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policies and legacies and lectures in history and a new series featuring archival government films from the 1930s through the '70s. c-span 3 created by the cable tv industry funded by your local cable satellite provider "like" us on facebook and follow us on twitter. now a discussion on u.s. natural gas production and hydraulic fracturing known as fracking. hosted by the atlantic council, this is about an hour and 20 minutes. well, i think we can start.

i wish you all a good afternoon and welcome to the global energy center at the atlantic council. i'm dick morningstar, the founding director of the center. also, i'm glad to see her david goldwin, chairman of our advisory group and brought us our moderator here today, cynthia quarterman. so we're very pleased to see you all here today. and today's discussion will focus on how energy prices, politics geology and environmental concerns have affected and will continue to affect fracking in the united states and the potential for fracking to succeed in other places, like europe, mexico argentina, china and other places. we do have an outstanding panel of experts today to discuss

these important issues. the discussion will be moderated by one of our own very distinguished senior fellows who, again david brought us. cynthia quarterman. cynthia most recently served -- this is always a tongue twister for me for some reason -- most recently served as the administrator of the u.s. department of transportation's pipeline and hazardous materials administration. she's been in energy development safety and transportation since the beginning of the clinton administration and we're pleased to have her knowledge and expertise here at the atlantic council. and today's expert panelists if you picked up the biographies available outside, right?

yeah. so i'll briefly introduce our panelists who included subash chandra from guggenheim partners. he recognized fracking's huge potential early on and involved 90% of the companies involved in the industry. i guess i could ask how many companies were involved in the industry at that time but i won't. >> all two. >> all two of them or one in seven out of two of them. and dr. terry engelder professor of geosciences at penn state and originally estimated the potential gas reserves in pennsylvania which first set off the shale boom and he's taught at texas a&m and has a whole host of credentials that you can see in his biography.

and finally, we have russell gold who is a senior energy reporter at "the wall street journal" who has been reporting on fracking since day one. mr. gold recently published a book specifically on this topic and it's titled "the boom: how fracking ignited the american energy revolution and changed the world." and for the audience and those watching the live webcast, you may also contribute to the conversation on twitter by utilizing the #acenergy. and so let me -- i will extend a warm welcome to cynthia and our panelists and cynthia will say a few words and then we will begin the panel discussion.

thank you. [ applause ] i just want to say thank you for being here this afternoon. i think this will be an interesting panel. we just came from lunch where we had lots of interesting conversation about what is happening with respect to fracking in the united states and these gentlemen also have an international perspective and we're going to push them to answer some of that and i'm going to start right out with dr. engelder who is known as the father of fracking because of his work figuring out how much gas there was in the marcella shale. he was noted as one of the top 100 thinkers in the foreign magazine on this issue. >> first of all, let me indicate

that i'm always embarrassed with this title father of fracking in pennsylvania and i have a written statement that i'd like to put forth as a disclaimer. but before that, whenever making an appearance, i always pass around a notebook in which i have the audience enter their name al a mater and company and affiliation. i'm going to hand this down to this gentleman. go ahead and pass this around the room during this period of time if you would. all right. this is the disclaimer. and i will read it, although i dislike red text but in this case this is so important that i'll disclaim it by reading. it is flattering to have people think that i might be the father of fracking. but it is a title that i don't deserve. in reality, i am a very small gear in a very large motor. the motor that supplies energy

to the human economy. my research on shale gas over nearly 40 years culminated in reserves calculations for the world's largest unconventional field, the appalachian basin in 2008. this research garnered international attention following a december 2007 press release from range resources the company responsible for pioneering and discovering wells in the mar sell list. at one point i asked range resources to actually write a statement to explain what it was that i actually did and his statement was, my worked aed a level of independent credibility that was lacking or understated at the time. bear in mind that this is late 2007 before the boom that russell gold is going to talk about. for perspective, they suggested that the volume of recoverable gas distributed through several

layers in the appalachian basin, including the mar sell list and utica is comparable to the world's largest conventional gas field. to me, uncle sam is the father of fracking under the leadership of president jimmy carter, they initiated the project known as eg -- eastern gas project, egsp. egsp provided funds to any of a number of scientists in government industry and academia for the purpose of tapping the vast reserves of north american gas shale. carter was president in the 1970s so i would suggest to you who might be the father of

fracking is al yost of the technology laboratory and he was responsible for drilling the first horizontal lines. this would include aamaco, the early fracture experiments in colorado and then there is george mitchell and this was done in the 1990s and then bill of range resources who put a massive hydraulic fracture on the market. all of these people are deserving. academic types include mark zoback and steve of texas a & m. while it's not fair to include me in the list of potential candidates for that title, you

asked me to explain myself. is that right? >> yes. >> okay. so i was blessed with funds from uncle sam to do some of the early work on gas shales back in the 1970s. this was the same time that george mitchell was experimenting with gas shale in ohio. again, using government funds. from the eastern gas shales project. then later egsp funding went to me to try to understand the state of stress in gas shales in the appalachian basin. that was a great experiment in the 1980s. i was a small part of shell's venture in gas shales, the first attempts at producing gas from a standard gas shale as we know it today. at penn state, i had an amazing group of graduate students -- and this is very important. not the faculty members but the students that are associated

with the factulty member. they all contributed to our understanding of gas and oil and shale. we came to understand which natural fractures were driven by high-pressured gas we came to understand the rate of fractured growth, the timing of fractured growth and the distribution of fractured growth. all of these are important elements that make commercial gas production possible. and finally, and most importantly, none of these are the discoveries of one person. >> thank you. i stand corrected on that. did i understand there was also a woman involved? a geologist as well back in the olden days? >> well, as a matter of fact, there were two or three interestingly enough when the new york state sur fay -- before it was called a survey decided

to understand the mineral james hull, the geologist responsible for that, had he just gotten married and i suppose his wife was looking for a honeymoon to go over to europe but rather he said, you're coming with me to map in western new york. now, she was an artist and on her honeymoon it was mapped by a cornell graduate student in 1912 and that's still remaining some of the work in understanding fractures and gas shales that allow you guys to do whatever you do. >> thanks. >> mr. chandra how did you get

involved in fracking? >> i guess my background is trying to find securities and that's when i got in the industry is when the gulf of mexico shelf is where the hot ipos came from. so that ended. and one of the first companies i found thereafter was mitchell energy as referenced by terry. so it was immediately impressed that we saw some companies do very well, get bought out, and some companies absolutely disappear. so when i saw mitchell energy, he was an onshore company growing sustainably every year on vertical fracs at that time. i was very excited by that. but it was also a curse in another way because after seeing

george and his company at a very, i guess, right before the takeout but a very late stage of the horizontal application of fracking, they sort of implied to me this would not work. i was too young to realize that every company says that. >> right. >> so i went for quite some time going, wow okay, guys, this stuff out here outside of wise and denton county, it's for the going to work. that cost me a couple of very, very good companies and ideas along the way. but i came around finally and in 2005 fayetteville, what was interesting about the barnett shale was supposed to have unique characteristics that could not be replicated and as it so happened in fayetteville they drove two wells and stock went up and that could not be replicated. what got me in touch with terry, appalaicha as a land mass was multitudes bigger than the fayetteville or the barnett and

today for very different reasons it has a very unique place in the u.s. as an exporter of gas, as an exporter product. and it's a very exciting place to be. so, anyway, i went to the father of fracking, you know -- >> you need a new title? >> -- to understand the basin at the time it was chesapeake energy who bought a company and had a big position there but it was different. everything about it was different than the other place. so that's how i found terry and terry introduced me to a lot of words that i still can't pronounce and concepts i didn't understand. but what was amazing about this whole shale experience is that there was no book could you read. and the education even now is very much realtime and you know, a long the way clients would ask why didn't you write a primer? it's so historical. there's so little i know.

every passing day i know so little and yet i feel like i know a lot since we had our chat. that's how i met terry and terry really helped us and since then it's been ohio and ves west virginia and iraq is getting more powerful and far more productive and the techniques are absolutely violent, where you have wells capable of doing these astro mom mcrates in the gulf of mexico were things that couldn't happen and are now being experienced in a single well per well in places like ohio, west virginia, and pennsylvania. >> for me it's great to be on

the end of asking you questions rather than answering them. tell us how you got into this. >> i will get into the personal in a minute but my story is a classic example of how it's better to be lucky than smart because when i was starting off at "the wall street journal," i was looking around and i joined the energy team not for any particular good reason, other than the fact that i was in texas and wanted to stay there. so they assigned me to the smallest companies, mostly doing u.s. domestic oil expiration. and these were companies, frankly, that very few people -- boston was an exception -- that investors were interested in. we had depleted the rock and we were imported. there wasn't that much money to be made. let's give it to the new guy. as the new guy, i go off and start meeting with companies and one of the companies wants to talk to me about this new drilling that they are doing in ft. worth in the barnett shale. so i went to my first frac job

in 2003. we didn't even call it a frac job back then. people talked about unconventional gas. so really i got in on it very early on and for several years, 2003 2004 2005 and 2006, i wrote about something that i saw very significant in the united states and then one day i got a call from my parents, my mother specifically, and they own 100 acres up in northwestern pennsylvania, a place to get away for the weekend. she said to me we got this strange call from chesapeake and they want to inquire about our land. at the time, there was drilling going on in the pittsburgh area but this was hundreds of miles away clearly -- clear across

pennsylvania. and so really i had to go back and start learning about why chesapeake was leasing all the way so far across pennsylvania and i did and that really got me onto the second stage of learning about fracking and what was going on and it really brought me into these questions of, should we be doing this? because that's really the question my mother asked me. should we sign a lease? should we allow this company to drill on this property that we own? and how can you get the benefits of all of this oil and gas in the country in the united states and minimize the risk and inscreens and the downsides to it. those are very important questions and i will pause and say i don't think those questions have been answered in the united states yet. i think we're still grappling with them. i'm based in texas and who actually should be regulating it? the state or the cities? we're still negotiating these questions and i think it's

important because one of the questions that we're going to get to is why hasn't shale taken off outside of the united states? it's been transformative in the united states and canada. but outside of the united states, it's really barely started and i think one of the answers is, because as much as the united states has struggled with these questions we had one thing going for us. we had incentive. americans in the united states we own our own mineral rights and so when chesapeake wants to drill on 100 acres of land, they are going to make an offer and they are going to make an offer that is sweet enough hopefully to overcome the inconvenience of having trucks driving across your property for the next few months. outside of the united states, that's not the case and as much as we're struggling in the united states with how to balance these questions, i think outside the united states it's even more difficult because that incentive question hasn't been fully addressed.

so when you say you want to drill wells here you're not bringing large checks as they do in the united states. so i wrote all about this in my book and about al yost and terry and all of the different people who created this technology and all of the questions that we're struggling with today. clearly in energy and all of these questions which we talked about and is talked about, should we allow gas exports, oil exports, keystone xl they are all questions that have been set in motion by fracking and this enormous new production of oil and gas. and it's been around for several years and then modified it and

completely changed the country's landscape. >> can fracking survive? i think the end of last week we saw the price of oil at about $59.50, price of gas a little over $2.5 and if you look back to july, prices were a lot different last year. they have been even lower recently. under those circumstances we've already seen the counts going down notices of job losses and, if so what kind of companies would be the ones to salvage themselves at the end. >> i would answer the last part first i think an enormous change is happening right now as we

speak. and it has fallen to what has not stopped 4 sustainably is that going to happen in the world of oil? we really had no way to tell. we understand that the oil molecule is a lot bigger. terry can quantify it exactly. it was a lot bigger than a gas molecule. it's a different beast and far more problematic. the world now understands that the u.s. can grow and a size to grow at a rate of million to million and a half barrels. they have made room for that barrel. the irony of this is that you know, if we were to express it this way, okay, so the u.s. oil every last barrel has cleared profitably, no matter what the cost was and each barrel marginal barrel made a profit, which is fantastic, right? so if you told someone, a layman, so to speak said, wow,

demand just must have been great and you look at the numbers, demand wasn't good at all. what happened was the global forces allowed u.s. oil to have a place in the world at a rate of growth that they decided, wow, we're down to 32% market share. they can keep growing at this rate. this is not just a little bubble that pops. so what did they decide last november, we won't allow it. we are going to defend our market share. i think there was a good review on it. that is a sea change. we have an industry and the gas did deflate and immediately transferred those dollars into oil thinking that they can grow forever. so what do you do? you lever that business up.

you hire lots of people and leverage it up. you feed leverage into that business. we now have built in a new environment, where it's not you a lowed so to speak it's too much excess capacity. in terms of land a lot of land will basically be returned back to the lease holder not to be jilted again and way too much in capital. you don't lever a business where your revenue is as influx as we are. talent and services. so you're already seeing that and what they don't want to do is within the organizations, it's hugely capable of enormous amounts of experience and you can't get it back. that's probably the next stage.

so what we're about to enter is a phase where all of that excess capacity is resized to the new place for u.s. oil. and that new place for u.s. oil is not a million, million and a half or two million barrels, we're still trying to grapple with it. my point of view is backwards and depends on the oil price. the oil price is the nerve signal. it is a signal where all of these forces come to bear and conveys its intent through the producer and really frankly $65, we're done but we'll start back at, say, something closer to 70 which tells me we're probably not going to be above 70, 75 or see the 90s or 100s anytime soon. it renews an environment where every last barrel is profitable. we wonder we have an analyst here with the washington

research group here in washington, d.c., she covered the iran topic and so on. of course, iran is a hot topic. who is going to make space for those barrels next year? it seems like the odds of a deal are pretty good and so we're going to resize this entire sector. so i did want to answer the last question first because i always forget the last question. but what it means to me is that what we're already seeing is that it's like this -- it's like an earthquake center. you have the core and then the fringe companies are already under huge stress and if not under the bankruptcy et cetera. that core is shrinking. who is in the core is the best rock and i think it plays that. frankly, it's going to be two things. it's going to be the price of oil conveying that and then the differential. it's going to be the cost of getting the barrel to the end user that also conveys places like the two assets of it.

when people say it's $70 oil, you have to take 15% off the top for the cost of getting it to a sales of 70. so they are not getting 70. so i think we want to be close to the end user market as close to the refining centers. it's going to be this exciting new play in oklahoma. so it's going to be exposed to that. we have companies like acquisition this morning of one company wanting the exposure and buying another company for that reason. >> great. >> okay. russell, is the boom now a bust? >> i don't think so. we have clearly seen as you put it a huge number of drilling rigs laid down decommission. we've seen a lot of people laid off but we've also seen

production remaining fairly covered and we run up to 9 million barrels a day and we're going to sort of be sticky coming down. this is a really immature industry in the sense that it's just learning how to do this and learn how to make bigger wells for less money, to get more oil and gas out for less money, to drill more wells longer wells with fewer rigs. a lot of the shedding going on is companies just getting smarter. the era of rapid relentless growth i think it's over. there's no question in my mind about that. but i also don't see any signals that that production is going to drop off. so in that sense no. we're not going through a bust. however, there are a number of

companies. wall street is fairly generous and a lot of management teams bought a lot of -- well i'll be generous. suboptimal rock. they just did not spend their money very well. and those companies will be bust. they will not be able to survive. so we are going to see a lot of that. i'm actually surprised that we haven't seen more already however, the era of the u.s. as a major oil and gas producer which, in my mind, the boom is was all about that's not going away anytime soon. >> terry, i know you have strong opinions about opec. have they squashed the shale revolution, in your view? >> absolutely not. the point that russell just made, the most important point is that there is oil available

at every incremental increase in oil that is there and waiting for small incremental changes. i think that the other point that russell made, which is that the u.s. right now has a fleet of oil and gas wells. why they may have very early rapid declines, the later history of these oil wells is a long period of production. this is particularly true of gas wells, also. and so in a sense, then, the capital spent early on is betting on these long tails of these wells and they will sustain this level of production of these wells and they are unlike conventional wells where once it declines, it really goes off the books in terms of production and these tight gas

and oil wells won't show that particular characteristic. at least not as rapidly. and we've had some experience in the appalachian basin where some of these wells will continue for as much as 40 years. and the big slick water fracking experience that we've had, of course, is now only 10 to 15 years old in the united states and we looked at the barnett to see how these wells are doing and particularly the tails of these wells and right now, a lot of these wells are being refractured and that particularly appears to turn on more gas to extend the life of these wells and so they last a long time. at a very low rate relative to the initial production. to the initial production. called betting the tail. my bet is the tail will do very well. >> sebastian, you mentioned a little bit what's happening in the rest of the world. what's your view on whether

fracking will take off any place else outside the united states given the price and the current environment? >> they're trying. i think that view that there was only one barnett was true and that there was only one barnett, there was only one fayetteville only one march sell is. all of these rocks have distinctive characteristics that i agree we have barely begun to understand. i think as an aside, two things, one is just on the prior question where i think of how our industry has changed is that we have spent 130% of cash flows, and that's been fully funded by wall street if you just want to call it that but by investors. i think we are going to a cash flow neutral world. this is the first time since the shale revolution occurred that

we have spent cash flow. in that respect i think the shale sector in the u.s. changed us sizably. in terms of now what the companies will do that applies to other countries is they're going to put a lot more effort into understanding the rock that they have and i think one of the problems is that this big data set hasn't really existed up until very very recently, and there's so many little parameters on the rock that are more visible at a microscopic level that you have to collect that data, then you have to make sure the science is good, that you have the same variables in two well bores that they don't vary one bit, and then understand why they vary in performance. we have seen wells that are within one square mile of each other in the very same rock in terms of performance be 100% apart, right so industry is going to spend a lot more time with the plays that they have to understand why those variances exist.

so before we take off internationally i think we've taken this view that brute force works. for instance if we put x thousand gallons of water in, let's put more. if we put x thousand pounds of sand per stage let's put more sand. if it is ten stages, why not do 40. it has all been about brute force. what this is going to force is big data gathering what we are going to find is there are intervals that work a lot bertha explain the variance in two well bores almost completely, so before we make the same mistakes, i shouldn't say mistakes, this is all part of the process, before we go internationally and start with brute force aspect of it, because frankly i don't think they have the equipment, we don't have the equipment to put in this many gallons of water at this pump rate, et cetera et cetera, i think we need to refine the science and understand. so internationally there's a lot of things like russell is talking about incentives here

existed. i think before it really takes off, those incentives have to exist elsewhere. a lot of the deals that companies are getting to figure it out aren't very good and will take too much time. so i don't think i see anything remotely parallel in what we have here. russia becomes a shale oil russia was bigger than we were, the only country bigger than we were. close to us was venezuela, i'm sorry, argentina. venezuela was slightly below that and algeria? these were a few of the so-called hot spots. i have not seen one single project really take off. >> terry. talk a little about geology here outside of the united states. i know you have been traveling

around the world talking about marcellus and the geology, have you studied any of these sites and know where things could develop quickly? >> yes, i have, and the answer is no i don't know of any place that will develop quickly. let me explain a couple of things by following up. he mentioned two wells can be drilled parallel, offset by a thousand feet and behave 100% differently. we also know, and this is where the real science will come in each well is fractured in stages. what that means is if you have a lateral 5,000 feet, each individual stage is only a couple hundred to 300 feet. and the industry knows if there are 15 stages in one well only two or three or four of the stages are money stages.

so the real scientific breakthrough that will happen on a lot of this is drilling a well and understanding where you put your money, what three or four stages are critical. that more or less gets back to the question of where are the fractures because the fractures can vary a great deal from one location to the next even in the length of 500 foot, 5,000 foot well. to answer your question cynthia, there are a lot of parameters that really matter and make a big difference. for example, china early on was believed to have a fairly decent resource in gas shales but chinese gas shales are different from marcellus for one of two reasons. marcellus was deposited on inland sea saltwater. and the chinese shale some are

deposited on the land surface in river channels or not yet below sea level. both produce shale and organic matter in the shale, yet these seem to make a big difference. marine marcellus has proven to be better than fluvial gas shales of china. we know there are other parameters in the rock. sue bish mentioned there are as many as a half dozen different parameters. all of them have to be perfectly aligned for gas shales to work. and if you have one for example, the polish gas shales appear to have too much water in the matrix to allow the kind of gas production that they like. that's been a bit of a disappointment. we have a suspicion that maybe the shale under the paris basin, which is different in age and depositional setting than shales

in poland through ukraine, yet the french have elected to take a pass on the paris basin. then we have the midland basin in england where i think the british government under cameron has realized that if the local people are going to participate in this, they're going to have to be rewarded in some way for their nuisance. now, that basin consists of a lot of coal age rocks, coal in the united states was deposited somewhere in the order of 250 million years ago, younger than the marcellus, older than say the paris basin. and they have a completely different set of parameters and all these things need to be sorted out. it is true however, that the biggest gas shales that really seem to work in the united states are these large basin marine gas shales, and this includes the barnett, fayetteville marcellus for

example, younger in age is the eagleford and haynesville. each of those are marine shales and they seem to have the best set of characteristics for all of this. marine shale that comes close to mimicking some of the properties that really work in the united states. >> russell we started talking about not just the geology of the other countries but some of the environmental and other issues. can you expound on that. >> sure. i wanted to quickly follow up on something that terry said about the paris basin and we don't really know because we haven't drilled that many wells into these places. one of the things that when i first learned struck me is the number of wells drilled in the united states is in order of magnitude different than wells drilled elsewhere so we talk about shales in poland and france, they're just -- the only way you can determine whether the shales will produce oil and

gas is to drill wells into them drill a number of wells and take samples. that just hasn't been done outside the united states. it will take time to drill samples and collect data. once again, getting back to the environmental question china was said to have a large gas shale deposits. the problem was is that one of their good deposits was in a very arid region to the north. the other in a part of the country which had a population density similar to new jersey. neither place made really from -- didn't make a lot of sense to drill. on the one hand, drying to drill in a place that's dry and you need a lot of water and liquid to frack the well, and there's a lot of competing demands for that water. then you go to another place like shesh won with that population density it was difficult to drill there.

we didn't get all of the details you did in the united states. there were a number of protests over as trucks came in as rigs and things were set up, there were a lot of local protesters saying what is going on. what's the impact going to be, how are we going to be compensated for this. and that essentially slowed the chinese growth of shale, even though arguably china would be an extraordinary beneficiary of more domestically produced gas. they're report tg in enormous numbers, it is no secret they have large environmental and pollution problems and would like to do some production with gas. we don't have it resolved. the shale that seems to move quickest, in argentina that's -- just happens to be

lucky it is in a fairly remote area where there has been a history of mining and there's sufficient water there so once again you happen to have found a place with the right conditions beneficial conditions for going forward. those are few and far between. i'm going to come back to this issue that what really made shale takes off in the united states is the fact you had companies and land men going out handing out large checks 10 $20,000 an acre to lease the land, then oh, by the way, get an eighth of the royalties on oil and gas that comes afterwards. companies had to do that because the individuals owned mineral rights. there are just -- i don't believe there are any other countries, if there are, it is escaping me that have private ownership of mineral rights. so what does the state do? there hasn't been a good answer for that. >> your book does a great job

talking boy the positives and negatives of fracking. assuming another country decides to move forward with fracking beyond argentina, what are some of the lessons learned you can pass on based on the experience in the united states. >> well, i think there have been several. first of all one of the problems we've had in the united states, we start drilling for oil and gas in an area and all of a sudden there are disputes about how has this impacted the quality of water or impacted the quality of air. one of the lessons learned, doing this to an extent in pennsylvania, measure the quality of water before you start drilling measure the quality of air. that way you know exactly what the impact has been, and as a bonus, you develop a fairly large environmental database about the quality of air and water in the countryside which is not bad to have. better data understanding is first and foremost. another thing that i think was certainly a lesson the federal

government learned out of the deepwater horizon is that it is difficult to have one government agency that's both promoting development of the resource and attempting to regulate it as well. one of the things the federal government did offshore after deepwater horizon is split it into groups. we haven't seen the states do that very well but certainly if shale development takes place elsewhere, that would be something i would look for. have one government body charged with leasing and getting interest and getting exxon and other companies to come in and another charged with protecting the quality of water. the final point is well construction. sounds boring, well integrity, it is critically important. make sure if you're drilling wells 5,000 feet deep that you are building the wells well and that they're going to survive for 20, 30 40, 50 years and you're sure of that up front because that's how -- we talked about fracking and problems

associated with fracking. most are associated with well integrity. if you can build the well right get the commenting and steel right, you're not going to have those problems. >> terry, i know that you wrote very recently something about missteps in pennsylvania and in response to some international bans on fracking in romania france and other places. what are those missteps following up on what russell was saying. >> russell has mentioned a couple of them. in order of importance i think one of the great failures in pennsylvania was to understand industry understood how important it was to measure the quality of water in individual wells, they misunderstood that that baseline chemistry had to be established in every well. so if they did it in one well in

ten, that proved not to be good enough because in pennsylvania, for example, there are no standards for water wells and it is well known that 40% of all private water wells in pennsylvania would not pass epa standards. and it is very easy for the public to identify a well that they have problems with and immediately blame it on industry regardless of whether that actually happened, so as russell has mentioned water well standards. the second of course importance was well construction, and just to amplify a little further the early wells drilled in pennsylvania by more than one company were wells in which a production string was passed down through several thousand feet of upper rock without being cemented. at the time that industry first came to pennsylvania, industry did not realize the extent to which this three to four thousand foot interval of

section was gas charged in itself, not gas from marcellus necessarily but other gas from other layers. and that came into the open well bore, went up several thousand feet and right into ground water. so those are the two most important. other issues one of which was industry made i think a fundamental error in a law passed known as the hall burton loophole in which additives that were put into frack fluid were secret. any time you keep a secret, it creates public distrust. that was remedied rapidly by a website called frack focus. then there was disposal of water, what to do with it. early on in pennsylvania, a lot of water was dumped down wells and we have known as geologists for the better part of a half

century that you put a certain amount of water down a well, that will cause local earthquakes. it was discovered in rocky mountain arsenal in the '60s, yet it is an area that's repeating, incidentally is going on in oklahoma and that is not a consequence of fracking, that's really the production of oil with a very very large water cut where the water has to be disposed of and it is being disposed of in massive amounts, and we know this, that's going to cause earthquakes. another issue when industry arrived, industry arrived from places like west texas where there were very few people living and you didn't have to do such things as build holding tanks very well for flow back fluids arriving in pennsylvania suddenly you had to manage these fluids well. the first holding tanks were open pits in the ground lined with plastic which tended to

leak. now industry will completely self contain systems to prevent this from going on. another industry habit that created a lot of problems early on, industry would air drill. by air drilling 1,000 feet through the water table that air under high pressure is designed to push cuttings back up the bore hole where they can be recovered. but that air pressure pushed against open holes in which the air pressure was leaking into surrounding rock that had groundwater. that pushed a front of methane in front of it toward people's water wells, pushed tur bid water toward people's wells this created a number of issues. if you're the owner of a private well that's been reasonably clean for years and suddenly it becomes turbid, starts to bubble with methane, you're going to raise cane. that's the list of the six

mistakes the industry made, all of which have been mitigated to a reasonable extent right now. but those were the six that of course caused an international uproar and it will take industry a long time to down live that. >> sebastian, do you want to add lessons learned for the industry and investors out there in other countries? >> yeah, i thought it was very comprehensive, some of the problems terry said were highlighted in various media forms was before these learnings. what other countries have a huge benefit now of is a fine degree of best practice. from well construction and water disposal water procurement to mitigating truck traffic if and when possible and how to dispose of water wells and avoid earthquakes by doing seismic programs making sure you're not near local faults. there's so much. we have learned so much and where some of the problems are

being highlighted right now more in transportation than in the physical production of product because we have come such a long way. i think any other country will be a huge beneficiary of those lines. >> before i open it to the floor, this is atlanta council talk geopolitical for a second. there was a lot of talk when the ukrainian crisis happened about potentially taking gas and liquifying it, sending it to the united states. lots of bills recently about crude and l and g exports. is that really feasible or not? >> there's no reason technically you couldn't do that. there's a large -- around the world, you take natural gas, cool it to 160 degrees below zero, put it on a ship take it elsewhere. that happens all the time.

i think the issue that came up around the ukrainian crisis was one of timing. that was a crisis that needed a short term solution and l and g and exporting gas is long term. it is going to take years to put that infrastructure into place, but if that's the direction u.s. policy wants to go, there's absolutely no reason the u.s. couldn't be a large exporter of gas. the other hiccup i suppose with that thinking is that the u.s. energy system isn't government controlled. the federal government may have had every reason in the world to want to bring gas to the ukraine at that point, but it doesn't have a history of telling the exxon and bps and shells and chevrons where to direct the gas, we let the market do that. so there are a couple of big changes that would be required to get to that point. >> anybody else? >> i was going to add when i think about some of the hurdles

that oil has now, given what oil prices are, one of the hurdles is we are not the low cost producer. in shale we are definitely at the low end of the spectrum. the other thing is in oil we can export, in shale gas we can. so my pendulum has swung back. the third thing is that gas companies have adjusted their capacity to this lower gas price world. the oil producers are about to undergo a very traumatic probably few years in adjusting to it. so i kind of feel good about the u.s. gas producer. the other thing and this is a longer term view, where i think the l and g game is going to change, also just a complete historical shift is its link to the oil price. as there are more ships on the water, i think you'll see delinking from crude and it will

be a market to itself far more i don't know competitive situation when you don't have an oil price link, even if oil was to go back don't have a link providing umbrella for these projects. then it will be the best project wins. that's a shift we are likely to see. if i am an end user one of say a half dozen countries companies can't do this but countries can. they'll say we aren't taking that price and we will see which are the best projects. i think the u.s. is well situated for the l and g. >> terry? >> yet i am reminded that gas coming out of the middle east a lot of that gas is associated gas, which means it is produced as a byproduct of producing oil which means that it is produced at no cost. of course the american gas shale producers still have a cost. and in principle even if we

were to liquify the natural gas, we might be competing against a market where people could continually undercut whatever it is we want to sell overseas. this is true of canadians who were trying to liquify natural gas. they were competing against gas coming out of the middle east that can invariably undercut canadian gas. >> throw it open to the floor for questions. somebody have a mike? back here. please introduce yourself. >> pardon me? >> please introduce yourself. >> bill holland, reporter with s and l energy. i interviewed two of the three up there. and before i question i want to share a story. was at the first appellation conference in pittsburgh in 2008

when he got up and changed estimates of size we have gone from 15 to 500 ccf. 500 held up. i watched these people leak out of the room when they heard that number and get on their telephones. so that brings me to my first question. we have three that are stacked. do you have a number for the total of all three, what the potential gas is there? >> you know, i'm like a better who hit the jackpot once and the smart better that hit the jackpot once will not try again. having said that let me remind you, bill, that the appalachian basin is amazing. big sandy field. i like to think in terms of this

being a stack of six and you can let your imagination run wild in terms of what this will do. there are some good bricket wells. i think you counted that as the third level. at the same time, wine street was tested in the western part of the state. there are some people happy with the outcome. let me remind you that when sue bish first called me up we looked at the five original range wells the ip coming out of those went from 1.4 million cubic feet the high one 4.7 or something like that. at that point in time 4 million cubic feet a day was judged as a great well. of course, right now 4 million is a failure so that i think each one of those layers i named have come up to that 2008

standard but today we have utica range holds the record right now. utica at flow rate of 59 million equivalent. >> and 54 on the marcellus. >> yeah. it is a big number. let me just say i'm content with 500 trillion cubic feet. this is technically recoverable. has nothing to do with today's prices. i might add recently university of texas has run a study too, and they basically stated we come up with about the same number for the marcellus 500 trillion cubic feet of technically recoverable gas. there's a bunch there. and i don't think we have to worry about running out of stuff in the next five or ten years, as they said of the stone age, the stone age didn't come to an end because we ran out of stones. >> all right. follow-up question if i could.

they went through a price crash, spent a year recovering now producing more than ever. chance they end up doing the same or is that a different commodity operating in a different market? different commodity. there's gas producer, i believe devin has done this. he hasn't had a rig running for a couple of years. their barnett shale production is pretty flat, impossible. physically impossible. did it through compression and maintenance, refracks, for instance they're not certain they could do that. vertically. you don't add compressors to a

pipeline to allow oil into it you have to do artificial work. i don't think it is going to work. so the other aspect is in terms of capital, the gas producer basically took a dollar and said i am going to spend 70 cents in oil, but going to put another 20 cents back in gas but not going to tell you, right? what we are looking at now is that you don't have capital for the gas or oil producer there's nowhere left to turn. so -- and it goes back to the original point what's the shape of the u.s. supply curve. you know right now second and third quarters will probably be troughs for u.s. oil supply and in the fourth quarter we will see. what we see in 2016 is the base decline rate mathematically does decline. should take less money to maintain volumes if not grow

slightly. the biggest change is my ability to outspend cash flow. that's a much bigger shift. if i can't spend 130, 150% of my cash flow i can't deliver the growth i've had. what i think we are going to see in the best rock is single digits growth rate in cash flows in 2016. you can describe that how you will, is that victory or not, it is certainly different than what we experienced the last five years. >> question right here. >> nick snow with oil and gas journal. thanks for having this. i find it interesting that nobody has said much about transportation and you have a former director. i happen to know because somebody at the federal railway administration told me a couple of summers ago that it is fnsa responsible for writing the

final regulations that dot issued. i wonder if any of you would be willing to address the implications of transportation as they effect u.s. access to global markets, particularly for crude oil. >> thank you for my question. that was on my list but we were running out of time. >> well i am going to take a crack at it. crude by rail has been a subject near and dear to my heart written a lot about it over the last 12 months. you just made the point, you're right, the new regulations have come out recently requiring a whole new set of tanker cars phase out of existing tanker cars in the next five to seven years or so, then this introduction of new type of brakes. the industry said they're going to fight that. we don't know where it ends up.

i'm not sure how that's going to impact right now export levels. primarily because really what crew by rail now is driving is it is feeding east coast refiners. these are refineries that existed on nigeria and angolian crude for a long time. from what i have seen and what i expect to happen the next few months, i think this is an important open question. just to step back so everyone understands what we are talking about, the backenshale in north dakota went from 100,000 barrels a day of production in 2008 to right now about 1.2, 1.1. tenfold increase. we didn't build pipelines to accommodate all of that. we figured out you can put it on train cars. now we are moving an incredible amount of volume of crude never had before in train cars. actually we did before but it

was in the 19th century. this is the modern equivalent. we are putting them on older tank cars which have shown not to be up to snuff. we've had a number of train car derailments involving both older train cars and newer generation at 30 miles per hour and results in giant fire balls as this crude is very gassy is very flammable. the question has come up, okay, we had these accidents in places like castleton, north dakota, 27 people lived in the town. but the train cars are going through chicago and philadelphia and albany and large population centers. the question it seems they're asking, how do you make it safer if moving crude? i think that's an open question

now. you have extraordinarily powerful entities involved. the railroad industry is enjoying lots of revenue from this. the oil industry needs this to keep going. they don't want to lose seven or eight00,000 barrels a day of production. keep an eye on the space. there's incredibly regulatory clash going on in washington. as a reporter i would tell you it is fun to watch and report on. >> talking to producers are they going to shift back to pipe, and they're making that change on available pipe space, but they're going to commit to new pipelines. if the global model is correct, single digits rate of growth overall, the pipeline capacity would be more than enough to satisfy future production growth out of the basin. i think some of the tier two rock is not going to produce any more anyway right, so you're

not going to have that explosive growth rate to handle. it is east coast refineries and west coast. what goes to west coast they're going to have to move product via rail. anything else gulf coast bound increasingly piped. [ inaudible ] >> take a mike please. >> we will shut you down. congress is going to shut you down. i am not kidding. you have a lot of pissed off people. if their neighborhoods blow up, they're not happy. the other question is technical. could you tell me what refrack means. >> yes. as you are aware when oil and gas are produced from gas shale gas shale itself is very permanent eeable. what makes production possible are hydraulic fractures in gas

shale. it is impossible to fill it all with hydraulic fractures at one time. refrack is a second stimulation of reservoir with the hope that that second stimulation will put fractures in new volumes of rock that weren't accessible with the first fracture. the well has to be temporarily shut down while rock is broken again. >> thank you. patricia shuker. the white house gave conditional approval for the arctic, you emphasize on lesson learned. my question is how can lesson learn be applied in the arctic if the drilling starts.

>> is that for me? >> any of you. >> i'll take a crack at it. we've had tremendous experience in the arctic to begin with and anwar has about the same geology as the geology to the west. i think maybe the first lesson to learn here is that maintenance of the alaskan pipeline is going to be incredibly important. the alaska pipeline is aging. british petroleum, for example, got in trouble because they didn't sufficiently maintain that pipeline. that won't happen if this new area of arctic is open. i think we learned a lot about managing fluids that are produced with the oil and that would be how does one dispose of them. incidentally, that's a nontrivial problem in a distant place like alaska. and i don't know what the answer

is. i imagine these wells if the area is ever opened up one of the first questions regulators will have, how are you going to manage waste waters. and i don't have an answer for that. there are a number of other issues including protecting the upper part of the wells with better casing and cement jobs. these are all lessons coming out of gas shale. i am sure there are others, too but i am not prepared to address those. >> thank you. right here. >> question one. is it possible to convert the entire u.s. truck fleet and for that matter railway system to use compressed natural gas instead of oil, instead of diesel? i mean, given how low the prices

of gas are, seems that you can keep producing more, at these prices, once you do that, you make a huge difference to the demand for oil not just in the u.s. but the world. i mean, is this a potential game changer? the second question i have, you mention two problems of water. one it is not enough then you say the problem is how do i dispose of excess water. one is for initial fracking, the other is sea water blows back and you have to dispose of it. i heard of technique of people saying instead of initially injecting water, we can inject natural gas liquids. that will frack it and that will then come back. then there's no question of -- you're almost recycling the same thing again and again.

so then the need for fresh water dissipates. is that feasible? >> well, all right. you asked two or three questions. let me remind you there is a man, investor t. boone pickens who was a smart geologist until he got into the business of equities. he attempted something called the pickens plan. that was to build a lot of wind infrastructure and he put a lot of money into west texas wind farms. what he was doing was then hoping that natural gas could be used not for manufacturing electricity but for compressed natural gas vehicles. so it really is technically possible. in fact, in pennsylvania one of the early hopes is that there would be a series of compressed natural gas stations built on the turnpike along i-80 for just

this particular purpose. so yes, it is technically possible. now, let me address the second question which was why don't you use compressed natural gas to fracture wells, and i can think of two reasons why that's not very practical, one of which is i would not want to be around a drill rig when you are running very explosive materials at very high pressure down a well bore. i mean, that's just incredibly dangerous, the beauty of using water is it doesn't blow up when it is under high pressure before it gets put down the well. the second reason for not doing that is that fracture stimulation itself is only as good as the transfer of energy from the surface to the rock itself. and using natural gas, for example, to fracture wells means that you spend a lot of energy compressing a compressible fluid

that will then expand on its own accord down the bore hole without transferring that energy into the rock itself, so it is a much less efficient way of breaking rock apart. in this business where every fracture really matters, the more fractures you create, the better off you are. and water allows this to happen. all the energy in the surface is transferred to breaking rock apart at depth. >> one of the things was use of gases. it is happening in canada and it had some application, had some success in canada. but in the u.s. the study so far suggests not only that it is not working but there's no intermediate view that it will work. it could i just don't remember the technical issues could be the nature of the rock and

depth, as terry was saying we have a longer way to go to deliver that energy. i did scud ee on c and g and l and g within vehicles what would really change things is the consumer adoption of cng vehicles. we have a lot of things like sanitation trucks, 100% of them are running on cng. a lot of commercial vehicles running on cng. when i am refilling, i need to know i am coming back the same time. i can't be stuck out there running out of natural gas. when we look at that in the pickens plan, et cetera one thing you needed to do was relevant row -- retrofit gas stations. doesn't sound like much like $50,000, that was going to come from the government and i don't think anything is coming from the government for that sort of thing, so i think it died its own death.