The Promise of the Shale Bubble
(Originally written in 2015)
Unconventionals are driving a wave of domestic oil and gas production in the United States that holds the promise of easing our transition into the renewable energy future. Without shale and tight hydrocarbons the American economy would have to absorb the shortcomings and higher cost of today’s renewable energy on a much wider scale or fall back on methods of electrical generation that have fallen out of favor with the public.
● Unconventionals can lessen the impact of globalized energy demand on the US economy
● An economy unhindered by an “energy tax” can provide the surplus needed for innovation
● The flow of domestic unconventionals will diminish and stagnant over the next decade
Vast reserves of oil and gas are locked in the semi porous rock and tight places deep beneath the continental United States. These unconventionals, shale and tight deposits, are already being exploited through hydro fracturing in North Dakota, Texas, and a host of other fossil fuel friendly states. While gas (~665 Tcf) is certainly the larger of the two in recoverable reserves, the estimated 58 billion of oil locked below is certainly the greater prize. While natural gas is well suited for power generation its uses as a transport fuel is more limited. Considering that almost 30% of the energy used in America is for transport the limited usefulness of a natural gas bonanza becomes evident. About 70% of the oil consumed in the United States is used to power transport for oil’s physical characteristics make it the ideal solution for the energy problem we have created for ourselves. Even the transport of natural gas is a much more difficult endeavor than the movement of oil as it requires dedicated pipelines or, for export farther afield, incredibly expensive liquefaction facilities and specialized LNG vessels. Oil therefore is where the true promise of shale exploitation can be realized.
The largest volume of oil shale in the US is concentrated in the Eagle Ford, Bakken and Permian basins in North Dakota and Texas. With recoverable reserves estimated at 30 billion barrels of oil. Already 1.2 million barrels a day (MMBD) is being pumped out of the ground from North Dakota’s Bakken formation, a significant portion of the 2 MMBD of oil being produced by all of the unconventional plays in the US. Now that the world is well past the age of easy oil and we are in fact quickly moving through the Earth’s stores of hard oil and we’ve begun to eye what today can only be called impossible oil. We will only tap those latter reserves if we fail to develop reasonable alternatives to our current hydrocarbon focused energy system. In short, we need robust economic growth to drive the innovation and investment that will lead to the creation of viable alternatives to fossil fuels. Expensive hydrocarbons would act as a tax on the entire economy, stifling development and encouraging the re-emergence of cheaper methods of power generation with greater external costs.
Today the alternative to shale plays is coal. Renewable energy is not robust or widespread enough yet and our transportation infrastructure is not electrified enough to allow renewables to fill the gap that would be created by the failure to exploit unconventional oil and gas. From 1962 to 2008 US coal production ( 92% of US coal is consumed domestically) grew at a steady pace, increasing year on year and only dipping temporarily during periods of economic recession. The recession of 2008 and the painfully slow recovery have put a historic dent in coal production, EIA estimates for 2014 will see only 1,028 MMst produced in the US, far off the 2008 peak of 1,171 Mmst but still a 4.4% increase.
Some have attributed switching, from coal to natural gas, for this prolonged slump in coal production but there is little evidence of this. Natural gas fed combined cycle gas turbine (CCGT) power plants have been built to take advantage of the historically low price of natural gas in the US, but not to replace older coal fired plants. The volatile or “peaky” nature of US electrical demand still favors the quick ramp up capability of coal plants over the the slower ramp CCGT plants. Also the comparative price per Million British Thermal Units (MMBtu) puts coal at a serious advantage when compared to natural gas, even as domestic natural gas has approached historic lows in price. At its most expensive coal approaches
$4/MMBtu while the price of natural gas has rarely dipped below $5/MMBtu and tracks closer to $7/MMBtu in northern markets where its used for heating as well as power generation. Moreover, the “low” price of US natural gas has not been absorbed by the industry as the new norm, and the proliferation announced of LNG export facilities further points to a higher price in the future. The era of cheap natural gas in the United States could come to an abrupt end if US LNG export comes online at the same time as we throttle back on the unconventional gas plays that would supply those terminals. While coal will continue to be the bedrock of our energy mixture for the near term, unconventional hydrocarbons can provide the economic “comfort zone” to allow renewables and other technologies to mature and help the United States avoid sliding back into an over reliance on coal power.
Natural gas has the potential to stabilize the price of electricity production over the course of the next decade. As electric and hybrid vehicles steadily penetrate the consumer transport market the need to further electrify commercial transport becomes evident. Natural gas powered vehicles have made some inroads in public transportation, but this would be a short lived solution if natural gas prices rise when LNG exports ramp up and unconventional production begins to wane. A larger share of the transport sector for electric and hybrid vehicles would allow renewables to compete in that sector from the electric side and allow natural gas to concentrate into the power sector. Unfortunately other uses for natural gas such as hydrogen fuel cells or Gas to Liquids (GTL) aren’t looking like they will bear fruit at a reasonable cost, but time and market forces will ultimately determine their viability. Although bio-fuels are currently the only viable renewable power sources that fits directly into the transport energy infrastructure we have in the United States, the danger lies in our dependence on ethanol and the energy linked commoditization of food products. In a real sense we risk calamity by feeding our trucks instead of our people. Rising food costs are often a prime indicator of social unrest. As a global exporter of food products linking our agriculture to the energy sector would also have knock-on effects on global agriculture prices. Bio-fuels sourced from waste products might limit the exposure of our agriculture sector ad prevent a direct linkage to global energy pricing. Exploiting unconventionals requires hydro-fracturing (fracking).
Fracking holds dangers, but they are dangers that have been managed by oil and mining company for generations, and for the most part responsibly regulated by the government. Effective exploitation of some shale reserves might require further safeguards to address NIMBY concerns in basins such as NY’s Marcellus. Pennsylvania’s experience with poorly executed shale exploitation could inform the way forward for shale in NY and California, measures such as the posting of insurance bonds to cover unintended accidents or outright negligence. As with any resource exploitation endeavor, state governments should work with companies to develop best practices concerning flaring, waste water and the proper disposal of shale tailings price set by the global commodities markets. This is one of the main reasons that the price of gasoline has remained stubbornly high across the US during the economic downturn and despite huge in-flows of domestic unconventional oil that cratered the price of WTI in late 2011. Unfortunately laws banning the export of US crude oil forced producers to sell the majority of that oil to US refiners who then sold it on the international market. Allowing producers to export gas and oil will shrink the spread between American hydrocarbon prices and international hydrocarbon prices, and will likely break the self-imposed bottleneck that has inflated domestic oil product prices for gasoline and jet fuel. This is but one example of why we need to responsibly exploit domestic unconventionals today to lessen the pain imposed on us by the increasing power and weight of global energy demand. Higher energy prices are akin to a tax on our overall economic growth as a nation, unconventionals not only produce jobs and their own revenue, they reduce the burden of this “global energy tax”. With proper planning, incentives and regulation this economic excess can be partially used to invest in energy alternatives — for the not too distant future when hydrocarbons become increasingly scarce. Today we envision a future dominated by renewable energy, where the transport sector has been viably electrified and power generation relies on hydrocarbons only to shave the peaks off energy demand a few days out of the year. The only thing we can be sure of is that the future will likely not turn out as we plan and we our better off investing in a wide range of energy technologies as opposed to picking a winner in exclusion of other possibilities. The promise of the shale bubble isn’t the fossil fuels that will be directly unlocked from the rock, it is the forestalling of a crippled economy in the face of an energy scarce future. It is the time to build energy infrastructure more appropriate for the future that is quickly coming to meet us.
