How Big a Role Will Shale Gas Play in America’s Energy Future?

Some people herald it as the start of a new dawn, and others condemn it as a potential environmental disaster.

I am talking of course about shale gas and shale oil, produced by hydraulic fracturing — known by its shorthand as “fracking.” With every new technology there are winners and losers, benefits and costs.

But hydrocarbons from shale deposits are shaping up to cause as big a stir in the energy markets as nuclear power did back in the seventies. Maybe more so, as oil and gas are consumed across a wider range of applications than just the electricity produced by nuclear.

This isn’t the place to delve into the environmental implications — there are dozens of sources that lay out their stall in rightly protecting the environment — but it should be said that the biggest threat to the future of shale resources will be environmental.

If widespread contamination of ground water, for example, began to be linked to fracking, the industry could yet be stopped in its tracks. So far (although there have undoubtedly been instances), cases of contamination have been sufficiently isolated that the industry still has full government approval, fueled by excitement of what the future could hold.

As the NY Times writes, an International Energy Agency (IEA) report this week leads with the headline grabber, “The United States will overtake Saudi Arabia as the world’s leading oil producer by about 2017 and will become a net oil exporter by 2030.”

Even this may be too pessimistic a prediction — the Telegraph newspaper states that total US liquid production is set to hit 11.4 million barrels per day (bpd) next year, close to Saudi Arabia’s current 11.6 million. Saudi production is itself running at a record level to depress world prices in an Iran-sensitive market; if not for that, Saudi production would be barely more than 10 million bpd.

Shale gas may have been eclipsed by shale oil in the affections of the exploration companies, but already US natural gas resources are put at over 1,300 trillion cubic feet — the bulk of which is shale gas — edging ahead of Russia’s near-1,200 trillion cubic feet of gas.

The arrival of US shale oil (and, it must be said, Canadian supplies of unconventional oil), have depressed US oil prices relative to the rest of the world, pushing the West Texas Intermediate benchmark to a discount of a fifth to Brent, the international benchmark. As a result, big chunks of the US are getting oil on the cheap, improving US competitiveness relative to the rest of the world.

Low natural gas and oil prices will be a boost for US industry and the International Energy Agency (IEA) estimates that electricity prices will be about 50 percent cheaper in the United States than in Europe, largely because of a rise in the number of power plants fueled by cheap natural gas.

The IEA estimates the point at which the US will become self-sufficient in oil production to be 2030, when it could become a net oil exporter. However, long before that, exports could become the norm from some parts of the continent, while imports remain in others — the effect there will be to limit the downside to US oil prices relative to the rest of the world.

But what about the wider geopolitical ramifications?

There will be winners and losers all around as shale oil and gas supply increases. As the US becomes less dependent on the Middle East, will it continue to take such a close strategic interest in developments there?

The IEA predicted that global energy demand would grow between 35 and 46 percent from 2010 to 2035. Most of that growth will come from China, India and the Middle East, where the consuming classes are growing rapidly.

Oil cargoes currently flowing to the US will instead go to Asia, making the region’s political developments increasingly crucial to China and the rest. Subject to securing the massive investment needed, Iraq has the ability to become the second-largest exporter of oil after Russia, but will that be Western investment or Asian?

Nor will shale gas be the savior of greenhouse gas emissions, supporters of gas-fired power generation claim. As we have seen, US coal — if not consumed in the US — is exported to India and China and simply consumed there.

Meanwhile, production in some parts of the world, once seemingly secure and solid, are beginning to look less so.

An FT article details how Russia’s Gazprom has just commissioned the massive Bovanenkovo gas field far above the Arctic Circle. The field is said to contain enough gas to supply Europe’s needs for decades to come, yet questions are already being asked about its viability as the spot gas price falls.

Mikhail Korchemkin, an independent commentator on the gas industry, is quoted as saying in this FT article Gazprom needs to export gas at a price of about $14 per 1 million Btu (MMBtu) by 2020 to afford the investments in its pipelines.

But the current average spot price in Europe is already about $10 per MMBtu, while sales in the US are even cheaper at $3.50 per MMBtu.

“They would reach a point of no return,” Korchemkin says. “Gazprom could reach a time when it’s permanently in the red,” potentially leading to a break-up of the firm. Unthinkable a couple of years ago, but now openly discussed as a result of the impact of shale gas.

What about closer to home? Will shale oil and gas result in a bonanza for US manufacturing and free up consumers to spend more on the back of cheap energy prices?

For a time, yes. The infrastructure to export shale gas as liquefied natural gas (LNG) is almost non-existent at the moment, but several projects are in the pipeline, and as exports rise the domestic price will become closer to the world price. In addition, as more gas-fired power stations are built, demand will rise and with it domestic shale gas prices.

Nevertheless US prices are likely to remain at a discount to world prices for many years to come. The US will win in another way; the country operates a current account deficit with the rest of the world in large part because of oil imports.

As oil imports have fallen this year, so has the deficit — imports up to August were the lowest since 1998, in part due to lower oil imports. On the flip side, a stronger current account means a stronger dollar, according to James Mackintosh on the FT’s Short View, which would not help US exporters of manufactured goods.

So on balance, shale oil and gas have much to offer the US.

It will probably usher in a prolonged period of energy supply independence — if not price independence.

It will reduce the demands made on the country’s military to police areas of the world it would probably rather not police.

It will provide, at least for a number of crucial years crawling out of the current crisis, access to cheaper energy relative to the rest of the world, which will benefit manufacturers and consumers.

And it will continue to provide a source of employment — so far estimated at 1.75 million — that is sorely needed in an economy that is not producing anywhere near enough new jobs for its rising population.

By. Stuart Burns