by Geoffrey Styles, Managing Director of GSW Strategy Group
With superlatives and extreme descriptions so common today, it would be tempting to dismiss references to a "shale gas revolution" as just more hype. Yet if any recent energy trend merits being called revolutionary, it is surely the large-scale extraction of natural gas--and increasingly oil and other liquid hydrocarbons--from shale, for at least the three reasons described below. Its emergence in a decade when both governments and the public have increasingly looked to renewable energy technologies to meet our future energy needs challenges the notion that oil and gas are "yesterday's energy."
Like most revolutions, the origins of the shale revolution seem obvious in retrospect but went largely unnoticed outside a circle of visionary technologists and investors, until recently. The key enabling development was the novel joint application of two well-established oil and gas technologies, hydraulic fracturing and horizontal drilling, to resources that were previously known but that could not be produced economically with standard techniques. Hydraulic fracturing, often referred to as "fracing" by engineers or "fracking" by the media and public, stimulates production by overcoming the relative impermeability of these rocks , which as Mr. Rozenfeld explained in another posting on this site are often not true shales. This technique has been used in other formations since the late 1940s. However, without the addition of horizontal drilling to enable a single well to drain a much larger area, fracking alone would typically not provide sufficient contact with a shale reservoir to yield attractive production rates. The insight to meld these techniques, widely credited to Mitchell Energy and further refined by dozens of other companies, has unlocked the equivalent of more than 80 billion barrels of potential resources just in North America. The global potential looks even larger.
Another reason that shale extraction merits being called revolutionary is more widely appreciated: It has reversed the costly decline of US natural gas production that set in during the previous decade. Based on figures from the US Energy Information Agency of the Department of Energy, between 2001 and 2005 US marketed gas production fell by 8%, contributing to annual average wellhead prices rising from $4 per million British Thermal Units (MMBTUs) to over $7/MMBTU. Thanks to the upsurge of shale gas, output subsequently recovered and last year surpassed previous US record gas production from 1973 by nearly 7%. An estimated 30% of 2011 gas production was attributable to shale gas. As a result of expanding supplies, in conjunction with weak economic growth, average wellhead natural gas prices averaged below $4/MMBTU last year and have traded at or below $3 throughout 2012, to date. That is the equivalent of less than $18 per barrel, in a period when crude oil has averaged nearly $97 per barrel.
The third and most important accomplishment of shale gas is the impact of expanding energy supply and lower prices on the economy beyond the oil & gas industry. Domestic US petrochemical activity is increasing again, after significant episodes of "offshoring" due to high domestic gas prices during the 2000s. Lower energy prices are also contributing to a resurgent US manufacturing sector, after many years of decline. And perhaps the biggest impact is found in the electricity sector, where power generation from natural gas has grown from 19% of total US electricity in 2005 to 25% in 2011. In the process, gas displaced higher-emitting fuels from the generation mix and facilitated the integration of intermittent or cyclical renewable energy sources such as wind and solar power, which would have faced higher barriers to their growth and acceptance without the flexibility and back-up generation provided by large numbers of gas-fired power plants.
So shale development emerged from relative obscurity to transform the energy sector and reduce energy prices and feedstock costs across large segments of the US economy. Those are solid qualifications for a technological and economic revolution. In common with other revolutions, it has also altered the status quo, especially in regions with little recent experience of energy production on this scale. Revolutions are rarely comfortable, but the rapid dissemination of best practices among both operators and regulators, as recently suggested by the International Energy Agency, should go a long way to alleviating the sharpest concerns, particularly when combined with forthright engagement with affected stakeholders. I plan to address some of the potential longer-term consequences of this revolution in my next posting here.
Geoff Styles
Mr. Styles is well-respected strategy consultant, advisor and commentator in the energy industry. His views on energy have been quoted frequently by the Wall Street Journal, the Financial Times, and the Washington Post. Mr. Styles is the author of Energy Outlook, which was named one of the "Top 50 Eco Blogs" by the Times of London.
With superlatives and extreme descriptions so common today, it would be tempting to dismiss references to a "shale gas revolution" as just more hype. Yet if any recent energy trend merits being called revolutionary, it is surely the large-scale extraction of natural gas--and increasingly oil and other liquid hydrocarbons--from shale, for at least the three reasons described below. Its emergence in a decade when both governments and the public have increasingly looked to renewable energy technologies to meet our future energy needs challenges the notion that oil and gas are "yesterday's energy."
Like most revolutions, the origins of the shale revolution seem obvious in retrospect but went largely unnoticed outside a circle of visionary technologists and investors, until recently. The key enabling development was the novel joint application of two well-established oil and gas technologies, hydraulic fracturing and horizontal drilling, to resources that were previously known but that could not be produced economically with standard techniques. Hydraulic fracturing, often referred to as "fracing" by engineers or "fracking" by the media and public, stimulates production by overcoming the relative impermeability of these rocks , which as Mr. Rozenfeld explained in another posting on this site are often not true shales. This technique has been used in other formations since the late 1940s. However, without the addition of horizontal drilling to enable a single well to drain a much larger area, fracking alone would typically not provide sufficient contact with a shale reservoir to yield attractive production rates. The insight to meld these techniques, widely credited to Mitchell Energy and further refined by dozens of other companies, has unlocked the equivalent of more than 80 billion barrels of potential resources just in North America. The global potential looks even larger.
Another reason that shale extraction merits being called revolutionary is more widely appreciated: It has reversed the costly decline of US natural gas production that set in during the previous decade. Based on figures from the US Energy Information Agency of the Department of Energy, between 2001 and 2005 US marketed gas production fell by 8%, contributing to annual average wellhead prices rising from $4 per million British Thermal Units (MMBTUs) to over $7/MMBTU. Thanks to the upsurge of shale gas, output subsequently recovered and last year surpassed previous US record gas production from 1973 by nearly 7%. An estimated 30% of 2011 gas production was attributable to shale gas. As a result of expanding supplies, in conjunction with weak economic growth, average wellhead natural gas prices averaged below $4/MMBTU last year and have traded at or below $3 throughout 2012, to date. That is the equivalent of less than $18 per barrel, in a period when crude oil has averaged nearly $97 per barrel.
The third and most important accomplishment of shale gas is the impact of expanding energy supply and lower prices on the economy beyond the oil & gas industry. Domestic US petrochemical activity is increasing again, after significant episodes of "offshoring" due to high domestic gas prices during the 2000s. Lower energy prices are also contributing to a resurgent US manufacturing sector, after many years of decline. And perhaps the biggest impact is found in the electricity sector, where power generation from natural gas has grown from 19% of total US electricity in 2005 to 25% in 2011. In the process, gas displaced higher-emitting fuels from the generation mix and facilitated the integration of intermittent or cyclical renewable energy sources such as wind and solar power, which would have faced higher barriers to their growth and acceptance without the flexibility and back-up generation provided by large numbers of gas-fired power plants.
So shale development emerged from relative obscurity to transform the energy sector and reduce energy prices and feedstock costs across large segments of the US economy. Those are solid qualifications for a technological and economic revolution. In common with other revolutions, it has also altered the status quo, especially in regions with little recent experience of energy production on this scale. Revolutions are rarely comfortable, but the rapid dissemination of best practices among both operators and regulators, as recently suggested by the International Energy Agency, should go a long way to alleviating the sharpest concerns, particularly when combined with forthright engagement with affected stakeholders. I plan to address some of the potential longer-term consequences of this revolution in my next posting here.
Geoff Styles
Mr. Styles is well-respected strategy consultant, advisor and commentator in the energy industry. His views on energy have been quoted frequently by the Wall Street Journal, the Financial Times, and the Washington Post. Mr. Styles is the author of Energy Outlook, which was named one of the "Top 50 Eco Blogs" by the Times of London.
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