Saturday, November 29, 2014

The Shale Revolution’s Global Footprint

MADRID – Thousands of negotiators are currently gathered at the United Nations climate-change talks in Warsaw, creating a blueprint for a comprehensive global agreement to be delivered by 2015. But, as the negotiators work, the world’s energy landscape is in enormous flux. Given that most of the world’s CO2 emissions stem from energy production and transport, it is critical to monitor these changes closely.

In particular, the shockwaves triggered by the shale-energy revolution unleashed in the United States are reverberating globally. With the advent of hydraulic fracturing, or “fracking,” US oil production has risen by 30%, and gas production by 25%, in just five years. Shale gas contributed almost nothing to US natural-gas supplies at the start of the century; by last year, its share had soared to 34%, with the US Energy Information Administration predicting a further rise to one-half by 2040. As a result of this bonanza, US domestic energy prices have plummeted.

The US, with all its geographical blessings, is on the road to energy self-sufficiency and is reaping clear economic benefits. Development of unconventional oil and gas supported 2.1 million jobs and contributed $74 billion in tax revenues and royalty payments to government coffers in 2012. Industrial competitiveness has soared, owing to much higher gas prices in Europe and Asia. Refiners and petrochemical companies are flocking to the US.

But this does not mean that the US can withdraw into splendid energy isolation. After all, energy is a global commodity. The effect is direct when it comes to oil prices. Although oil accounts for a smaller part of the energy mix nowadays and spare capacity is currently well ensured, chiefly by Saudi Arabia, a price shock would still have global effects – as such shocks have had in the past.

Gas prices, by contrast, vary widely across regions: from under $4/MMBtu in the US to around $10 in Europe and $15 in Asia. Until the gas market becomes more liquid and more global, this spread will remain. Nonetheless, global economic interdependence means that every country has a stake in others’ energy bills. If one region’s economy falters, all countries feel the effects.

In Europe, shale-energy resources have largely remained in the ground. Even so, the shale revolution across the Atlantic has been felt in diverse ways. For example, decreased US demand for liquefied natural gas (LNG) has allowed gas prices to come down in Europe. European utilities’ bargaining power vis-à-vis Russian gas giant Gazprom has risen considerably – despite long-term oil-indexed supply contracts.

Yet European competitiveness is in danger. European companies are still buying gas at around triple the price paid by US firms. This is unlikely to change in the near future, as liquefaction and transport costs will keep LNG prices high even if the US issues more export permits.

Finally, Europe’s energy mix is gradually shifting from the one that it needs to reach its climate-change goals. As inexpensive natural gas has eroded coal’s traditional share of electricity generation in the US, importing cheap coal from the US has become more attractive to Europe. Especially in Germany, the Energiewende (the shift away from nuclear energy following the Fukushima catastrophe in 2011) has led to an increase in coal consumption. Indeed, coal is on track to provide more than half of Germany’s electricity supply.

The EU’s position as a climate-change champion is in danger. Greenhouse-gas emissions may have dropped as a consequence of reduced production amid the economic recession, but the coal resurgence does not bode well for future targets.

Coal is king in China too, providing two-thirds of its power supply. But China’s rulers know that this situation is unsustainable. Not only is air pollution a growing source of concern, but diversification of energy sources is a crucial national-security interest.

The scale of China’s unconventional energy endowments is still relatively uncertain. But population density and water scarcity will certainly be inhibiting factors in their exploitation. China maintains robust relationships with energy producers in the Middle East, Russia, and elsewhere (including booming Myanmar) – to secure and diversify its conventional sources. Just last month, Dmitri Medvedev’s first visit to China as Russia’s prime minister resulted in a ten-year, $85 billion oil-supply deal for the state-owned energy giant Rosneft.

Natural gas, however, is the weak link. Asia’s pipeline network is far too thin, and gas prices are among the highest in the world.

That implies a potential boon to Russia’s main gas producers, especially as Europe’s energy-diversification campaign weakens export demand. Indeed, given that oil and gas revenues account for half of Russia’s federal budget, adapting to new realities is virtually an existential imperative for the Russian state. There is opportunity in Siberia’s frozen taiga, particularly the Bazhenov field, which may hold some of the largest unconventional reserves in the world. But the investment needed to develop these resources may remain in short supply in the absence of tax reforms.

The shale-energy revolution that started in the US is thus causing sweeping changes worldwide. And incorporating shale gas into the world’s energy mix could help to combat climate change by creating a bridge to a low-carbon future. So long as methane leakage is contained, CO2 emissions from natural-gas combustion can be significantly lower than those caused by reliance on oil.

Cheap energy sources, however, can eventually come at a high price, albeit with a politically tricky time lag. Simply put, the current cost of pollution is too low, while the level of urgency is high. In Warsaw and beyond, it is vitally important that the international community reaches a sufficiently high common denominator in limiting greenhouse-gas emissions. If not, we will not be able to limit the global temperature increase to a sustainable level.

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    1. CommentedZsolt Hermann

      I agree with the other comments that the viewpoint the writer represents is one-sided, only concentrating on the demand side.
      And we could even call this viewpoint the "dinosaur viewpoint" for two reasons.
      One is that today even the "simple public" starts to understand what it means that we evolved into a global, integral human network within the closed and finite natural system, where instead of the prevalent excessive and artificial demand our present socio-economic system is built on, we need to concentrate on available means and natural necessities. Thus stubbornly maintaining the previous thinking and attitude throws these people back into a foregone era.
      Besides it is a "dinosaur viewpoint" because remaining in our present paradigm will sentence us to the same fate, missing the continuing train of evolution.
      We simply cannot go on with our unnatural, self-absorbed thinking and attitude and expect that we can continue cheating the system.
      We have already been found out, the global crisis is the sign we entered a dead end.
      Only a completely new human socio-economic system based on the understanding of the new global, integral, natural world can offer a way out.

    2. CommentedSean Mac

      This is not a balanced article because it only states the economic benefits of fracking ignoring its downsides. This has become a predictable phenomenon--all the establishment linked to corporation interest will always paint natural gas production as a rosy picture, including job creation and cleaner energy.

      In fact, natural gas production is not a cleaner energy at all--it is a heavy-handed and chemical fueled process--and will waste a great deal of water resources, which are increasingly lacking in the world, needless to say the greenhouse gas—methane—produced by fracking is much more potent than CO2.

      Just asking any local residents who leased their home to the gas company, they will tell you the real picture. Fracking will cause water pollution, which is not only local but can be regional when the chemicals injected to the underground leaking to the aquifer. The reduced property prices once a home became a fracking site.

      Asking the gas companies why they don’t want to publicize what chemicals they have injected to the underground? Also, what is the percentage of the cement layer may break in the long run thus leaking the chemicals to the underground aquifer? So far, the gas companies have avoided to answer these questions.

      Yes, we may gain short-term economic benefits but we should not forget the long-term implication fracking can cause to our health, environment, and way of life. So far, the European governments have not permitted any production of fracking, which showed they are wiser than the US government.

    3. CommentedProcyon Mukherjee

      The crucial issue in hydraulic fracturing is water, and that I am afraid is missed in the article. As the current growth rates of shale gas through this route would portend the permanent removal of water from the natural cycle at a rate that is truly alarming as Steve Bennet has shown that it is not 0.3% of natural water use by the current production of shale gas that is a matter of concern but the 17% of permanent water withdrawal from the non-fracking use twenty years from now if the current growth rates of production is extrapolated. This could be an exaggerated warning, but the fact remains that permanent removal of water (specially ground water) from the cycle would be the fundamental reason why growth rates are never going to be what is being projected. In other parts of the world, this would be the primary reason of partial or no success for this technology; Asia particularly is likely to draw a blank.

    4. CommentedPaul Mathew Mathew

      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."

      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."