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SPECIAL REPORT: The New Energy Rush
More money, manpower and brainpower than ever is being expended to answer one of the biggest questions of our time: How can the world satisfy its growing demand for energy?

Inside this Special Report:

• Fossil Fuels: Still Alive and Kicking

• Wildcatting, 21st-Century Style

• New Pieces in the Energy Puzzle

• The Next “Alternative” Energy?

• New Frontiers in Energy: A special pull-out world map describing promising new locales and types of energy.

• PLUS: Projections on the future of energy from the Energy Information Administration

Today’s new energy rush knows no bounds. Nations are competing to stake their claims to vast hydrocarbon reserves under the Arctic. Oil drillers are setting up operations in Indiana cornfields. Japanese firms seek to pull methane hydrates out of ocean trenches. And it’s not just the locations that are new; it’s also the host of technologies being used to find and extract that energy, such as seismic imaging and directional drilling. Then there are new forms of energy that are growing increasingly viable, such as wind, geothermal and even wave energy.

The opportunities are dizzying, for investors as well as for the entrepreneurs and companies seeking to develop technologies or to explore and produce energy. But the challenges are just as monumental: How can we produce energy without damaging ecosystems or exacerbating global warming? How can we efficiently transmit that energy to people who need it, given the maze of regulations and logistical hurdles involved? How can we raise the capital needed for a multitude of expensive energy projects?

The following features, map and charts will provide a glimpse of this new energy rush. No one new technology or strategy promises the answer we all seek. But it’s becoming increasingly apparent that there will be not one answer to our energy challenges, but many. And that hints to opportunities ahead that we have yet to even imagine.

Fossil Fuels: Still Alive and Kicking

Think hydrocarbons are fuels of the past? Think again. Climate change or not, new technologies and high prices mean that traditional energy is headed for a new era.

By Darrell Delamaide

The Barnett Shale in Texas, a geological formation that is hundreds of millions of years old, may be the largest onshore natural gas field in the United States, with 2.5 trillion cubic feet of proven reserves and potential reserves as high as 30 trillion cubic feet capped tightly under tons of compacted rock.

As oil trades above $100 a barrel and natural gas rockets toward $10 per million Btu, this kind of energy reservoir is immensely attractive. At a stroke, production from this field could ease the upward pressure on prices and lessen our dependence on foreign sources of energy. There’s just one hitch: Dallas/ Fort Worth, the fourth-largest urban agglomeration in the country, sits right on top of the Barnett Shale. In fact, some drilling is occurring right now at the 18,000-acre Dallas/Fort Worth International Airport, the third-busiest airport in the world in aircraft movements. “They’re actually drilling for gas underneath the airport, which raises some real interesting issues,” says Dallas-based Patton Boggs attorney Stephen Molina, who is also a former general attorney for ARCO Oil and Gas Company. “This whole issue of urban drilling has caused a fracas.” In the past, Molina notes, most energy drilling took place in rural areas or on federal lands. “It wasn’t often that the hospitals inside of Fort Worth were being asked to lease the land under their parking lots,” he says. (See Q&A)

While Texas wrestles with urban drilling issues to exploit the Barnett Shale, some 1,000 miles to the northwest, energy companies are facing a different obstacle as they tap the Colorado Plateau, another geographic formation with voluminous reserves of natural gas.

“If you’re trying to drill a well on a piece of property that happens to be mule deer and elk winter habitat, there are about 10 weeks out of the year that you would not be permitted to go in and drill a well,” says Martha Whitmore, a partner in Patton Boggs’ Denver office who has extensive experience in permitting for energy projects. In fact, Whitmore says, Colorado is considering new regulations that would require even further consultation with wildlife officials before drilling for oil or gas. “When it comes to the use of public lands,” she notes, “we’re seeing a growing preference for ‘no use’ as the preferred use.”

These two cases—the shale gas in Texas and the coal bed methane gas in Colorado—illustrate two trends in energy production that are set on a collision course. The first is that vast new reservoirs of hydrocarbon fuels are more attractive than ever, thanks to new technologies for exploitation and high energy prices. The second is that getting access to these reservoirs is harder than ever, thanks to a society that is both highly urbanized and increasingly aware of the fragility of the environment.

The pressure is on to find domestic sources of energy to reduce our dependence on foreign countries. Despite all the media attention being lavished on renewable energy, it’s clear that traditional hydrocarbon fuels will be important in filling the gap until alternatives are fully developed.

WHITMORE:
“When it comes to the use of public lands,” says Patton Boggs partner Martha Whitmore, “we’re seeing a growing preference for ‘no use’ as the preferred use.”

Unconventional Plays

There is, in fact, very little that is traditional about traditional fuels today. Exploitation of the Barnett Shale depends on two innovative technologies: directional drilling and hydraulic fracturing. Directional drilling provides access to reserves located underneath existing structures by drilling horizontally from another location. Hydraulic fracturing involves pumping water and propants into the well under pressure to cause fractures that allow a higher rate of production. (By contrast, in coal bed methane extraction in Colorado, water released through drilling must be disposed of to prevent water quality issues.)

Numerous other technological advances, such as 3-D seismic imaging, deepwater drilling and carbon sequestration, are being developed to increase the supply or extend the use of traditional hydrocarbon resources. These technologies are important because experts reckon that for all the effort and incentives that will go into development of alternative energy, four-fifths or more of our energy demand will continue to be met by traditional fuels for the next 20 to 30 years. Seismic imaging, for instance, not only uncovers new reserves of oil and gas, but also enables wildcatters to return to fields once thought exhausted and extract further pockets of bypassed reserves that can be recovered at a profit at current prices.

Martin Gibson, a partner in the Dallas office of Patton Boggs with a focus on energy law, notes that “unconventional plays” like depleted fields and shale gas are accounting for an increasing proportion of production in Texas and elsewhere in the U.S. “Based on past experience,” he says, “we can expect technology to bring out more of the stuff out there that nobody knows how to get right now.” Other promising unconventional plays include tar sands in Alberta, Canada, and salt domes off the coast of Louisiana (click here to see gatefold).

Going Natural

Natural gas gets a lot of attention because the U.S. has such an abundance of it, ranking sixth in the world, just behind Saudi Arabia and the United Arab Emirates. Jude Kearney, a Patton Boggs partner with a specialty in international project finance, speculates that the U.S might someday be a natural gas exporter. “It’s conceivable that we will have liquefaction facilities being built in the U.S. so we can export it to Asia or other regions that need it,” he says.

The state of Alaska is engaged in a controversial process to license and build a trans–Canadian pipeline to deliver its natural gas to the lower 48 states. Governor Sarah Palin wants TransCanada Corp. to head up the project, but the oil majors that extract the oil and gas in Alaska are holding back from committing to it because the state is demanding a bigger share of the profit. Once a pipeline is built, however, its gas could be exported as liquefied natural gas. “It’s a world market,” Molina says. “I think it will be a while, but LNG is going to be hugely important for transporting gas where it needs to be.”

Despite its high price, natural gas may remain the fossil fuel of choice for power generation because its production emits much less carbon dioxide than other hydrocarbon fuels, says Amy Koch, chair of Patton Boggs’ Energy and Natural Resources Group. Coal, the country’s most abundant hydrocarbon resource, is being sidelined due to concerns about carbon emissions. While newly developed “clean coal” technologies may be able to address this issue, they have yet to be proven viable. One such technology, known as integrated gasification combined-cycle technology, has faced problems with cost and reliability. Another, carbon sequestration—which involves capturing the carbon emitted by burning coal and storing it by some method, such as injection into a geological formation— is unproven. Current capture technology is expensive, and long-term storage has not been tested. As a result, numerous plans for coal-fired plants—there were more than 150 on the drawing board at one point—have been delayed or shelved. The delays are frustrating to advocates who note that coal is America’s most plentiful energy source. “Its big advantage is that it’s free of foreign political interference,” says Gibson.

Pinning its hopes on clean coal technology, the coal industry has lobbied the government to increase assistance for R&D and to streamline the process for retrofitting the 1,300 existing coal-fired plants with emission-reducing equipment. Clean coal was dealt a blow in January when the Department of Energy withdrew funding from the ambitious Future-Gen project, which was a test technology for the separation of hydrogen and carbon dioxide, coupled with carbon capture and sequestration. But the technology isn’t dead: Both of the Democratic presidential candidates, Barack Obama and Hillary Clinton, have put out plans to spend $150 billion on energy research and development, including clean coal technology. Obama, an Illinois senator, has been particularly partial to greater use of coal given the large reserves in his home state.

A Changed Climate

While the major energy bills of 2005 and 2007 focused on reducing dependence on foreign oil and promoting energy efficiency, the emphasis in Washington, D.C., has shifted to addressing climate change, says Patton Boggs public policy partner Jeff Turner. After years of resistance by Congress and the Bush administration to the Kyoto Protocol, Congress has concluded that something must be done. “In short, the climate has changed,” Turner says. “Congress has recognized the time to do something has arrived. Now the question is what.”

House Energy Committee Chairman John Dingell, along with many leading economists, favors a carbon tax as the simplest, most efficient means to spur emissions reductions. But other legislators, and many in the industry, prefer a cap-and-trade program like that implemented by the European Union as part of its compliance with the Kyoto Protocol. Under a cap-and-trade regime, emitters subject to the system must acquire allowances or carbon credits to meet emission targets. A newer, cleaner energy plant may have excess credits to sell, while an older plant may prefer to buy credits to meet its emission targets rather than invest in the technology to reduce emissions. By ratcheting down the availability of allowances, a cap-and-trade program makes carbon use more expensive and thus less economical.

Supporters of cap-and-trade programs note that they can reduce emissions while offering flexibility to companies. They point to the success of a program to reduce the sulfur dioxide emissions that lead to acid rain, launched by the 1990 Clean Air Act. Experts say that program cut emissions in a cost-efficient manner.

The question of how to reduce carbon emissions won’t be resolved in a hurry. “Because the legislation will ultimately reallocate trillions of dollars of resources, this is a fight that is likely going to take a few years to resolve, ” Turner says.

CLEAN COAL
Reid Gardner Station is a coal-fired power plant located in Moapa, Nevada. It is receiving an $85 million overhaul to clean up its emissions. The improvements stem from a settlement between Nevada Power Co. and state and federal environmental protection agencies. The company expects to wrap up the installation of new technology in 2009, but progress is visible already in clearer skies.

But not everyone is waiting for Congress to act. The Chicago Climate Exchange was founded in 2003 as a voluntary emissions trading program and has enlisted 350 members, including corporations, municipalities and universities that have made a binding pledge to reduce carbon emissions, and many of them have made measurable progress toward reaching their goals. In addition, the Chicago exchange has a new competitor. Patton Boggs New York partner Michael Smith notes that the New York Mercantile Exchange (Nymex) is developing its own carbon trading program. “Nymex wants to be the leading international exchange for the trading of carbon credits,” Smith says. To that end, Nymex announced the launch of its Green Exchange program in December, listing Morgan Stanley, Credit Suisse, JP Morgan, ICAP and Constellation Energy among its partners.

For carbon trading to function properly, however, the market requires that carbon credits be certified according to a uniform standard. In most voluntary programs, it’s difficult to know exactly what you’re trading, Smith says. By laying the groundwork now, he feels that Nymex will be well positioned once the government sets up the proper infrastructure. “Investment banks are lining up to do this trading,” Smith says.

Whether it’s drilling under a Texas airport or trading on a Chicago exchange, energy issues of all sorts are coming closer to home. Driven by profits and government incentives, a whole raft of innovative technologies and techniques are being developed to help us meet rising energy demand and to reconcile that need with our concerns for the future of the environment. This is good news for consumers, but also for investors, who are finding new plays in old energy (see Wildcatting below). Fossil fuels may be ancient, but they’re not yet history. CT

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