Sometimes the very smallest part of a complicated piece of equipment can bring down the entire project.
The part at issue here, a thin ring of rubberized plastic, costs about $7. Yet it may be responsible for forcing the U.S. to rethink its entire domestic energy strategy.
Here's what happened.
Clearfield County is a rural area of scenic rolling hills in northwestern Pennsylvania, about an hour from my house. Shortly after 8 p.m. on the evening of June 3rd, I received a text message: The sky over Clearfield County had exploded above a natural gas well being drilled there in the Marcellus Shale. I read the news and knew that, along with the well, much of the last five weeks' work to develop better drilling regulations for the state may have gone up in smoke, too...
But I'll get to that work a little later. It was certainly less pressing than other matters on my mind throughout the night and the next morning. Finally, after a 16-hour-long spillage of gas, toxic flowback water, and brine, the well was capped.
Its effects, however, are just beginning.
The good news from Clearfield is that there were no injuries and little damage in a remote part of a state forest. The bad news is what this event may mean for the move to produce more U.S.-based energy resources.
Two Major Blowouts May Put A Cap on Domestic Drilling
With popular opinion rising in opposition to drilling offshore - thanks to the disastrous Gulf of Mexico oil spill - we now have a similar event challenging the ability of companies even to produce safely onshore .
The Clearfield episode is another blowout, following so closely on the heels of the BP tragedy in the Gulf, and both involve the failure of the same vital piece of equipment - something called a Blowout Preventer (BOP).
At Clearfield, as gas production was beginning, the well experienced a sudden increase in pressure. The BOP, a cheap, rubberized seal, forms a series of redundant valves that should allow technicians to stop the flow of oil or gas, stabilize a system, or even cap a well in the event of a pressure surge.
But the BOP connection malfunctioned; the seal was broken, and with it went any chance of preventing or controlling the blowout itself.
It is also clear that a BOP failure brought about the sinking of the Deepwater Horizon platform in the Gulf, the destruction of the most advanced piece offshore drilling equipment, along with the deaths of 11 people and the likely destruction of an entire region's economy.
We already know the companies in the initial crosshairs of both the political backlash and liability debates. These are the producers - BP plc (NYSE:BP) in the Gulf and EOG Resources (NYSE:EOG) in Clearfield County.
EOG used to be part of Enron (a legacy it is anxious to overcome) and was poised to be one of the major producers in the Marcellus. That aspiration will now be interrupted. The state Department of Environmental Projection (DEP) has ordered EOG to halt operations. The company is prevented from all drilling activities for at least a week; hydraulic fracturing (the movement of large water volume down under high pressure to break open the shale) must stop for at least two weeks; and it cannot complete or start post-fracturing at any of its 265 active wells in Pennsylvania for at least a month.
These bans are likely to remain in place until the DEP has determined the cause of the blowout. EOG, for its part, has indicated that the integrity of a seal (our little $7 guy again) in part of the BOP assembly was compromised, allowing pressurized gas and fluids to flow. Why that happened - and what it means for the thousands of wells supposed to be spudded in the Marcellus - remains to be seen.
EOG is one of the largest independent U.S. oil and gas producers, and Marcellus production accounts for less than 1% of its total daily output. The company says that suspension of activities in Pennsylvania should not prevent it from reaching its goal of a 13% rise in overall extraction volumes this year.
Of course, meeting production goals is less the issue here; what's vital is maintaining public confidence levels on Marcellus and other shale potential. These domestic sources are becoming a major component of the national energy balance, especially in the wake of reduced offshore drilling.
Ultimately, the issue may well come down to the defense provided by other companies, the BOP manufacturers. Here the market is dominated by Cameron International Corp. (NYSE:CAM). CAM built the BOPs at issue in both the Gulf and Clearfield blowouts. The second-largest provider is T-3 Energy Services Inc. (Nasdaq:TTES). Shares in both have taken a hit, although the companies stand by their products. CAM maintains that an electrical problem - and not anything in the BOP itself - caused the Deepwater Horizon blowout.
Indeed, an exhaustive 2009 study supports that contention. In over 90,000 field tests, there were 62 BOP malfunctions - a failure rate of less than 6/100ths of 1%. At Clearfield, EOG said that it successfully tested the BOP before initiating a gas flow.
Nonetheless, the two blowouts have another element in common...
Balancing Energy Needs With Safety Concerns
Each project experienced a massive pressure surge before the blowout. That is of great concern for drilling in Marcellus, where pressure has been consistently higher than anticipated. Greater pressure increases how much gas is coming out of the ground (a good thing for operating companies and their investors), but it also ups the safety risks and concerns.
And that brings me back to that text message I got on June 3rd. One of the immediate casualties of Clearfield may be proposals to change drilling regulations in Pennsylvania. We started the process five weeks ago with a major meeting at Duquesne University in Pittsburgh, my academic base. The Pennsylvania Environmental Council brought together experts from around the country to develop recommendations for DEP.
The intention was nothing less than meeting the requirements for energy needs and environmental safety at the same time. Our conclusions were working through the state government in Harrisburg... and then a $7 seal got in the way.
What is beyond doubt, however, is the need to become increasingly reliant on unconventional production to satisfy our energy thirst moving forward. This requires that we solve the concerns over shale production and do so responsibly. Whatever the impact, it's sure to be nationwide, as more shale deposits come under development.
In my next column, I'll bring you out to California, where the Monterey Shale is rapidly bringing what was once thought to be an exhausted production basin back to life.
This time, it is all about oil shale - as much as 500 billion barrels of it.
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About the Author
Dr. Kent Moors is an internationally recognized expert in oil and natural gas policy, risk assessment, and emerging market economic development. He serves as an advisor to many U.S. governors and foreign governments. Kent details his latest global travels in his free Oil & Energy Investor e-letter. He makes specific investment recommendations in his newsletter, the Energy Advantage. For more active investors, he issues shorter-term trades in his Energy Inner Circle.