The American Shale story is a myth. Well, maybe a myth is strong, but the story of Shale in the US is certainly not what it seems.
For one, this was never anything new. Fracking, or hydraulic fracturing, is over 60 years old in the United States and has occurred in over 1 million conventional Oil & Gas wells during that time. It’s not just the US though. In fact the UK has been hydraulically fracturing for over 30 years as well, including in areas of outstanding natural beauty, with barely a squeak of publicity until documentaries like “Gasland” in the US.
Next, the “discovery” that Shale contains large quantities of oil & gas isn’t new either. In fact it’s been known for a very long time but what is new is figuring out how to get it out of the ground commercially. I repeat: commercially.
So what? Why does this matter and why does this make the US Shale story “a myth”.
Firstly Shale gas is a loss making enterprise. In fact, the only money that is profitable in the vast majority of US Shale plays is where they are after Oil. Not gas. The write downs by Shell and BHP Billiton on their Shale concessions in 2013 were just the start of what’s coming, but the sale of prime real estate by Chesapeake energy to avoid liquidation is one of the best pieces of evidence that the gas these companies are extracting is a loss making endeavour.
The next issue is that Shale gas is already requiring more land rigs than the rest of the world’s rotary rig fleet combined simply to cover the US declines in conventional gas production and this is the real story: US gas fields are ageing with no obvious replacements while demand from domestic consumers and industry is growing. Furthermore the pace of decline is rapid and only the staggering level of capital investment in Shale extraction in the US will delay this process.
The US Shale “phenomenon” in short has been driven by two critical and correlating factors – large domestic demand for energy and a lack of significant import or export capability for natural gas. The lack of a natural gas market of the scale and interconnectivity of the Oil market is a key element in this, reducing the natural market forces which would have made the notion of US gas prices below $4 per MMBtu against over $12 per MMBtu in Japan, unfathomable.
In short, forget US “Energy independence”, the US will be importing again in less than 10 years and countries like Iran, Iraq, Nigeria and Mozambique are part of the reason why.
Conventional natural gas is actually very cheap in many places in the world, in part as it has no natural market in many economies where it can be produced in (hence why Nigeria has been estimated to flare over $2.5 Billion of potential gas revenues every year). But more importantly, natural gas can be very cheap to produce but it is expensive to store and transport unless the economies of scale grow enough to bring those costs down. Enter Europe, with LNG Terminal import capacity that is large enough to add another Norway of gas to Europe on a fleet of new LNG vessels, currently in hot demand from Asian yards (and conveniently mostly European owned too).
This injection of demand into Global LNG will accelerate the economies of scale required for natural gas to expand into a truly international trade and help to reduce the need for long term locked-in prices, thus allowing countries to purchase gas more on the spot market. Thus declining gas prices will not be an issue for gas producers sitting on fields like South Pars in Iran (estimated as the world’s largest natural gas field), where the well can be capped for a period if prices are atrocious. It is and will however be a major issue for any shale company that will be require to drill repeatedly and regularly to stimulate the well concessions they have that are producing shale gas/oil, at a cost of between $4-8 million per well to drill.
Taking aside this soon to be regained advantage of natural gas productionagainst the distorted US Shale gas market however, the simpler problem is that continued investment into resource extraction is not a smart long term investment.
The scope of global renewable potential presents a range of fantastic options for a smart grid system, with integrated battery technology helping to stabilise the variable power production levels of renewable energy sources while reducing the barriers to entry for new energy companies. This model also increases system survivability by diversifying the power production sources so that a natural, man-made or terrorist action against a piece of energy infrastructure is less dramatic that it is currently.
This infrastructure therefore is not only a national investment into systems that will last well over 20 years, but also into advanced technology which provides solutions for providing energy to a highly diverse range of consumers. From the military applications, to off-grid settlements, mega cities and small towns – renewable energy integrated into a smart grid system with battery capability is scalable to any level.
Thus Shale gas will not and cannot be the long term answer to the US and the world’s energy challenges. Rather, it is an artificially stimulated hiccup in the broader gas and oil production landscape.
Many energy pundits have been quick to label this century “the Gas Century” and for now they are right, but for our future they need to be proven wrong. There may well be vast stores of gas whether conventionally or Unconventionally (Shale, Coal Bed Methane, Methane Hydrates), but this is not a future for our world either economically, ecologically or politically.
It’s hard to see what needs to be happen for people to join the dots and make the integrated smart grids which the technology of today is so close to being ready to deliver, but my bet for where it may happen first would be to look in unexpected places: I particularly liked this photo from rural Myanmar as a sign of encouragement for the future, so feel free to share on: