Wednesday, June 20, 2012

Why U.S. Shale Gas Will not Be a Cookie Cutter Model

A new report of the International Energy Agency (IEA) on unconventional natural gas earlier this month predicted that “global exploitation of shale gas reserves could transform the world's energy supply by lowering prices, improving security and curbing carbon dioxide emissions.”  But unconventional gas revolution may fall short of its promise if social and environmental issues are not adequately addressed. The IEA report points out many common concerns about shale gas extraction in the U.S. and other countries.  Chiefly among them are groundwater and air pollution, dangers of structural faults in well drilling, disposal of flowback water, and emissions of polluting gases from wells, which are some of the factors of public skepticism about the industry’s safety.

As more countries begin to tap shale gas, the learning curve promises to be steep.  Countries with major shale gas reserves, such as China, Australia, Poland, and Canada, are aware of the long lead times, high capital and operational costs, necessary price environments to attract investment, and the importance of overcoming regulatory and environmental constraints before this resource becomes a reality.  Just this week, Europe’s biggest shale potential in Poland came under question and confusion after ExxonMobil pulled out of shale exploration in this Eastern European country due to unsatisfying findings, legislative foot dragging and complex geology.

Conditions that existed in the U.S. to revolutionize this industry may not exist in other countries to easily replicate its success, which include geological differences, inadequate or lack of access to equipment, water, manpower, and infrastructure as well as complex land ownership issues. Because maturity of the shale gas industry outside the U.S. will take anywhere from five to ten years before it reaches commercial production levels, developments in this unconventional gas sector in America are likely to set the tone to other countries.  In other words, what happens in the U.S. shale gas is bound to have ramifications on the trajectory of the industry elsewhere because the U.S. is far ahead of the rest of the world in exploiting this energy source. 

As much as there is enthusiasm and effort to follow the footsteps of the American unconventional gas evolution, a possible serious incident in the U.S. shale gas may set the newly emerging industry back in the rest of the world.  Given an already complex set of costs and public concerns over hazards of shale gas in many countries, an incident in one country is likely to cause more stringent regulations, and even more moratoria, in others.  In such a scenario, costs of drilling and operations are likely to be even higher for investors and operators with an added challenge of winning hearts and minds of the distrustful public.  The U.S. may have brought down the costs of taking natural gas out shale rocks, but its global success and acceptance will hinge on minimal mistakes and no major disasters.

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