Nick Butler wrote an excellent blog in the Financial Times that brings some start messages. He firmly believes that the shale “revolution” is real and not going away. He warns the climate change lobby will have to adapt. Is he right? He certainly puts a good case forward for starting from a point of reality. Let’s see.
Galileo and the shale gas revolution
The news that Exxon is to build a $10 bn LNG export facility in Texas marks another significant step forward in the story of shale gas and its disruptive impact on the world energy market. Those who want a parallel for the painful process through which so many of the established forces of the industry on one side and the lobby groups on another have struggled to come to terms with the reality of shale gas over the last three years should read John Heilbron’s fascinating book on Galileo.
Back in the 17th century, those who had tied their reputations to old ideas used ever more elaborate and unconvincing arguments to deny the truth of new discoveries. Nothing but the old status quo could be conceived, particularly if new ideas threatened the very foundations of received beliefs. After all, didn’t the Bible say that the earth didn’t move? And, of course, if one idea was permitted where would it end? Rather than permitting open discussion, dangerous thoughts were suppressed. Galileo was tried by the Inquisition and forced to recant before being put under house arrest for the remainder of his life.
Over the last few years, the assertions of the ancien regime in the energy business have become ever more strident. Shale gas would never be developed because fracking didn’t work. The resources were inadequate to make development commercial. Fracking could not be done safely even by the best engineers in the business. There would be mass earthquakes. The resource base would soon run dry. The infrastructure could not cope. And then, more recently, no other country could match what had happened in the US. There were no resources, no skills, no water, and even less infrastructure. And no, shale gas would never affect the market beyond the US because no US president would ever permit exports.
There will be winners and losers and surprise, surprise the losers have been the loudest voices in denial
One by one these assertions have become more desperate and further from reality. Shale gas development is now within reach of a dozen different countries around the world. Some development will no doubt be too expensive to be commercially viable but the technology is not static. Costs are falling not rising and companies are learning how to handle complexities such as the recycling of water.
Prices will be volatile – that is the nature of many new commodity market developments. There will a boom and then the first overinflated bubble will burst – which is what has been happening to a degree in the US. But then, as so many times in economic history, the pieces will be picked up and consolidated and an enduring industry will emerge around more stable prices. And beyond that there is tight oil to come as well.
The impact will be profound. The UK may not have as much shale gas as the US – but let’s just wait for the British Geological Survey to be finally released. The fact that such a reputable study is not being published is raising a lot of questions. Who exactly in Government is claiming to know more about geology than the BGS. ?
Some communities do not want shale gas development – and they should not be forced to accept it. France may never allow its shale gas (or tight oil ) to be developed. But because of trade, energy prices everywhere will be affected . This is where US exports are so important. Exxon is not a company to invest big money lightly. There is a market for gas in the Far East where the demise of the Japanese nuclear sector has left a supply gap which has to be filled. Now it will be filled. And in a world where all prices are linked that will drive down prices in Europe too.
Meanwhile companies like Centrica will bring gas from the US into the UK. There will be winners and losers and surprise, surprise the losers are been the loudest voices in denial of the reality and potential of shale gas. But they too will adjust – even relics such as Gazprom who for so long have been determined to try to maintain a price structure which ties gas to oil prices are starting to recognise that there really is gas to gas competition now.
The climate change lobby has to adjust too. The shale gas revolution is in the process of lowering the cost of using hydrocarbons just when they wanted the reverse to happen. Shale gas is not all bad. It has reduced coal use in the US, and could make a major positive difference in China and India – reducing emissions from their likely path by more than any other change which is in prospect.
Those prospective developments have yet to be proved commercial but the climate lobby should be hoping that they will be. Beyond that those who care about the climate have to adjust their strategy to a world in which hydrocarbons have a new lease of life and energy costs are significant lower than they have previously predicted.
On both sides the important thing is to start from reality. Galileo after recanting under intense pressure from Catholic authorities who wanted him to deny that the earth moved around the sun, is said to have whispered: “but still it moves”.