Increased natural gas production use in Michigan gets attention

September 25, 2011
| By Pete Daly |
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Natural gas is receiving a lot of attention throughout the U.S. these days, including in Michigan, where an MSU professor has released a study on “The Economic Impact of Replacing Coal with Natural Gas for Electricity Production.”

A combination of government, economic and technological factors have combined to create the perfect storm in support of increased drilling for natural gas, as well as its increased use in place of coal and oil as energy sources. Michigan has significant natural gas reserves, but it brings in a lot of coal from other states for generation of electricity.

The government ramification is reflected by a common phrase heard within the utility industry: “the EPA train wreck,” explained Steve Kohl, a Warner Norcross & Judd partner whose expertise is energy issues.

Kohl is referring to a series of EPA regulations that are expected to be put into place in the next several years, which “would either mandate that existing coal-fired power plants incur significant additional expenses in new emission controls, or that they be shut down.”

Sanford C. Bernstein, a Wall Street investment-management firm for private clients, has predicted that the new EPA rules could force the closure of 54 gigawatts, or 16 percent of the U.S. coal-fired electricity generating capacity.

Most of the impact of the EPA regulations would be in the Midwest, the Southeast and Texas, according to Kohl.

The issue for the utilities is deciding if it makes economic sense to install new controls or replace those plants with alternative technology, “one of which would be natural gas-fired generation,” said Kohl.

In June, the Michigan House of Representatives created a Natural Gas Subcommittee “for the purpose of exploring and evaluating Michigan’s utilization of the valuable energy source,” according to the website of State Rep. Aric Nesbitt, R-Lawton. Nesbitt was named to chair the new panel.

Michigan now produces about 20 percent of the gas it uses, according to Nesbitt.

Industry has been a major user of natural gas, but that demand declined when many U.S. factories were closed down in favor of foreign locations and the recession further dampened consumer demand.

Nesbitt said chemical companies, in particular, use natural gas as a raw material. Now, with the supply increasing and the cost going down, companies such as Dow Chemical are considering U.S. sites for expansion for the first time in years, he said.

In late August, Bill Knudson, a marketing economist at the Michigan State University Product Center for Agriculture and Natural Resources, released a study for which he had been commissioned by the Energy Foundation. Knudson said about two-thirds of electricity generated in Michigan is from out-of-state coal while only 10 percent is from natural gas, even though gas is in abundant supply and can be produced in Michigan. Michigan ranks about 15th among the states in known reserves of gas.

Knudson estimated that converting about 10 million megawatts — about 10 percent of Michigan’s electrical generation capacity — from coal to gas would result in about $4.1 billion in economic activity and create about 19,000 jobs related to construction.

Years ago, Grand Rapids-based Wolverine Gas & Oil Corp. was one of the largest producers of natural gas and oil in Michigan. About 15 years ago, Wolverine sold its Michigan wells to a public utility and concentrated on drilling in other states; today, according to its CEO/president, Sid Jansma Jr., Wolverine is the third-largest oil producer in the state of Utah, and has gas and oil wells in other states, including Texas.

“And now we are coming back into the state of Michigan,” Jansma said recently, adding that he has just begun planning to drill a couple of oil wells in southern Michigan.

Jansma said new technologies — especially horizontal drilling — have made it more cost efficient to extract gas that is trapped within rock. “Forty or 50 years ago, no one dreamed you could ever drill horizontally,” said Jansma, who took over the company started by his father 60 years ago.

“A drill bit sunk to a deep level and then turned to move horizontally into a layer of gas-bearing shale can penetrate thousands of feet of it. So horizontal drilling technology has brought tremendous opportunity to the oil (and gas) business,” said Jansma.

Then another technology — hydraulic fracturing or “fracking” — comes into play. Fracking involves pumping water, or water mixed with chemicals, under very high pressure into the well — high enough to fracture the rock formation. The chemicals make it more porous and allow the trapped gas to flow into the well bore and up to the surface, according to an article in the January issue of the Michigan Bar Journal by attorney Susan Hlywa.

She wrote that shale gas production has expanded in the U.S. from 1 percent of natural gas produced in 2000 to about 10 percent now. Michigan has about 12,000 “fracked” wells in the shallower Antrim Shale formation, but in 2010, a drilling company working in Missaukee County successfully reached the deeper Collinwood Shale formation and used fracking to access the gas. The result was new mineral lease sales of more than $178 million at the state mineral lease auction in May 2010 — “the most lucrative mineral sale in Michigan history,” according to Hlywa.

Fracking is controversial among environmentalists, according to Hlywa, because of the chemicals they suspect are being used; it is a propriety process and drillers are not required by law to identify the chemicals. Jansma maintains, however, that fracking has been done for years and is a safe technology. He attributes the controversy to people who don’t know what it is. “People in the oil industry have known about it for 60, 70 years.”

“With the industrial base changing here, we’re not using the amount of natural gas that we used to,” said Jansma. “We’re still using a very huge amount but lost some of that market because of our economy. But that will come back, and the reason it will come back is natural gas is a very environmentally friendly energy source. You burn natural gas and you basically get carbon dioxide and water. And you get a lot less carbon dioxide from burning gas than you get by burning oil of any kind.

“Natural gas is a much cleaner energy source than coal or crude oil,” with coal being the most polluting of the three, he said.

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