U.S. shale gas: The new kid on the block -Part II

Shale gas can also displace other liquid fuels such as gas oil and naphtha. It seems clear that the shift to natural gas is still in its infancy in the U.S. but the indications are that it has already started.


By Gustavo Coronel | February 27, 2013


Marcellus formationBakken formationHaynesville formation

Thanks to the improvement in drilling and production techniques developed jointly by the public and the private sectors during the last 20 years, shale gas is no longer an unreachable resource but a main contributor to the production of energy in the U.S. Shale gas plays across the country have generated a rapid change in the domestic energy landscape, one that could have significant influence in the global energy equation and the geopolitical scene. Shale gas production has already played a role in the significant decline in U.S. oil imports. The share of total U.S. consumption met by liquid fuel net imports, including crude oil, has been falling since 2005, when it reached 60 percent. It declined to 49 percent in 2010 and to 45 percent in 2011. The Energy Information Administration, IEA, expects that the total net import share of oil consumption will continue to decline further to 37 percent this year. If so, it will be the first time since 1991 that the share of total U.S. consumption met by liquid fuel net imports is less than 40 percent. In the latest EIA Annual Energy Outlook released in December, the share of imports is shown in continuous decline, representing only 34 percent in 2019. There is no doubt that part of this decline in hydrocarbon imports has been due to the growth in the domestic production of shale gas.

The Shale Gas Revolution by the Numbers

The U.S. Department of Energy, DOE, estimated last year that natural gas from shale reservoirs already accounted for 23 percent of total dry natural gas production in the country and will account for 49 percent of the total by 2035. DOE also predicts that the U.S. will become a net exporter of Liquefied Natural Gas, LNG, by 2016, starting at a level of some 1.1 billion cubic feet per day and increasing to some 2.2 billion cubic feet per day in 2019.

A report by global information company IHS is even more optimistic. It estimates that by 2035 two thirds of the total natural gas production capacity, estimated at 88 billion cubic feet, BCF, per day, will come from shale gas deposits. According to this report, by 2035 total U.S. natural gas consumption will be satisfied by 60 percent domestic shale gas, 32 percent other domestic gas, and 6 percent imports from Canada.

The Financial Impact of Shale Gas Development on the U.S. Economy

The spectacular nature of this boom is also evident in the financial and economic sectors. A 2011 report by the KPMG Global Energy Institute entitled, Shale Gas Outlook: A U.S. Perspective states that the total mergers and acquisitions (M&A) in the U.S. shale gas segment during 2010 amounted to US$39 billion—equivalent to 21 percent of the global upstream M&A value. Most of these mergers and acquisitions have followed a similar pattern. Smaller companies enter shale plays early and acquire significant acreage positions. Once the plays become commercially attractive, they sell off their stakes to bigger players to minimize their capital commitments:

“Shale gas makes the U.S. the Saudi Arabia of natural gas,” says Aubrey McClendon, chief executive officer of Chesapeake Energy. Former Energy Secretary Steven Chu has called the increased development of shale natural gas “a seismic shift in the energy landscape.”

Interviewed in November 2011, oil and gas expert Daniel Yergin said: “So far this century, [shale gas] is the biggest innovation in energy, in terms of scale and impact.” Yergin likened the impact of shale gas on the energy sector to the arrival of a new Wal-Mart in town, “which shakes up competitors, big and small.”

Impact of the Shale Gas Boom on the U.S. Economy

The economic impact of the activity in the shale gas sector is summarized by the IHS report, above cited, as follows:

  • In 2010 the shale gas industry supported more than 600,000 jobs. By 2035 it will support 1.6 Million Jobs;
  • Shale gas will generate more than $930 billion in federal, state, and local tax and royalty revenues over the next 25 years;
  • Capital expenditure in 2010 was $33 billion. It will increase to $48 billion by 2015 and it is expected to amount to nearly $1.9 trillion during the period 2010-2035.

The Marcellus and the Haynesville shale plays, the first in the northeastern portion of the country and the second in Louisiana, are the two areas having the largest shale gas resources in the country, at 262 and 251 trillion cubic feet, TCF, respectively, of technically recoverable reserves. The Marcellus shale gas deposits are shallower than the ones at Haynesville and have lower drilling costs. For this reason, it is the area that is showing the most activity. Another reason for this is that the Haynesville shale gas production has a higher declining rate. A recent report: indicates that gas production in the Barnett shale seems to have peaked and shows a rate of decline near 29 percent per year, requiring more than $17 billion to keep production at the current levels.

Some Important Shale Gas Development Ventures

Some of the important ventures in shale gas involve foreign companies in association with U.S. corporations. In 2010, the Chinese state company CNOOC entered into a joint venture with Chesapeake to develop a portion of the Eagle Ford play, with an investment of some $1.3 billion. The Chinese not only will get access to gas reserves but also to the technology related to this activity. In January 2010, Chesapeake also joined forces with France’s Total, with a joint investment of $2.2 billion in order to develop shale gas fields in the Barnett area. In October 2010, Norway’s Statoil and Canada’s Talisman Energy started developing an area of the Eagle Ford shale with an investment of $1.3 billion. In June 2010, India’s Reliance and U.S. Pioneer Natural Resources agreed to invest $1.3 billion in the Eagle Ford area. According to Marcellus Drilling News, no less than 50 large and mid-size companies are currently engaged in developing shale gas resources in that area. A notable transaction is the $4.7 billion acquisition of East Resources in 2010 by Royal Dutch Shell to develop shale gas in four states where the Marcellus shale is present. As recently as February 2013, Gulfport Energy Corp. was buying acreage for some $220 million from Windsor Ohio LLC in the Utica shale gas area, adjoining the Marcellus.

Short Term Impact on the U.S. Market

In 2009, the U.S was consuming around 19 million barrels of oil per day, about 65 percent in the transport sector. The new abundance of shale gas suggests that even if a minor percentage of the oil used in transport could be replaced by natural gas, the savings to the U.S. economy would be significant. For example, in Armenia, 75 percent of all cars and trucks run on natural gas. In the U.S. less than one percent do.

A measure introduced in Congress in 2011 (H.R. 1380) by Representatives John Sullivan (R-OK), Dan Boren (D-OK), John Larson (D-CT), and Kevin Brady (R-TX), the New Alternative Transportation to Give Americans Solutions Act, would, among other things, provide a 50 percent tax credit, up to a maximum of $100,000, for installing natural-gas filling stations and also encourage people and companies to buy more natural-gas vehicles.

Shale gas can also displace other liquid fuels such as gas oil and naphtha. It seems clear that the shift to natural gas is still in its infancy in the U.S. but the indications are that it has already started. The end result would be near energy self-sufficiency for a country that only two decades ago was deeply and dangerously dependent on oil imports.

Uncertainties

The future of shale gas presents two main question marks: one, environmental and the other economic. The environmental factor will continue to be an area of concern for some time but experts agree that it will be overcome, as techniques improve and the population realizes that many of their fears were unfounded. Probably more difficult to solve, at least in the medium term, is the economic issue, as natural gas prices might tend to remain very close to shale gas production costs. In the long term, however, shale gas appears well established as an important player in the energy field.

In Part III of this four part series of shale gas in the U.S. and the world we will analyze the components of the U.S. current energy equation and try to predict how this equation will change in the mid and long-term, as liquid fossil fuels gradually lose relative importance.



Gustavo Coronel, who served on the board of directors of Petróleos de Venezuela (PdVSA), has had a long and distinguished career in the international petroleum industry, including in the USA, Europe, Venezuela and Indonesia. He is an author, public policy expert and contributor to

SFPPR News & Analysis.