Ten years ago, few crystal balls foresaw the lightning impact and development of shale gas on the world’s energy scene. In the last 10 years – during which shale gas became commercial in the US – its use has grown from near zero to about 20% of the already enormous US gas stream. Booked shale gas reserves, at present rates of production, may still be onstream 100 years into the future, a figure that will increase if gas begins to approach oil on a price parity basis.
Many likely changes will result from shale gas development. But the most important ones reflect the economic impact of shale gas on global politics and today’s energy producers.
Economic model implications Let’s start with one of the more subtle changes: that of the economic models used around the world. Although shale deposits are distributed globally and have been so for millions of years, it was US R&D with its entrepreneurial risk-takers that put recoverable shale gas on the mineral inventories of many nations. Hopefully, spreading of the entrepreneurial model will be one of the more lasting effects of the shale gas story.
Traditionally, US capital and know-how migrated in search of raw materials. In the case of shale gas, other countries are inverting that approach and bringing capital here, investing billions in the expertise and reserves of US shale gas companies: Statoil of Norway, CNOOC of China, Mitsui of Japan, Reliance of India, and Total of France, to name a few. It’s hard to imagine they will value the technology that enables the production of this tight gas – yet ignore the competitive economic system that produced the technology. Interestingly, we are even seeing some of this result already in China, where the major state-owned energy companies find themselves in tough competition with each other for limited global resources.
The shale gas impact won’t stop in abstract economics. Developing reserves will help stop the wealth drain and spread prosperity. For example, in the US, as we drill wells and hook up gathering systems, we’ll see investment in exploration, pipelines, storage facilities, conversions of electricity generation to gas, cheaper and cleaner electricity, more competitive US manufacturing, good jobs, royalties to property owners, and a better US balance of payments. These activities will generate concrete real economic growth in the US – and can produce similar results worldwide.
Worldwide political impact of shale gas The distribution of shale gas is so widespread that locally produced shale gas may become the standard fuel in many places. Traditional gas imports (by pipeline or as LNG) may become incremental sources.
The potential of shale gas implies a loss of political leverage for some sellers. For example, Russia has used threats of interruptions – and actual interruptions – like old-time gunboats, notably with Ukraine, but with other European countries too.
I recently attended a conference on shale gas in Poland on behalf of Mayer, Brown. The Poles share with other Europeans concerns about fracking, water recycling, and environmental issues. They have no tradition of American-style entrepreneurship. What they do have is reliance on Russia’s Gazprom in a power-constrained economy. They want to accelerate the development of their shale gas reserves. This story is repeated many places.
Cartel pricing versus market pricing Politics aside, shale gas pricing could thwart the once likely coalescing of a Russian-Persian Gulf gas cartel. Gas prices will likely reflect real costs rather than cartel-engineered prices that spike with every political flare-up.
With competitive, market-priced shale gas onstream, the massive international wealth transfers of the last 40 years could retrench. But other developments will affect gas exporters’ global strategy. For example, five years ago the US was building LNG import facilities and signing up long-term cartel suppliers. Today, we are seeing a very likely prospect of US gas exports.
This unexpected development hits global LNG prices three ways: One, US demand no longer supports extreme gas prices. Two, we may compete for LNG customers – or help other nations establish their own production. Three, the economics of gas-to-liquid projects have seemingly been immutably changed. Gas exporting countries will still be suppliers but likely not as they anticipated.
Development of renewables and nuclear power Because shale gas can be distributed through existing gas facilities, it can decrease the urgency with which some countries pursue solar and wind projects. But these renewables have been supported by global warming concerns and benefited from deliberately high subsidies. So a commitment to renewables is likely to remain even if gas availability is explored and ultimately adopted.
But don’t count the market out: Many countries will have shale gas potential but no country will soon have a functional, unsubsidized renewables industry. In today’s global economy, competitively priced gas can make its own case.
Where nuclear power is used, it has already passed three big tests: A) reduced emissions, B) competitive economics, and C) exaggerated fears of catastrophic results. Where it isn’t being used, the value of those tests has been discounted. I don’t see big changes in today’s nuclear position.
Two potential futures Looking at a present day oil and gas importing area like Europe, we could focus on a potentially negative outcome: a world divided into many smaller, densely populated countries with state ownership of minerals and no deep-seated entrepreneurial tradition. Such countries may resist the disruptions associated with exploration, production, hydrofracking, building an industrial infra-structure, and so on – just as US coastal state residents often resist offshore oil production – and offshore windmills, for that matter.
Citizens in countries with green politics and economics are already accustomed to choosing favorites and then subsidizing them significantly. Shale gas may open economic options yet still be rejected in favor of commitments to wind and solar capability. In any case, subsidized, vested interests will no doubt fight to hold their favored positions – even at the risk of losing a job-producing, indigenous energy supply and a more prosperous national economy.
But we can also focus on a more positive future, one in which shale gas accomplishes two things: A) it removes a huge area of international economic uncertainty, one in which – for decades – a supply concentration in volatile regions of the globe held many of the cards in basic energy; and B) because low-emission gas power plants are cheaper to build and operate than coal plants, shale gas may permit greater progress in reducing greenhouse gases.
In such a world, the results would be nations economically grounded on safe, reliable, and often domestically produced energy supplies, the fostering of new jobs and opportunities, growing freedom from monopolistic energy pricing, and a cleaner environment.
I think the trend is in favor of the more positive world market economy. But even if the more positive view of the future starts off slowly, few consuming countries will want to extend the forty-year economic drain many have experienced, the dependence on long sea-lanes, and powerlessness in the face of high prices and pressure politics.
There are no guarantees, but in a world with widely distributed shale gas reserves, this potential future is much closer than it was ten years ago.
About the Author Parker is a partner in Mayer Brown's Houston office. He represents clients in corporate and securities law matters, with extensive experience in the areas of mergers, acquisitions, takeovers, proxy contests, public and private offerings of equity and debt securities, corporate governance, independent committees, and related matters. Parker represents US-based clients wishing to do business around the globe, as well as international clients wishing to conduct business in the United States. He earned his JD, cum laude, from The University of Texas School of Law and his bachelor’s degree from Vanderbilt University.
BPT Price at posting:
$1.67 Sentiment: Buy Disclosure: Held
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