The Global Shale Gas Revolution (Dear Renewables: Meet the New Competition for Power Generation)
Editor’s note: This article is the first of two posts on shale gas production and concerns the U.S. situation. The second will look at the potential impacts of shale gas production in Europe and China. While some have interpreted shale gas in terms of coal displacement in power generation, this new competition has profound (negative) implications for the viability of politically favored renewables in power generation.
Shale gas formations have been known for many years. But only in the 1990s did an understanding of hydraulic fracturing technology make production of gas from such formations feasible technically. And it was not until the middle of this decade, with U.S. domestic gas prices consistently above $10/mmbtu, that shale moved from an interesting future resource to a major current reserve.
The U.S. Department of Energy now estimates that recoverable shale gas resources in the U.S. total more than 550 tcf, with conversion of resources to reserves occurring at a rate of more than 1 tcf/year, above production. The production of shale gas and the increasingly economic production processes have reversed the historic decline of U.S. gas reserves, which stood at 293 tcf in 1968 and fell to 164 tcf in 1998. Dry gas reserve estimates for the U.S. as of December 31, 2007, stood at 237 tcf. Production has moved in a similar fashion (with a small lag), peaking in 1973 at 21.7 tcf, then falling to a plateau of about 17–19 tcf throughout the next three decades, until shale changed the domestic U.S. gas supply picture.
What Has the Shale Bonanza Meant for the U.S.?
Large-scale commercial production of natural gas from shales commenced only in the middle of this decade, becoming significant as a proportion of supply only in the last couple of years. In 2005, U.S. gas production stood at just over 18 tcf. In 2008, domestic production had risen to 20.6 tcf, reversing more than a decade of decline, and closing in on the 1973 peak production figure.
‘LNG to the rescue’: Conventional thinking in mid-decade was that only large-scale imports of liquefied natural gas (LNG) could meet the demands of the U.S. gas market. With prices tracking oil closely, the U.S. seemed the ideal target market for gas produced and liquefied in the Gulf, the European Arctic region, and off NW Australia. Along with rapidly rising demand from China, the producers of LNG could count on the two strongest economies in the world to support their gas exploitation plans. (And at attractive prices! Where else are you going to go for the gas?)
LNG is foiled by Mr. Market: LNG was considered so important for the U.S. energy supply picture that even the Maestro, Alan Greenspan, made specific mention of the importance of new LNG import and regasification capacity for the U.S. economy. Greenspan noted in 2003 that larger LNG import volumes would be likely to reduce the volatility of natural gas prices in the U.S. Before much new LNG import and regasification capacity could be built, however, natural gas prices soared, reaching $10/mmbtu at the wellhead in 2005 and again in 2008. LNG prices have proved less volatile, though generally they exceed domestic wellhead prices by more than 15%. In recent months, LNG has exacted a premium of more than 30% on domestic production. Increased domestic production of gas, much of it from shale, abetted by falling industrial demand in 2009, has tempered the price trends in the domestic U.S. market. Imports of LNG, rising through this decade, fell off in 2008 as growing domestic production opened up a significant pricing gap between LNG and domestic output. LNG comprised just above 1.5% of domestic gas supply in 2008, after rising as high as 3.5% earlier in the decade.
Reversal of Fortune: The U.S. DOE now projects that LNG imports will remain low throughout the next two decades, unlikely to account for even 5% of supply in the future. Shale formation gas production is expected to rise from 1.2 tcf in 2007 to more than 4–4.5 tcf by 2030, and will comprise more than 20% of total U.S. gas supply by then. Only California, aided by a group of politicians dedicated to fighting energy production and market forces, is likely to see increasing reliance on imported gas (through Mexico—none of those nasty regasification terminals for us!). Elsewhere along the U.S.-Mexico border the DOE expects increasing exports of U.S. gas to Mexico. In fact, the decline in Canadian conventional gas production raises the spectre of the U.S. becoming a net gas exporter by 2030 (table A13).
Hugo, Maybe Uncle Sam is Just Not That Into You
An article of unshakeable faith among many who look at energy security issues is that affirmative national policies are required to reduce U.S. dependence on the various global psychopaths bearing hydrocarbons. One has only to think of Hugo Chavez’s Venezuela, still a major U.S. supplier; the House of Saud, which now wants to be compensated if global oil demand falls (perhaps the U.S. Treasury can cut checks directly to al Qaeda, cutting out administrative costs and overhead in the Kingdom); and of course the Iranian poster boy for global energy supply nightmares, Ahmadinejad. A sense of unease comes naturally to most of us.
Added to the usual litany of supply-side nightmares—mostly about efforts to destroy the Abqaic processing and transfer station in Saudi Arabia and the vulnerability of crude oil and LNG shipping in the Strait of Hormuz—is the looming Chinese “threat” to world oil supplies. As the story is told, China, needing vast amounts of new energy to fuel its industrial machine, will go anywhere, pay any price, in the pursuit of energy supplies. Many of China’s recent forays have supported such thinking. With nary a concern about dictatorship, genocide, or rule of law, China has waded into the Sudan, Burma, and central Asia in search of oil and gas supplies.
Let me see if I have this right. In order to compete with China in locking up future hydrocarbon supplies, the U.S. has to be just as amoral, pay as much in bribes, and overlook the same transgressions for—the right to degrade our moral capital even more in the future? Surely, once there is even more intense competition between the U.S. and China for oil and gas resources, the price extracted by the beneficiaries of the oil curse will rise.
But if the U.S. is to be able to honor its history and ideals, then we had better take another look at our preferences for cutting deals with the world’s bad boys in order to keep the oil and gas flowing. Increased domestic supply financed by willing investors greatly improves our ability to resist the siren song of accommodation with the Hugos and Bashirs of the world, and teaches us a lesson, if we are willing to learn it.
U.S. Shale Gas: How to Do Things Right
The gas supply revolution provides a textbook example of how freeing up markets can help the U.S. pull back from the precipice of a series of uncomfortable and cynical foreign economic policy choices. Using our strengths in petroleum geology, engineering, and computer assisted simulation (a practical economic example of the military’s OODA loop), U.S. gas companies were able to see, assess, decide, and invest at a speed that has not only revolutionized domestic gas markets, but promises also to accomplish the same for the world.
With gas firmly ensconced as a reliable, economic source of clean energy for 100 years or more, the U.S. has a chance to develop the longer-term sources—clean coal, renewables, nuclear, oil shale, or other options—in a measured and efficient manner that does not hide the costs and benefits behind a screen of opaque governmental accounting methods. There is no pressing need for crash projects in renewables, which are, in any event, ineffective from the standpoint of both the energy supply and environmental concerns.
Still, there are those, especially in the U.S. political class, who see functioning energy markets and their supply-side results as a threat to state-directed energy programs. One has only to look at the nature of the increasing volume of noise on shale gas, domestic oil and gas drilling, offshore drilling, clean coal, shale oil and nuclear to understand that this debate is only partially about energy supply and the environment. The rest is about political power and the ability of those with that power to allocate the nation’s productive energy resources where they wish.