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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.

13 comments

1 Jeffrey Conopask { 10.14.09 at 10:16 am }

Great stuff DH. My observations precisely for a year or so. Combine this with elements of the Picken’s plan for converting trucks to CNG, etc. and you have the beginnings of a rational energy policy…and God forbid, a real economic stimulus plan for immediate job creation. Now about that political class…how do we re-educate them about markets…

2 Steve C. { 10.14.09 at 10:57 am }

It’s funny, LNG always seems to be the next big thing. Always. It just never made any sense to me for the US.

Here’s a shale gas question. I live in Dallas/Ft. Worth and while I am more than encouraged by developments in the Barnett Shale, recently criticisms have been popping up about the impact of fracturing etc. on the stability of local geology. Even the newspapers (which have largely been pro shale exploitation) are featuring “stories” about how development is upsetting things. Have there been any studies on how fracturing impacts local geological conditions?

3 TheLastMan { 10.14.09 at 11:53 am }

Interesting slide show here…
http://www.321energy.com/editorials/simmons/simmons100409/simmons100409.html#

Less optimistic about shale gas, and confirms my friend’s view that we are already past peak oil production. I am thinking about buying some oil futures!

4 Donald Hertzmark { 10.14.09 at 4:59 pm }

Jeff,
Thanks, good to hear from you again.

Steve, there are not yet any definitive studies about local geological impacts, production has not been going on for long enough, though there is no strong evidence that problems have arisen as a result of fraccing technology.

TLM, wish I could share your pessimism, but I think that if you look at the real (2009) costs of finding and developing oil in the 1920s and 1930s, you will find that the cost of adding 1 mmbtu of liquid fuel to the US economy was about the same then as it is now, probably more, owing to improved current efficiency of use. Until that figure changes, and there is no sign that it will soon, liquid fuels are not becoming more scarce than previously. Just as an aside, estimates of total unconventional gas resources for North America (cited in the second post) run north of 3.8 x 10^15 cu ft, many centuries of gas use at even higher levels than today’s.

5 TheLastMan { 10.15.09 at 5:26 am }

Donald,
I am not in the energy field, just an interested observer – so bow to your superior knowledge. I also tend to be swayed by the last piece I read – just like most of the ignorant general public!

However I talk regularly with a oil engineer friend who’s job it is to trouble-shoot oil production and exploration problems all round the world. Recently he has spent most time in places such as Algeria, Norway and the Gulf.

He has commented that in his opinion ‘peak oil’ production was 2005. He says the problem is not just one of cost, but of a degradation in the quality of the wells and fields currently in production, and the huge engineering problems of extracting oil from the difficult and/or sensitive environments it is now being found in. He also says that countries such as Saudi Arabia and Venezuela just plain lie about their remaining reserves.

He says that, regardless of the price of oil, the rate at which new reserves can be brought into production is constrained by the time needed to solve the engineering issues rather than the extra cost. It is simply not that quick and easy to locate a wellhead at the bottom of 500m of water. All of the offshore production facilities he deals with are now not on rigs but sitting on the sea floor.

The main problem with existing wells is the increasing amounts of water coming up with the oil slowing down production and reducing yields.

In his scenario the down-slope from peak oil will probably be more gradual than the worst scenarios predict – but that new oil supplies will not come on stream quickly enough to meet the increasing demand for energy, particularly in places like China and India. As a result oil prices will be driven higher to the extent that alternative energy sources (including unconventional gas) will become more economic and oil will be relegated to use in materials production (plastics etc) and will simply be too expensive to burn in the quantities it is now.

Maybe I should get him to write a piece for the blog. He is not an academic, but his experiences make for entertaining conversation!

6 Donald Hertzmark { 10.15.09 at 8:56 am }

M. le dernier homme,
You raise a number of good points on the specifics of increasing output from offshore production units. There is no question but that production from older onshore fields has declined greatly. Our point is not that there will be no declines anywhere, but that there is a continuum of hydrocarbon resources, going from Titusville to Ghawar to the sub-salt of Brazil, and on to tar sands, shales, heavy oils and other resources that is greater than the conventional oil thus far removed and used.

In the case of shale gas it is probably not the case that this one resource is the end-all of future fuel use, no one hydrocarbon resource (or any other energy resource, for that matter) is. The point, rather, is that allowing resource investments to operate in a market setting will permit cost-effective production of the gas, restraining the baser motives of some major gas producers.

What we seek to avoid is a premature declaration of defeat, one that could (and already has in some countries) justify all manner of resource-devouring crash energy technology schemes. These schemes consume investment that could have gone into more cost effective evolutionary production technologies along the hydrocarbon resource continuum.

If the power plant can use gas and the planes get their kerosine, then does it matter whether the source is Qatari LNG or tight sands gas? Do we really need only Bonny Light to produce jet fuel?

As to your petroleum engineer friend, by all means encourage him to comment at our blog, that is how most new contributors have been identified.

7 Mark Bahner { 10.15.09 at 11:17 am }

Hi,

TheLastMan, regarding a presentation by Matthew Simmons, writes, “Less optimistic about shale gas, and confirms my friend’s view that we are already past peak oil production. I am thinking about buying some oil futures!”

If your decision to purchase is based on the predictions of Matthew Simmons, you should be aware that he is about to (barring something like nuclear war in the Middle East) lose spectacularly in a bet with John Tierney and Rita Simon (Julian ?Simon’s widow):

http://en.wikipedia.org/wiki/Simmons-Tierney_bet

Of course, one (spectacularly) wrong prediction shouldn’t invalidate a person’s future predictions. But still…oil is going to average nowhere near $200 a barrel in 2010. (Again, barring something like nuclear war in the Middle East.)

8 TheLastMan { 10.15.09 at 11:46 am }

Donald, you have very clearly expounded the ‘mission statement’ for this blog, thanks. I too worry about Government interference in this area. Trying to second guess the energy markets will more likely than not lead to disastrous economic and environmental decisions.

About the only rational way they can get involved is through moderate differential taxation. If they are really worried about the use of coal or oil, just gently tweak taxation in favour of gas and renewables over time and let the free market do the rest. In the UK we have taxed vehicle fuel increasingly over many years – but a gradual lift, nothing sudden. This has given the free market enough time to deliver cars like my VW Touran Diesel, which averages 40mpg around town and 55mpg on the open road. Even better if I am light on the gas pedal. As far as I can tell it has not disadvantaged us in any way. I have read that European and US car drivers spend approximately the same on fuel per mile, it is just that in Europe we buy less fuel for more money. What is more, because most of the price is tax, the price is much less volatile.

I look forward to reading future contributions.

9 Mark Bahner { 10.15.09 at 4:09 pm }

“This has given the free market enough time to deliver cars like my VW Touran Diesel, which averages 40mpg around town and 55mpg on the open road. Even better if I am light on the gas pedal. As far as I can tell it has not disadvantaged us in any way.”

There are two problems with diesel versus gasoline:

1) The soot emissions from diesel are carcinogenic, though this problem has been greatly reduced with the very newest diesels that have full particulate filters,

2) The soot (black carbon) from diesels is potentially a strong global warming agent; it could even be argued that (prior to the latest models with the full particulate filters) diesels were no better than gasoline vehicles from a global warming standpoint. That is, it could be argued that, prior to the latest particulate filters, the black carbon emissions from diesels almost completely negated their lower CO2 emissions.

http://www.germancarblog.com/2005/11/vw-touran-19-tdi-now-with-diesel.html

http://www.policyinnovations.org/ideas/innovations/data/000084

10 TheLastMan { 10.16.09 at 4:29 am }

Yes, diesels used to be dirty, carcinogenic, asthma inducing horrors – most of the cargo trucks on our streets still are! VW have very efficient particulate filters in their car exhausts now (stringent German emissions regulation). Up until the last fuel price crunch I would never have considered a car with a “tractor engine”, but they are a lot more refined than they used to be.

Very low consumption petrol engines are now being introduced too and petrol / electric hybrids are coming down in price. Strangely this is happening despite the recent fall in fuel prices. I think many of us were seriously shocked by the jump in prices in 2007/8 and those of us with “gas guzzlers” were caught out big time, and don’t want to be caught out again. The sales of expensive SUVs, luxury sedans and sports cars have slumped.

Before we bought the Touran our previous car was a turbo-charged petrol engined “sports” station wagon which averaged about 27mpg – compared to the VW which averages about 45mpg overall. We do over 20,000 miles a year, so with petrol at £4.80 a gallon ($7.80) our fuel bill is down from around £3,600 ( $5,760) a year to £2,200 ($3,520), a saving of £1,400 ($2,240). That is enough to cover my annual heating bill! The VW is a nicer car too, and what is more it was cheaper.

I think the thing that will end the “oil age” is volatility in its price rather than the absolute level. People will want stable energy prices and may be prepared to pay a bit more up front for some certainty (a bit like buying futures). Any ideas how that could be achieved? I see a blog article from somebody there.

BTW, excellent informative second item on the shale gas situation. I like the high frequency of the articles, the very high information content and lack of biased comment. “Just the facts ma’am…”

Sorry, I don’t mean to clog up your blog with this trivia. I will shut up now…

11 db { 10.23.09 at 6:04 pm }

This is a great post. I worked for one of the supermajors and as far as I can see we are going to have a complicated time as oil prices go up while natural gas prices go down. In the short and medium term there might be a hard recession (ha) but in the medium to long term I see any potential reduction in oil supplies being partway mitigated by the shale gas. It all comes down to economic substitution. The horror stories extrapolated from “peak oil” are so much hocus. There are substitutes (admittedly expensive) for most things oil does:
Long distance ocean freight? Nat Gas or Nuclear
Air travel? Nat Gas or Coal to Liquids
Medium duty trucking (up to 100 miles): Electric medium duty trucks and CNG Trucks.
Light duty logistics (up to 100 miles): Electric light duty trucks and CNG Trucks.
Heavy duty trucks? CNG and Gas to Liquids
Long distance trucking without trucks? Electric rail freight or Nat Gas freight

While oil production may peak and decline, there is plenty of energy out there, it’s an infrastructure problem more than anything.

12 Cooler Heads Digest, 16 October 2009 | GlobalWarming.org { 10.28.09 at 10:19 am }

[...] The Global Gas Shale Revolution Donald Hertzmark, MasterResource.org, 14 October 2009 [...]

13 Kim { 12.18.09 at 1:20 pm }

Hi…….can u tell me if excess imports causes a downward pressure on price?. IS this a possibility?. Cause I read that ample imports to UK caused a glut therefore pushing price downwards. SO my main question is “CAN EXCESS IMPORTS ALSO CAUSE A DOWNWARD PRESSURE ON PRICE”

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