Energy industry analysts are predicting a global shale gas boom that could turn the cleaner-burning fossil fuel into the oil supply of the coming century. They are watching the gas industry undergo a global transformation that is starting to reshape the geopolitics of energy supply all over the world.
A dozen major natural gas pipelines that are either under construction or in the planning phases will link suppliers and markets in Europe, Africa and Central Asia, in anticipation of large new supplies of shale gas in need of transport to energy markets.
Confirmation that these analysts are reading the tea leaves properly comes in part from the recent behavior of the big oil and gas companies and oil field suppliers — Exxon, Shell, Schlumberger — which were initially slow to recognize the potential of the shale gas business. Now they’re paying top prices to take over bold, pioneering firms and staking claims throughout Europe and Asia.
It’s another fossil fuel boom in the making, but although cleaner-burning than coal, shale gas still poses a severe threat to environmental security. The drilling method that frees the gas requires the use of a cocktail of toxic chemicals that many fear could contaminate underground sources of drinking water that supply millions of people.
Concern over the drilling method called hydraulic fracturing (“fracking” for short) is most advanced in the U.S. Last week, the New York State Legislature imposed a moratorium on drilling in the gas-rich deposits of the Marcellus shale, also a source of drinking water for residents of New York City. In Washington D.C., Congress is conducting an inquiry into the fluid mix the industry uses in the process. Each company uses its own formula, and up to now they have opted to keep the specific chemicals used secret.
Paradox of Higher Prices
Still, it has been the rapid expansion of shale gas drilling in the U.S. that has created an oversupply and depressed natural gas prices not only at home, but globally. Analysts predict that if any of a host of proposed federal regulations is imposed, the cost of shale gas would rise, which would paradoxically provide an incentive for increased drilling.
“The most severe of the proposed regulations, which have to do with the monitoring of each well, are the most costly and are probably unlikely to happen,” Sebastian Brinkmann, a research analyst with MSCI told SolveClimate News. “But there definitely has to be a coming together where these companies will have to be more transparent.”
Fracking entails injecting water and a cocktail of chemicals into the gas-bearing shale at high force to bust open the rock. The fluid mix is extracted and then dumped into lined pits above ground, where producers are responsible for treating and managing it, but in some cases that water has contaminated soil and groundwater. Poorly lined wells have also resulted, in some areas, in natural gas and fracking chemicals getting into water supplies.
According to Brinkmann, what is most likely to happen is a tightening up of the regulations around the treatment of the process water.
“What that could do is reduce the potential of some reserves,” Brinkmann said. “For more marginal reserves, it would make it uneconomic to produce from those wells.”
While the fracking debate has become a stumbling block for the shale gas industry in the United States, a source within the Department of Energy with access to policy discussion, who asked to remain anonymous, echoed analysts’ predictions and said shale gas will unavoidably be a major part of U.S. domestic energy policy moving forward. The United States is not going to exempt itself from leading the development of the next big hydrocarbon market, the source said.
Brinkmann also said that in addition to being able to export technology and expertise to countries getting into the shale gas business, American companies could even end up exporting the gas itself.
Low-Emissions for China and India
China and India are both pursuing shale gas development, as it could provide an abundant and cleaner source of energy for economic development.
“If the world is going to set targets to reduce emissions, natural gas will play a big role in that, especially in the move away from coal,” Brinkmann said. “That will be true in countries like China and India as well.”
It remains to be seen what sorts of shale gas reserves exist in those countries, but the Chinese government hasn’t let that stop it from announcing ambitious shale gas development goals.
Last November, President Barack Obama and President Hu Jintao of China announced a US-China Shale Gas Resource Initiative aimed at promoting “environmentally sustainable development of shale gas resources.” In July, the state-owned China National Petroleum Corporation announced that it aims to produce 500 million cubic meters of shale gas by 2015. Conoco Philips, Royal Dutch Shell, and BP are all working with China’s state-owned oil and gas companies to explore for shale gas there.
Many of these big international oil and gas companies, including U.S. companies such as Exxon and Chevron, were late to the shale gas game themselves, and are now playing catch-up by getting in on the early stages of shale gas development in other countries, and by partnering with the smaller, independent companies that pioneered the uses of hydraulic fracturing and horizontal drilling. The drilling technology was seen as risky at first, and the economics weren’t yet proven, so it was the independent companies—notably Chesapeake, Range Resources, and Devon Energy—that pioneered the practice.
India is so far lagging behind in the development of its shale gas industry, but is trying to catch up quickly. Like China before it, India is pursuing a partnership with the US Department of Energy to jointly develop shale gas reserves. In July, Reliance Industries, India’s largest private company, acquired a 40-percent stake in Atlas Energy’s leasehold in a shale gas field in Texas.
The End of Russia’s Energy Monopoly?
Europe is further along in its exploration than China and India, with Poland and Bulgaria actively and publicly exploring for shale gas, and Russia watching them closely. Chevron has applied for a permit to explore for natural gas in shale deposits in northeastern Bulgaria.
Russia’s Gazprom supplies most of Western Europe with natural gas. But according to oil and gas consultants Wood McKenzie, there could be as much as 48 trillion cubic feet of shale gas in Poland, which would make it home to the largest shale gas reserve in Europe. Were the country to tap into that reserve, it would not only eliminate its dependence on Russia, but become a major competitor in the European natural gas market.
According to a DeutscheBank research note published earlier this month, Europe is dreaming of a new “gas wonderland” as a result of the recent viability of shale gas and the discovery that reserves likely exist in many European countries.
“In fact production could actually begin in two years in northern Germany (e.g. Lower Saxony), southern Sweden or Poland,” authors Josef Auer and Thu-Lan Nguyen wrote. “However, the muted trend in prices as a result of the gas glut is currently putting a damper on development, so that significant output is not to be expected for a decade.”
By that time US technological advances may have caught up with environmental concerns, but nonetheless the Deutschebank analysts expect European citizens to put up some opposition to the drilling.
“Europe does have an advantage on America in that it already possesses quite a close-knit natural gas grid facilitating feed-in of the widely dispersed deposits,” Auer and Nguyen write. “But owing to Europe’s higher population density, environmental concerns such as potential hazards to groundwater and drinking water argue at first sight against excessive usage.”
European land ownership patterns may also pose a problem, according to Adam Sieminski, chief energy economist for DeutscheBank.
“The problems in Europe associated with developing shale gas will have more to do with resource ownership,” Sieminski told SolveClimate News.
“The way it got done in the U.S. was through the independents—Chesapeake, Devon, Range—they pioneered this and they started in Texas, which is fairly friendly to oil and gas development, and where surface owners tend to own mineral rights.
“Similarly, in Pennsylvania, one of the reasons it got going so fast in the Marcellus is that landowners are getting paid a lot of money for land leases and royalties on production. In Europe, it’s common for the state to own mineral rights and so surface owners might oppose development.”
Convergence of Global Natural Gas Markets
Nonetheless, Sieminski said the prospects look good for there to be major stores of shale gas all over the world, and all of the industry analysts expect an ongoing boom. The international boom is likely to cause a shift in natural gas prices. Currently, prices are governed by the local context. In the United States they’re low at the moment because more and more natural gas is being produced thanks to the new viability of shale gas. If the rest of the world starts to produce and use shale gas, there could be a convergence of natural gas markets.
Sieminski said it’s still too early to tell exactly what will happen.
“The shale gas boom is already keeping natural gas prices low in U.S.,” he said. “So the question is, will U.S. prices seep out into rest of world because we’re not using as much LNG [Liquid Natural Gas] and there’s a lot of LNG available? And could shale gas be developed in Europe for less than what, say, Gazprom is selling LNG for there? Those are the questions we’ll see answered over the coming years.”