House of Lords - The Economic Impact on UK Energy Policy of Shale Gas and Oil

The Economic Impact on UK Energy Policy of Shale Gas and Oil - Economic Affairs Committee Contents

Chapter 3: The US shale gas revolution and its global economic impact

Development of shale

29. Over the last five years total gas production in the US has grown by 25%[44] and oil production by 60%—an increase in absolute terms of 3 million barrels per day. This amounts, in Professor Dan Yergin's words, to "more than the output of 9 of the 12 OPEC nations".[45]

FIGURE 4

Domestic Production of Shale Gas in the US

Shale gas production (dry) billion cubic feet per day (LCI Energy Insight gross withdrawal estimates as of January 2013)

Source: U.S. Energy Information Administration (March 2013)

30. Increased US output is thanks to hydraulic fracturing technology which has made possible the production of both shale gas and tight oil (oil trapped in shale rocks). As a result, US oil production is now at its highest level since 1989[46] and shale gas constituted 35 per cent of total US gas production in 2012.[47] These trends seem likely to continue: the US Energy Information Administration has estimated that shale gas will account for 50 per cent of total US gas production by 2040.[48] It also estimated last year that the United States would be the world's top producer of petroleum and natural gas hydrocarbons in 2013, surpassing Russia and Saudi Arabia.[49] According to the latest BP Energy Outlook, North America (the US, Canada and Mexico) is expected to switch from being a net importer of energy to a net exporter in 2018.[50]

FIGURE 5

Shale gas leads growth in total gas production through 2040

Source: U.S. Energy Information Administration (March 2013)

FIGURE 6

Map of US shale gas activity

Source: U.S. Energy Information Administration (May 2011)

31. Development of US shale reserves has been building over the last three decades from a very low base, as Professor Paul Stevens[51] and EDF[52] told us, with a strong acceleration after 2008. The rapid expansion of the last few years has been helped by the well established infrastructure network into which both shale gas and tight oil supplies can easily be absorbed, by an experienced and flexible oilfield service sector and by the incentives provided by a legal structure within which landowners benefit directly from development. Professor Alan Riley told us that "the land owners own the subsoil rights. That creates substantial incentives to develop. There is also a regulatory industry that is very familiar with all the technology … that gives the US immense advantages."[53]

32. Growth in production in recent years has come from use of horizontal drilling—a technology originally developed within the oil industry.[54] In 2012 for example the US completed over 45,000 oil and gas wells.[55] Of those, more than 4,000 were shale oil wells.[56] Across the rest of the world, excluding Canada, only 3,921 oil and gas wells (both conventional and unconventional) were drilled.

33. Operators can produce commercially-prized oil and natural gas liquids (NGLs) associated with shale gas. Although the scale and speed of shale gas development led to a period of oversupply by 2011/12, with prices falling as low as $2 per million British thermal units (MMBtu),[57] and some wells were temporarily shut, overall development of the shale industry continued because of the value of the associated products. The Economist reported in November 2013 that gas exploration in the US was "increasingly being determined by the prices of oil and natural gas liquids. If they are high enough, energy firms will drill for these, treating natural gas as a by-product".[58]

34. Dr Chris Wright, one of the US's leading shale gas entrepreneurs, confirmed that the development of the industry had been led by smaller companies: "There were no big oil companies involved at all in the development of shale gas … It is not a game for big companies. Every rock is different; every rock you have to innovate".[59] High capital costs involved in drilling multiple wells have however led to a subsequent process of consolidation with larger oil and gas companies entering the market once shale gas resources are confirmed and investment becomes less risky, as EDF noted.[60]

35. Shale development has transformed energy supply in the US. It is now forecast that North America (including Canada and Mexico) will be more than self sufficient in energy within a decade.

US gas prices and industrial investment

36. US natural gas prices have fallen and have only recently begun to stabilise at a level less than the price prevailing a decade ago.

FIGURE 7

US Natural Gas Prices

Source: www.bp.com

37. Abundant low cost supplies of natural gas have encouraged substitution, particularly in the power sector where gas has displaced large amounts of coal, and pre-empted any renaissance of the US nuclear sector, as Mr Thierry Bros of Société Générale told us.[61] Falling energy prices are encouraging the repatriation (or "reshoring") of energy intensive businesses including petrochemicals. Mr Tom Crotty of INEOS said "There has been no new investment in the petrochemical industry in the United States for 25 years. There are now 11 major facilities under construction and another seven in the planning phase."[62] European firms are also reported to be moving production to the US.

38. According to Dr Howard Rogers of the Oxford Institute for Energy Studies, "what has rejuvenated the petrochemical industry in the US is not so much the natural gas … but the co-production of ethane, propane, butane and the higher alkanes, which are the traditional feedstock components for petrochemicals".[63] In Dr Wright's view, "the energy-cost advantage of the US [as a result of shale gas development] over China more than offsets the labour cost disadvantage in energy-intensive manufacturing."[64] Professor Riley told us that, with US gas prices at about $3.50 MMBtu against prices of $10 to $12 in Europe, the competitive advantage of the US in energy intensive sectors is now very significant.[65]

39. Shale gas and associated "tight" oil developments have contributed to the revival of the US economy after the financial crisis of 2008, providing employment and a material benefit to the balance of payments. According to an IHS report, by 2012 in the US, the unconventional oil and gas sector and energy-related chemicals activity was supporting 2.1 million extra jobs and had added $284 billion to US GDP.[66]

Global impact of the US shale gas revolution

40. The US shale revolution is also beginning to have a significant impact on global energy markets. Before 2008 the US was expected to be importing significant volumes of natural gas in the form of LNG. This gas has now been diverted to other importers in Asia and in Europe, with added supplies creating an element of gas to gas competition. With coal prices within the US reduced through competition with low-cost gas, US coal exports have increased over recent years, not least to Europe. The result has been increased coal use for electricity generation. For example, US exports of coal to the UK increased from 6.8 million short tons in 2011 to 12 million short tons in 2012;[67] coal's share of electricity generation in the UK rose from 30 per cent in to 39 per cent over the same period.[68]

41. The global impact is expected to be greater as the US and Canada open their markets and permit gas exports. By February 2014 thirteen proposals for LNG export terminals had been submitted and 36 applications to export domestically-produced LNG had been made to the US Department of Energy, of which 32 have been approved.[69] Mr Dan Dorner of the International Energy Agency (IEA) reported approval of a number of LNG export facilities and licences "and we are expecting more significant volumes to come forth towards the end of this decade."[70] He said the IEA have estimated that the US will be a net exporter of 50 billion cubic metres per year by 2045.[71] According to Société Générale, although "a wide variety of authorisations are needed before a liquefaction facility can be built in the US",[72] LNG exports are likely to begin as early as 2016 and the US and Canada could be exporting 67 billion cubic metres a year by the 2020s.[73]

42. In the short term US gas exports are likely to flow to Asia[74] where prices have been strong as a result of the cut back in the Japanese nuclear supply following the Fukushima disaster in 2011.[75] The gas market remains regional but is linked by the trade in LNG; falls in prices in any region are likely to affect supply and prices across the world.

43. It is not yet clear just what the long-term impact of the US shale revolution will be on global energy markets. The impact on global prices is not expected to as dramatic as in the US. Mr Dorner said

"before 2008 the regional differentials between North America, Europe and Asia were relatively close when it came to gas prices. From 2008-09 onwards, the differential really expanded very rapidly as US gas prices stayed very, very low, while European prices, and even more so Japanese prices, increased … shale gas and the significant forthcoming quantities of shale gas in the US have made a really big difference … it is becoming a little bit more of a buyer's market when it comes to gas."[76]

In Professor Helm's view

"The transmission mechanisms from US shale gas to world markets are many, varied, quite complicated, and typically poorly understood, so the impact of US shale gas on world gas prices is, and is likely to remain, very limited. Even if the US develops all the LNG projects that are currently in the pipeline, they are not enough to make much difference to the world price. If anyone thinks that US shale gas is about to reduce UK gas prices, the answer is that it is very unlikely."[77]

Professor Riley's view was that gas imported from the US would probably come into the UK or European markets "at around what we pay at the moment".[78]

Climate change and the environment

44. One important effect of shale gas development in the US has been to reduce greenhouse gas emissions by displacing coal. US emissions of carbon dioxide are now back to their 1994 levels,[79] even if a part of this gain is offset as low prices encourage other countries to use more coal.[80]

45. Shale gas development has at times been controversial. There have been high profile campaigns against specific drilling plans and against hydraulic fracking itself. Local concerns remain and in some areas fracking has been effectively halted. But the impact of anti-fracking campaigns has been limited and has not prevented rapid development of the industry across the US.

Shale gas and oil outside the US

46. The shale gas revolution which began in the United States is likely to spread throughout the world:

FIGURE 8

Map of Worldwide Basins

Source: U.S. Energy Information Administration (June 2013)

47. Few countries have the readily available services or infrastructure of the United States. Technology, however, continues to advance, making widespread development more likely. Professor Muller said "A belief by the experts in the United States is that the efficiency of fracking is going to double in the next few years and in the next 10 years will double again."[81] As Mr Graeme Smith of Shell told us "The technology is developing very rapidly … we are trying to reduce the amount of chemicals that are used and just use pure water for fracks, or indeed no water."[82]

48. Dr Wright saw Canada as the second major source of shale gas supplies, with other countries likely to follow: "Canada will become a massive shale gas producer … China is certainly going at it hard … Argentina and Russia have tremendous quality shale rocks … Tunisia, Algeria, Turkey, Colombia, the United Kingdom and several others have what look to be very promising rocks".[83] Professor Helm agreed that shale gas development would spread beyond the US:

"We cannot know in advance in any detail what these resources are like until we have done some drilling. Argentina … Russia … Ukraine … Algeria … Saudi [Arabia. [It would be] … a complete illusion to think that in the medium term this is a US phenomenon … The Algerian deposits look to be enormous."[84]

49. For many countries development of shale gas and tight oil offers the prospect of reducing import dependence and providing jobs, although few will be able to match the US scale of operation. The International Energy Agency have forecast that shale gas will provide around 15 per cent of global gas production by 2030, including supplies from Australia, China and Argentina as well as from the US.[85] Global production of tight oil is also expected to grow, led by the United States where the estimate of resources in place was raised last year from 35 to 58 billion barrels.[86]

50. Shale gas could have a profound impact on the strategic balance of energy trade, with possible geopolitical consequences: Professor Riley told us that "some 80% of all the oil and gas in the planet is in OPEC and Russia, and 10% in OECD counties and China … the shale gas revolution potentially implodes that ratio and changes the geo-strategic energy balance of the planet."[87]

51. The US shale gas revolution has already had far-reaching effects but the full impact on world energy markets has yet to be seen:

· low US gas prices have displaced US coal to other markets and as a result, coal consumption in both Germany and the UK has risen in the last two years;

· reduced import requirements have diverted gas from the US and have limited price increases in the international market;

· US exports of natural gas are likely to have a greater effect on the patterns of global trade; so too, in the longer term, would the development of large volumes of shale gas in other countries;

· if developed at scale internationally, shale gas and shale oil could alter the balance of the international energy market as a whole and undermine the dominant role of energy exporters in the Middle East and Russia, as the pattern of production and trade in oil and gas is redrawn.

44 Q96. Back

45 See http://theenergycollective.com/jessejenkins/344901/daniel-yergin-looking-back-and-forward-big-trends-energy for Dan Yergin's speech to the 2014 MIT Energy Conference on 21 February. Back

46 US Energy Information Administration (2014) This Week in Petroleum, 12 March. Back

47 See http://www.eia.gov/dnav/ng/ng_prod_sum_dcu_NUS_a.htm for US natural gas production figures. Back

48 US Energy Information Administration (2013) Annual Energy Outlook 2013. Back

49 US Energy Information Administration (2013) 'US expected to be largest producer of petroleum and natural gas hydrocarbons in 2013', 4 October. Back

50 BP (2014) BP Energy Outlook 2035, January 2014. Back

51 Professor Paul Stevens. Back

52 EDF. Back

53 Q 1. Back

54 Wang,Z. and Krupnick, A. (2013) 'A Retrospective Review of Shale Gas Development in the United States', Resources for the Future, RFF DP 13-12. Back

55 Maugeri, L. (2013) The Shale Oil Boom: A US Phenomenon, Belfer Centre for Science and International Affairs, Harvard Kennedy School. Back