In recent months, many have touted that the United States is on the road to energy independence. Citibank pointed in the early part of the year that the emergence of shale oil and shale gas and increased vehicle efficiency may make USA the new Middle East of Oil, whilst Philip Verleger, a famed American economist argued that the US will be energy independent in that it will export more oil than it imports by 2023. In March 2012, the United States exports of petroleum products exceeded imports for the first time since six decades.
Whilst the Americans satiate their energy appetite with advanced lateral and horizontal drilling for tight oil and gas, the Europeans are pursuing their own energy agenda via a different route.
Divergent paths to energy independence
The use of gas instead of coal in power generation has reduced American carbon emission by 450 mt over the past 5 years. At the same time, lower energy costs have resulted in a renaissance of industry in the States, with thousands of jobs created and the relocation of petrochemical and fertiliser industries back to the States.
In Europe, countries are adopting a renewables approach towards energy independence instead. Germany’s adoption of Energiewende – an energy turnaround or transformation – faces hurdles to meet all its targets. The Irish targets renewables to be 20% of all energy sources by 2020. These targets are made more arduous by European countries phasing out nuclear power, whilst shale gas lumbers with environmental and geological obstacles in the continent.
Divergent paths meet on transportation
Even as renewables growth accelerates over the next 5 years and natural gas increase its share as an energy source, energy independence in both continents hinges on the key transportation sector. The transportation sector unlike the power sector is made up of disparate millions of vehicles which face inertia to fuel type change relative to more concentrated power stations.
Both continents’ success hinges on reducing the use of gasoline (for America) and diesel (for Europe) in vehicles. The Europeans will largely depend on electric vehicles to wean off oil. However a recent IEA report highlighted the muted impact of electric vehicles – only 5 million of vehicles sold in 2020 or 5% of total vehicles production. It may take another 30 years for electric vehicles to make a material impact, during which re-charging stations and the mileage range of electric vehicles are improved.
The greater abundance of natural gas for the Americans may see it adopt natural gas (CNG / LNG) vehicles as an interim solution for energy independence. However, similar issues arise for this type of vehicles – re-fuelling stations and the mileage range. In the case of natural gas though, prices are not likely to remain at present depressed levels. Advancing renewables technologies on the other hand are likely to see a decrease in unit costs of production over time.
In a recent interview of George Soros by CNN, he highlighted that shale gas and shale oil have contributed to the economic recovery of the US. The US ISM manufacturing rose 1% in Jan 2012 over the previous month. Shale gas impacts the economy through:
1. direct employment and production in gas producing states
2. lower production costs through power savings and manufacturing feedstock
3. lower trade deficits and stronger USD; lower inflation
In the main shale gas production states of Texas, Wyoming, Louisiana and North Dakota, towns have been revived and employment is at a country-wide low of 3.3%. It is even reported that McDonald’s in Dickinson provided a sign-on bonus for staff in their outlets. An estimated number is 600,000 people employed in the shale gas industry in a survey done by IHS Insight. In another study by PwC, an estimated 1m more jobs is expected to be created through the middle of the next decade. The PwC study also highlighted several companies like Bayer and Dow Chemical reviving their chemical plants in the shale gas rich regions to appropriate the cheaper feedstock of ethane (in natural gas). Shale gas contributes to almost 40% of daily production 65 bcf of natural gas. This amounts to $29b (at a per mmBtu price of $3) in annual production revenue. Notwithstanding the multiplier effect on the GDP, shale gas impact is much larger than this baseline estimate.
Other unintended consequences of shale gas and oil are a lower trade deficit and a stronger USD. A big story in 2011 is the USA turning to a net exporter of petroleum products. This by far is due to the lower domestic demand and stronger domestic production volumes of oil and gas (shale oil contributed 400kb/d). The dual consequence is to lower core inflation, which directly supports fiscal measures and quantitative easing.
Europe case is different
Comparatively, Europe is still deliberating on the environmental aspects of shale gas drilling. Already France and Bulgaria set a moratorium on shale gas drilling. Further, many of the rosy projections on shale gas in Europe by smaller companies appear too optimistic, and it may take another 5 years for shale gas production in Europe to take off according to Exxon. Among the European countries, Germany and Poland hold the most potential for shale gas reserves and production. See also an article by the author “All not so rosy for shale gas“. Whilst Europe shares US’s concern on energy security, it has traditionally been more environmental conscious than the larger American continent. Not that, energy security is a less pressing issue for Europe with Gazprom having delivered ‘less than enough’ volumes of natural gas to the continent during the cold snap last month.
Would shale gas (and oil) have delivered equal benefits to Europe? Firstly, there are much higher electricity tariffs and diesel/ gasoline taxes in Europe than the States. This is due to the higher taxes (VAT and excise) and feed-in tariffs for renewable generation in OECD Europe. The tables below indicate the household and industry electricity prices in Europe and USA, sourced from the Oil Drum and originally from the IEA quarterly database in 2009. Germany electricity data is not in the figure but in 2011, its residential tariff was $0.178 /kwH on the upper range of the prices. Except for Norway, US has lower electricity tariffs than any European country.
A historical comparison between USA and Europe indicates that the USA industrial electricity prices as always below that of Europe. In spite of the increases in fossil fuels (coal and oil) in particular from 2006-2009, industrial electricity prices in USA have remained relatively unchanged in the period.
In theory, Europe could have lower electricity prices from cheaper natural gas which contributes about 19% to its power generation. However, it imports almost 35% of its imports from Russia based on take-or-pay long term oil-indexed contracts. This renders it contractually liable to take a minimum amount of gas imports. The imports are mainly on oil-indexed prices which have remained high, although there have been recent pressure to index it on spot gas prices.
This coupled with its higher taxes and feed-in tariffs would have kept its electricity production costs high. Consequentially, it would also not have experienced a similar revival in its chemical industries, based on price parity on the gas feedstock.
A rosy scenario has been painted about the emergence of natural gas as a major fuel source. This was contributed in part by an increase in unconventional gas supply – in particular coal bed methane, tight gas and shale gas. Coal bed methane production is growing but is expected to be important in countries with large coal reserves – Australia and Canada.
Shale gas boom:
Of this natural gas boom, shale gas share of supply has increased to 40% in 2011 from 10% in 2005 in the United States alone. Dick Cheney in 2005 then Vice-President exempted gas drilling from federal regulations. This led to advances in horizontal drilling and hydraulic fracturing and the subsequent boom in shale gas revolution in the United States. Shale gas is expected to contribute to ~13% of total gas volumes in 2035 worldwide under the Golden Age of Gas Scenario (GAS).
Much of the shale gas drilling techniques were attempted by small independents initially. This has contributed to recent boom in shale gas investments in particular with large foreign entities for ‘technological transfer’:
- in Dec 2011, a $2.3b joint venture between Total S.A. (25% stake), and Cheaspeake Energy and EnerVest to develop the Utah Shale in Ohio
- in Dec 2011, a $0.9b joint venture between Sinopec and Devon Energy for shale gas development in the United States.
- in Jan 2012, Marubeni $1.3b joint venture with Hunt Oil to develop Eagle Ford shale resources
This shale gas revolution has spread worldwide. Below is a figure showing the shale gas reserves estimated by the Energy Information Administration. Presently countries that are investing heavily include China, Argentina and Poland whilst licensing rounds have started in India and Israel.
Environmental considerations for shale gas:
However, not all is rosy in this shale gas scenario – in particular environmental and costs considerations have surfaced. Scientists have speculated the following environmental concerns:
- Hydraulic fracking possibly causing two separate earthquakes in Ohio and Blackpool, UK, although the link has not been confirmed.
- Fracking chemicals leakage to the water aquifer in Wyoming as detected by the Environmental Protection Agency, (EPA). Again the evidence is not conclusive, but this has led to legislation requiring drilling companies to publicise the content of their proprietary fracking liquids. Many in the industry advocated tighter regulations and casings on the drilling as enough to prevent such leakages.
- Huge amount of water resources needed for the fracking process. Total volume pumped into a well is from 7500-20000 cubic metres. (source: IEA GAS report)
- From well head to burner, shale gas production is also more emissions intensive relative to conventional drilling – although only marginally at 3.5%1 higher than conventional gas production if modern techniques are used. (source: IEA GAS report)
Already, these environmental concerns have led to bans and moratorium in Europe – in particular France, Germany and Britain. Only Poland has been going ahead in the environmental conscious continent.
There is also a lack of price projection and its effect on project economics. With estimated break even costs for shale gas production at about $4 mmBtu2 and present Henry Hub prices at $3 mmBtu3, present production is at a loss. The shale gas revolution is a victim of its own success in the United States. Supply glut is only expected to clear in 2015. A key reason investments still keep flowing is technology transfer and realising that shale gas could be a future revolution.
Notwithstanding these, production over the past 3-4 years is still shedding light on the reserves profile. Presently, a hyberbolic decay profile is assumed whilst in a study an exponential decay is found more appropriate. Total recovery is reduced by half consequentially. Given the short life of existing wells, costly re-fracking may also be needed later. These have important impacts on project economics. Already, reserves estimation in the large Marcellus shale resources has been reduced in a new USGS survey to 84 tcf from a previous 264 tcf by the Department of Energy.
Implications: Higher costs and lesser abundance
The overall implications of these environmental considerations and project economics are potentially higher costs and lesser abundance. However the cause and effect may not be linear. Potential factors include the fast development of LNG infrastructure to link world markets3, and the de-linkage of gas to oil prices outside of the Americas. Maintaining gas prices linkage to oil indices will de-link its own supply and demand fundamentals to gas prices. The construction of LNG terminals will facilitate the export of the gas to markets in Asia, priced at >$10/mmBtu. See the author’s earlier article on a trading hub in Asia. The consequential development of any protocol post 2015 will have a bearing on the relative emissions advantage of natural gas to its substitutes, fuel oil and coal.
1 – Other study reports highlight shale gas emissions (including the higher GWP of methane) to be much higher. This remains a subject of debate.
2 – This estimate figure varies greatly among different well and reports – $2-$6 per mmBtu.
3 – This is progressing at a fast pace worldwide, but still faces obstacles – for example the recent aborted Hess Fall River project.