Shale Shock Therapy For Peak Oilers

Shale Shock Therapy For Peak Oilers

As the U.S. continues to extol the virtues of its shale gas revolution, peak oil theorists must be cringing to see their staunchest Malthusian beliefs demolished: the world may not run out of oil after all. But beyond the prospect of energy security, tight oil might have a much broader impact and added benefits to the early adopters. Stronger geopolitical leverage might be one of them. And the situation in Ukraine may not be foreign to the recent announcement of a first test release of 5 million barrels of oil from the US strategic reserves, no matter how small the effect.

More American gas on the global markets may slowly but surely undermine Russian pricing power, especially if the supply can reach European consumers at an affordable cost. While unconventional oil and gas have unlocked completely new energy perspectives, they may tip the balance towards a truly global energy market. With more countries willing to harness their shale resources, fossil fuels may finally shift away from the long established monopolies of a selected few producers.

The U.S. has been prompted to improve drilling and extraction efficiency on its shale gas plays. Higher competitiveness and a decade of high and rising hydrocarbons prices help operators thrive. According to a recent report by the IHS group, tight fossil fuels accounted for 1.7 million jobs in 2012, a figure likely to grow to 3.5 million by 2035. They generated a tax bonanza of nearly $62 million. International oil companies are now coveting what could be the next step into big profit, if only with rather mixed results.

Shell's bets on tight oil in North America have struggled to make a profit out of the $24 billion investment, prompting the company to shed off debt. BP fared little better: the unlashing of its U.S. shale gas operations into a separate business could portend a future spin off. Whether those players entered the game too late or overpaid for some of their assets, they also owe their poor performance to lower gas prices. Supply is gushing from a large number of smaller, independent producers, putting the oil majors slightly out of their league.

A bigger prize

But there might be a bigger prize to win from the shale gas boom: its expected impact on global warming and climate change. Gas is a good substitute for coal and comes out the cleanest of all fossil fuels. Burning gas rather than oil or coal produces lower CO2 emissions and may foster the transition to more sustainable energy sources. This may result in a significant slowdown of global warming by a factor two to three, and would enable a near-total phasing out of small particles emissions (less than 2.5 microns), possibly the most nefarious form of air pollution.

As two Berkeley University researchers, Richard and Elizabeth Muller recently suggested, this should be reason enough to embrace fracking whole-heartedly. Some of the environmental concerns about this technology could easily be addressed through tighter regulations, at least similar to those applying to conventional oil and gas. Innovative companies have already found cheap and practical ways to head off some of the much-publicized issues that plague the discussion about hydraulic fracturing.

For example, the use of abundant geological brines (deeper saline waters) has proved extremely successful to limit the squander of fresh water. Non-toxic chemical additives are being produced and an increasing number of operators are now disclosing the composition of their fracking fluids on the website.

It is also thought that the threat of fugitive methane release has been grossly inflated and is well below the coal equivalent percentages. With an average 1.4 percent leakage, including transportation, any producer is well aware that higher rates would not be profit-wise. Externalities, such as earthquakes caused by the improper disposal of wastewater, can also be minimized, namely by reducing injection volumes and recycling water.

Asset or liability?

However promising shale gas might sound, it should not be used as a surrogate for energy transition. Achim Steiner, executive director of the United Nations Environment Programme, claims that shale gas might divert resources away from renewables. And any disincentive to invest in cleaner energies will only delay the world's critical energy transition, especially if it becomes a liability.

But a right amount of shale gas may also provide the necessary bridging energy to backup intermittent sources such as wind and solar. Finding the delicate equipoise will be crucial to mitigate climate change.

The main risks are time and speed. Europe can develop shale fuels far more rapidly than it can move to renewables, especially in countries where such energies will entail huge and complex territorial grabs. If it fails to do so, the most likely competitor might be cheap coal. Already used as a temporary substitute in the German energy transition, it still represents 40.7 percent of UK's electricity. As energy prices continue to rise, the broad use of coal might keep power costs low enough for a number of developing countries.

Whether shale gas will actually get us closer to genuine global energy markets still is a hotly debated topic. So far, scientific ignorance, political opportunism and celebrities besotted with a new cause have somewhat fudged the real issue.

However, a number of unique factors have been germane to the U.S. boom, especially those prevailing above ground. The combination of private mineral rights, robust competition and strong drilling skills honed through years of wildcatting has proved a successful one.

Some countries like Russia or China might hold much bigger shale formations. But their economic and political systems still lack the technical expertise and a competitive environment, two major assets to quick innovation and free enterprise. Both states might also be reluctant to relinquish their piggy-bank monopolies for market competition.

Yet, for all the polemics, the shale phenomenon will be more than a fad. However fast it spreads from the U.S., it will have a long future ahead. And in the context of rising energy prices and climate mitigation, the case for adopting it should only have increased appeal.

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