The damned discovery – Arrival of cheap shale gas in North America

US Natural Gas prices 2007-2012

You may be wondering, why I put the word ‘damned’ in the title. Well, the conclusion will explain that.

Shale gas boom in Northern America

Strategists, energy experts, news papers etc are celebrating shale gas boom in US. With the arrival of new oil & gas king – US – OPEC’s ability for giving another oil shock may reduce, even a temporary instability in Middle-East or a crisis in Venezuela may not take crude oil prices over the head. However, Asian countries will remain vulnerable to the events in Middle-East.

According to Energy Department in Washington, in the first six months of this year US met 83% of its energy needs. This year alone, US crude import has fallen by 11%. Forecasts states that, US will overtake Saudi Arabia in oil production by 2020; and North America will become net exporter by 2030. However, Saudi Arabia may reclaim its position as the top oil producer by 2030.

Not only US oil and shale gas boom, but energy discoveries in Canada, offshore production in Gulf of Mexico and re-entry of old oil mogul Iraq to the game will certainly increase the availability of oil and gas in international markets.

Europe

Europe is yet to enter the shale era. As far as energy is concerned, continent is living under triple fear.  They fear to introduce hydraulic fracturing techniques, for extracting gas trapped in shale layers; secondly, they fear about constructing more reactors and using nuclear energy – especially after Fukushima crisis; thirdly, they fear about gas and oil supplies from Russia and climate change.

The way out for them, may be investing in evergreen energy producer – Coal. I used the word evergreen here because, whenever people start thinking that age of coal is over, she used to fight back successfully and conquer the throne. Europeans can also increase the drilling in Arctic, but it requires heavy investments and not all European countries have arctic shores.

US may replace her dirty coal fired plants with cheap and clean gas fired plants for generating electricity. Such an event will force US coal to search for new markets; probably across the Atlantic – to Europe. Already struggling under the twin weight of high dependency on Russian energy imports and self imposed nuclear ban Europe may embrace cheap coal.

India

However, these events may not turn out good for India because of various reasons.

1. Even after struggling for a good number of years, GOI is yet to come up with a good, non-controversial piece of paper called – Price Sharing Contract. Ever shifting policy, priorities and other problems were visible in court cases with Reliance industries over KG basin.
2. The construction spree of Ultra Mega Power Projects (UMPP), powered by coal – which we need to import from Indonesia, Australia etc – will keep the cost of electricity generation high.
3. Rising consumerism and number of fossil fuel powered vehicles will make the problem worse.
4. Even though gas prices are going down in US, we may not experience any such relaxation as gas prices are linked to oil prices; moreover governments are going for long term contracts instead of short term ones. So, if oil price remains high, gas prices will also remain high.
5. GOI is yet to form a comprehensive shale gas policy for India, it may come in 2013 or 14. Considering GOI’s problems in NELP (New exploration licensing policy) even after nine rounds, shale gas policy may take long time to consolidate. This will effectively make Indian shale gas exploration unattractive for international energy giants.

On the positive side, oil price may stabilize and go down. In future we may have more LNG terminals to receive cheap gas from Northern America, Russian Far East and Middle East – especially Qatar.

Conclusion

You may be wondering why I put the word dammed in the title. I am very much happy to see revolutionary changes in oil and gas extraction technologies in US, cheap oil and gas production and millions of new jobs created in US. However, this will reduce the incentives for US energy giants, automakers and the government to invest in alternate energy production techniques; especially the ones which can run cars and trucks.

I thought that, US dependency on Middle-Eastern oil and European dependency on Russian oil and gas will force them to speed up the research of alternate energy sources for utilities and vehicles. With the availability of cheap gas in US; coal, oil and gas (Russia in cooperation with EU energy companies is building pipelines to Southern Europe) will remove (or reduce) the strong urge for investing heavily in new energy frontiers. This will force India, China etc to depend on oil import for foreseeable future.

I sincerely hope that, GOI will find some time, in between building UMPPs, to take up commercially producible alternate energy - not only wind or solar plants spread over large areas but the one which can run small cars to big trucks. I can only hope that, there will be some breakthrough in this area. Till that time we may have to build more LNG terminals and try all we can do to delink gas prices from that of oil.

GOI needs to take this as a do or die fight; otherwise we may find ourselves totally helpless in front of rising oil and gas bills.

Sajeev.

References

1. US Energy Information Administration
2. Bloomberg
3. International Energy Agency

Photo Courtesy: Energy Information Administration, US Government