No Matter what Happens in Pennsylvania and New York, Fracking Is Going Global

Shale gas—natural gas reserves trapped under large rock formations—is the oil of the next century. As the U.S. Environmental Protection Agency begins to study the impacts of the processes involved in shale gas drilling, and the debate over whether tighter regulation is needed heats up in the U.S., the rest of the world is racing to get a piece of the shale gas action.

The financial, geopolitical and environmental implications of this global gas rush are huge, according to oil and gas industry analysts. In the United States, shale gas has already caused a natural gas glut, pushing down the price for natural gas, according to Adam Sieminski, chief energy economist for DeutscheBank. Seen as a bridge fuel between coal or oil and alternative energy, natural gas burns cleaner than either and can cheaply and easily feed into existing power-generation systems.

The price of the stuff could increase, however, if any of a host of proposed federal regulations is pursued. Shale gas was only recently made viable when a process known as hydraulic fracturing—“fracking” for short—underwent a few technological improvements in 2004 and 2005, compliments of Halliburton, and companies were suddenly able to use the process, along with horizontal drilling, to access the gas.

“What really opened up shale gas in the US was the combination of a bunch of things everyone knew but never put together—horizontal drilling, fracturing, and especially multi-stage fracturing,” Sieminski told SolveClimate. “That allowed you to frack 1,000 feet, drill a horizontal well, frack another 1,000 feet, drill another well, and so on. So you’ve got all the equipment there once, but instead of just doing one well you’ve got three fracks across the reservoir…and that suddenly makes it very economical.”

The same technological breakthroughs that made shale gas an option, and suddenly made huge stores of natural gas available, thereby driving down the price of the stuff, could drive it back up again. Fracking entails injecting water and a cocktail of chemicals into the shale at high force to bust open the rock and unleash the gas. That water is then dumped into a lined pit above ground. The idea is that it’s then treated and managed, but in some cases that water has contaminated soil and groundwater. Poorly lined wells have also resulted, in some areas, in natural gas and fracking chemicals getting into water supplies. Given that one of the largest shale formations in the country—the Marcellus Shale—also happens to sit over a drinking water source for most of New York and Pennsylvania (including New York City) has some local residents and environmental advocates concerned, prompting the EPA to look into how the process is regulated.

“The most severe of the proposed regulations, which have to do with the monitoring of each well, are the most costly and are probably unlikely to happen,” Brinkmann said. “But there definitely has to be a coming together where these companies will have to be more transparent.”

According to Brinkmann, what is most likely to happen is a tightening up of the regulations around the treatment of the process water. While that wouldn’t make shale gas economically unviable, it would probably reduce the amount of drilling, Brinkmann said.

“What it could do is reduce the potential of some reserves,” Brinkmann said. “For more marginal reserves, it would make it uneconomic to produce from those wells.”

However, technology developed in the U.S. to better deal with the wastewater created by shale gas drilling would likely be picked up by other countries that are just beginning to explore for shale gas, according to Brinkmann.

“A lot of the technologies and techniques that need to be developed to handle these risks will benefit the future of shale gas internationally, particularly around the recycling of used water, the way they process it to make it potable again,” he said. “Those are going to be technologies that they’re going to have to employ abroad as well.”

A source within the Department of Energy, who asked to remain anonymous, told SolveClimate that regulations or no, shale gas will be a major part of U.S. domestic energy policy moving forward.

“If the U.S. is going to set targets to reduce emissions, natural gas will play a big role in that, especially in the move away from coal,” Brinkmann said. “That will be true in other countries, like China and India, as well.”

In China and India, any shale gas that might be lurking underground could provide a way to continue developing on the cheap, without suffering the politically untenable side effects of increased pollution. It remains to be seen what sorts of shale gas reserves exist in those countries, but the Chinese government hasn’t let that stop it from announcing ambitious shale gas development goals.

To hasten the establishment of their own shale gas industry, Chinese and Indian companies are partnering with some of the U.S. companies that pioneered shale gas drilling technology, both in their own countries and in the United States. Earlier this month, Reliance Industries, India’s largest private company, acquired a 40-percent stake in Atlas Energy’s leasehold in a shale gas field in Texas.

Last November, President Barack Obama and President Hu Jintao of China announced a US-China Shale Gas Resource Initiative aimed at promoting “environmentally sustainable development of shale gas resources.” In July, the state-owned China National Petroleum Corporation announced that it aims to produce 500 million cubic meters of shale gas by 2015. Conoco Philips, Royal Dutch Shell, and BP are all working with China’s state-owned oil and gas companies to explore for shale gas there.

Many of the big international oil and gas companies, including U.S. companies such as Exxon and Chevron, were late to the shale gas game themselves. The drilling technology was seen as risky at first, and the economics weren’t yet proven, so it was the independent companies—notably Chesapeake, Range Resources, and Devon Energy—that pioneered the practice. Now the big companies are partnering up with the independents, and in some cases the independents are finding new revenue streams in the form of exporting their knowledge and technology overseas. Larger American companies, meanwhile, are making up for being behind on the domestic shale gas rush by racing to lead the way overseas.

In early July, for example, Chevron applied for a permit to explore for natural gas in shale deposits in northeastern Bulgaria. Europe is further along in its exploration, with Poland and Bulgaria actively and publicly exploring for shale gas, and Russia watching them closely. Russia’s Gazprom supplies most of Western Europe with natural gas. But according to oil and gas consultants Wood McKenzie, there could be as much as 48 trillion cubic feet of shale gas in Poland, which would make it home to the largest shale gas reserve in Europe. Were the country to tap into those reserves, they would not only eliminate their dependence on Russia, but become a major competitor in the European natural gas market.

According to a DeutscheBank research note published earlier this month, Europe is dreaming of a new “gas wonderland” as a result of the recent viability of shale gas and the discovery that reserves likely exist in many European countries. “In fact production could actually begin in two years in northern Germany (e.g. Lower Saxony), southern Sweden or Poland,” authors Josef Auer and Thu-Lan Nguyen write. “However, the muted trend in prices as a result of the gas glut is currently putting a damper on development, so that significant output is not to be expected for a decade.”

By that time US technological advances may have caught up with environmental concerns, but nonetheless the Deutschebank analysts expect European citizens to put up some opposition to the drilling. “Europe does have an advantage on America in that it already possesses quite a close-knit natural gas grid facilitating feed-in of the widely dispersed deposits,” Auer and Nguyen write. “But owing to Europe’s higher population density, environmental concerns such as potential hazards to groundwater and drinking water argue at first sight against excessive usage.”

European land ownership patterns may also pose a problem, according to Sieminski. “The problems in Europe associated with developing shale gas will have more to do with resource ownership,” Sieminski said. “The way it got done in the U.S. was through the independents—Chesapeake, Devon, Range—they pioneered this and they started in Texas, which is fairly friendly to oil and gas development, and where surface owners tend to own mineral rights. Similarly, in Pennsylvania, one of the reasons it got going so fast in the Marcellus is that landowners are getting paid a lot of money for land leases and royalties on production. In Europe, it’s common for the state to own mineral rights and so surface owners might oppose development.”

Nonetheless, Sieminski said the prospects look good for there to be major stores of shale gas all over the world, and all of the industry analysts expect an ongoing boom. The international boom is likely to cause a shift in natural gas prices. Currently prices are governed by the local context. In the United States they’re low because more and more natural gas is being produced. If the rest of the world starts to produce and use shale gas, there could be a convergence of markets.

According to Brinkmann, shale gas may even end up being a U.S. export, in the form of LNG.

Sieminski said it’s still too early to tell exactly what will happen. “The shale gas boom is already keeping natural gas prices low in U.S. So the question is will U.S. prices seep out into rest of world because we’re not using as much LNG and there’s a lot of LNG available? And could shale gas be developed in Europe for less than what, say, Gazprom is selling LNG for there? Those are the questions we’ll see answered over the coming years.”

Meanwhile questions continue to surface over the environmental impacts of shale gas drilling and it remains to be seen how the EPA will handle regulations if and when it decides to step in.

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