Shale petroleum poses a threat to OPEC member states

Unconventional gas resources (shale gas reserves) have existed for several decades, but its production had been hampered by lack of technology, environmental and social issues, and low oil prices. As the price of crude oil started hovering around the $100 per barrel and above, from 2007 to 2014, this trend triggered the invention of the ‘fracking’ technology for the economic exploitation of shale gas reserves.

The other plausible reason for shale gas production in the US was the growing energy demand and the quest to cut down rising cost of energy imports. Strive for economical energy resources supply, self-sufficiency and pragmatic energy policies by the Obama administration led to the advent of the ‘fracking’ technology to harness this unconventional resource.

What are shale gas resources & where are they abundantly found?

Shale gas is trapped natural gas within fine-grained sedimentary rocks. The gas which is more environment-friendly is unleashed using the combination of horizontal drilling and hydraulic fracturing. However, its commercial production was made possible by advanced extraction technology such as ‘fracking’, whereby chemicals and water are injected at very high pressure to release the gas.

According to China’s Land & Resources Ministry, China has about 25.08 trillion cubic meters (tcm) of exploitable onshore shale gas reserves, whereas the US has 13.65 tcm of technically recoverable gas from shale formations. However, as at 2013 China has the world’s largest technically recoverable shale gas reserves estimated at 31.2 tcm (1,115 trillion cubic feet, tcf) followed by the US which has about 18.6 tcm (665 tcf) of recoverable shale gas reserves (US Energy Information Administration, EIA).

Also International Energy Agency (IEA) estimated China’s Unconventional/Total Recoverable Natural Gas Reserves to be 92.3% as against US’ 50.3% affirming the huge shale deposit in China.

Although China’s shale gas reserves are almost double that of the US, its current production targets are significantly lower than the US production which has reached about 290 billion cubic feet (bcm) in 2012. Also, energy experts have identified a number of factors that might slow down China’s shale gas development relative to the US. Some of these factors are geology, low natural gas prices, underdeveloped gas pipelines, water shortages, and a dearth of advanced technology.

Shale layers in the US are simple and uniform, but China’s shale layers (like those of Europe) are heavily faulted as reported by Daiwa Securities. The implication is that China’s rock formations are deformed due to underground movements. As a result, only short horizontal sections can be drilled thereby incurring higher drilling costs.

China is currently the world’s fastest-growing major economy with annual GDP growth rates averaging 10% in the last three decades. As a result, China is the main driver of increasing energy demand in this present decade in line with the nation’s accelerated industrialization.

BP reports that China would overtake the US as the world’s largest oil consumer by 2027 and the 2013 IEA World Energy Outlook, WEO, also affirms China as the largest consumer of oil by 2030, as OECD oil use drops.

As a result, the Chinese Government has set robust shale gas production targets at 6.5 bcm for 2015 and 60-100 bcm target for 2020.

Europe’s shale gas resources

There are significant shale gas reserves in Britain, Poland, France, Ukraine, & Bulgaria. US Oil companies have been pushing for shale gas development in these countries, but have been restrained by significant opposition from citizens and local legislators who worry about the environmental impacts of shale gas extraction (including earthquakes and groundwater contamination) caused by hydraulic fracturing or ‘fracking processes’.

According to US EIA, Ukraine has Europe’s third-largest shale gas reserves at 42 trillion cubic feet (tcf). Unlike other European countries, Ukraine offers considerable less opposition because it has been steeped in numerous gas disputes with Russia in recent years and so yearns for energy independence from Russia. The corporate struggle for Ukraine’s oil and natural gas is probably the reason behind the geopolitics pitting Russia against the West and the ethnic tensions tearing Ukraine East & West.

Russia’s state-owned Gazprom, controls nearly one-fifth of the world’s gas reserves, supplies more than 50% of Ukraine’s gas annually, and about 30% of Europe’s. Russia has often used this strategic position as political and economic leverage over Kiev and Brussels.

Some observers believe that one of Putin’s objectives for annexing Crimea was to ensure that Gazprom will control Crimean offshore energy assets, as well as ensuring the continued use of Crimea as host to Russia’s Black Sea fleet. It is expected that when the geopolitics of shale gas development in Ukraine is settled, Ukraine will add significant volumes of shale gas to the growing shale production.

Implications of shale gas development to OPEC member states

Until the advent of shale gas, crude oil and natural gas have been the main global energy resources. The main threat stems from the fact that shale gas positions as a renewable energy resource. It would seem from the foregoing that US is the leading producer of shale gas, followed by China.

However, China has the largest shale gas reserves and has set ambitious targets for its production. Ukraine is expected to follow suit shortly, and Canada, Australia, India, South Africa, etc. Quite ominously for OPEC Countries, the shale producer nations are the largest energy consumers.

One of the major forces in “Michael Porter’s “5-Forces” that determine industry competitiveness” is the ‘threat of substitute products. The other forces are, existing competition among rival companies, threat of new entrants, threat of backward integration, and threat of forward integration. Of all these, one of the most potent is the advent of an alternative or substitute product.

Therefore, the implications of shale gas revolution are threefold. First, it would seem that an alternative energy and natural gas resource is being aggressively explored and produced in nations who consume the largest volumes of energy resources. This will likely affect the demand, supply and prices for crude oil and conventional natural gas resources. These effects will exacerbate when the drilling cost for shale wells are significantly reduced.

Second, global environmental concerns are increasingly in favor of the use of natural gas as the fuel of the future, as opposed to crude oil. When eventually the price and supply of shale gas improves more than that of conventional natural gas, OPEC Member States would be forced to find domestic uses for both their crude oil and conventional natural gas or be faced with dwindling revenues from these resources.

Third, the gas-to-liquid (GTL) technology could help transform shale gas to ultra-light refined petroleum products. In the likely event that this occurs, the Rotterdam’s prices for petroleum products derived from refining crude oil will also be adversely affected.

China has set big targets for shale production by 2020, and this should act as the ‘marker’ for OPEC Member Countries. The latter will have to look inwards and start to develop ‘domestic homes’ for their crude oil and natural gas resources.

Developing the downstream petroleum sector should be the primary focus for most OPEC Countries, which would ensure adequate refining capacity for their crude oil and OPEC Member States should also embark on construction of new petrochemical plants that will convert natural gas and feed stocks from the refining process into petrochemical products. Fertilizer and Ammonia plants will have to be robustly developed as well as secondary plants that would convert petrochemical products to finished goods.

OPEC member countries that are yet to achieve complete electrification of their countries now have the opportunity to use their natural gas resources to drive an aggressive domestic electrification agenda.

This is the time to begin planning and execution of a ‘home-based’ energy industry for most of these countries. It may be too late by 2020!