The 'Shale Gas Revolution' in the US, achieved by the application of horizontal drilling and hydraulic fracturing, has the potential to transform the global energy scene. However, two questions are key: can this revolution continue in the US and can it be replicated elsewhere?
Potentially global unconventional gas resources (coal bed methane, tight gas, and shale gas) are estimated at five times conventional gas reserves. For the US, the main concern is the possible negative environmental consequences of hydraulic fracturing. This involves injecting water and chemicals at very high pressure into the gas plays. As concerns grow, drilling moratoria have been called while environmental impact studies are completed.
There are also concerns over replication outside the US. The US revolution was triggered by favourable factors such as geology, tax breaks and a vibrant service industry. In 2000, shale gas provided 1 percent of US production while in 2009 it accounted for 20 percent. However, in Western Europe where there is much current interest, geology is less favourable, there are no tax breaks and the drilling industry is far behind the US. Also in a densely populated Europe (compared to the US), disruptions caused by shale gas developments will struggle to find public acceptance. Unlike the US, benefits from gas production accrue to governments, not local landowners.
Uncertainties over the answers to these two questions will inhibit future investment in gas supplies. If the 'revolution' does continue and extend to the rest of the world, consumers can anticipate a future floating on large clouds of very cheap gas. However, if it falters, in the medium term the world will face serious gas shortages given current investment uncertainties. There are already signs of the cancellation or postponement of gas export projects.
As the world recovers from global recession and as earlier constraints on gas use erode, gas demand will grow. However, given the investor uncertainty described above, future gas supplies will be lower than required had the 'Shale Gas Revolution' and its current hype had not happened. If unconventional gas fails to deliver on current expectations - and we will not be sure of this for some time into the future - in ten years or so, gas supplies will face serious constraints. Markets will eventually solve the problem as higher prices encourage a revival of investment. However, given the long lead times on gas projects, consumers could face high prices for some considerable time.
A related problem concerns investments in renewables. There is general agreement that the world must move to a low carbon economy if climate change is to be managed. Among other things, this requires much greater investment in renewables. In a world where there is the serious possibility of cheap, low carbon gas, who will commit large sums of money to expensive renewables to lower carbon emissions? Again, if shale gas fails to deliver, it condemns us to a higher carbon future than would otherwise have been the case.
The 'Shale Gas Revolution': Hype and Reality
Chatham House Report
Paul Stevens, September 2010