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How Shale Will Reshape America’s Role in the World

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After the fall of the Berlin Wall, the rise of China and the Arab spring, American energy independence looks likely to trigger the next great geopolitical shift in the modern world.

U.S. reliance on the Gulf for its oil — and its consequent need to maintain a dominant presence in the Middle East to keep the oil flowing — has been one of the constants of the post-1945 status quo. That could be turned on its head.

It's been dubbed "the homecoming". After decades in which the hollowing out of American manufacturing has been chronicled in Bruce Springsteen's blue-collar laments, cheap energy is being seen as the dawn of a new golden age for the world's biggest economy.

North American shale plays (areas) as of May, 2011.
Click on image to enlarge. 
Credit: U.S. Energy Information Administration.

The reason is simple. The U.S. is the home to vast shale oil and gas deposits made commercially viable by improvements to a 200-year-old technique called fracking and by the relentlessly high cost of crude.

Exploitation of fields in Appalachian states such as West Virginia and Pennsylvania, and further west in North Dakota, have transformed the U.S.'s energy outlook pretty much overnight. Professor Dieter Helm, an energy expert at Oxford University, said: "In the U.S., shale gas didn't exist in 2004. Now it represents 30 percent of the market."

If all the known shale gas resources were developed to their commercial potential in North America and other new fields, production could more than quadruple over the next two decades, and account for more than half of U.S. natural gas production by the early 2030s, according to recent study by the Harvard Kennedy School Belfer Center.

Pennsylvania — where the first oil well was drilled in 1859 — produced about 30 million cubic metres (1 billion cubic feet) of natural gas in 2008. By 2010, the state was producing 11 billion cubic metres, helping to put the U.S. on course to be the world's biggest supplier of oil and gas within a decade.

Looming self-sufficiency in energy has three economic benefits to the U.S. The first is the direct impact on production and employment in the sector, with Barack Obama noting in this year's state of the union speech that fracking was likely to support 600,000 jobs by the end of the decade and that the U.S. now had enough gas to keep it supplied for the next 100 years if current consumption patterns were maintained.

Regime Stress

Long-term consequences for the rest of the world are hard to predict but it is probably safe to say that many of the regimes whose global role rests on hydrocarbons alone are likely to be significantly weakened, if not swept away.

That includes the monarchies that have thus far withstood the Arab spring. Their persistence has depended on a historically high oil price and unquestioning western backing. Both those conditions are now in question.

An Iraqi policeman shouts during an attack on a pipeline during the Iraq war. 
Credit: Jamal Nasrallah/EPA.    

Shashank Joshi, a fellow of the Royal United Services Institute, said: "The Gulf Arab political order for almost the entire post-war period has depended on U.S. interest in the region.

"The monarchies endured for so long not because of any sort of popular legitimacy but because they could depend on enormous external support. Those regimes, which have already had to deal with a high degree of domestic mobilization will come under unbearable stress and they cannot survive without the technical advantage of western weapons."

Few are expecting the U.S. Fifth Fleet to pack up and sail home in the immediate future, just because America has found enough oil and gas for its needs in its own back garden. Geopolitical change tends to lag a decade or two behind economic change, but as the U.S. finds itself less reliant on regimes with which it has little in common there will be powerful pressure on the Pentagon to begin to bring home its troops and hardware.

The speed of U.S. disengagement will depend to a large extent on whether the alternative is a vacuum and instability, as a variety of religious and tribal forces vie to inherit the Gulf kingdoms. The role of Iran, an economy largely dependent on oil sales that already faces severe budget shortfalls from sanctions, is likely to be critical. Whether it responds to crisis by collaboration or confrontation with its traditional Gulf adversaries will shape the region's future.

A lot depends, too, on whether the new biggest customers for Gulf oil are ready to take America's place in patrolling the tanker routes.

Joshi said: "There is a mismatch between China and India's reliance on Middle East energy and their provisions for its security. India will have three carriers and both China and India are building blue-water [ocean-going] navies. They may be compelled to engage if the U.S. pulls away."

Nicholas Redman, senior fellow for geopolitical risk and economic security at the International Institute for Strategic Studies, doubts that the U.S., even if freed of Gulf oil dependence, would want to cede the space to Indian or Chinese rivals.

"If the Gulf goes haywire, there is a transmission effect on the economy, whether or not it gets its oil from there," Redman said.

Oil Powers

The U..S alliance with Israel is also likely to be highly resistant to change. As the presidential elections have just demonstrated, it has become an article of faith in security policy for both American parties — a fact that is largely independent of the geopolitics of oil.

The Gulf is not the only area where the established oil powers are in danger of crumbling. The biggest single loser of all will most likely be Vladimir Putin's Russia, a regime largely dependent on high energy prices and a captive market with no real alternative plan.

Shtokman Field - Russia - Barents Sea.
Click image to enlarge.
Credit: Arcitc Economics.

Russia is already feeling the direct impact of the new gas age. Development of its Shtokman field — believed to be one of the largest gas fields in the world — deep under the Barents Sea, has been shelved, because its intended customer, the US., now has its own home-grown source of natural gas.

Russia is the most vulnerable of the current petro-states because of the central role of gas to its international standing. Moscow's sway over eastern and central Europe is dependent on Gazprom, which has used its dominance to set favourable terms, selling long-term contracts linked to the oil price.

Now, as more and more of the liquefied natural gas (LNG) formerly intended for the U.S. finds its way on to the western market, the spot gas price is coming adrift of the oil price and the Europeans have new options, which will lessen their dependence on a single dominant seller.

"Russia has just seen its aspiration market disappear. The U.S. is already a bigger gas producer than Russia," Redman said.

He pointed out that there were deep obstacles — environmental and economic — to large-scale European exploitation of its own oil shale resources, but imports from the U.S. and elsewhere could still transform the continent's uneasy relationship with Moscow.

"Europe doesn't want to get into deeper reliance on Russia. They are looking at other options like: can you bring gas in from places like Turkmenistan? If the import of American LNG becomes a serious option in northern Europe, it could have very interesting implications."

Russia has tried to look east, but China prefers to keep its energy sources spread around the world — emerging LNG producers such as Qatar, Australia, and west African states, for example.

The Putin government has talked a lot about diversifying the Russian economy, but very little has happened in that direction. It remains essentially a petro-state dependent on an oil price of $120 to balance its budget. With a current price of $109, Moscow already faces a serious shortfall, which is only likely to grow in an age of energy abundance, deepening its long-term problems and narrowing its capacity to diversify.

Tankers load oil in the northern Persian Gulf.
Credit: Richard J. Brunson/U.S. Navy.

David Clark, chairman of the Russia Foundation, said: "Russia needs $200 billion a year in investment over the next 20 years, to open new fields and modernize its infrastructure. But it faces $60-$80 billion capital flight a year. It cannot meets its requirements."

The consequences are a greatly weakened Kremlin, both in relation with Russia's own regions and the rest of the world. If Moscow manages its decline well, that could have positive impacts in multipolar collaboration. Obama could find he has a partner in his bid to make deep cuts in the world's two biggest nuclear arsenals, and there could be a more collaborative atmosphere in the U.N. security council over issues such as Syria.

The geopolitics of an energy surplus world will be quite unfamiliar. Australia is tipped to emerge as a major player, rivalling Qatar as the world's largest LNG exporter by 2030. As a region, west Africa is likely to emerge as a major hub, alongside Argentina. It will also, arguably, be a more interesting, more multipolar planet.

Whether it will also be a better one will depend largely on how the shift is managed from the old world to the new.

Why Now?

• Shale gas is natural gas — methane — that was generated from the rotting of forests millions of years ago, and is now held close within deep geological formations of dense rock.

• Blasting open this rock requires vast force — the jetting of water, sand, and chemicals against rock formations at extreme pressure — and the technology to do so has been developed only very slowly since the 1950s.

• More importantly, conventional drilling for oil and gas has involved vertical wells that open up oilfields, which then spew their contents to the surface, where it can be captured.

Shale gas release is entirely different, requiring the blasting open of rocks across vast distances at close quarters, making vertical wells useless.

It was only in the early 2000s that the necessary horizontal drilling techniques were perfected.

• Wells can now be drilled down 5,000-7,000 feet, then diverted at right angles to produce tunnels 5,000-8,000 feet long. These allow rocks to be blasted apart across huge distances.

Reprinted with permissions from The Guardian.

Comments

By Jeff (Oak Forest, IL 60452)
on November 22nd, 2012

The immediate and medium range geopolitical and economic effects of all this methane is outlined in the article, but the 900 pound gorilla in the room is the effect on the climate.  As readers of climatecental.org well know, increased methane production will accelerate climate change; thousands will die from floods, millions will die from drought, and economies will crumble.  What are we thinking????????????????????????

Solar—production is free for the next 4.5 billion years.  Infrastructure must be built, but that means jobs.  Pollution:  0.  What are we thinking??????????????????????

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By Roger Blanchard (Sault Ste. Marie, MI 49783)
on November 22nd, 2012

Below is a commentary I recently wrote for the ASPO-USA newsletter concerning tight oil (see ASPO-USA newsletter for figures).  I’m I incorrect concerning tight oil production in the U.S.?  Concerning gas, it would be worthwhile to evaluate what petroleum geologist Art Berman has to say.


A Closer Look at Bakken and U.S. Oil Production

Recent U.S. news reports have highlighted the fact that U.S. oil production has been rising and is now higher than it has been in years.  Reports that highlight the recent U.S. oil production increase don’t mention that oil production outside of Texas and North Dakota has actually declined in the last few years. 
Occasionally the media highlight the production increases that have occurred in the Bakken Shale region of North Dakota without going into any detail so it’s worthwhile to take a closer look at the Bakken region to see what’s happening.
Figure 1 is a map showing the location and extent of the Bakken Shale formation. 

Figure 1 – A Map of the Bakken Shale Region

Bakken extends over a large area of North Dakota, Montana and Saskatchewan so one might think that if oil production is rising rapidly in North Dakota, it must also be rising rapidly in Montana and Saskatchewan.

Figure 2 is a graph of Montana’s oil production rate in recent years.  Production reached a high of ~100,000 b/d in 2006 and has since declined to ~65,000 b/d.


Figure 2 – Montana Oil Production

I read occasional articles in the Bakken Weekly suggesting that there is considerable oil activity on the Montana side of the border in the Bakken region.  That activity has not translated into increasing oil production in recent years.

In the case of Saskatchewan, oil production did increase 2.2% in 2011 but that occurred after essentially flat production from 2000 to 2010 so there has not been an oil production surge in Saskatchewan like there has been in North Dakota.

Oil production in the North Dakota sector of the Bakken formation has increased rapidly, illustrated in Figure 3.

Figure 3-Bakken Oil Production in North Dakota

Although oil production in the Bakken region of North Dakota is growing rapidly, production is not growing uniformly throughout this region.  Production is heavily concentrated in 4 counties: Williams, Mountrail, McKenzie and Dunn.  Figure 4 is a map of North Dakota showing the location of the 4 counties on the western side of the state.

Figure 4-County Map of North Dakota

For the month of June 2012, the four counties had production of:

1). Mountrail – 4,882,352 barrels
2). McKenzie – 3,817,698 barrels
3). Williams – 2,970,930 barrels
4). Dunn – 2,734,640 barrels

Total production for the four counties was 14,405,620 barrels while total Bakken production was 17,830,456 barrels.  The four counties represented 80.8% of total Bakken oil production.  The four counties also produced 72.7% of total North Dakota oil production. 

I have a contact in southern Billings County.  According to that contact, oil companies have largely moved out of Billings County and moved north to the four counties specified above because that is where the oil is. 

The Bakken Weekly has drilling permit data which shows that most new drilling permits are for the four counties as well.  It’s standard procedure for the oil industry to produce in the most favorable area of a region first before going to subprime areas and that’s what the oil industry is doing in western North Dakota. 

To achieve the rapidly increasing oil production in the region, oil companies have rapidly increased the rate of drilling, illustrated in Figure 5.  The number of producing wells has now surpassed 4000 and the number of new well completions in 2012 should exceed 1000.


Figure 5 – The Number of Oil Producing Wells in the Bakken Region of North Dakota

Even within the four counties specified above, some of the area is not exceedingly fruitful.  It appears to me that in the near future, the prime producing area within the four counties is going to be saturated with oil wells considering that the fracking wells being used can extend up to approximately 2 miles.  Assuming that the industry continues to add new wells rapidly, they will have to go to less fruitful areas outside of the prime producing area.

Oil wells in the Bakken region decline rapidly.  From data I’ve seen, the average decline in the first year is ~60%.  The only way to maintain or increase Bakken oil production is to rapidly increase the number of wells.  As the industry has to drill in less fruitful areas, being able to maintain production will become an increasing challenge.

In a previously published commentary, I stated that I expected Bakken oil production to peak around 2014.  I maintain that position with my predicted peak date being 2014 +/- 1 year. 

North Dakota’s oil production outside of the Bakken region is already declining, illustrated in Table I.

Year North Dakota Oil Production
Outside of the Bakken Region (b/d)
2006 103,110
2007 103,157
2008 97,227
2009 82,058
2010 74,145
2011 66,380
2012* 65,301
Table I – North Dakota Oil Production Outside of the Bakken Region

*Based upon data for the first 6 months of 2012

When oil production in the Bakken region starts declining, North Dakota’s oil production will decline with a decline curve that pretty much parallels that of the Bakken region.

As I’ve stated above, the increase in U.S. oil production has been due to production increases in Texas and North Dakota.  Table II contains U.S. oil production data excluding Texas and North Dakota. 

U.S Oil Production minus Texas and North Dakota
Year Using U.S. DOE/EIA data for the GOM (mb/d) Using BOEM data for the GOM (mb/d)
2006 3.905 3.905
2007 3.881 3.881
2008 3.719 3.723
2009 4.042 4.042
2010 3.998 3.988
2011 3.787 3.788
2012* 3.789 3.713
Table II

*Based upon data for the first 6 month of 2012

In Table II, I’ve included data for the Gulf of Mexico (GOM) from both the U.S. DOE/EIA and the Bureau of Ocean Energy Management (BOEM).  I’ve done that because the near-term data from the two agencies are considerably different with the U.S. DOE/EIA data being higher.

In 2011, there was a large volume difference in data from the two agencies at the end of the year for the GOM.  It appears that the two agencies met and agreed upon a production rate for the GOM in 2011 with the U.S. DOE/EIA going down and the BOEM going up.  That may be the case in 2012 as well.

In Table II, the higher U.S. oil production rate outside of Texas and North Dakota in 2009-2010 was due to higher production from the deepwater GOM in those years.  Since then, GOM oil production has declined leading to a decline in U.S. oil production outside of Texas and North Dakota.

According to the Annual Energy Outlook 2011 from the U.S. DOE/EIA, GOM oil production is going to increase through 2013.  I personally expect GOM oil production to decline through 2013 because the only significant GOM oil complex brought on-line in 2012, Caesar/Tonga, was brought on-line in March 2012.  The bulk of the production increase associated with Caesar/Tonga will be in the first half of 2012. 

No new significant fields beyond Caesar/Tonga are expected to be brought on-line in the GOM through 2013 while deepwater GOM fields in decline are probably declining at an average rate of 10-20%/year, based upon my experience.  Maybe the U.S. DOE/EIA knows something I don’t know but it won’t take long to determine if that is the case.

Without going into detail concerning Texas, I expect Texas oil production to have a secondary peak around 2014 (Texas oil production actually peaked in 1972 at 3.57 mb/d while it’s presently ~1.5 mb/d).  If oil production in both Texas and North Dakota begins to decline around 2015, I expect U.S. oil production as a whole to begin to decline in that same time frame.

 

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By Betsy (guilderland, NY 12303)
on November 23rd, 2012

kind of surprised that climatecentral would place such a business outlook on this web page which normally focuses on climate , for an industry which can sidestep alot of methane controls, (Cheney’s energy act 2005) .  While the article may be factual, I agree with Jeff that it would be good also to add something about the questionable (verdict is still out) environmental impacts; particularly unavoidable methane migration, much freshwater lost in the process and likely contamination of groundwater with drilling fluids or methane (most recently a Duke study) . Renewables!  please see how the eia also discusses the loss of methane in the processing of natural gas, in their most recent report on GHG emission trends for methane .

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