If natural gas is so cheap right now, limping along between $2.50 and $5.50 per thousand cubic feet, why did Exxon pay the equivalent of $41 billion for natural gas giant XTO Energy? There is a global glut of natural gas, which won’t be disappearing any time soon.

I can think of a couple reasons. The obvious one is that the market is low right now and, as China has demonstrated for months, it’s the time to buy.

The second is that there are fewer and fewer major oil finds out there right now and it’s time to diversify. Natural gas is the logical step, since gas, upstream (drilling etc) and downstream (refining etc), is much more similar to oil than, say, mining or green energy — even shale gas, which is a large chunk of XTO’s business.

XTO also has proven reserves — always a comfort — here in the US, where the rules of the road are somewhat clearer, if often more expensive. It’s always better to buy a sure thing, if you don’t want too many ugly surprises. You don’t have to face the ground shifting under your feet as it so often does in Iraq or Nigeria or Russia or Central Asia.

Exxon may also be betting that the US will be moving away from coal and towards natural gas to power our electric supply. It would be a new opportunity.

The acquisition of XTO is not the only such investment Exxon has made this year: it is part of a consortium developing oil in Iraq, it is developing the offshore Ghanaian Jubilee oil field with the Chinese.

Energy companies around the world — multinational corporations, state-owned companies, smaller independents, little wildcatters — are in the proverbial scramble to sew up territories anywhere in the world. It almost doesn’t matter the challenges in getting the stuff out. There seems to be an industry-wide belief that it’s now or never. As bigger companies look to buy sure things,  exploration is left to the smaller independents companies (like Tullow Oil and Heritage in Uganda), and of course, China.

Increasingly this will matter, because the larger companies must, and mostly do, play by the rules of the road, no matter how close to the edge. Their leases today have far more environmental protections than in the past — they have to. The big companies are sometimes open to the idea of greater transparency. There is sometimes more involvement with local interests. The Western multinationals have inched towards being more willing to hire locals; many times, the Chinese use their own imported laborers and are openly not interested in transparency.

The problem with the smaller companies is that they often don’t or can’t offer the same levels of protection. Their margins are much smaller, their expertise less, their pockets shallower. They’re out there taking a chance. Environmental corners may be cut, local interests ignored, unsavory rulers supported. This means small poorer countries with little national expertise — the ones for whom an oil or gas strike would mean everything — are the most vulnerable.

(Of course, the big boys have done this too, but now less and less. It’s just not worth it. This week Shell began seeking buyers for 10 of its onshore oil assets in Nigeria, even with the possibility of more peace in the country. The Wall Street Journal quotes a Nigerian official saying they may be sold to the Chinese, but it is unclear if Shell is receiving Nigerian encouragement to divest.)

What began as a financial crisis in the energy sector this year has not been wasted: the seismic shifts in involvement by big companies and China have permanently altered the energy landscape forever.

Last year, Tim DeChristopher, a student in Utah, bid $1.8 million he did not have in a federal oil lease auction. He won the leases. He stated he did it to protect the environment and to prevent further global warming, arguing that the danger from this drilling was too great and immediate to try to stop it any other way. This week the judge in the case, Dee Benson, disagreed, citing the lack of imminent danger. DeChristopher is now facing felony charges of making false statements and interfering with a (government) auction.

Coincidentally, several days earlier in New York City, the State of New York Department of Environmental Conservation held a public hearing on new regulations allowing natural gas drilling in the Marcellus shale deposit in upstate New York.

The Marcellus, which supposedly holds enough gas to power the entire country for 20 years, also crosses the Catskill/Delaware River watershed, a major source of water for the City.

Stuyvesant Auditorium was packed, with the audience, many with placards, overwhelmingly against the drilling. Public input started with local politicians fulminating (this is what talented politicians do well). Their anger was directed at the hydraulic fracturing process used to release the gas during drilling; their fear is that there will be an accident and some of this probably poisonous fracking glop will end up in the New York City water supply, which is comes from the Catskills almost totally untreated. They can yell, but their anger was misdirected and so, ineffective.

There are any number of perfectly good reasons to be concerned over the leasing of land for oil or gas drilling, but to voice a complaint effectively, there are some common sense considerations:

1) Do your homework so you know what you are talking about. The problem with the city’s analysis is that it is infinitely more likely that gallons of the fracking fluid will mess up some rural site, ruining that land and maybe the water for local farmers (who don’t seem worried enough about this and should know better — it has happened before). Even in a worst case scenario, only the most miniscule amount of the fluids will make it into the watershed, and then be diluted by trillions of gallons of water before getting to the City. Ironically, the environmental groups that got up afterwards to give public comments made more sense. Their objections very sensibly focused on the horrendous mess of a plan the state government has offered in its haste to cash in on the Marcellus craze. Some of its allowances include drilling and using explosive technology within 1000 feet of  century-old water tunnels. Anyone with a brain has to ask: Really? Is this for real? The plan is badly thought-out and needs to be re-done with more sensible regulations, protections, oversight and back-up plans. New Yorkers might be comforted by the knowledge that because of competent regulation and oversight, the City of Fort Worth has allowed shale oil drilling and hydrofracking in hundreds of wells within city limits for years without contamination of the city’s water — although there have been problems in the less regulated rural areas. In Mr. DeChristopher’s case, he should have understood the whole situation even a little, before reacting on emotional impulse. Any drilling takes years to bring to fruition and there are many other means, especially legal, to protest or halt the sale of the leases.

2) Focus on the real problem. The marginal information used by all the New York politicians must have come from some external press release because it was so universally parroted and so completely unrelated to the very real dangers that can occur from poor drilling regulation, oversight and drilling. These include the disposal of the “salty” waste water that comes with drilling and the subsequent extraction (much worse and in much greater volume that hydro-fracturing fluids), the preventable careless overuse of local water supplies to drill and frack (a million gallons per well – which can be recycled if the companies are pushed), and the lack of adequate oversight or emergency and clean-up plans. Surely Mr. DeChristopher is not (and was not) the only one extremely concerned about the wholesale land sale by the Bush administration, its lamentable environmental record, and excessively cozy arrangements with energy companies. Mr. DeChristopher might have worked to rally people of the West, who have vastly inadequate legal, regulatory, and environmental protections and sought legal challenges. Plenty of people in Western states are working on the same issue: he ahd a ready-made constituency.

3) Understand the entire picture. No matter how New Yorkers City demands a moratorium on leasing upstate, it will not protect the water supply in total, because Pennsylvania also shares the watershed and is unaffected by any New York regulations.

4) Be honest about why you’re doing it. Is it concern about the environment or a distrust and dislike of oil or gas companies? Is it water protection or is it you don’t want your bucolic country retreat less bucolic? In short, are you representing your own interest or a genuine public one? Nothing wrong with self interest — but any argument is strengthened if you are coming from a legitimate place, and self interest is quite often as legitimate as anything else. And honesty usually makes for a better solution.

4) The solution is public and legal, hire a specialist, and expect the fight will cost money and take time. Both Mr. DeChristopher and the City protesters are right to be concerned — the problem is that each acted in a way that would have been better for the other scenario — Mr. DeChristopher in a public fight using a legal or state challenge, the city people in offering to buy the most risky sites. Fortunately for the people in Western states, Secretary of the Interior Ken Salazar has begun to smell a rat in how oil and gas leases were distributed under the last administration. At the end of last month, he resumed shale oil leasing in the West with dramatic curtailments of the previous leases.

Not all gas leasing can or should be stopped. Energy is essential for the country too and the overwhelming majority of gas wells have not been damaging to people or the environment in any meaningful way. (Leaving global warming out of the immediate equation.) But oversight is critical.

The best ways to challenge leasing for oil and gas is to get all the information, figure out the realistic costs and benefits and dangers, and weigh the best legal and economic options. Certainly the man who spoke up for the local people of upstate New York’s Sullivan County made sense. He had requested a state list of the previous accidents and problems from drilling, demanded that protections and environmental considerations be put in place first, and that New York State regulations be re-thought and re-written. He had a worthwhile point.

For decades now, speculators in oil have justified their bidding up oil futures with the concept of peak oil: to wit, we have discovered all the major fields that there are and soon there will be no new oil, and this will lead to wars and exorbitantly high prices, and so although not now, but SOMEDAY oil will be scarce and so we should pay more for it TODAY. (No kidding: this is the rationale.)

What to make of the fact, then, that in this year alone, hundreds of new fields — some sizable — have been discovered?

Oil has been discovered by big companies, little ones, national oil companies. It’s been found in expected places (Brazil, Nigeria, Iraq, the Gulf of Mexico), places thought defunct (Norway), and completely unexpected places (Uganda, Sierra Leone).

How does Economics 101 (supply and demand (greater volume available now and in the future), diminishing demand (the current recession, green energy, staggering quantities of natural gas globally)) account for the fact that oil is hovering at $70 a barrel instead of falling?

“Peak oil” has been around since the 1970s. Last week I heard it promoted again, this time at an event featuring Peter Maass, author of the new book, Crude World: The Violent Twilight of Oil. To the average layman, the idea sort of makes sense — doesn’t everything non-renewable have to have a limit?

But peak oil is a myth for speculators. Why oil companies and others keep pushing it? For the speculators and investment houses, it’s a way to make money —so much so that the Commodity Futures Trading Commission has considered limits on the futures contracts available to them.

For oil companies, who reap the rewards of high prices, it means large profits, but it also means capital.

What is true is that oil is not and cannot be as cheap as it once was, no matter how plentiful. A lot has changed since the first oil well in the 1850s Pennsylvania was found just dozens of feet below the surface. Now oil is tens of thousands of feet down in terrible conditions, like the Arctic Circle or off the Continental Shelf. Governments and landowners now want more money for their treasure. And drilling is not cheap — offshore drilling costs between $500-600 per foot.

So what is the conclusion to draw? The world isn’t running out of oil, but don’t think for a minute it will ever be cheap again. It’s amazing what enough money will find.

One of the greatest bones of contention about extracting fossil fuels — in the industrialized world anyway — is the damage it can or will do to the environment. The industries resist the idea.

Do the costs of environmental protections cripple the production of newer, more unconventional fields, as the industry has long proclaimed?

Apparently not.  For example: the Associated Press reported this week that Chevron, a partner in the joint venture, had agreed to meet the 28 environmental conditions Australia set for the development of the offshore Gorgon gas field, worth $41 billion in gas exports to China. One of the condition is a safeguard for a rare turtle.

Similarly, in northern Pennsylvania, Hess has just signed a deal with a large group of farmers, in the Marcellus shale play. Their environmental demands included much stronger safeguards for their farmland and water supplies than required by state or federal law, and stringent demands on waste disposal. Responding to public pressure, the regional water authorities there have also set much tougher regulations to limit water use.

In the contracts offered by extraction companies, environmental protections are played down, although according to energy lawyers I have talked to, these contracts are still infinitely better than those signed years ago. These lawyers also say that the worst offenders aren’t the energy super-giants, but the smaller scrappier companies who have leaner margins and are willing to take greater risks in developing small or questionable fields.

Unsurprisingly, all these contracts serve the financial interests of the company. Meaningful environmental considerations, especially site specific ones, are conveniently limited. A number of developing countries seem to just accept this — perhaps they lack capacity or perhaps they are ill-informed or, for some of the worst dictatorships, they just don’t care. But they don’t have to accept these terms and shouldn’t.

Similarly, the landmen who travel through the US seeking unsuspecting homeowners in resources-rich areas willing to sign over their mineral rights for a pittance also offer environmentally inadequate terms.

Most companies will start with the gambit that strong environmental protections make any given project economically unfeasible. Occasionally, this is true. However, increasingly, though, this argument seems like a negotiating tactic — untrue and dishonest. The rationale that it’s just business to glean every penny even at the cost of environmental damage is even worse than ripping people off financially. It ruins their homes, their lives.

Fortunately, more and more, it seems that if a country or group of contiguous landowners sitting on a sizeable deposit worth extracting comes up with its own thought-out and locally appropriate environmental demands and sticks to them, sooner or later an energy company will come along willing to meet the terms.

Oil and gas companies have historically managed to develop truly astonishing technology to get oil under the conditions that they face. Some of these will be the environment and they can and do rise meet these challenges — but only if they must. It is up to the governments that set the environmental laws to make them.

The Democratic-led Senate Energy and Natural Resource Committee supported legislation today that would allow for oil and gas exploration off the coast of Florida. In an ironic twist, this includes an area that Republican President George W. Bush took off limits in 2002. Far more Congressional action is needed before the legislation is past, but today’s action is a sign of a changing political landscape.

Seven years ago, at the behest of his brother, Republican Governor of Florida Jed Bush, President George W. Bush spent over $100 million to curtail drilling near Florida’s coast by buying back seven of nine federal leases from oil companies in a resource rich area called Destin Dome. The government secured a ten-year nonproduction agreement from Murphy Oil, which decided not to sell back its two leases in a calculated decision to wait till the government reversed course.

The decision helped bolster the governor’s standing in his state while the Bush Administration heralded the deal – which also included buying back leases near the everglades — on environmental grounds. He said, “Florida is known worldwide for its beautiful coastal waters and the Everglades. Today we are acting to preserve both.” But it was a costly way to prolong the inevitable: more offshore drilling.

Now Byron Dorgan (D-ND) is leading the charge. His amendment is a bit more pragmatic. It is an attempt to get more Republican senators on board with a larger climate bill, by opening up for exploration a proven, hydrocarbon-rich area that could be developed quickly due to its proximity to existing infrastructure. The legislation does not open up all of the water near Florida as it codifies a moratorium elsewhere.

But even those areas may be eventually under threat, …..click here to read more

In a move that went widely unreported last week, California Governor Arnold Schwarzenegger unveiled a plan that would allow additional drilling within state waters in an attempt to help ease California’s fiscal troubles. California had banned new exploration activity within state waters (an area that roughly extends nine miles from the coast) since the 1969 spill in Santa Barbara — although there has been ongoing production in existing sites within state boundaries.

This proposal, like the previous one in Florida, is all about money as the states grapple with budget shortfalls. California expects the legislation could bring in over $1.8 billion over time. The proposals also show how quickly two states which were adamant against lifting the drilling moratorium in federal waters less than a year ago could change their opinion.

California’s decision to allow offshore drilling would be a boon to the exploration industry, especially if the state supported opening up federal areas beyond state waters. Those regions have substantial proven reserves: roughly 2/3 of all proven supplies on the US’s outer continental shelf.

Chevron CEO David O’Reilly spoke out last week against the Administration’s plan to use a cap and trade system to limit carbon emissions. His stance against US policy is nothing new.

from a policy standpoint, America has been moving in the wrong direction for a very long time.

He further outlines his list of grudges against US policy: taxes, restrictions on oil and gas development, and the belief that we can drill our way to energy independence (although the latter is not policy).

With such a grudge list, his apprehension against a cap and trade system is no surprise. His call for a carbon tax after he berated US policy is.

One of the main reasons why people support a carbon tax to limit carbon emissions is because it is simple and easy to employ quickly. (For other reasons check out the Carbon Center’s rationale.) In addition, it can also reduce emissions as well as a cap and trade system because it increases the cost of CO2. (The debate has become more intense recently as cap and trade legislation is being discussed.) O’Reilly’s decision to support the tax, however, is part business calculation, part negotiating tactic.

O’Reilly wants a stable and predictable business environment. A cap and trade system, which puts a variable cost to a unit of emissions, is intended to create incentives when demand to pollute is high. But the oil and gas industry with its long-term investment does not like short-term instability. Rex Tillerson, CEO of ExxonMobil, derided Europe’s cap and trade system last year, saying it is “all about moving the money around” as people buy and sell emission credits. Although a tax may increase the cost of their products, it would reduce uncertainty in their cost structures, which may be a greater management obstacle.

Cynics argue that he is trying to forestall the debate on climate action by bringing forth unpalatable idea: a call for a tax during a recession, which the American public is loathe to support. After all, it’s highly improbable you will see him lobbying for a $.50 gas tax just as you would not see a CEO of a steel company ask to increase taxes of iron ore.

O’Reilly knows that future climate legislation is near certainty. The more supportive he appears of some type of legislation, the more likely his views will be accepted in the debate.

Florida’s Republican-controlled House of Representatives supported a measure yesterday to allow drilling in state waters. It is a major change in policy as supporting such legislation even just a few years ago would have almost been political suicide as so many citizens in the state feared for the cleanliness of the their beaches. The likelihood that the bill will pass this session, as the Senate has not considered similar legislation, remains remote. But with Florida facing fiscal shortfalls and the opportunity of a windfall estimated at $31 billion over 20 years from offshore revenue, politicians are facing a new reality.

Florida has been the linchpin to maintaining the moratorium on federal offshore drilling in the Atlantic, Pacific and certain areas of the Gulf of Mexico due to the size of its poltical clout, its coastline and the abundance of oil and gas off its shore. While Jeb Bush was governor, his brother supported his anti-drilling stance and ensured no new oil and gas activity would begin in federal waters off the coast of Florida (Federal waters on the outer continental shelf begin roughly ten miles from the coast, while the states control the sea floor until that point). In fact, the federal government bought back leases in federal waters in 2002 to placate Florida’s political leadership.

Now, the winds now appear to be shifting in Florida, and odds are they will eventually blow across the rest of the federal outer continental shelf.

The reality is that expanded offshore drilling will not be decided on after an exhaustive environmental or energy policy debate, but whether or not the government needs the proceeds from drilling and how it plans to spend them.

Secretary began a four-city tour this week to discuss ideas for harnessing the energy potential of offshore areas. He has made broad claims regarding resources offshore such as windpower off the coasts can produce the energy of 3,000 coal-fired plants as he boasts about offshore’s energy potential.

He is likely to face resistance in opening up more areas to development, whether that be for maritime agriculture or for offshore drilling. A new plan, which will likely come out later this year, will address both issues. This roadshow is part sales job, part temperature check. He needs to show that he has listened to the American public, but he is also checking into specific resistance in changes in policy.

The rub is, we need new energy sources, and if it doesn’t come from offshore, than it must come from onshore or abroad. And those sources often pose far greater challenges.