The Morality Of Fossil Fuels

It is shocking how much better it is to use fossil fuels than to not use them.” So declared Alex Epstein last month. A philosopher, author and pro-industry activist who has publicly confronted and formally debated the greens, he captivated the Houston Producers’ Forum with his funny yet passionate defense of oil and gas. Speaking before a sea of suits at the Houston Petroleum Club, he wore jeans and a T-shirt that said “I love fossil fuels.” Epstein advised attendees on how to rethink the way they advocate for their industry.

It is about more than jobs and the economy, he said; it is actually a moral issue.

Epstein cited numerous examples of how society is better off by using fossil fuels. “For example, the more we use them, the more we can irrigate ourselves out of a drought … the more CO₂ in the environment, the faster and bigger plants grow. Fossil fuels absolutely help people and if you are against them, then it follows that you are against humanity … .”

Recently Epstein has delivered his message directly to Chevron and ConocoPhillips employees. He also said he is helping the Republican Party to develop a more positive energy message for its platform in this election cycle. He emphasized he is not being paid by the oil and gas industry, but as a philosopher, he thinks about what is logical, what is right and what is wrong. Just because many young people grew up with the narrative that fossil fuels are bad, doesn’t mean that that assumption is true, he said.

He challenges that thinking and, equally important, the thinking of anti-industry “fracktivists” and industry leaders as well.

The same day he spoke, Harvard Business School and The Boston Consulting Group (BCG) released their study that found that developing and exporting unconventional U.S. resources is not incompatible with environmental protection, and in fact, using more natural gas in the power sector actually aids it. The report presented 11 action steps for government and industry to take.

“There is no inherent trade-off between environmental protection and industry profitability—we can have both,” said David S. Gee, a BCG partner, the North America leader of the firm’s energy practice, and a coauthor of the report.

“Much of the debate over unconventional gas and oil is uninformed or reflects purposefully misleading arguments,” the report said. “The ‘facts’ advanced by all sides are frequently incomplete or taken out of context. Many stakeholders are also hung up on the false trade-offs between harnessing America’s energy advantage, protecting the environment, and mitigating climate change.”

The report concedes that developing unconventional oil and gas does create significant environmental risks, but real progress is being made in managing these risks at a relatively modest cost that does not threaten competitiveness. “Mitigating the environmental impacts, such as through water recycling and reduced flaring, can actually reduce costs.” (You’ll learn more about how one E&P in West Texas is doing just that, in this month’s Q&A with Approach Resources’ CEO Ross Craft, elsewhere in this issue.)

Reducing costs must continue to be the goal, even as we increase oil output. It rose 3.2 million bbl/day from 2010 to 2014, according to EIA data. Looking back over the 10-year shale boom from 2005 to 2014, E&Y found that total capex for the 50 biggest E&Ps more than tripled, usually outpacing cash flow, with spending increases averaging a robust 25% per year, even accounting for the 2009 downdraft.

Those capex increases are being wrung out of the system now during today’s lull. To wit, ConocoPhillips CEO Ryan Lance told attendees at the recent OPEC conference in Vienna that the breakeven price in most U.S. shale plays has come down already by anywhere from 15% to 30%. The best U.S. shale areas can still generate a rate of return of at least 10% even if oil sinks as low as $40/bbl, he said.

That gives most E&P companies a lot of wiggle room—assuming first and foremost that their balance sheets are in decent shape.

So all in all, efficiency is in, costs are down, the reserves are still there and fossil fuels are not going away. They just need to be developed in a more sustainable, environmental way that helps forestall government or activists’ interference.

“U.S. natural gas production is expected to reach a record in July,” said the EIA. “Despite the large decline in crude oil prices since June 2014, this May’s estimated oil output in the United States was the highest for any month since 1972. … Even with slower oil production growth, U.S. net oil imports in 2016 are expected to meet the smallest share of domestic petroleum and other liquid fuels demand since 1969.”

The equation has changed and we all need to move beyond old ways of thinking. Operate in the right way and it should make it easier to make the moral case for fossil fuels.