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The Shale Gas Revolution

Recent advances in hydraulic fracturing (“fracking”) are spurring development of shale gas reserves in the United States, Canada, Poland, Australia, and other countries. The shale gas boom has strengthened energy security in these countries by lowering dependence on imported fossil fuels. It has also reduced natural gas prices, bringing welcome relief to hard-pressed households still recovering from the global downturn.

But the use of hydraulic fracturing to recover natural gas raises potentially serious environmental effects that have provoked growing concerns by residents of affected areas, regulatory agencies and other stakeholders. Fracking employs toxic chemicals and high pressure water to release natural gas from underground shale deposits, creating risks of ground and surface water contamination.

While the magnitude of the environmental threat remains unclear, the public outcry over hydraulic fracturing has been widespread and vociferous. Environmental groups in Europe, North America, South Africa, and elsewhere have called for outright bans on fracking. Political leaders facing re-election in the U.S., France, and other countries are voicing reservations about fracking despite the manifest benefits of increased natural gas supplies. Global energy companies are hedging their investments in shale gas operations to await clarification of the political/regulatory climate surrounding hydraulic fracturing.

This article examines the shale gas revolution, focusing on the debate over hydraulic fracturing in the United States and Europe.

Shale Gas Boom

The shale gas revolution is arguably the most important development in global energy over the past decade. Previously a minuscule share of natural gas production, shale gas supplies have surged in response to advances in recovery technologies.

The U.S. Energy Information Agency (EIA) estimates technically recoverable shale gas reserves at 6,672 tcf (trillion cubic feet) worldwide. The EIA assessment excludes regions possessing major shale gas deposits (including the Russian Federation, Central Asia and most of Sub-Saharan Africa) and so the total volume of exploitable shale gas around the world is probably much larger.

Among the countries covered in the EIA study, the following hold the largest recoverable shale gas reserves:

#1 China 1,275 tcf
#2 United States 862 tcf
#3 Argentina 774 tcf
#4 Mexico 681 tcf
#5 South Africa 485 tcf
#6 Australia 396 tcf
#7 Canada 388 tcf
#8 Brazil 226 tcf
#9 Poland 187 tcf
#10 France 180 tcf

In September 2011, energy developer Cuadrilla announced the discovery of a shale deposit in the United Kingdom containing up to 5.6 trillion cubic meters of gas. This finding raises potential shale gas reserves in the European Union to 22 trillion cubic meters which, according to the European Centre for Energy and Resource Security, would meet EU energy demands for 60 years.

 

Benefits of Shale Gas

The surge in shale gas production generates a number of benefits for the world economy:

  • The entry of shale gas heightens the utility of natural gas as an energy source for electricity generation, industrial and residential heating and chemical feedstock production
  • Expanding supplies of shale gas reduce the utility bills of households and lower the operating costs of energy-intensive industrial manufacturers
  • Declining natural gas prices facilitate the deployment of natural gas for transportation fuel, already used by heavy vehicle fleets and now penetrating the passenger car market
  • Increased production of shale gas promotes the development of the inchoate market for LNG (liquefied natural gas)
  • As a comparatively “clean” fossil fuel with a lower carbon intensity than coal and petroleum, natural gas represents a vital bridge in the slow migration to a renewable energy platform
  • Amplifying these positive effects, the countries that are moving aggressively to develop shale gas (Australia, Canada, U.S.) have well developed natural gas infrastructure (pipelines, transmission lines, processing facilities, storage depots) ready to absorb increased supplies.

The United States is a first mover in the global shale gas industry. Over 50,000 shale gas wells have already been drilled in the U.S., and the growing push for domestically produced energy signals the continued exploration of shale gas in coming years. The share of shale in American natural gas production increased from 1 percent in 2000 to 14 percent in 2009, and is projected to rise to 45 percent (well surpassing conventional gas production) by 2035.

Amid slow commercialisation of renewable energy technologies, the shale gas boom enables the U.S. simultaneously to reduce its carbon footprint (e.g., replacement of coal-fired plants with natural gas combined cycle plants) and to lower its dependence on imported energy (including replacement of foreign oil with domestically produced natural gas). The politico-economic environment is thus ripe for the continued growth of shale gas production in the U.S.

Risks of Hydraulic Fracturing

The sharp growth in shale gas production also raises environmental dangers emanating from hazardous chemicals used in the hydraulic fracturing process.

As shown in the exhibit overleaf, benign water and sand constitute the overwhelming share (99.5 percent) of materials used in hydraulic fracturing. However, the residual 0.5 percent of fracking fluids consists of a variety of toxic chemicals that create environmental dangers even in trace amounts.

In March 2011, facing mounting public anxiety in New York, Pennsylvania and other states, President Barack Obama directed U.S. Energy Secretary Steven Chu to form a subcommittee of SEAB (Secretary of Energy Advisory Board) to address the environmental impact of shale gas production in the United States. In August 2011, SEAB issued its preliminary recommendations that included greater public information about shale gas, improved communication between federal and state regulators, and increased disclosure of fracking fluids used by shale gas developers.

In November 2011, the U.S. Environmental Protection Agency issued a report on the environmental fallout of hydraulic fracturing (“Plan to Study the Potential Impacts of Hydraulic Fracturing on Drinking Water Resources”). The EPA identified five areas of concern:

  • Water Withdrawal: Environmental effects of large withdrawals of ground and surface water for hydraulic fracturing
  • Surface Water Quality: Impact of surface spills of hazardous chemicals used in fracking
  • Groundwater Quality: Leakage of toxic drilling chemicals into underground aquifers
  • Flowback and Produced Water: Possible contamination of water resources by flowback/producer water from shale gas wells
  • Wastewater Treatment and Disposal: Consequences of inadequate treatment and disposal of wastewater from hydraulic fracturing operations

In December 2011, the EPA released another report (“Investigation of Ground Water Contamination Near Pavillion, Wyoming”) that appeared to validate growing concerns over hydraulic fracturing. Drawing on samples taken from wells near the Pavillion gas field in central Wyoming, the EPA reported high groundwater concentrations of benzene, diesel and gasoline range organics, dissolved hydrocarbons, methane and xylenes.

 

Hydraulic Fracturing in Europe

The backlash against hydraulic fracturing is especially pronounced in Europe. France has banned the method, and President Nikolas Sarkozy holds to his opposition to fracking in a country that possesses the world’s 10th largest shale gas reserve. Bowing to German environmental activists, the state of North Rhine-Westphalia imposed a moratorium on shale gas drilling. Small, resource-poor European countries have joined the opposition to fracking. On 16 January, Bulgaria revoked a shale gas exploration permit granted last year to Chevron. Public support of fracking is waning in the Netherlands, long a global leader in natural gas recovery.

Poland represents the foremost exception to the rising opposition to hydraulic fracturing in Europe. The country’s estimated recoverable shale gas reserves (187 tcf) are the largest in Europe and the ninth largest in the world. Poland’s recent shale gas discoveries (traversing the Baltic Basin in Pomerania to the Lublin Basin in the southeast) promise to strengthen energy security by reducing dependence on natural gas imports from the Russian Federation. As a coal-centric economy facing an EU mandate to lower greenhouse gases, Poland looks to natural gas-fired power plants as a rapid and economical means of reducing the country’s carbon footprint.

Since 2007, the Polish government has issued over 100 shale gas leases to leading energy companies (Chevron, ExxonMobil, Marathon, et al). In January 2012, Poland’s Internal Security Agency detained seven individuals for alleged corruption in the issuance of shale concessions. But Polish political leaders have reaffirmed their determination to proceed with shale gas development despite the misgivings of France and other West European countries over hydraulic fracturing. Exploratory drilling in Poland has begun with the aim of beginning commercial-scale production at mid-decade.

Conclusion: Environmental Safety vs. Energy Security

The divergent positions of France and Poland on the fracking question highlight the tension between environmental safety and energy security in the rapidly growing shale gas industry.

For France, the environmental hazards of hydraulic fracturing outweigh the economic benefits of increased shale gas supplies. The Sarkozy government’s position on fracking illustrates both the political dynamics of French environmentalism and the country’s large nuclear energy capacity (generating 85 percent of national electricity) that lessens the economic imperative of shale gas development.

For Poland, energy security trumps anxieties over the environmental fallout of hydraulic fracturing. As Europe’s most coal-dependent economy (86 percent of national energy production), Poland faces mounting pressure to hasten the development of low-carbon energy sources to meet the EU’s 20/20/20 mandate. The recent discovery of large shale gas deposits in the Baltic and Lublin Basins presents a natural opportunity to replace coal with cleaner burning natural gas and to lower reliance on hydrocarbon imports from Russia, whose bilateral relations with Poland remain uneasy.

About David Bartlett

David Bartlett, Economic Consultant, has over ten years’ experience of consulting, researching and teaching on international corporate strategy. He specialises in international growth, global manufacturing, foreign sourcing and distribution and corporate risk management.

David is Adjunct Professor of Strategic Management and Organization at the Carlson School of Management, University of Minnesota. He has also held faculty appointments at Vanderbilt University (USA), Yerevan State University (Armenia), and the University of World Economy and Diplomacy (Uzbekistan).

David has received a Fulbright Senior Scholarship, Salzsburg Seminar Fellowship and other scholarly awards. He holds a PhD and BA from the University of California and an MA from the University of Chicago.

E: david.bartlett@rsmi.com

David Bartlett
Economic Advisor, RSM International
January 2012

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