I take it that the United States is not unique in having shale gas reserves. What are the implications for other regions?
The reserves in the United States are on a different scale to those elsewhere. Russia has some shale gas reserves, and there are some in the Middle East, in Iran, and off the coast of Venezuela. But the key point is that shale gas in the United States and Canada can really change the balance of power among energy producers. Today we have OPEC as a cartel dictating oil pricing to some extent to the world. The United States could have an impact on this pricing. Another important factor is that natural gas is a very clean fuel. It will make it much easier for the United States to lower its carbon footprint and get closer to the Kyoto Protocol.
There are issues with the hydrofracturing, or hydrofracking, techniques used, with claims that the chemicals in the hydrofracking mix are environmentally damaging. Will that become a major stumbling block to the development of shale gas?
The background to the hydrofracking controversy was fully aired in a series of articles in the New York Times recently. There are two major issues. One concerns the additives mixed in with the water and sand that are pumped down the well. The additives are only a very small component, typically around 0.5%, but the charge is that they contain toxic elements which, if they escape to the surface, will pollute and poison the soil and the environment. This is very difficult to establish since the production companies take a very proprietary attitude to their formulae for the additives, claiming that the right mix conveys a competitive advantage, so they should not be forced to disclose it to their competitors. The other problem is that a percentage of the water that is pumped down the well to fracture the rock flows back out again. In the Marcellus Shale area, which is both the second largest shale gas reservoir in the world and is located in and near densely populated areas, these controversies will run and run and they look certain to impose some kind of additional regulatory cost on the industry. It seems unlikely though, that the protests will stop gas shale from being produced.
Another key point to grasp about US shale gas is that it confers a tremendous competitive advantage to US industry at a time when the US deficit is a serious cause for concern. US companies that are heavy energy users can save considerably on their production and manufacturing costs by switching from oil at US$120 or more a barrel to natural gas at US$4–$5 per 1,000 cubic feet instead of US$20, which would be the logical price if the gas price had not decoupled from oil. Although shale gas prices will go up over the next few years, gas futures pricing even going out 20 years is still very low.
However, there is an issue with distribution. The United States is poorly served as far as coast-to-coast and state-to-state distribution pipelines are concerned, and there are huge planning and permission obstacles in the way of private companies wanting to build new pipelines. No town or city wants a pipeline running near it or through any scenic spot. So it is hard to retrofit a national gas distribution network on to the country. The other point is that baseload electricity generation in the United States is very solidly predicated on coal-fired power stations. Gas-fired generation plants are there in plenty, but they are used to meet peak demand, since they can be powered up very quickly. Switching from coal- to gas-fired stations designed to run 100% of the time is going to be a challenge. On the plus side, in a speech at the end of March 2011 President Obama announced a number of new energy policy goals, including making much more use of shale gas and using compressed natural gas to drive bus fleets and heavy transport fleets. That will be a very positive boost for natural gas. It will also help the United States to go some way toward meeting its carbon reduction obligations under the Kyoto Agreement.
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- Previous section Both oil and natural gas are hugely important fuels for industry. If we look at the relationship between the price of oil and the price of natural gas, that relationship varies dramatically from one region to the next. What are the implications for natural gas pricing in the medium term?