The Shale Revolution Is A Uniquely American Story
In this newsletter:
1) Happy Birthday! Shale Revolution Turns 10
Business Wire, 20 June 2018
Kathleen Hartnett White, Washington Examiner, 18 June 2018
3) Lessons From The Great American Oil Boom
RealClearEnergy, 21 June 2018
4) Oil Industry Tries to Take the Fracking Boom Global
The Wall Street Journal, 19 June 2018
5) US Prepares For Next Wave Of LNG Exports
Financial Times, 21 June 2018
Business Wire, 20 June 2018
IHS Markit expects natural gas production to rise by almost 8 billion cubic feet per day (Bcf/d) or more than 10 percent in 2018 alone. Altogether, U.S. production is expected to grow by another 60 percent over the next 20 years, the report says.
Additionally, IHS Markit now estimates that approximately 1,250 trillion cubic feet (Tcf) of U.S. supply is economic below $4 per MMBtu Henry Hub price today, up from a previous estimate of 900 Tcf in 2010.
The new report, entitled The Shale Gale Turns 10: A Powerful Wind at America’s Back assesses the impacts of the first 10 years of the unconventional gas revolution—unlocked through the combination of hydraulic fracturing and horizontal drilling technologies—and its future potential. When the shale revolution began a decade ago, the prevailing assumption was that the U.S. supply base was being exhausted and that the country would have to become a major importer of liquefied natural gas (LNG).
Instead, in what the report describes as a “wholesale turnaround,” U.S. output rose by more than 40 percent in that first decade (2007-2017) and real natural gas prices fell by two thirds during the same period.
In contrast to the assumption a decade ago, the United States is now on track to become one of the world’s major LNG exporters, the report notes. IHS Markit expects U.S. LNG export capacity to more than double in the next five years and rise to at least 10 Bcf/d by 2023.
“To say that the ‘Shale Gale’—as IHS Markit originally coined it in 2010—has been anything but a veritable revolution would be an understatement,” said Daniel Yergin, vice chairman, IHS Markit and co-author of the report. “It represents a dramatic and largely unanticipated turnaround that dramatically changed both markets and long-term thinking about energy. The profound and ongoing impacts on the industry, energy markets, the wider economy and the U.S. position in the world continue to unfold.”
The most dramatic effect has been on the U.S. electric power industry, the report says. Where coal and nuclear had previously dominated the growth in share of U.S. electric power generation, natural gas has become a “backbone of electric generation” and regularly competes with coal for the largest share of total electric generation. By 2040, IHS Markit expects natural gas’ share to grow from almost one-third to nearly half of all electricity generated in the United States.
The report observes that the Shale Gale, has also made a major contribution to reducing U.S. CO2 emissions. IHS Markit estimates that in 2017, CO2 emissions from power generation were down 30 percent from 2005. More than half of that emission decline was from gas replacing coal.
What started with natural gas would be extended to oil a few years later, with enormous global impact, the report notes. Between 2008 and 2018, U.S. oil output more than doubled and exceeded the previous height set in 1970. On a net basis, the United States went from importing 60 percent of its liquid fuel at the peak to below 16 percent in 2018—and the share is still falling. The United States is now on track to be the world’s largest oil producer, ahead of Russia and Saudi Arabia, by early next year.
The combined developments of unconventional oil and gas have had far-reaching impacts for the manufacturing sector and the U.S. economy as a whole, the report says.
IHS Markit estimates that more than $120 billion in new capital investments will be spent from 2012-2020 to expand U.S. petrochemical manufacturing capacity — a result of abundant and inexpensive natural gas and natural gas liquids providing advantages in terms of thermal energy, feedstock and electricity costs. “Ancillary” investments could double that number, the report says.
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2) The Shale Revolution Is A Uniquely American Story
Kathleen Hartnett White, Washington Examiner, 18 June 2018
The story of the shale revolution is not just the scuttled claims that we’re running out of energy resources. It is also an important lesson about American exceptionalism and the conditions that made this breakthrough possible.
The shale revolution likely could not have emerged and resiliently endured in any country other than the U.S. The still young energy miracle is an achievement of technological innovation, determination, and economic freedom operating within a country that respects free enterprise and competitive markets.
President Trump’s reform agenda to stimulate economic growth and to eliminate excessive, burdensome regulations is igniting the roaring productivity of the American shale fields. Unleashed by supportive energy policy and rebounding from the collapse of oil prices in 2014, shale producers keep setting record output while cutting costs with Texas leading the pack.
Instead of nationally owned oil companies, cartels, and multinational corporations, the shale revolution is the work of small to medium-sized energy companies in the only country in the world that recognizes private property rights in subsurface minerals.
The shale of the shale revolution is what petroleum geologists call the “source rock” — a kind of cradle in which crude oil and natural gas are formed over millions of years deep within the Earth. Geologists were long aware of these prolific shale resources, thought to be forever locked in rock.
Then, determined and creative geologists developed the technologies that broke the code and made shale resources accessible. The shale producers are continuing to refine these technologies. In so doing, they are accelerating natural geologic processes by hundreds of millions of years — no small feat!
The Energy Information Administration forecasts that shale oil from the Permian Basin in Texas alone will account for 50 percent of all new global oil production over the next five years. As Bloomberg noted: “The fate of U.S. oil and ultimately a large slice of the total additional output for the entire world is all predicated on aggressive forecasts from one place: the Permian Basin.”
Driven by record-breaking production levels, Texas’ economy grew faster than any state in 2017, two and half times faster than Obama-era GDP.
Last year, output from shale oil and natural gas in Texas literally fueled growth in manufacturing, which significantly outpaced the national average. Mainstream economists rarely recognize this synergy between manufacturing and the abundant, concentrated, versatile energy in fossil fuels. And the jobs created by this growth pay well, to say the least.
A study by PricewaterhouseCoopers showed that U.S. oil and natural gas industries supported 10.3 million jobs in 2015. In 2016, Texas shale industries accounted for more than 325,500 direct jobs with an average annual wage of $130,000.
Such “shared prosperity” extends beyond employees and interest owners to property owners, investors, schools, local, state, and federal coffers as well as the many service companies in the supply chain supporting upstream oil and gas extraction. Add to those economic benefits the expanding petrochemical industries. As of August 2017, 134 new projects totaled investments of $71 billion. Pipelines under construction or planned account for an investment of $6 billion according to the leading industry association in Texas.
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3) Lessons From The Great American Oil Boom
RealClearEnergy, 21 June 2018
Jude Clemente
Thanks to evolving hydraulic fracturing and horizontal drilling technologies, the U.S. shale revolution that has taken flight since 2008 has transformed energy markets around the world.
In fact, new crude production has come so fast this year that even the top experts have quickly been shown to be out of touch. Back in November, for instance, analysts at Morgan Stanley claimed it highly unlikely that U.S. shale could add 1 million b/d of supply in 2018. So far, however, production has actually increased 1.4 million b/d, reaching another record of 10.9 million b/d for the week ending June 8.
Constant technological and efficiency gains have laid the foundation for soaring U.S. oil production. One of the key advantages of the commodity price collapse that began in 2014 is how “lean and mean” it forced the U.S. oil industry to become. Sunken prices pushed those companies that were not able to cut costs out of business, with over 100 E&P companies going bankrupt by the end of summer 2016.
Today, producers have streamlined operations to such a degree that they can “be in the black” even when oil costs just $44 per barrel, or a hefty 33 percent below where prices are now. Capital discipline has firmly been installed: Most companies are not approving projects that cannot generate a 15 percent return even if prices plummet to below $50.
We have six or seven major shale plays, but the Permian basin in west Texas has replaced the Bakken in North Dakota as the driving force behind our production boom. Almost doubling since 2015, Permian output is now at ~3.3 million b/d, and the field holds over half of all U.S. oil-directed rigs. Although constraints on pipeline takeaway capacity are raising concerns of a slowdown, IHS Markit still expects the Permian to soar to 5.4 million b/d by 2022. Outside the Permian, the higher prices that we have seen this year — U.S. oil prices hit a four-year high on May 22 of over $72 — have put the other fields more in play, such as the Bakken, offshore, and even a potential resurgence in the Austin Chalk.
Rising U.S. crude production has also ignited an export business that has been ramping up since late 2015, when a law change made it possible to ship crude to other nations besides Canada. In particular, flat U.S. demand for the past decadeand a refining system largely configured to process the heavier crudes that we import from Canada, Mexico, and Venezuela have freed up loads of our oil for other countries. (U.S. shale oil is a lighter, sweeter grade that is not a perfect match for our refineries.) Commercially, U.S. crude exporters have also been bolstered by a widening gap between our own grade (West Texas Intermediate) and the higher cost international benchmark (Brent). It is noteworthy that U.S. petroleum product exports have also been at record highs, with distillate fuel oil leading the way.
Data source: EIA
Looking forward, the future remains very bright for the U.S. oil business. Our Energy Information Administration (EIA) has us racing toward 12 million b/d by the end of next year to easily surpass Russia as the world’s largest petroleum producer. The Paris-based International Energy Agency has the U.S. accounting for 75 percent of new non-OPEC supply this year and next. Our crude exports could reach 5 million b/d over the next five years — more oil than any OPEC nation besides Saudi Arabia currently produces in total.
The great American shale boom offers a number of lessons for us. But let me focus on just two.
First, we should never underestimate the non-stop advance of energy technologies, even for the conventional sources that many assume will just simply cede the future to renewables. It regularly gets forgotten that while it is indeed true that wind and solar energy will continue to evolve, so wil oil and natural gas technologies. To illustrate, EIA’s International Energy Outlook 2007 never even mentioned shale as a possible future source of oil (or natural gas) in the decades ahead — forecasted out until 2035. In the years since, however, the U.S. shale boom has become the most important energy development globally in at least the past 50 years.
Secondly, as OPEC readies to meet with Russia and other partners on Friday to discuss next steps in their November 2016 agreement to cut production by 1.8 million b/d, the U.S. shale story also demonstrates how quickly policy support for our oil industry can allow the country to flourish. Besides the obvious economic and job benefits, our exports have also helped weaken the geopolitical influence of risky OPEC and Russia.
For example, since U.S. exports started in 2016, import-hungry China has been our second largest crude customer, receiving 122 million barrels as of March — a $1 billion monthly boon for us. But unfortunately now, the Trump administration’s burgeoning trade war on potentially hundreds of billions of dollars of Chinese goods is being met by very predictable retaliation: China proposing a 25 percent tariff on U.S. crude oil.
A loss for us but a gift for OPEC and Russia.
4) Oil Industry Tries to Take the Fracking Boom Global
The Wall Street Journal, 19 June 2018
Sarah Kent
BP’s Khazzan natural-gas project in Oman marks a breakthrough for fracking projects outside the U.S.
A BP PLC project deep in Oman’s desert shows how big oil companies are taking hydraulic-fracturing techniques perfected in Texas to the global stage, where they had long struggled.
BP’s $12 billion Khazzan project launched last year on a complex roughly the size of London, surrounded by sand dunes and little else. One of the biggest fracking projects ever completed outside the U.S., Khazzan produces natural gas from rock so dense and deep beneath the desert that it was long thought too difficult and expensive to exploit.
It’s a breakthrough for a technology that revolutionized the oil-and-gas industry in the U.S. but had failed to gain ground elsewhere, with early setbacks in China, Europe and Russia. Now, big oil companies are drawing on expertise gained from their U.S. operations and making investments around the world again.
However, those efforts will depend in part on the Organization of the Petroleum Exporting Countries and its allies like Russia whose meeting this week in Vienna could have implications for crude prices. Rising oil prices—which breached $80 a barrel this year—have provided support for fracking projects, though executives say government policy and technological advances can also help make projects work at lower prices.
“It’s going to happen in other places,” BP Deputy Chief Executive Lamar McKay said.
Fracking isn’t new to the industry, but it’s become a key technology to help unlock resources trapped in tight rocks, like Khazzan. Gas production from such “unconventional” resources—so-called because they require special techniques to produce—has more than doubled over the past eight years outside of North America, reaching 6.6 billion cubic feet a day in 2018, according to Norway-based energy consultancy Rystad Energy.
In general, big oil companies are pushing ahead with so-called “short-cycle” projects, where production can be turned on and off depending on the oil price. Traditional projects have long life cycles and produce no matter how low prices go.
In Argentina, oil giants including Exxon MobilCorp , Chevron Corp. ,Royal Dutch Shell PLC and BP have moved to frack the country’s massive shale reserves, though high costs have slowed progress. According to the International Energy Agency, oil production from fracking in the country will more than triple over the next five years to 110,000 barrels a day.
In Russia, PAO Gazprom Neft is now leading experiments with fracking the Bazhenov shale formation, the largest in the world. Wood Mackenzie forecasts production of shale gas in China will almost double by 2020, driven by investments from the country’s state-backed oil companies. Even Saudi Arabia has begun efforts to tap its most-difficult to pump natural gas by fracking.
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5) US Prepares For Next Wave Of LNG Exports
Financial Times, 21 June 2018
Ed Crooks
Chinese demand is soaring — so much so that Beijing spared the product from tariff rises
When China last week set out a list of US exports threatened with retaliatory tariffs, almost all fossil fuels were covered, including oil, coal and liquefied petroleum gases such as propane. There was, however, one conspicuous exemption: liquefied natural gas.
Beijing’s decision not to impose additional tariffs on US LNG shows the critical role that the fuel plays in the Chinese government’s plans as it attempts to curb the country’s reliance on coal. China’s demand for LNG is soaring, and its imports of gas from the US have been rising fast: from nothing in 2015 to 17bn cubic feet in 2016 to 103bn cubic feet last year. By deciding not to restrict imports of US LNG, China has let its energy policy override its trade policy, for the time being at least.
That is an encouraging sign for the companies including Venture Global LNG, Qatar Petroleum, LNG Ltd and Tellurian that are hoping to be part of a second wave of investment in US LNG export plants. For any would-be seller of LNG looking for buyers, China is the big prize.
Already last year China was the third-largest destination for US LNG exports, behind Mexico and South Korea. Its demand for gas is expected to continue to grow rapidly, accounting more than a quarter of all global consumption growth between 2015 and 2040 according to the US Energy Information Administration.
Rapid demand growth in China and other emerging economies meant 2018 was shaping up to be an exciting year for aspiring US LNG exporters. After three years without a single new plant being given the go-ahead, several companies say they are approaching final investment decisions to build their planned facilities. But the escalating trade dispute between the US and China casts a shadow over those plans.
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