Revised U.S. Shale Gas Estimates Came at No Surprise

According to new information from the U.S. Department of Energy, estimates of shale gas in the country were lower than predicted earlier.  The Energy Information Administration (EIA), Energy Department’s collector of data, reported that there were 482 trillion cubic feet (tcf)of available shale gas in the U.S., which is 40 percent lower from the 2011 estimate that maintained 827 tcf.  New estimates of shale gas in the Marcellus region, which spans from New York to West Virginia, were at 141 tcf from previous estimates of 410 tcf.  Attributing the new projections to the availability of better information, the industry considers its accomplishments a huge step forward for the U.S. energy supply security, despite the latest estimates of lower amount of shale gas, noting how far it has come in the past few years. 

While natural gas prices have been record low in recent times, primarily due to the explosion of the shale gas supplies, influx of new producers, economic slowdown and warm winters, it is yet to be seen whether the fresh projections will have any implications on the price.  Despite the lowered estimates of shale gas in the U.S., natural gas is likely to bring down electricity prices in the next few years and surpass coal in electricity production.  According to EIA, increase in gas output will cut U.S. dependence on energy imports by almost half by 2035.  All in all, the role of natural gas will remain important in the U.S. energy mix.

The changes in the estimates of shale gas reserves are not shocking, given that the industry is still relatively brand new.  The technology and information collection on it improves with time.  As the industry evolves and changes, it is also worth keeping an eye on the rate of return of shale gas wells.  As experience shows, there were rapid declines in several fractured shale gas wells from 50 up to 80 percent or more during the first year.  Emphasizing my earlier views expressed on shale gas and oil in this blog, the novelty of the industry warrants sufficient experience and time to establish recoverability of reserves, decline rates and production lifespan of shale gas and oil wells. 

No Keystone Pipeline. For Now

Despite the U.S. State Department’s rejection of the heavily contentious Keystone XL pipeline on January 18, 2012, industry observers believe that it may not be an end of it.   Demand for oil and jobs in the U.S. are likely to prompt TransCanada Corporation, Keystone XL’s sponsor, to look for other ways to bring Canadian crude oil to the U.S.  The fact of the matter is Canadian oil will be increasingly important to the U.S. with time, as refineries of the latter have been feeling the crunch from dropping production levels in Venezuela and Mexico.  American demand for Canadian oil is estimated to be at 2.7 million barrels a day by 2015.  As the U.S. economy is picking up pace, oil demand is expected to rise. 

TransCanada seems to be determined not to give up on the project.  It may re-apply for permit later or build the pipeline in pieces.  Even some Democratic Senators favor the project and hold the belief the pipeline is not shelved for good.  According to Senator Kent Conrad, D – N.D., “it is clear that Canada is going to develop this resource, and I believe it is better for our country to have it go here rather than Asian markets.”  If the Republican-imposed timeframe to review the pipeline's safety was the major reason for the Obama administration to turn down the pipeline, it is likely that Keystone will reemerge through alternative routes, perhaps after the 2012 elections.

U.S. Shale Gas: In for More Game Change

2012 kicked off with major developments in the U.S. natural gas sector: huge foreign acquisitions of its shale gas plays and the lowest natural gas prices in a decade.  Within the first week of January, China’s state-run Sinopec acquired a 30-percent stake in Devon Energy’s five shale plays; French oil giant Total planned to invest in Chesapeake Energy’s Utica shale; and a Japanese trading house, Marubeni, acquired a minority interest in the Eagle Ford Shale play.  Racing to take advantage of the shale gas boom in the U.S. and to transfer technological know-how to other countries, these foreign companies and others, which have already entered the market last year, pay a premium price for an acre of shale play in America. 

At the same time, the plummeting natural gas prices in the U.S., due to the glut topped by mild winter thus far, have not stopped the production.  Gas futures dropped 17 cents, closing the day at $2.77 per thousand cubic feet on January 11, 2012, which is the lowest since 2002.  There are concerns that the U.S. will run out of places to store gas.  At the end of the day, the news is good to consumers’ heating bills.  Despite the excess supply, new producers are entering this crowded sector in anticipation that the market will pick up pace, given the popular push for cleaner energy sources. 

At this point, U.S. is ready to export its natural gas and it makes economic sense.  Several companies began looking into building liquefied natural gas (LNG) export terminals, which would be expensive, but the costs could be recouped and, ultimately, create huge profits for the U.S.  Natural gas prices in Asian markets, for example, would be nearly four times more than they are in the U.S.  Some American lawmakers questioned the advantage of exporting U.S. natural gas.  Rep. Ed Markey, D-Mass., asked Energy Secretary Steven Chu to explain the effect of gas exports on prices for consumers and producers, noting that he was “worried that exporting America’s natural gas would reduce the global competitiveness of U.S. businesses, make us more dependent on foreign sources of energy, and slow our transition away from dirtier fuels.”  While U.S. should seek diverse sources of energy, not taking advantage of the gas export opportunity makes no economic sense. 

The more important questions that should be posed to the Energy Secretary are why the U.S. still lacks a cohesive energy policy, what it could be like and when it can emerge.  Rejecting the production of low cost traditional energy sources and pushing for expensive alternative sources with no clear vision on their economies of scale is not a real solution.  The shale gas revolution in the U.S. may be a timely push to a debate on a long-term energy policy.

The Costs of Playing Chicken with Iran

The West is pleased at the thought that the pain of tightening economic sanctions on Iran to punish for its reported development of atomic weapons appears to be bearing fruit.  Otherwise, how to explain Tehran’s increasingly aggressive statements to close the strategically important oil chokepoint Strait of Hormuz, which transited nearly 17 million barrels of oil per day in 2011, and threats against US ships in the Persian Gulf. 

But tightening the noose around Iran’s petroleum sector may ultimately miss the West's main goal, and worse, backfire on its fragile economies, beginning of which was already felt at the gas pumps.  As the second largest OPEC oil producer, Iran’s daily supply of 450,000 barrels to the European Union (EU) would clearly find its market in Asian customers, China and India.  A response of oil markets to the possible supply disruption from Iran was a jump in prices on January 4, 2012.  Brent crude reached $113.97 on January 4, 2012, highest since November 14, 2011, with a prospect to rise further as EU draws closer to implementing the sanctions. 

In the given situation, Western countries seem to be as irrational as the Iranian government (further proof of uselessness of the rational actor theory), as their choices of action are hardly rational at the time of delicate domestic economic recovery and a multitude of colossal debt crises.  While stable (read - low) oil prices are not necessarily guarantors of economic growth, economists caution that a sudden rise in oil prices had preceded nine out of previous 10 recessions in America.  According to a 2000 report by the International Monetary Fund, “a $5 permanent increase in oil prices cuts world GDP growth by 0.25 percent over the first four years. But the impact on the U.S. was a larger 0.3 percent, reflecting this country’s high per-capita energy use.”  Given a possible economic backlash from sanctions on Iran, can the US afford to bite the bullet and survive the high oil prices?  It does not look like it can afford it right now.

Further, the West’s reliance of Saudi Arabia’s excess capacity and growing production from Libya and Iraq to salvage the situation is a hard bet.  Recovery of production capacities of post-war Libya and Iraq are inevitably subject to existential domestic political and security threats, raising the specter of their uncertainty as reliable suppliers in the short to medium-term.  Meanwhile, an OPEC swing producer, Saudi Arabia, faces close to 7 percent growth per year in domestic demand for oil and gas.  The Joint Organizations Data Initiative (JODI), which provides official oil output numbers from its 90 member-countries, shows that Saudi Arabia “produced 9.4 million barrels a day of oil (mbd) in October 2011 and consumed 2.0 mbd.”  Although the Kingdom indicated it could produce up to 12.5 mbd, it is unlikely that it can maintain this production level for a long time. 

Lastly, economic sanctions to punish an enemy can yield some results, but often are less than effective.  According to a 1992 study of the US Government Accountability Office (GAO) on 27 cases of post-World War I economic sanctions “the measures are more successful in achieving the less ambitious and often unarticulated goals [...] however they are usually less successful in achieving the most prominently stated goal of making the target country comply with the sanctioning nation’s stated wishes.”  Given that the sanctions by the United Nations and Western countries have been directly aimed at forcing Iran to suspend its nuclear enrichment program, it is unlikely that falling short of that goal would be acceptable to the West, while Iran is increasingly defiant and provocative.  But it is also not likely that an escalation of the conflict to a point of war or risking the economic recovery with high oil prices would be acceptable and economically affordable to the West either.