It’s Too Soon to Judge Shale Gas

Its effect on energy economics is huge, but will it last?

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Shale gas—that is, natural gas from shale deposits—may seem at first glance a huge, indisputable success for the United States. In 2007 it accounted for just 8 percent of the gas extracted; by 2013 its share had risen to nearly 40 percent. As a result, in 2009 the United States became the world’s largest producer of this, the cleanest of all fossil fuels. This surge has led to two far-reaching decouplings of price: between those of natural gas and crude oil, and between those of natural gas in North America and in Eurasia.

Before 2008, the energy-weighted price of crude oil in the United States used to fluctuate at between one and two times that of natural gas. By 2013, that ratio had risen nearly to 5. In 2008, wholesale gas prices in the United States were just marginally lower than in Europe and only about 20 percent lower than in Japan. But by 2013 Europeans were paying nearly three times as much as Americans, and the Japanese nearly 4.5 times.

No wonder foreign chemical companies have shown a lot of interest in building their new capacities in the United States. By 2013 nearly half of the US $100 billion in planned petrochemical investment had come from abroad. And the U.S. regulatory authorities have received nearly 40 applications to export natural gas in liquefied form.

Yet even so, it would be best to reserve judgment on fracking, the technology that made it possible, for at least a decade or so. That’s because it always takes time to assess the durability and impacts of new ways of supplying energy.

Consider the problem of production over the long term. Freshly fractured shale layers yield a lot of gas, but by the end of the first year, the output of U.S. shale gas wells declines by at least 60 percent and by as much as 80 percent.

To keep the gas flowing, companies must drill new wells, each at a cost of between $3 million and $6 million. For some producers that may be either barely profitable, or too high, at today’s natural gas prices.

Hence an inevitable question: How long will the recent surge of output—shale gas volume is up 5.5-fold between 2007 and 2013—and the resulting low gas prices last?

On a global strategic scale, will U.S. shale gas, exported as liquefied natural gas (LNG), ever make a difference? Will it, for instance, greatly diminish Europe’s dependence on Russian gas? And even if the nearly 40 projects to export American LNG could make profits at today’s prices, wouldn’t rival producers in Russia, Qatar, and Australia just lower their prices in response?

Reserves of shale gas are enormous on all continents, but few basins offer such favorable recovery conditions and such low production costs as do the best half-dozen basins in the United States. Most important, many gas-rich basins have no ready access to the large volumes of water needed for fracking. This is particularly true in China, the country that has perhaps the world’s largest shale gas resources and which would benefit most from their development.

Then there are the environmental aspects. Fracking can pollute air and water, and the one great environmental advantage of gas—burning it releases less carbon dioxide than burning oil products and coal—disappears if too much natural gas escapes during drilling and fracking. Natural gas is mostly methane, and every molecule of methane traps more than 20 times as much of Earth’s infrared radiation as does a molecule of carbon dioxide.

Exaggerated claims and promises are rife in energy affairs, and that is why we must remain cautious. Shale gas has already transformed the U.S. energy balance, and it promises to change the global energy economy, but we cannot yet say how long this transformation will continue, nor can we predict its final economic, strategic, and environmental effects.

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