03/18/2010 05:12 am ET Updated May 25, 2011

Shale Gas Will Tip The Scale

A seismic shock wave is coursing through the global energy industry.  Based on American innovation, a new way of extracting natural gas from prehistoric clay called shale is unbalancing the global energy equation.  The traditional rulers of the fossil fuels industry – Saudi Arabia, Iran and Russia -- are watching in horror as independent wildcatters in unlikely places like Poland and Pennsylvania are finding gigantic new natural gas reserves.

Shale Gas has been creeping up on the energy industry.  As far back as 1981, a Texas wildcatter by the name of George T. Mitchell experimented with a new way of gathering natural gas from tight-rock deposits of organic shale.  His idea was to drill horizontal wells 1 ½ miles behind the surface and then fracture the rock by using water pressure.  ‘Fraccing ‘ is the industrial equivalent of pressuring hosing the back deck, except that the process requires 2 to 3 million gallons of water and 1.5 million pounds of sand for just one well -- though 3 million gallons of water is not as much as it sounds, only the equivalent of 5 Olympic size swimming pools. 


According to The Potential Gas Committee, which is connected with the Colorado School of Mines, estimated US natural reserves increased almost 40% between 2006 and 2008 due to shale gas technology.   The US is now estimated to possess 1,836 trillion cubic feet (Tcf) of gas reserves, 33% of which is related to shale gas that no one knew how to extract economically as recently as two years ago.  This translates into an additional supply of 26 years at current rates of consumption of about 23 Tcf per year.  Total US natural gas reserves are now estimated at 75 years.    In less than two years,  the US has gone from a gas importing nation to a gas surplus nation.


Outside the United States, there has been almost no exploration for shale gas resources, and correspondingly little is known about the reserve potential in other countries.  But suffice it to say that a lot of shale gas will be found and developed in the next five years, and when it is the global energy equation is going to change.  Places like Poland, Germany, Sweden, France, China and India will suddenly emerge as major natural gas producers.  The net effect of these new sources of supply will be the decline in importance of Russia, Canada, Iran, Qatar and Algeria as energy producers.  Russia’s domination of the European energy market is likely to evaporate overnight.  Canadian exports to the US will drop.  Liquefied natural gas producers like Algeria, Iran and Qatar will be forced to dump natural gas to maintain production and cash flow.

If the US market is any guide, when shale gas starts to flow in Europe, China and India, prices are going to plummet and supplies are going explode.  Last month, natural gas prices dropped to a cyclical low of $2.15 per million BTU’s (“MBTU”) at the Henry Hub in the Oklahoma.  Since a barrel of crude oil contains on average 5.8 MBTU, a natural gas price of $2.15 per MBTU is the equivalent of only $12.50 per barrel of crude oil.  This month with the arrival of cold weather in the Northeastern United States natural gas prices have spiked to almost $4.00 per MBTU, or the equivalent of $23.20 per barrel of crude oil.  Longer-term, the cost of producing shale gas is estimated at about $6.00 per MBTU, equivalent to crude priced at $34.80 per barrel.  Based on the physics of supply and demand, this new source of ‘unconventional’ gas will exert downward pressure on energy prices for years to come.

The effect on European prices should be massive.  Currently, long-term fixed contracts for Russian natural gas are reported to be priced at 70 English pence per therm which is equivalent to $11.15 per MBTU.    As shale gas fields come on line in the next five years, it is likely that European prices will drop in half.  If this occurs, the Russian gas giant, Gazprom, is in trouble.  Since Gazprom generates a significant portion of Russia’s foreign reserves and tax revenue, any weakness at Gazprom will translate into recession, if not depression, in Russia.  Vladimir Putin belated opening of the Chinese market to Russian gas will come too late to save the day.

Shale gas development does face significant environment hurdles.  The technology uses significant amounts of water and chemicals.  If improperly sealed, a shale gas well can leak into the water table and pollute drinking water.  This has happened already in Pennsylvania as reported in various articles on Groundreport.

However, regardless of its environmental risks, shale gas will be developed on a massive scale.  It is likely that Europe, China and India will emerge as major producers causing energy prices in general to moderate or decline.  This American innovation will do more to undermine the power of Russia and Iran than any military force or cultural export.