The U.S. has embraced shale gas production enthusiastically, leading to a fall in domestic gas prices and making it possible that the country could achieve energy independence in oil and gas by 2035, according to the International Energy Agency. But most member states of the European Union have been reluctant to explore the potentials presented by this controversial energy supply.The Baltic Review explains the dark side of the Shale Revolution.
George Mitchell, the founding father of the Shale Revolution, died this past July, leaving a controversial legacy behind him. He was convinced that the vast reserves of oil and natural gas that were trapped in shale rock could be freed for production. Mitchell spent decades experimenting and he finally discovered that water, sand and chemicals injected into the rock at high pressure allow the gas to come to the surface. This process is known as hydraulic fracturing, or “fracking”. Energy goldmines started to sprout like mushrooms. Shale gas now accounts for more than one-quarter of America’s natural gas production, compared with a non-existent 1% in 2000.
The Frack Show
All that glitters is not gold. The extensive use of fracking has prompted environmental as well as economic concerns. The first is that fracking uses huge amounts of water that must be transported to the fracking site, at significant environmental cost. There are also worries that potentially carcinogenic chemicals used may escape and contaminate groundwater around the fracking site and that the fracking process can cause small earth tremors.
The second is that there are negative economic impacts related to fracking. The current shale gas boom will soon go kaput, according to experts. In the U.S. unconventional oil and gas from shales has been claimed to be a game changer, revolutionary, “a gift and national treasure”, but the business model is not sustainable.
David Hughes, a geoscientist and former team leader on unconventional gas for the Canadian Potential Gas Committee, says that the U.S. boom on which many base their expectations is founded on shifting sands. “Supply can be maintained for many years,” Hughes said, “but only at much higher prices with ever-escalating environmental impacts due to the accelerating number of wells that must be drilled.”
The supposed economic benefits of shale gas and oil have been overstated by industry in every shale play to date. The ever increasing supplies of shale gas are not compatible with low prices, because the best ‘sweet spots’ for extracting shale tend to deplete quickly. While there is some initial economic boost, it has proved short-lived. Initially individual well productivity appears to climb rapidly, but the older the play, the more difficult and costly it becomes to maintain the production plateau.
Higher costs and poor production adds further problems for shale developers. With so many uneconomic wells it becomes much harder to make profits. Smaller companies unable to inject capital are forced to merge to larger ones. Experts conclude that rather than offering the cheap energy and economic prosperity, fracking will provide only a decade of gas and oil abundance, at most, and is creating a fragile new financial bubble that is already starting to deflate. Some fear that the market is already too contaminated. In fact, when you look at the level of debt some of the companies are carrying, and the poor performances of their gas reserves, there is a lot in common with the subprime mortgage market just before it melted down. So, who are the winners and losers of the fracking boom?
Deborah Rogers in her report Shale and Wall Street: Was the Decline in Natural Gas Prices Orchestrated?, uncovers the role of Wall Street investment banks in inflating the natural gas bubble to their advantage. “The main point for me is that the investment bankers heavily promoted shale and put pressure on the companies to meet production targets,” said Rogers. A handful of energy companies made fortunes by exiting at the market’s peak but most companies are suffering. They are committed to spending far more to produce gas than they can earn selling it. Gradually industry is demonstrating reticence to engage in further shale investment.
Shale gas in Europe
European-energy intensive industries are convinced that shale gas development in Europe is vital for secure, competitive energy supplies, but most European countries want to stay away from the “shale gas race”. According to EU Climate Commissioner Connie Hedegaard, closer cooperation between EU countries and an emphasis on energy efficiency would be more effective at lowering prices in the old continent than an American-style shale gas boom.
At EU level, Poland and the UK believe in shale’s potential but Bulgaria, France and northern Spain have all banned it, due to public concerns. German environmental experts doubt that developing shale gas is economically profitable. The potential of exploitable shale gas in Germany is so small that it would have no impact on regional energy prices, the German Advisory Council on the Environment (SRU) experts argued. “We believe that the potential of fracking gas is too small and that the production costs are very high,” explained Martin Faulstich, chair of the advisory council.
Experts reject the argument of fracking supporters on the assumed competitive advantage of the U.S. due to the shale gas exploration. An increase in unconventional gas production would be “a good move if it replaces coal,” Fatih Birol, the International Energy Agency chief economist told EurActiv at the launch of ‘Golden rules for the Golden Age of Gas’ in Brussels, “but it is definitely not the optimum path.” As shale gas is a finite energy resource, many argue that further investments in energy efficiency and renewable energies are the best way forward.