Tuesday, November 25, 2014

The Global Impact of US Shale

WASHINGTON, DC – The biggest innovation in energy so far this century has been the development of shale gas and the associated resource known as “tight oil.” Shale energy ranks at the top not only because of its abundance in the United States, but also because of its profound global impact – as events in 2014 will continue to demonstrate.

America’s shale gas and tight oil are already changing global energy markets and reducing both Europe’s competitiveness vis-à-vis the US and China’s overall manufacturing competitiveness. They are also bringing shifts in global politics. Indeed, how shale energy may change America’s role in the Middle East is becoming a hot topic in Washington, DC, and in the Middle East itself.

This “unconventional revolution” in oil and gas did not come quickly. Hydraulic fracturing – known as “fracking” – has been around since 1947, and initial efforts to adapt it to dense shale began in Texas in the early 1980’s. But it was not until the late 1990’s and early 2000’s that the specific type of fracturing for shale, combined with horizontal drilling, was perfected. And it was not until 2008 that its impact on the US energy supply became notable.

Since then, the industry has developed fast, with shale gas currently accounting for 44% of total US natural-gas production. Given abundant supply, US gas prices have fallen to a third of those in Europe, while Asia pays five times as much. Tight oil, produced with the same technology as shale gas, is boosting US oil production as well, with output up 56% since 2008 – an increase that, in absolute terms, is larger than the total output of each of eight of the 12 OPEC countries. Indeed, the International Energy Agency predicts that in the next few years the US will overtake Saudi Arabia and Russia to become the world’s largest oil producer.

Five years ago, it was expected that the US would be importing large volumes of liquefied natural gas to make up for an anticipated shortfall in domestic production. Now the US is not importing any LNG – thereby saving $100 billion on its annual import bill. At current prices, the increase in US oil production has been cutting another $100 billion from that bill. In addition, the unconventional revolution supports over two million jobs.

The global impact has been enormous. Much of the new global LNG capacity was developed with the US in mind. Now, with the US market cordoned off by cheap domestic gas, some of that LNG is going to Europe, introducing unexpected competition for traditional suppliers Russia and Norway.

For Japan, the lack of US demand for LNG proved fortunate in the aftermath of the disaster at the Fukushima Daiichi nuclear-power plant in 2011. Much of that LNG could go to Japan to generate electricity, replacing the electricity lost from the total shutdown of nuclear power.

Many other countries are reassessing their own energy policies in light of the unconventional-energy revolution. China, seeing the speed and extent of US shale-gas development, has placed a high priority on developing its extensive unconventional gas resources. For China, replacing coal with natural gas in electricity generation is essential to mitigate public discontent and health problems stemming from the heavy burden of urban air pollution.

The rise of US shale energy is also having a broader global economic impact: American shale gas is changing the balance of competitiveness in the world economy, giving the US an unanticipated advantage. Indeed, inexpensive natural gas is fueling a US manufacturing renaissance, as companies build new plants and expand existing facilities.

Throughout Europe, industrial leaders are becoming increasingly alarmed by enterprises’ loss of competitiveness to factories that use low-cost natural gas and the consequent shift of manufacturing from Europe to the US. This is particularly worrying in Germany, which relies on exports for half of its GDP, and where energy costs remain on a stubbornly upward trajectory. These high costs mean that German industry will lose global market share.

Whatever their targets for shifting their energy mix, European Union countries, already suffering from high unemployment, will be forced to reconsider high-cost energy strategies or face weakening competitiveness and loss of jobs.

The geopolitical impact is already evident. For example, Iran is now seriously at the table in nuclear negotiations, which might well not have happened were it not for tight oil. When strict sanctions were imposed on Iranian oil exports, many feared that world oil prices would spike, and that the sanctions would ultimately fail, owing to insufficient alternative supply. But the increase in US oil production over the last two years has more than made up for the missing Iranian output, enabling the sanctions (bolstered by parallel financial measures) to work – impelling Iran to negotiate seriously, which it was unwilling to do only two years ago.

In Arab capitals, anxiety is mounting that a rapid increase in US tight-oil production will fuel wholesale US disengagement from the Middle East. But this overstates the extent to which direct oil imports shape US policy toward the region. To be sure, rising US output, combined with greater automotive fuel efficiency, will continue to reduce US oil imports. And, while the US will still import oil in the years ahead, more of it will come from Canada (notwithstanding the debate about the Keystone XL pipeline).

But the fact is that Middle East supply has not loomed very large in the overall US petroleum picture for some time. After all, even before the growth of tight oil, the Persian Gulf provided only about 10% of total US supply. It was not direct US oil imports from the Middle East, but rather oil’s importance to the global economy and world politics, that helped define US strategic interests.

The Middle East will continue to be an arena of great geopolitical importance, and its oil will be essential to the functioning of the global economy. This implies that the region will likely remain a central strategic interest for the US.

Overall, however, the shale-energy revolution does provide a new source of resilience for the US and enhances America’s position in the world. The emergence of shale gas and tight oil in the US demonstrates, once again, how innovation can change the balance of global economic and political power.

Read more from "2013: Reversing Gears" here, or on Kindle and iBooks.

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    1. Commentedsri ram

      India can do business with Iran. Russian gas will be available and at a cheaper price to India. Rise of China ahead of USA could be delayed. Pretty good story, all in all.

      SRIRAM's IAS,

    2. CommentedDavid Kelland

      I know that Yergin is an alleged authority on global energy markets and he wrote a really important book. That's why I'm so surprised to see him even mention the fact that we only get
      10% of our supply of oil from the Persian Gulf (even before the rise of tight oil). As if a $2 rise in the price of Brent weren't very likely to cause WTI to go up $2. I know he was careful with his language, but to cloud the fact that this is a global market is ridiculous. Nobody cares where the ships come from -- they care about the price they pay for the product.

      "But the fact is that Middle East supply has not loomed very large in the overall US petroleum picture for some time. After all, even before the growth of tight oil, the Persian Gulf provided only about 10% of total US supply. It was not direct US oil imports from the Middle East, but rather oil’s importance to the global economy and world politics, that helped define US strategic interests."

    3. CommentedWilliam Hileman

      The main problem with shale gas is the tremendous amount of methane being leaked into the atmosphere at all the fracking sites. This methane is 50 to 70 times as bad as CO2 as a greenhouse gas, thus potentially raising our planet's temperature by enough to turn our farmlands into deserts. Also, we're mixing our water supply with gas, oil, and fracking chemicals during the extraction process.

    4. CommentedWilliam Hileman

      The worst problem with shale gas is the tremendous leaking into the atmosphere of methane, a substance 50 to 70 times worse than CO2 as a greenhouse gas. What will be the answer when temperatures in the U.S. exceed those in the Mideast? And where will our water come from once we have mixed it all with oil, gas, fracking chemicals, etc ?

    5. CommentedDavid Donovan

      Its rare to read an article from someone who "gets it". But the author has left out the punch line to this sick, dark humor.

    6. CommentedDirk Ouellette

      EROEI. I can't say that enough. Energy returned from energy invested. Sean Mac says it from the environment POV. But the "sunny" outlook from the Natural gas industries is also rife with pumped ( pun intended!) up figures for extraction and then pricing to market. It is all a "play" for the investor's dollar with the hope that governments will be corrupted enough to back any failures with public monies.

    7. CommentedNM Wander

      I think Mr. Yergin's explanation for the rise in the price of hydro-carbons is acurate ... up to a point.
      I beleive the instability we are living with right now, is the result of China's entrance into the world market. China's market alone is 5X bigger than the US market. Add to this situation, the demand for oil/gas/etc in India......
      And its no wonder that traditionaly westward directed pipelines are now heading east!!
      Euorpe has no large oil/gas reserves and is completely reliant on Russia and their ex-colonies.
      We managed to alienate Iran in the 1950s by refusing to share oil revenues and deposing their democratic govt.
      The underlying purpose of occupying Afghanistan is to prevent pipelines from the Middle East running to China......the occupation has been a dismal failure.
      China is now developing most of the Iraq oilfields also.
      Back in North America....we have the obsolete 20th Century Oil Development Industry desparately trying to preserve its market share.....willing to destroy water aquifers in order to extract thru expensive means oil/gas from shale and to build an expensive new pipeline in order to sell more oil to......China!!

    8. CommentedRoland Kupers

      Clear piece - with two notable omissions:
      1- This echoes the much heard idea that shale gas is low cost. It isn't: it is for example much more costly than Saudi Oil, or traditional gas. It is just that there is so much of it, that supply exceeds demand, so it is low price. Inevitably in the efficient US economy demand will respond as transport switches out of oil and prices will balance in the medium term.
      2- It is also very late in the game to introduce a new source of fossil fuel, and it then has the potential to create another lock-in. As the OECD secretary general recently calls for, zero fossil fuel to power is probably the right target for mid-century. Gas will still be required for chemicals, and fertilizer but that will be a much smaller quantity.

    9. CommentedSean Mac

      What this post conveys is directly following the playing book of the Natural Gas Industry. Fracking is All sunny--job creation and economic growth. But the writer misses something more important--the downsides of fracking technology--how it pollute sour air and our water resources. How it industrializes the backyard of our homes. To an individual home owner, leasing your home for fracking is to decrease your property values. Fracking is a short-sighted growth model--we may gain something now but we will pay the ultimate price later. Remember there is no way we can clean up our water aquifer when it is polluted by fracking.

    10. CommentedKir Komrik

      Great article!
      Its rare to read an article from someone who "gets it". But the author has left out the punch line to this sick, dark humor.

      Petroleum that can be accessed using the technological infrastructure currently available to all nations except the United States and Canada is running out fast. The U.S. and Canada are unbelievably lucky because they have the technology, capacity and favorable geology to allow the exploitation of petroleum in different forms for a very long time. And only the United States is wealthy enough to capitalize this kind of effort.
      This means two things:
      1.) The world is about to enter a depression of cosmic scale with the United States and Canada receiving only a relatively small portion of the brunt of that impact. That will indeed forever change the world more than any other single event in human history.
      2.) The first projection I made will happen this way only if the United States and Canada figure out how to, between the two of them, become fully self-sufficient economically. And they need to do it fast because economies in the rest of the world aren't going to be around much longer.
      Welcome to the Church of the Painful Truth.
      Petroleum is why modern society exists at all. It is telling that the author notes that fuel prices are 3 times higher in Europe and 5 times higher in the Far East (think China). Any casual perusal of Chinese news will reveal that the gas lines the United States experienced in the 1970s on an order of magnitude larger scale are already occurring in China. This is why I keep telling people that China isn't going to be the economic power everyone thinks it will. China and India will be hit particularly hard.
      I don't say any of this with glee. This is a horrific forecast that I arrived at only after months of research and I do not see any way this outcome will be avoided. We would have to be totally wrong in our understanding of geology and petroleum for this to change now ... in my opinion.
      - kk

    11. CommentedPaul Mathew Mathew

      Oh Daniel .... have you seen this article in the FT a couple of weeks ago?

      Toil for oil means industry sums do not add up (FT.com)
      Rising costs are being met only by ever smaller increases in supply
      The most interesting message in this year’s World Energy Outlook from the International Energy Agency is also its most disturbing.
      Over the past decade, the oil and gas industry’s upstream investments have registered an astronomical increase, but these ever higher levels of capital expenditure have yielded ever smaller increases in the global oil supply. Even these have only been made possible by record high oil prices. This should be a reality check for those now hyping a new age of global oil abundance.
      According to the 2013 WEO, the total world oil supply in 2012 was 87.1m barrels a day, an increase of 11.9mbd over the 75.2mbd produced in 2000.
      However, less than one-third of this increase was in the form of conventional crude oil, and more than two-thirds was therefore either what the IEA calls unconventional crude (light-tight oil, oil sands, and deep/ultra-deepwater oil) or natural-gas liquids (NGLs).
      This distinction matters because unconventional crude has a higher cost than conventional crude, while NGLs have a lower energy density.

      More http://www.ft.com/intl/cms/s/0/5e923e3a-51d3-11e3-8c42-00144feabdc0.html

    12. CommentedHao Jing Soon

      It's possible that the US will manage to export its gas as far as Eastern Europe where it will compete with Gazprom and break Russia's near monopoly on the gas supply there, which Putin loves to exploit during winter to settle scores in his favour. Perhaps selling more gas to East Asia will also curb urgent desires to carve up and exploit the East and South China Seas for natural gas as well.

    13. CommentedWilliam Bidwell

      Begs the question in my mind of why gasoline pricing remains elevated in most areas of the nation

        CommentedSergey Ivanovitch

        @Paul MM, oil was priced in the high single/low-double digits for much of the late 90s and part of the early 2000s. Oil companies don't "need prices >$75 to make a buck". Those prices are a result of a) increase in global demand, particularly from the East, b) perma-high risk premia that interpolate an antagonistic Iran and political unrest in the Middle East, and c) inflated asset prices caused by loose monetary policy around the world

        CommentedPaul Mathew Mathew

        Gasoline prices can never come down much otherwise shale, deep sea and tar sands operations go bust.

        They need minimum 75 bucks a barrel to make any money at all.

        It's not that we are out of oil its that we are out of CHEAP OIL.

        And that is a MASSIVE problem for the economy - see http://ourfiniteworld.com/2014/01/02/why-a-finite-world-is-a-problem/#more-38698

        And once again - Yergin is paid by big oil - he is totally biased - he is to be ignored.

    14. CommentedJayesh Nair

      Would this bring down the average cost of energy production in the US? Among others whose plans might get severely derailed by this: Cleantech startups. Companies that are dependent on govt subsidies to ensure their clean energy products are viable, will now need to lobby for even greater subsidies, i suppose.

    15. CommentedPaul Mathew Mathew

      Former BP geologist: peak oil is here and it will 'break economies'


    16. CommentedPaul Mathew Mathew

      Yergin is a shill for big oil.

      Here's the reality Daniel

      Scientists Wary of Shale Oil and Gas as U.S. Energy Salvation
      Hughes sums up: "Tight oil is an important contributor to the U.S. energy supply, but its long-term sustainability is questionable. It should be not be viewed as a panacea for business as usual in future U.S. energy security planning."

      U.S. Shale-Oil Boom May Not Last as Fracking Wells Lack Staying Power
      “I look at shale as more of a retirement party than a revolution,” says Art Berman, a petroleum geologist who spent 20 years with what was then Amoco and now runs his own firm, Labyrinth Consulting Services, in Sugar Land, Tex. “It’s the last gasp.”

      Robert Ayres, a scientist and professor at the Paris-based INSEAD business school, wrote recently that a "mini-bubble" is being inflated by shale gas enthusiasts. “Drilling for oil in the U.S. in 2012 was at the rate of 25,000 new wells per year, just to keep output at the same level as it was in the year 2000, when only 5,000 wells were drilled." http://www.forbes.com/sites/insead/2013/05/08/shale-oil-and-gas-the-contrarian-view/

      Why America's Shale Oil Boom Could End Sooner Than You Think

      Overinflated industry claims could pull the rug out from optimistic growth forecasts within just five years. A report released in March by the Berlin-based Energy Watch Group (EWG) concluded that: "... world oil production has not increased anymore but has entered a plateau since about 2005." Crude oil production was "already in slight decline since about 2008."

      The decline of the world's major oil fields
      Aging giant fields produce more than half of global oil supply and are already declining as group, Cobb writes. Research suggests that their annual production decline rates are likely to accelerate.