on Marcellus Shale and other mineral extraction issues and is regularly asked to speak at conferences, in the media and at other venues regarding energy issues and their legal and political implications.

 

The Lawrence, MA Pipeline Explosions

20180914_Marcellus Shale Update

On January 11, 1912, women weavers shut down the Everett Mill in Lawrence, Massachusetts.  Earlier that day, they opened their pay envelopes to find their wages cut by 4%.

A recently enacted Massachusetts law had reduced the workweek for women and children from 56 hours to 54. Mill owners reacted by cutting the pay of their already lowly-paid workers.  The women revolted.

The strike soon engulfed the city.  Workers slashed machine belts, threads and cloth. Mill owners hired strike breakers and militiamen.  That only ratcheted up the tension.

Known in history as the “Bread and Roses Strike”, the bitter work stoppage lasted nine weeks.  When it was over, Congressional hearings had galvanized the public against the working conditions allowed by the owners, and the workers gained a 15% pay raise.  The political earthquake would be one of the seminal moments of the American labor movement.

A century later, a more literal earthquake in Lawrence, Massachusetts may portend a seminal movement for the natural gas industry.

Just three days after a gas pipeline exploded in Western Pennsylvania, at least 70 explosions tore through a Columbia Gas pipeline in Lawrence.  Fires broke out throughout the city.  One person is dead, at least twelve are injured, and 60-100 homes burned.  A large geographic area around Lawrence has been evacuated.

It is far too early to tell what caused the explosions, but certain things are clear.

First, our national infrastructure is deplorable.  Decades of disinvestment leave us with power lines, electrical grids, roads, airports and bridges that would embarrass a third world country.  The nation is falling apart.

Second, it is the responsibility of the owners of natural gas pipelines to ensure their safety.  That means adequately maintaining lines that already exist, properly building new pipelines, and informing the authorities when pipelines begin to decay or show damage.

Third, pipelines carrying pressurized gas are inherently dangerous.  To deny that is to deny reality.  It is up to the owners of the pipelines to show that they are safe, and not up to the public to show they are not.

Fourth, “renewable energy” will not solve this transmission problem.  Solar and wind power can create electricity, but it takes high-tension lines to transmit it.  To those who propose offshore solar and wind as a major source of the nation’s power, imagine the situation in the Carolinas right now if they obtained a significant amount of their power through offshore solar and wind farms transmitted by high-tension lines.  Even inland, think about the aftermath of Hurricane Florence in a “renewable energy’ world.  How many of those solar and wind installations would survive intact, and what would be the result of the storm on the transmission lines?  For how long would the area be unlivable?

Fifth, given modern political realities, the natural gas industry in the Northeast could be in serious trouble.  It must get a handle on its pipeline situation.  Andrew Cuomo defeated Cynthia Nixon in the New York Gubernatorial primary, but Nixon pushed Cuomo even further to the left than before.  With two pipelines blowing up in four days, what chance does the industry have of convincing the public or political leaders that natural gas pipelines are a good idea?

For the last decade, gas industry workers have produced an energy revolution in the Marcellus Region.  Whole parts of Pennsylvania, Ohio and West Virginia that faced economic depression have been revitalized; the grip on our economic lifeline of tyrannical regimes in the Middle East, Africa, South America and Russia has been broken.  American consumers throughout the country have saved tens of billions in energy costs.

All of that will be at risk if the gas industry doesn’t get serious about policing its own.  The boards of directors of our major gas producers should think about the tens of billions of dollars in investment they’ve made in our region.  Are they prepared to see it vanish because they refused to hold the pipeline companies to the highest standards of construction and maintenance?  If they abdicate their responsibility at this most delicate moment, they will have only themselves to blame.

Questions? Let Dan know.

Daniel Markind of Flaster Greenberg

Daniel Markind is a shareholder at Flaster Greenberg PC with over 35 years of experience as a real estate and corporate transactional attorney. He has represented individuals and companies in the energy industry for over 20 years. Dan is a frequent lecturer on Marcellus Shale and other mineral extraction issues and is regularly asked to speak at conferences, in the media and at other venues regarding energy issues and their legal and political implications.

Marcellus Shale Update – 7.3.2018

As we approach Independence Day, the disconnect between what is reported in the press and what the world situation actually is remains very curious.

Today, speaking on MSNBC’s Morning Joe, host Joe Scarborough and Council of Foreign Relations President Richard Haass bemoaned the fact that President Donald Trump is eviscerating the post-World War II order and not replacing it with anything.  Haass said we voluntarily are giving up our international position of primacy.  One wonders if Mr. Haass has spent much time looking at Nord Stream 2, the gas pipeline from Russia to Germany through the Baltic Sea, bypassing Ukraine, Russia and the Baltic States.

The effect of this pipeline will be to give Russia greater control over Europe’s energy supply.  It will enrich Putin, remove any control or payment that these other countries would have received, and make German Chancellor Angela Merkel even more subservient to Russia.  Ukraine for example, may lose 2% of its GDP as a result of the loss of trans-shipment payments.

Trump, who according to Morning Joe and much of the Western press is a Russian stooge, adamantly opposes the pipeline.  The Trump Administration is going so far as to have Secretary of State Mike Pompeo announce that the United States has made it clear that Russia should not be allowed to get more opportunities to exert political influence not only in Germany, but also in Europe in general, if Nord Stream 2 is implemented.  The current Administration has threatened to sanction any company involved in the project.

None of this has stopped Merkel, ostensibly the leader of the country blazing the trail toward a “green economy”.  She is determined to get this pipeline built, increase her dependency on Putin’s energy and rely more fully on Russian gas production from environmentally sensitive areas of the Arctic.

All of this sounds upside down, doesn’t it?  Indeed yesterday Estonia’s Minister of Foreign Affairs Sven Mikser said it is in the EU’s best interests to stop the project as it serves Russian geopolitical interest.  Earlier today, the German environmental group Nabu filed a lawsuit with Germany’s highest constitutional court asking to halt the pipeline.

Supporters of the project say that Nord Stream 2 will give Germany access to a cleaner form of energy than it currently uses.  That this might be so shows how dirty Germany’s current power supply is.  Despite refusing to greenlight any power project that is not “renewable” this decade (or perhaps because of this), Germany remains highly dependent on a very dirty form of coal called “lignite”.

Why then, is the Trump Administration, which according to many press reports (a) is in the pocket of Putin, (b) doesn’t care about the environment and (c) is willing to tear apart the old European alliance, so opposed to this pipeline?  Even if its only concerns are geopolitical and economic, the fact that the Administration is opposed to Nord Stream 2 shows that something is missing from the national debate.  A Putin puppet would just go along.  Instead the United States is taking a remarkably hard line.  Nowhere, however, is this nuance reflected in the press.

The topic of energy encompasses so many facets of our modern political debate, from geo-political power to environmentalism to future economic growth, that these stories have to be part of the discussion.  Trump may be secretly aligned with Putin.  None of us really knows.  The fact though that the Trump Administration is fighting so hard against Putin’s interests in this critical field is a story that needs to be told.  Each reader or listener then can draw his/her own conclusions.  It certainly may not show that Trump is an environmentalist, but it argues against the idea that he’s in Putin’s pocket.

Why Scarborough, Haass, the rest of MSNBC, CNN and even Fox News  fail to report on Nord Stream 2 remains mystifying.  It only increases the level of suspicion and derision with which the American press is held.

Questions? Let Dan know.

Marcellus Shale Update – 6.26.2018

For the second time in two months, a lead energy story comes from Canada.

On Monday, newly elected Ontario Premier (Governor) Doug Ford announced that he immediately would dismantle Ontario’s carbon cap and trade system.  Mr. Ford gave no specifics, but his announcement put $2.9B (Canadian) in carbon tradable allowances in limbo.  Already California, which was integrating its system with Ontario’s, announced it would no longer accept or trade Ontario carbon credits.  Quebec stopped as well.

Cap and trade is an attempt to find a quasi-free market solution to environmental externalities.  There are many variations of these systems, but in Ontario companies that emit at least 250,000 tons of greenhouse gasses per year have to purchase an equal amount of “allowances”. The allowances were made available at quarterly auctions and could be purchased on the free market, hence the integration with California and Quebec.

Regardless of how the program is wound down, the fact that Premier Ford is ending it will have repercussions among all such programs.  The more potential investors believe a program is subject to political influences the less they will be willing to participate, increasing prices and decreasing efficiency.  It’s one more byproduct of the politicization of the climate issue.

Another byproduct is the attempt to use the court system for political purposes.  Yesterday US District Judge William Alsup granted a motion by BP, Royal Dutch Shell, Exxon Mobil, ConocoPhillips and Chevron to dismiss lawsuits by the Cities of San Francisco and Oakland attempting to hold these companies liable for the impact to Bay Area residents of climate change.

From the beginning, this case went opposite the way the plaintiffs intended.  Attorneys for the defendants obtained copies of bond documents executed by the cities when they issued their revenue bonds in which they made no mention of any threat to public welfare from climate change.  The Judge held a special hearing to try to understand the science of climate change.  This did not go well for the cities.  Anticipated “smoking guns” – in the form of internal emails among employees of the companies suggesting they knew they were causing climate change but were hiding it – never materialized.

Instead, Judge Alsup ruled that while global warming was a real threat, it must be fixed by “our political branches.”  “The benefits of fossil fuels are worldwide,” he continued. “The problem deserves a solution on a more vast scale than can be supplied by a district judge or jury in a public nuisance case.”

It is likely that similar suits brought by New York City and other municipalities will end up the same way.  This is a good thing, because we need as a society to decide what our future energy mix will be, not by judicial fiat.

Finally, on the same theme three new studies came out over the last two months that contradict the “environmentalist” position about the evils of fracking.

Peer reviewed studies from the University of Cincinnati, Penn State and Yale all reached the conclusion that there is little correlation between hydraulic fracturing and groundwater contamination.  The researchers were almost apologetic in their conclusions, noting in the Cincinnati study that the findings contradicted what they had expected.  Indeed, the Cincinnati study had been partially funded by environmental groups opposed to fracking.

This does not mean that fracking is pristine. It’s an industrial process that produces externalities like any other.  It does contradict all of those people who claim an overwhelming body of scientific evidence exists showing the evils of fracking.  I saw many of them in January at the Delaware River Basin Commission hearing in Philadelphia about the DRBC’s proposed fracking ban within the basin.  Indeed the science mostly goes the opposite way.  Let’s hope that, unlike our immigration  “debate”, we in the energy context can move beyond wild assertions and use science as our realistic guide to protect our one lonely planet.

Questions? Let Dan know.

Marcellus Shale Update – 6.6.2018

Following a contentious few months, the Canadian Federal Government bought out Kinder Morgan’s interest in the Trans Mountain Pipeline expansion stretching from Edmonton, Alberta to the Pacific Coast north of Vancouver.  For a price of $4.5B, the pipeline switches from private to public control, with all that entails.  It does not necessarily mean that the pipeline even gets built, however, as British Columbia continues to raise environmental objections that caused the delay in the first place and resulted in Kinder Morgan’s bailing out of the project.

Bucking continued Court victories by Kinder Morgan, threats from the Province of Alberta and the wishes of both the Canadian Federal Government and a majority of Canadians polled, British Columbia still refuses to relent.  Had the pipeline asset sale not been completed, Alberta Premier Rachel Notley was prepared to enforce Alberta Provincial Bill 12 which would have seen one Canadian Province embargo oil and gas shipments to another.  This would have raised fundamental issues of Canadian federalism and the basic concept on which the Canadian nation rests.  Instead, Canadian interprovincial trade seems to be preserved, and B.C. Premier John Horgan now has a tougher foe to face.  His opposition now is the Canadian Federal Government, not an American pipeline company or a sister Canadian province.

It’s very hard now to see how Horgan comes out ahead in this dispute, but indeed the entire matter is filled with degrees of losers and no real winners.  For Canada, $4.5B in private investment in the country simply evaporated.  Now in Federal hands, no one knows how or when the pipeline assets will be sold.  The business climate in Canada to attract private direct investment has taken a huge hit.  Alberta still is a long way from seeing the pipeline built, and Alberta needs the revenue to balance its budget.  Finally, Kinder Morgan Canada watched its shares tumble on the Toronto Stock Exchange as Trans Mountain provided its main source of growth potential.

Perhaps Chris Bloomer of Canadian Energy Pipelines Association said it best.  “We can’t do this again and we need to look forward to how we don’t get into this situation again.”

We in the United States should be watching the Trans Mountain controversy very closely.  It provides a case study of what happens when the national good gives way to parochial interests, but simultaneously those interests don’t trust the national government to strike the proper balance to preserve legitimate parochial rights.  We are dangerously approaching that point in the Northeast.  It would be helpful if all would pull back from their apocalyptic political pronouncements, as neither side’s political statements hold water when subjected to critical analysis.

A perfect example is the claim by certain political leaders that we need to move immediately to a “100% Renewable Energy” future.  Politicians who state this don’t understand what that really entails.  Indeed, they shield their eyes to the downside of even attempting to put that aspiration into practice given the state of modern science.

Central to the concept of “100% Renewable Energy” is the reliance on batteries to store and transmit the energy produced from sources like solar and wind.  Batteries use lithium and are dependent on a process involving cobalt.  Last month CNN, and this week Greentech, reported on how the world’s cobalt supply is dependent on child labor from the Democratic Republic of the Congo (DRC).   One analyst predicted that the percentage of the cobalt supply expected to come from the DRC will increase from its current 66% to 73% by 2023.

The DRC is an extremely poor, politically unstable country.  Despite claims that cobalt merchants are trying to ensure their supplies don’t come from mines known to exploit children, nearly all agree this simply isn’t sufficient.

There is no way around the conclusion that the greater reliance on “renewable” sources of energy means the greater mining of non-renewable minerals such as lithium and cobalt to store and transmit the renewable power.  That means more abuse of child labor in mining the non-renewable sources.

It’s not a pretty picture.  When you factor in the unreliability of some of these renewable sources and the environmental degradation that will come from converting millions of acres of pervious land to the impervious coverage needed to house the massive solar and wind farms and other infrastructure this “100% Renewable” world would require, you begin to question the environmental foundation on which such a plan rests.

There is a need for increased use of solar, wind and other “renewable” energy, and there is value in spending billions of tax dollars on research to improve our energy generation, storage and transmission.  However, given the state of modern science, the idea of converting all of our energy use to renewables is not sustainable, renewable or environmentally beneficial.  Some serious discussion on all of these points without the simplistic name calling would be a very useful exercise.

Questions? Let Dan know.

Marcellus Shale Update – 5.18.2018

The Canadian pipeline civil war got even nastier this week.  To those observant enough to notice, the warning sirens for the United States are blaring.

On Wednesday, the Alberta provincial government followed through on its threat to neighboring British Columbia by passing a law permitting Alberta to control who receives Albertan energy shipments.  Premier Rachel Notley said that “if the path forward for the (Trans Mountain) pipeline through B.C. is not settled soon, I am ready and prepared to turn off the taps.”

Immediately B.C. Premier John Horgan responded by threatening to seek an injunction preventing Alberta from ever using the law.

Thanks to his leftist environmental supporters, Horgan has backed himself into a corner.  He now is fighting Alberta, the Canadian federal government in Ottawa and the B.C. Liberal Party opposition.  “We’re seeing the biggest pump prices in B.C. history” noted B.C. Liberal leader Andrew Wilkinson.  “We can’t live with that forever.”

All of this is devastating Canada’s ability to attract investment.  The Liberal federal government of Prime Minister Justin Trudeau strongly backs the Trans Mountain pipeline project, but seems powerless to make it happen.  Canadian Finance Minister Bill Morneau announced that the Federal government would provide financial assurances to anyone building the pipeline, and said that if Kinder Morgan will not go forward there are plenty of other investors who will.  That’s debatable.  Canada is now a slow growth economy.  Its provincial infighting over pipelines is but one example of a business climate unwelcoming to investors.

From an energy perspective, British Columbia is to Canada what New York and New England are to the US.  At least in Canada they don’t have the absurd spectacle of a “Sex and the City” actress so spooking the Governor of New York that he is moving ever further to the left.

Both countries now are staring into the energy abyss.  Increased local control over interstate or interprovincial projects means increased paralysis due to local veto power. New York is finding this out the hard way.

Earlier this month the owners of the Constitution pipeline extended their legal losing streak by failing to get the United States Supreme Court to overrule the Second  Circuit’s decision not to intervene in New York’s rejection of a Section 401 Clean Streams Permit.  In effect, this both killed the project and solidified State ability to block Federally-approved pipelines.

Statewide, New York has gone further.  Since 2014, New York State Court rulings enshrined the right of localities to pass on energy projects. Unfortunately for Cynthia Nixon, those localities are now vetoing “renewable” solar and wind farms.  Ultimate hypocrisy rests in Dryden, near Ithaca, which was a name plaintiff in the case that ended the State’s right to control energy projects.  Last year Dryden blocked a large solar project, claiming that it was too big and being built in the wrong place.  Dryden, they name is NIMBY.

From where, Governor Cuomo or potential Governor Nixon, do you intend to find energy to power New York’s  economy?  The winters get very cold in Upstate New York.  Like the voters in British Columbia who are dealing with massive gas price increases, the voters in New York may love environmental justice warriors now, but wait until the winter.

Questions? Let Dan know.

Marcellus Shale Update – 3.27.2018

The eternal state of confusion surrounding natural gas development in America continues unabated.  As events play out domestically and internationally, the absurdities manifest themselves.

Despite enormous obstacles and the inexplicable missteps of the gas industry, the pipeline buildout continues.  One measure of this is that the discount at which gas is sold at Henry Hub in Louisiana has dropped to its lowest level in five years when compared to the price at the Dominion South hub in Western Pennsylvania.  So far in 2018 it has averaged 49 cents.  For 2017 the differential was 85 cents and in 2016 approximately $1.

Gas sells at a premium in Pennsylvania because of the difficulty in getting the gas from the ground to market.  With more pipelines being built, more gas can flow in Pennsylvania and the price differential decreases.  The premium is larger for gas coming out of Northeastern Pennsylvania, which actually is where the best wells are located and which is closest to gas-starved New England, because the pipeline system from the Northeast is even more spotty.  Hopefully, as Atlantic Sunrise gets completed that differential also will lessen.  Thanks to the pipeline buildout, in April the industry produced 27 bcfd of gas from the Marcellus/Utica region, representing a third of entire national output.

The price differential will continue to drop as Mariner East 2 comes on line, but before that happens the natural gas industry has to get out of its own way.  Sunoco Logistics, which is constructing the pipeline, has antagonized practically everyone with its operations, including Pennsylvania state regulators and legislators.  At an extraordinary hearing last Thursday at the Pennsylvania State Senate, Senators from both parties took shots at Sunoco Logistics.  After a spokesman for the Marcellus Shale Coalition stated that pipelines are the safest way to move energy,  Democrat State Senator from Andy Dinniman of Chester County responded:

“I don’t disagree that pipelines are the safest way, but if you want it to be a reality, your companies need to tell Sunoco ‘you’re screwing it up for the rest of us.  And you’re hurting the people of Pennsylvania.’  And that’s what any trade group needs to do to protect its own interests and in the process also protect the interests of the citizens.”

It sounds like everything I’ve been saying in this column over the last year.

Pipeline advocates don’t need to look far for enemies.  On Friday the new Murphy Administration in New Jersey filed in Federal Court to prevent the taking by eminent domain of 149 parcels of land needed to complete the Penn East pipeline from Northeastern Pennsylvania to Central New Jersey.   New Jersey’s Attorney General asked the Court to deny the eminent domain request, and a spokesman for the Eastern Environmental Law Center said that the public entities that own these lands “have spent significant funds preserving these lands for their critical environmental values, not to create a green path for a dirty pipeline.”

That’s lovely sentiment, but Governor Murphy, who originally is from Massachusetts, might want to do a reality check first.  Governor Murphy might ask how the reliance on “renewable energy” sources is working in the Bay State?  Has he heard that due to its failure to provide a reliable energy supply New England now is importing gas from Russia?  Has he heard that Massachusetts Attorney General Maura Healey has gone on record as saying that importing gas from Russia during cold snaps is preferable to building pipelines from the Marcellus to New England?  That buying Russian gas drilled in the Arctic eco-system is better for the environment than taking it from the Marcellus?  Does Governor Murphy agree with her?

Thanks to New England (and now possibly New Jersey), Vladimir Putin is in a stronger position as he faces the hostile reaction of the West following the assassination attempt in England of former Russian spy Sergei Skripal.  The UK has responded very harshly, expelling 23 Russian diplomats, and President Trump just expelled 60 Russians and closed the Russian consulate in Seattle.

Of course, there is a limit to the pressure the West can put on Russia, and Putin knows it.  Western Europe remains remarkably dependent on Russian gas.  That gives Putin more incentive for his international adventurism and increases the chances that soldiers from places like Fort Dix, New Jersey will be sent overseas to counter further Russian aggression.  Should that happen, I am skeptical that either Attorney General Healey or Governor Murphy will take “credit” for their deployment.

Questions? Let Dan know.