A funny thing is happening on the way to the clean energy future–reality is setting in. There is ‘incontrovertible evidence’ about the economic growth and job creating effects of America’s unconventional oil and gas production boom – more than 600,000 jobs directly attributable to shale gas development. Even President Obama is praising the job creating benefits of ‘America’s resource boom’. America is getting its energy mojo back and that is good news but not the entire story.
How Much Shale Gas is there in the United States? In July 2011 US EIA released a [Review of Emerging Resources: US Shale Gas and Shale Oil Plays produced by INTEK. This is an updated assessment of onshore lower 48 states technically recoverable shale gas and shale oil resources. The assessment found the lower 48 states have a total 750 trillion cubic feet of technically recoverable shale gas resources with the largest portions in the Northeast (63%), Gulf Coast (13%), and Southwest regions (10%) respectively. The largest shale gas plays are the Marcellus (410.3 trillion cubic feet, 55 percent of the total), Haynesville (74.7 trillion cubic feet, 10 percent of the total), and Barnett (43.4 trillion cubic feet, 6 percent of the total).The INTEK assessment was incorporated into the Onshore Lower 48 Oil and Gas Supply Submodule (OLOGSS) within the Oil and Gas Supply Module (OGSM) of NEMS to project oil and natural gas production for the Annual Energy Outlook 2011 (AEO2011) to provide a starting point for future work.
Total US recoverable natural gas resources (includes conventional, unconventional in lower 48, Alaska and offshore) totals 4.244 quadrillion cubic feet according to the Institute for Energy Research:
• Enough natural gas to meet US electricity demand for 575 years at current fuel demand for generation levels
• Enough natural gas to fuel homes heated by natural gas in the United States for 857 years
• More natural gas than Russia, Iran, Qatar, Saudi Arabia, and Turkmenistan combined.
The US has Three Times the Proven Reserves of Saudi Arabia in Shale Oil. Global oil shale resources exceed 10 trillion barrels. More than 1.8 trillion barrels of oil are trapped in shale in Federal lands in the western United States in the states of Colorado, Utah and Wyoming, of which 800 billion is considered recoverable–three times the proven reserves of Saudi Arabia. The INTEK assessment for EIA found 23.9 billion barrels of technically recoverable shale oil resources in the onshore Lower 48 States. The Southern California Monterey/Santos play is the largest shale oil formation estimated to hold 15.4 billion barrels or 64 percent of the total shale oil resources followed by Bakken and Eagle Ford with approximately 3.6 billion barrels and 3.4 billion barrels of oil, respectively.
New Jobs Creation is driven by Low Cost Energy. A report from PricewaterhouseCoopers for the National Association of Manufacturers says low cost domestic natural gas will save $11 billion per year in US manufacturing costs over the next ten years and create more than a million new jobs. This new low cost energy reality is expected to increase disposable income by $2,000 per year per household in the United States. The growth in domestic natural gas production from unconventional sources (shale gas) has decoupled domestic North American gas prices from world oil and LNG prices, reversed the once expected US dependence on imported LNG, and driven down prices to near record low levels from long term reliable domestic energy supply.
New Jobs Creation Leads to Growing Worries over Skills Shortages and Fierce Competition for Talent. Just as the shale growth phenomenon takes off, the market face a looming new reality that more than 10,000 baby boomers per day will begin retiring in the US alone. The same fate or worse affects other global markets. The good news is the demand for experience, skills and technology expertise among workers in the oil and gas industry means that many will be coaxed into working longer or auctioning off their expertise to refill their retirement accounts left shattered by the great global recession. The demand for replacement skills is expected to swell the ranks of engineering, technology developers, science, math and software training programs and universities to meet that need. But the bigger need will be welders, plumbers, electricians, skilled machinists and other crafts to install and operate the equipment and support the technology deployment around the world.
Market Discipline of Fossil Fuels Weeds Out Coal in Favour of Cleaner Gas. After pursuing a virtual war on fossil fuels imposing one new regulation after another to undermine the economics and weaken the support for low cost energy production in order to reduce demand and thus emissions, opponents of fossil fuels are also faced with a stark new reality. New regulations may force the premature closure of coal generation plants, but that capacity is likely to be replaced with high efficiency natural gas fired generation not renewable energy. Low gas prices are a much more virulent threat to coal than anything the US EPA can dream up in regulations and more ruthlessly efficient. So older coal plants will be replaced with newer, cleaner, cheaper natural gas plants not a bad market outcome. Not a bad environmental outcome either. Meanwhile US EPA is left to take arrows in the chest over its regulatory overreach, piling on in times of economic uncertainty, and deliberate efforts to undermine America’s productive capacity for growth. This weeding out of older less efficient coal fired generation is the natural result of market forces at work. The replacement for many of these retiring coal plants will be load following natural gas because it is the fuel of choice in almost every power market and gas is required to back up every MW of renewable energy. Low gas prices from shale gas production growth make gas the least cost, best fit in almost every region.
Delivered energy consumption in the transportation sector grows from 27.6 quadrillion Btu in 2010 to 28.8 quadrillion Btu in 2035 in theAEO2012 Reference case (Figure 7). Energy consumption by light-duty vehicles (LDVs) (including commercial light trucks) initially declines in the Reference case, from 16.5 quadrillion Btu in 2010 to 15.7 quadrillion Btu in 2025, due to projected increases in the fuel economy of highway vehicles. Projected energy consumption for LDVs increases after 2025, to 16.3 quadrillion Btu in 2035.
Low Cost Shale Gas Drives Down the Grid Parity Price for Renewable Energy. The same market forces that forced old coal plants to give way to newer, clean natural gas fired combined cycle generation are also impacting renewable energy especially wind and solar. The global glut of solar photovoltaic panels and wind turbines brought on by overproduction by China in search of export growth is now caused governments in Europe to reduce or eliminate feed-in-tariff supports and subsidies as falling prices bring renewable energy prices into competitive levels with natural gas. But the new reality is low gas prices caused by the growth in shale gas production is driving down the grid parity price point. EU government reeling from the Eurozone financial crisis cannot afford the FiT subsidies. Many US states that adopted renewable portfolio standards are nearing their goals and few are following California’s lead to its higher 33% RPS target. The bottom line is renewable energy finds itself a mainstream resource at or near grid parity pricing levels but still dependent upon subsidies for profitability. Consolidation is sweeping the sector as smaller players sell out to larger global players with deeper financial pockets.
Taming the bad boys in the neighbourhood. As shale development potential is better understood around the world a slow and subtle trend turns viral as the competition for access to the technology and infrastructure needed to exploit shale development grows. The bad boys in every regional neighbourhood suddenly face pressure from their neighbours to clean up their act. Why? The fierce competition for technology access enables its multinational suppliers to be choosy about where they work–and they choose not to work where insurgents shoot at them, blow up their projects or extort them with out of control corruption. An informal code of conduct emerges that scores each market based upon its potential for profitable returns for the technology and infrastructure vendors. The competition to be next in line for access forces the locals to rein in the bad behaviours and improve their place in the queue. Combined with lower prices reducing the mischief funding potential from Iran, Russia and other traditional fomenters of mischief and the eagerness of nations and NOCs to gain access to Western technologies they need, the elders of each regional neighbourhood reassert themselves to enable their economies to grow.
Economic growth results in a rising middle class and demand for less corruption, more reforms and lasting democratic change. Shale development produces the mother’s milk of democratic change envisioned by the Arab Spring but suppressed by the bad boys in each neighbourhood. The enthusiasm for growth accelerates the demand for change. The lessons from taming of the bad boys in the neighbourhood are not lost on despots. A few resist and are forced out by the combination of domestic demand for change and the ‘code of conduct’ smack-down pushing those locations to the bottom of the queue. The fear of being left behind in the wave of global economic growth proves too powerful to resist.
Abundant energy reduces global conflict Abundant and evenly distributed energy sources (natural gas) reduce the intensity of competition for new energy sources of New Core countries like India and China. Bringing this new fuel to domestic markets will have a higher priority than energy adventurism (China’s search for energy in Africa.) It also allows important global players to focus on growing their economies rather than growing their militaries to insure themselves against resource scarcity.
Abundant energy increases global conflict New energy sources and technology lets national governments extract resources where they couldn’t extract them before. This new technological capability increases conflict at the local, regional and global level. Indigenous groups, local grievances and movements for autonomy will spring up in newly resource rich areas. Long contested border disputes will gain new intensity when resources are found in these areas. Governments will prioritize extraction in these areas out of fear that their neighbours will “drink their milkshake.”
National Oil and Gas Companies are forced to compete for competitive access to horizontal drilling and hydraulic fracturing technology and the rigs. With many shale gas sources majors and super majors lose interest in some NOCs that have traditionally been difficult to do business with or seeking to retain too much of the profit.
Access to water proves to be one of the biggest challenges to shale development. Resistance grows to use of potable water for fracking especially in arid regions like the Middle East where it is more precious. This leads to investment in infrastructure to make use of recycled wastewater effluent and the growth in desalination especially of brackish waters. As infrastructure expands water storage, conveyance and distribution systems are made more efficient and leak less especially in aging systems.
The Middle East becomes a laboratory for new energy development with combined heat and power projects and microgrids supporting shale development. Expanding use of solar for small scale applications takes advantage of falling prices for photovoltaic panels produced in China. The need for so much new energy and environmental infrastructure positions the Middle East to be a hot bed for clean, distributed energy technology development which accelerates investment by China and others around the world eager to gain access to advanced technology to develop their own shale resources.
The growing demand for technology challenges conventional wisdom and overturns old business models. Super majors and horizontal drilling technology leaders create auctions market for their services forcing nations to compete for access to their capabilities instead of the traditional state tenders and concessions.
O&G business models shift from owning the product to supplying the technology and getting paid in tradable shares of proven reserves. This leads to vast portfolios of distributed shale resources that are fungibly traded to balance risk, reward potential and accelerate economic growth in an open market rather than through OPEC. Russian, or Qatari dominated monopolies or NOC bilateral deals. In such competitive markets bad boys like Iran, Venezuela and others are stranded unable to compete in open markets and unable to extort providers at home who threaten to leave or do leave for better opportunities elsewhere. Other markets like Mexico where self-imposed constraints on outside investment or foreign ownership have undermined growth and limited access to technology find the open markets a way out of their trap and seize it by bidding for new technology to restart their E&P growth using the global portfolio exchange to pay for their E&P development with tradable contracts from future production and reserves.
Investment in technology develop and infrastructure services skyrockets as each regional market seeks to improve its place in the queue and looks for new technology players eager to steal business from super majors by offering better deals on upstart companies. In fact, this growing market for new energy technology is funded by super majors, sovereign wealth funds and traditional energy suppliers eager for access to new technologies.
The ripple effect of E&P growth widely distributed accelerates global GDP, encourages investment, lifts millions out of poverty and intensifies demand for democratic reforms to assure sustainable growth.
Global Business Finance Implications of Shale E&P Development
PriceWaterhouseCoopers reported that in the first three quarters of 2010 shale gas M&A deal value had grown to $20.1 billion from $6.8 billion in the same period in 2007. This deal flow increase resulted from energy majors leveraging their financial strength to position their companies for growth in shale reserves markets was driven by wildcatters or small independents like Mitchell Energy that is largely credited with development of horizontal drilling and hydraulic fracturing as a way to creating a market so they did not have to compete head to head with the majors. But the growth of unconventional oil and gas E&P success attracted the majors and other investors eager for a piece of the shale growth action. Today major oil companies are large investors in shale recognizing its growth potential and leveraging it as an alternative to conventional oil and gas plays with growing environmental restrictions and rapid decline rates. In fact, the growth in unconventional oil and gas has largely offset the decline in production output from conventional US sources.
Approximately one-third of total U.S. delivered energy, 23.4 quadrillion Btu, was consumed in the industrial sector in 2010. In the AEO2012Reference case, total industrial delivered energy consumption grows by 16 percent, from 23.4 quadrillion Btu in 2010 to 27.0 quadrillion Btu in 2035. The largest user of energy is the bulk chemicals industry, which represented 21 percent of total energy consumption in the industrial sector in 2010. By 2026, however, the refining industry, defined as including energy use at petroleum, biofuels, and coal-to-liquids (CTL) facilities, becomes the largest energy-consuming industry in the AEO2012 Reference case.
Collectively, the energy-intensive manufacturing industries such as bulk chemicals, refining, paper products, iron and steel, aluminium, food, glass, and cement produce slightly more than one-quarter of the total dollar value of industrial shipments while accounting for nearly two-thirds of industrial delivered energy consumption. Although the energy-intensive industries are expected to recover from the recent recession, their long-term growth is slowed by increased international competition and a shift in U.S. manufacturing toward higher value consumer goods. The dollar value of shipments from the energy-intensive manufacturing industries grows by 29 percent from 2010 to 2035 in the AEO2012 Reference case, while the value of shipments from non-energy-intensive industries increases by 57 percent. As a result of the shift toward non-energy-intensive manufacturing, total industrial delivered energy consumption increases more slowly than total shipments, and the energy intensity of industrial production declines.
Low energy prices also bring energy security as long as reliable supply is sustained reducing American dependence on imported oil and natural gas from the Middle East and reducing the volatility of oil prices as demand is distributed across wider global supply opportunities from shale. Low energy prices especially in oil undermine the economies of OPEC member states and reduce their geopolitical and global economic leverage. This can lead to a change in US foreign policy priorities away from the Middle East.
By. Gary L. Hunt
Gary Hunt is President, Scalable Growth Strategy Advisors, an independent energy technology and information services adviser and a partner in Tech & Creative Labs, a disruptive innovation software collaborative of high tech companies focused on the energy vertical. He served as VP-Global Analytics & Data at IHS/CERA; global Division President at Ventyx, now an ABB company; and Assistant City Manager-Austin Texas responsible for Austin Energy and Austin Water.