Thomas White Global Investing
Green Reports

April 27, 2011

The Green Report


Shale Gas: The fuel for the future?

Shale Gas: The fuel for the future?

Shale reserves, from which natural gas is extracted, are abundant and widespread across the globe. They could emerge as an integral source of energy over the next decade or so.

 

In the mid-2000s, U.S. energy company Apache Corporation started building a liquefied natural gas (LNG) terminal in Kitimat, a city by the Pacific coast of Canada. The site consisted of towering cylindrical tanks, snaking pipelines, and colorful valves among other engineering accessories required for the storage of natural gas. The idea behind the terminal was that the U.S. demand for energy would shoot up so much that the supply of oil would inevitably fall short of demand, and the country would have to import gas from Asia to fill the gap.

But the anticipated U.S. demand for imported natural gas never really materialized. Instead, something odd happened. The wildcat drillers of Texas and Louisiana, relentlessly pursuing gas in America’s own lands, perfected a technique to squeeze out gas and from an unconventional source, an organic-rich fine-grained sedimentary rock called shale. Now, the technique of the wildcat drillers called ‘hydraulic fracking’ and the vast deposits of shale in the U.S. are poised to turn the dynamics of the energy markets upside down. In fact, the shale reserves in the U.S. are estimated to be so abundant that over the next five years they could actually help transform the U.S into a net natural gas exporter.

Currently, the U.S. consumes over 23 trillion cubic feet (tcf) of natural gas annually, while shale reserves in the country’s explored areas are reported to hold over 2,500 tcf. At current consumption rates, the U.S. has shale reserves that could last over 100 years. Already, shale reserves are proving their importance on the national stage. In 2000, only 1% of all the gas produced in the U.S. came from shale reserves but the figure jumped to 25% in 2010. Energy officials estimate that shale will account for 50% of all the gas produced in the U.S. by 2020.

Over the last decade more than 3000 gas wells have been built in the six largest shale reserves of the U.S. The most prominent and the largest are located in the Marcellus shale reserve in Pennsylvania and the Barnett shale reserve in Texas. In fact, the U.S. is believed to have overtaken Russia as the world’s largest producer of natural gas in 2010, thanks to rising production of gas from shale.


Shale reserves are abundant and widespread across the globe. The U.S.
alone is estimated to have shale reserves required to produce 2,500 tcf of
natural gas. At current consumption rates, 2,500 tcf of gas will take of
the country’s , gas needs for another century.

Furthermore, unlike oil, shale reserves are not just present in a few isolated pockets of the world. In fact, large areas of the world and many countries across the globe boast huge shale reserves. Israel has shale reserves with the potential to produce around 16 tcf of natural gas. Poland’s shale gas reserves of 5.3 tcf could meet the country’s energy needs for over 300 years at the current rate of consumption. According to the International Energy Agency (IEA) the world’s prominent emerging markets like India and China also have large reserves of shale. Asia contains enough shale reserves to produce 3,000 tcf of natural gas.

In recent years, oil majors and other energy businesses have awakened to the huge potential of shale gas. Oil majors which were on the sidelines of the quiet gas revolution have since joined it. These big firms are increasingly acquiring small wildcat explorers in the southern U.S.

Such an opportunity could not have come at a better time for the oil behemoths, as the rise in gas exploration has coincided with declining new finds in oil reserves. Hundreds of billions of dollars have poured into the development of shale gas fields since the entry of big oil firms. In 2009, Exxon Mobil paid nearly $41 billion dollars for Xyto, a shale gas explorer. Even foreign firms such as India’s Reliance Petroleum and China’s CNOOC have invested billions of dollars in U.S. shale fields. If successful, these foreign companies could effectively take the technology back home to exploit shale reserve found in their respective countries.

Naturally, all these advantages of shale gas should have brought unabashed joy for both consumers and producers of energy. But they haven’t. Lately, there have been many protests against extracting gas from shale. Although natural gas burns more efficiently than both oil and gas and emits relatively less carbon, the process of extracting the shale gas, hydraulic fracking, is hugely controversial. The process involves blasting a mixture of water (ranging a few hundred thousand to several million gallons) and strong chemicals into the shale deposits thousands of feet below the ground. The mixture hits the shale rock fracturing the weakest part. The gas trapped inside the shale is then captured in a reservoir.

It is this process that is a concern for many, and a potential roadblock for shale’s prospect as a source of energy. Some of the water-chemical mixture employed to extract shale gas returns back to the ground often bringing up underground brine. This mixture consists of radioactive components such as radium and strontium that are partially carcinogenic. Further, farmers in agricultural states have complained that toxic water pollutes and spills into arable land. They also grumble that hydraulic fracturing consumes too much water, depriving the water available for agriculture.

Although the industry claims that it has the capability to treat such waste, sporadic spilling incidents have been reported in the U.S. In fact, Chesapeake Energy Corp, a shale gas drilling company, encountered a spilling incident in Pennsylvania that affected nearby farmlands. Even now a number of residents and governments feel that the technology to extract shale gas is yet to prove itself completely safe. New York has announced a moratorium on shale drilling in the Marcellus shale basin even though neighboring Pennsylvania allows it. France, amidst huge local protests has been considering a ban on drilling, even though it granted drilling licenses to explore the Paris basin three years ago. Even in the U.S. the Environmental Protection Agency (EPA) plans to regulate fracking more closely.

Nonetheless, in the U.S., where land for drilling is more readily available than in Europe, the prospects of drilling still look better. The industry also contends that despite complaints about rising water usage, it only consumes only 0.02% of all water used in industrial activities.

Thus far, the U.S. shale gas drillers have done a good job of convincing land owners to obtain long-term leasing rights on lands for drilling purposes. The shale gas reservoirs indeed are drawing a steady supply of gas and in many cases are getting bigger. And Apache Corp, the company that built the Kitimat terminal originally to import gas, is also positive about its prospects. Instead now, it has simply retooled the terminal to export gas to energy-hungry emerging markets.

 

 


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