Thomas White Global Investing
Shale oil boom fuels America’s energy dream
US Stamp
November 30, 2012
A Postcard from the Americas
Shale oil boom fuels America’s energy dream

Rocks that spew energy

North Texas sits on a recently discovered deposit of natural gas called the Barnett Shale. Wells like this burn off excess gas before they begin producing natural gas.

Oil, true to its nature, has remained a slippery subject for the United States ever since the country’s energy requirements had to be met by imports from across its borders and even from regions as far as the Middle East. The geopolitical significance of this commodity has been so great that America has had to ensure its safe passage through some of the world’s most sensitive waterways not only for the country’s best interests
but also to ensure global energy security.

But now, there has been a recent twist in the all-too familiar tale of muscle-flexing by the likes of big oil producers such as Saudi Arabia and Russia, a script that has rarely changed since the Arab oil embargo of 1973. The U.S., the world’s biggest oil consumer that gobbles up no less than 19 million barrels of oil a day, may well turn out to be the biggest producer of the fuel by 2020, going by the recent projections from the Paris-based International EnergyAgency (IEA).

Behind this newfound boost to American energy independence, the topic of political rhetoric for decades, are the little-known rich repositories of oil and natural gas: shale rocks.

The sudden spurt in the availability of oil and natural gas in the domestic market is hardly an overnight phenomenon though, but the result of two decades of painstaking research and digging. Needless to say, America has to thank technology and the market dynamics of the consistently high cost of crude, for this seemingly incredible achievement. The IEA joins the ranks of the Organization of the Petroleum Exporting Countries (OPEC) and the U.S. Energy Information Administration in coming out with forecasts for a sharp increase in domestic oil production in the years ahead. According to a WSJ report, U.S. oil production is estimated to reach 11.1 million barrels a day by 2020. The report also says natural gas will displace oil as the single largest fuel in the domestic market by the year 2030. Production figures also attest to the shift in energy consumption towards less-polluting fuels, with natural gas contributing to 31% of power generation during the first eight months of the year, compared to the year-ago figure of 24%.

The popularity of shale oil and gas has drawn attention to the technologies, namely hydraulic fracturing and horizontal drilling, which made the discovery possible. Fracturing, or fracking, as the process is often called, involves injecting huge amounts of a high-pressure mixture of water, sand, and chemicals into the dense shale rocks to extract natural gas and oil. The glut in natural gas production from shale beds, which has touched 37% of the total U.S. gas production compared to a meager 2% just a decade back, also made this process dirt-cheap. Interestingly, it was the successful extraction of natural gas that led explorers to apply the same technology to dig out “tight oil”, which lay several layers deeper. The process, though much more expensive in the case of oil extraction, has seen U.S. oil output rising 25% since 2008.

Besides the shale oil and natural gas produced, the ‘energy awakening’ has benefited the struggling economy by helping to generate more than 1.7 million jobs. The labor-intensive process demands billions in investments and a long supply chain. And, according to an article by Daniel Yergin published in the Financial Times, the booming industry is estimated to create about 3 million jobs by 2020. The plentiful and inexpensive natural gas has also changed the way businesses are run in America, as it has helped reduce energy costs for big industrial consumers such as manufacturers of fertilizers and chemicals.

The economic viability of shale oil production has attracted producers, big and small alike, to partake in the hectic mining activity centered primarily in Pennsylvania, Texas, Arkansas, and North Dakota. Geologically too, the U.S. has an advantage over Europe in that most of its land is private, which can easily be made available for exploration, thanks to the liberal incentives given to land owners. A well-developed system of pipelines and a thriving oil-services industry make the U.S the ideal hunting ground for corporates such as Murphy Oil.

The buzzing activity on the ground in the U.S. has echoed across the border in Canada where Exxon Mobil recently agreed to buy Canadian oil-and-gas company Celtic Exploration for $3.1 billion, lured by the natural gas-rich Montney shale formation in Alberta. The vast Canadian shale gas reserves, representing about half of the gas findings unearthed in the U.S., also attracted the attention of Petronas of Malaysia, which made an attempt to acquire Progress Energy Resources. Corporations such as Canadian gas producer Encana Corp., Chevron Corp., and Talisman Energy Inc. all have made huge land acquisitions in locations such as Duvernay and Montney, which are rich in natural gas, gas liquids, as well as oil reserves.

It may be quite some time before America can think of becoming completely energy self-sufficient and free from the tether of foreign oil. Yet, the tremors emanating from beneath its ground will likely be felt in regions far and wide, eventually redrawing the contours of the global oil map.

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