Suspicious energy?

The Energy Outlook 2012 of the International Energy Agency (IEA) confirmed in November what many saw coming: the US is dealing with an historical energy revolution, the ripples of which can also be felt around the world. Recent developments in the exploitation of non-conventional oil and gas, especially shale, could lead the country to energy independence in the short term. By 2020, the US could be the largest oil and gas producer in the world, surpassing even Saudi Arabia and Russia. By 2030 the country could be a net exporter. In 2005, 60 % of oil in the US was imported; that figure already fell to 39 % last year. While the stock of regular natural gas in the US decreases, shale gas provides 40 % of domestic needs. Twelve years ago it was 2 %.

The gas that changed everything

The US had been experimenting with the exploitation of shale gas for a while, but large scale exploration and exploitation only began with the run-up to the 2008 crisis, when high oil and gas prices had made investments interesting. The country had two great advantages: at least a hundred years of detailed subsoil mapping, and decades of deep drilling experimentation, leading to a vast amount of available knowledge and technology. More than anywhere else in the world, the US has an expansive infrastructure for domestic storage and transport. Another advantage is that the stocks of non-conventional oil and gas are spread across the whole of the US, from Texas to Louisiana, North Dakota, Pennsylvania, Ohio and New York. Today, 88 % of shale gas is extracted from six oil fields: Haynesville (Louisiana), Barnett (Texas), Marcellus (Pennsylvania, West-Virginia and New York), Fayetteville, Eagle Ford (Texas) and Woodford (Oklahoma).

For tight oil or shale oil, the Bakken formation in North Dakota is the most significant. North Dakota has already surpassed California and Alaska thanks to its non-conventional oil and is now the second biggest oil producer in the US, after Texas (see map).

This abundance of energy from domestic soil is heaven-sent for the American economy. 58 % of the American trade balance’s deficit is made up of energy imports. The new energy projects also provide tens of thousands of jobs across the whole country: in 2010 the shale gas industry provided 600,000 new jobs.

These drillings have already produced a gigantic supply, decreasing the price of the gas from 7 - 8 dollars per million BTU (British Thermal Units) to 3 - 4 dollars. This low gas price is a gift for energy-intensive industries, such as the chemical industry, aluminium, iron and steel production, and the cement industry. They have secured a considerable competitive advantage over Europe, which is today’s big loser, and over China, which works with cheap but polluting coal.

Redrawing the map of the world

The growing energy independence of the US also means that the Middle East is no longer the most important supplier of oil, and that Russia can no longer dominate gas prices. However, Coby van der Linde, director of the Clingendael International Energy Programme and Professor of Geopolitics and Energy Management at the Rijksunversiteit Groningen (NL), expresses the impact.

“When the US becomes more self-sufficient, it doesn’t require complete autarchy. The country will remain integrated with the international oil and gas markets. The export of oil from the US will increase, but the US will also keep importing in order to supply the refineries in the north east. They will also keep following the Middle East, because of Iran and to safeguard Saudi Arabia, Kuwait and Qatar.”

What could change, according to van der Linde — not just because of energy, but also due to internal budgetary discussions — are the investments in the preservation of sea routes and installations. “For a while now, we’ve seen how the US wants other partners, for example NATO, to contribute to the costs, as seen with the conflicts in Libya, Mali and Syria.”

The Middle East itself will focus more on exporting to Asia. That movement began with the 2008 crisis, when economic growth in Europe and the US almost came to a halt. And as far as Russia is concerned, the recent visit of Chinese President Xi Jinping to Russia says it all. Both countries need each other. Coby van der Linde: “Gas has always been a point of contention in the relations between both countries. Russia wanted to sell it at a price tied to oil, while China used the Charcoal Index. But apparently they are now negotiating.”

When Russia delivers gas to China, it will gain an important client, and that can have consequences for Europe. All roads for future energy export lead to Asia, that much is clear: the Middle East with its oil and the US with its shale gas. At least as soon as that can be exported.

Obstacles

Precisely within this export, there is an important obstacle to overcome. “To transport a barrel of oil around the world currently costs 4 dollars, to transport a barrel of liquid gas costs 45 dollars,” Iain Conn, head of Refining and Marketing at BP dryly remarked at the Forum of the German Marshall Fund in March in Brussels. The US dreams of exporting gas to Japan, where the price of gas is three times as high, up to 15 dollars, but for the time being that’s impossible: terminals need to be converted and trade regulations revised.

Consumers benefit from low gas prices in the US, but investors are at a loss. The exploitation of this non-conventional fossil fuel is costly. The yield of a gas source decreases very quickly: the exploitation can take from a couple of months up to three or four years. This is in sharp contrast to the exploitation of conventional gas, whereby a source keeps producing more or less continuously for a couple of decades. To maintain the supply, extra wells need to be drilled constantly, which is financially challenging when the gas price is low. Chesapeake Energy was confronted with this and had to sell part of its assets for 6.9 billion dollars. To some extent, the same goes for shale oil. Adding these oil fields to the mix denotes that quick exhaustion seems inevitable, but the advantage is a higher price for oil. According to a 2011 article in the New York Times, the figures for the reserves have been exaggerated, and the suggested amounts have not been at all proven. All this adds to the suspicion that we’re dealing with an oil and gas bubble that could burst within ten years.

And then there is the impact on the environment. Shale gas is mined by drilling horizontally into the deep layers of the Earth and by fracturing them hydraulically: a process known as fracking. This can cause seismic activity, which is especially concerning in densely populated areas. Also, large amounts of clean freshwater are necessary for the process. The water is injected into the soil along with sand and a cocktail of chemicals (2 % of the injected liquid) to break the layers to allow for the gas to be released. The stream of waste that resurfaces is heavily contaminated and contains extreme saltwater which has to be drained or purified. During this whole operation, there is a risk that subsoil water sources and drinking water reservoirs could be contaminated by the chemicals. The companies are also not very transparent regarding the chemicals they are using.

Another problem is that methane, a greenhouse gas many times more powerful than CO2, can escape from the subsoil. These risks and effects triggered a civil movement in the US against fracking. Food and Waterwatch, an American NGO, is campaigning for a total ban on fracking. Geert De Cock of Food and Water Watch Europe: “Stricter regulations should solve this. Some companies like Halliburton are talking about ‘green fracking’ and ‘chemical-free fracking’, but in reality that hasn’t happened. Moreover, this involves thousands of wells, so it would be impossible to control them all.”

Lower CO2 emmissions

Supporters of shale gas love to bring up the argument that, even though gas is a fossil fuel, its CO2 emission is much lower than coal or oil. David Neslin, of the US Interstate Oil and Gas Compact Commission, recently spoke at the American Embassy in Brussels and proudly presented the results: “In the last five years we have seen a clear decrease of CO2 emissions, precisely because the energy-intensive companies switched from coal to gas. According to the American Information Energy Agency, the emissions decreased in the first quarter of 2012 by 8 % compared to the previous year, and reached their lowest level in twenty years. The International Energy Agency came to the same conclusion and calculated that the US emitted 430 million tonnes less CO2 than in 2006, which also comes down to 8 %, thanks to the gas.”

Can this shale gas provide a transitory situation for a carbon-poor economy after all? Professor Jean Pascal Van Ypersele, Professor of Climate and Environmental Science at the Université Catholique de Louvain (BE), is hesitant: “The relationship between shale gas and oil and climate change is complex. For countries that have these resources, it is interesting to use them instead of coal. Coal uses twice as much CO2 per unit of energy as gas does, and contains a number of components like sulphur, which is also very polluting. Everything is better than coal. On the other hand, the climate gain for shale gas is highly dependent on leak-free exploitation. If the gas that is released, mostly methane, is about 25 times per kg more disruptive to the environment than CO2, it is essential to avoid leaking. Some articles state that shale gas exploitation probably has no environmental benefits at all, exactly because of the leaks. Fracking also has other negative influences on the environment, like water pollution. Only when all these factors are perfectly controlled, can shale gas, and to a lesser extent shale oil, provide some short term climate benefits.

But one has to consider the long term effects as well: the use of non-conventional sources like these also causes the price of fossil fuels to drop, including coal, and that’s not good news for the climate because it extends our addiction to fossil fuels.”

Cheap gas has lowered the price of coal in the US, which is being exported on a massive scale to Europe, subsequently increasing the use of coal here and lowering the use of gas.

If so much money flows into the exploitation of non-conventional fossil sources, is there anyone still interested in investing in renewable energy? David Neslin: “It is indeed a concern for many people that cheap gas will push renewable energy off the market. What is remarkable, however, is that the two kinds of energy whose market share went up last year, were actually shale gas and wind energy. These two are compatible because wind is not available on demand and cannot be stored, but gas can be. Wind energy can help to deal with price fluctuations for gas, as it fluctuates quite a bit. Therefore these are easy to combine.”

Senator Christopher Murphy, a guest at the German Marshall Fund, feels otherwise: “When shale gas provides us with an easy way out, it’s questionable whether the US will form a real market for renewable energy, also because there are so many deniers of climate change. In the US there is no wide social debate either about the environmental impact of fracking – even though it is expected now that it has started to concern New York.”

And what about Europe? Will we have to follow the hype for our own energy security and economic competitiveness? Opinions differ and each country has its own policy. Poland seemed to have attractive supplies, but Exxon left after only three drills. Gasland Nederland is meanwhile awaiting further studies.