The Implications of Shale

Worldwide spending on renewable electricity generation, primarily by wind and solar, hit record levels in 2008 and remained stable last year in spite of the recession. In addition, investment in low-carbon R&D has increased by a third since 2005, production of hybrid and electric vehicles is on the rise, and energy efficiency in OECD countries has doubled in a little over a decade.

This, says the International Energy Agency (IEA), is an indication that an “energy revolution” is taking place, a shift from a hydrocarbon-based global economy to a renewable one, and one much faster than anticipated. “For several years, the IEA has been calling for an energy revolution to tackle climate change and enhance energy security and economic development. For the first time, we see early indications that such a revolution is under way,” says Nobuo Tanaka, executive director of the IEA. These are signs that the first “green shoots” of a renewable future have sprouted, he says.

But the unexpected rise of unconventional shale-gas resources should temper the IEA’s enthusiasm. Output from shale in the US and the availability of new liquefied natural gas (LNG) supplies have created a gas glut, depressing prices. Shale resources in the US and Europe are now thought to be so large as to alter the conventional wisdom about short-term energy, and geopolitical, scenarios. Natural gas has long been thought of as a bridge to the future from a hydrocarbon economy to one based on renewables because of its smaller carbon impact compared with oil and especially coal. But the rise of these unconventional resources, made available with better technology that has driven down production costs, could slow that transition because of gas’ cheap cost and availability. With an inexpensive and more environmentally friendly fuel available, it may make investment in and use of sources such as wind and solar seem less urgent.

Shale may be altering the geopolitical landscape as well. An informal gas producers’ organization was formed earlier this decade with giant producers Russia, Iran, Venezuela, and Qatar assessing the viability of such an organization that affects prices and supply. In a sense, a “gas OPEC.” But as long as local gas supplies are plentiful in North America and western Europe, the impact of such an organization is diminished. And Russia may lose its hold over parts of the European gas market as European shale output increases and LNG supplies, once thought to be directed to the US, find their way to Europe.

One thing that could derail the growth of shale is new regulation based on environmental concerns. Government scrutiny over hydraulic-fracturing techniques used in shale production has increased, and the Macondo blowout in the US Gulf of Mexico has heightened public fears of drilling and has encouraged environmental skeptics to put pressure on regulators. But absent that, shale’s impact on the global energy market will be significant. The US Department of Energy predicts that worldwide production of unconventional gas will increase 5.2% per year from now to 2035.

John Donnelly is Editor of The Journal of Petroleum Technology, a monthly publication of the Society of Petroleum Engineers, who have kindly consented to the reprinting of this article.