For those of us in Europe, shale seems to be yesterday’s story, but as Nick Butler writes in the Financial Times, that story is far from over when looking at global developments.
Shale — the unfinished revolution
If you live in Europe you could be forgiven for thinking that the shale revolution is strictly an American phenomenon. Casual readers could also easily get the idea that low oil and gas prices are driving down US production of shale gas and tight oil and that even there the revolution is over. All these impressions are mistaken.
Shale development in Europe is virtually non-existent. Fracking is banned in France and discouraged in Germany. In Poland, early results have been disappointing while in the UK, thanks to mistakes by the government and the industry, no drilling has taken place for several years. Starting operations in Balcome — a wealthy and vocal community with no economic imperative to give up its peaceful lifestyle was a mistake. Creating great expectations without putting in place either proper incentives or a clear regulatory framework was a serious policy error. There is talk of a few wells being drilled this year but probably only if local objections can be overridden by edicts from Whitehall — a crass process somewhat at odds with the government’s rhetoric about devolving power to local communities. The approach is not likely to win over hearts and minds and may well prove unenforceable in a number of areas.
But Europe’s failure to develop its shale resources is not typical of the story worldwide. In the US, despite much reduced levels of drilling, production of shale gas and tight oil has yet to see any major decline. The country’s industry is not monolithic and some regions face hard cost challenges. The level of new drilling has declined sharply. Nevertheless, given the scale of the price falls over the last 18 months, the resilience of production levels has been remarkable. The latest data for February suggest that tight oil production will average 5.02m barrels a day. The US shale industry has adapted very successfully and even if production falls over the next few months there is every chance of it increasing again in response to any price rise.
This view was confirmed by the long term energy outlook published by BP a couple of weeks ago. Its most distinctive forecast is that US shale gas output will rise over the next two decades to a plateau of about 80m b/d — almost double current levels, while tight oil production will increase to around 8m b/d in 2030 and beyond.
In addition, there will be significant shale development around the world — particularly in Asia. Overall, BP’s projection is that global shale gas production could rise to more than 110bn cubic feet a day almost a quarter of global gas supply and tight oil output —to 10m b/d — some 10 per cent of total oil production.
The three driving forces behind such an increase are the resource base which is clearly considerable, the advances in technology that are opening up new areas and reducing costs and the heightened concern about increasing reliance on oil and gas supplies from politically unstable areas such as the Middle East and Russia.
The projections for shale gas and tight oil production are big numbers which, if fulfilled, will have profound effects on the whole energy market.
- Production on this scale will put continuing pressure on markets that are already fully supplied. New sources of production add to the sense that energy is no longer scarce. On the contrary, supplies are plentiful, and relatively easily accessible. The downward pressure on prices will continue and projects at the high end of any cost curve will be stranded and left undeveloped. There could also, as the international advisory service ICIS points out in an interesting commentary, be significant knock-on effects including the relocation of petrochemical production to countries such as China.
- The diverse geography of shale production means that the world’s energy map will be redrawn and the pattern of trade will alter. The power of the Opec producers will be reduced, making their attempts to manage the market even harder. Total energy trade could fall — in particular the trade in natural gas and its closer competitor, coal. China is just one country that could meet more of its own needs from its own resources — starting with shale gas. In addition, as the World Energy Council pointed out in a paper published last week, the worldwide development of shale gas will reinforce the obvious trend towards a single global gas price.
- In environmental terms, the story is mixed. Shale gas on this scale could displace some of the projected growth in coal use, especially in emerging market economies. In terms of emissions, that is a clear net gain. On the other hand, the development of significant volumes of shale gas and tight oil can only extend the age of hydrocarbons, bringing on added supplies at a competitive cost and complicating efforts to reduce emissions through the use of alternative sources such as wind and solar.
The whole story shows how much advances in technology can alter the outlook. A decade ago, no one projected the growth in shale gas or tight oil in the US or anywhere else in the world. In the outlook documents written at BP and elsewhere at that time, shale was not mentioned as a potential source of energy — I know, because I was involved in writing some of them. The physical existence of oil and gas in shale rocks was known but its development was believed to be uneconomic and it was therefore excluded from the projections.
Technology is changing the industry at a dramatic rate. The long-term outlooks produced by the companies and by institutions such as the International Energy Agency can only project the prospects on the basis of known and proven technology. That is a reasonable approach but no one should think that it represents the end of the story.