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18 Jan 2013

Cracking the shale conundrum

Mathew Wallace

by Matthew Wallace

Global Head of Resources and Energy Group, Global Banking, HSBC

Oil pipelines

New technology has made it possible to extract oil and gas trapped in shale rock

A breakthrough in the way oil and gas is produced is setting off far-reaching changes in energy markets, global trade patterns and the balance of political power. Fears of a global energy shortage have eased, the US is enjoying an unexpected export resurgence and China, Argentina and others have potential vast new resources. However, there are material sustainability considerations and there will be losers as well as winners as trade patterns undergo what may be a seismic shift.

US oil and gas production, which since 1971 had seemed in irreversible decline, has risen by 16 per cent since 2008 – more than
1 million barrels a day

For more than a century oil and gas trapped in shale rock was thought inaccessible on an economically attractive basis. Recently major advances, led by the US, in exploration technologies such as horizontal and multilateral drilling and fracturing or “fracking” of the rock have led to a transformation.

The results are dramatic. US oil and gas production, which since 1971 had seemed in irreversible decline, has risen by 16 per cent since 20081, more than 1 million barrels a day. US shale gas production has grown by more than 500 per cent in five years, according to HSBC Global Research. Gas imports have fallen sharply and some coastal import terminals are being converted to export gas via liquefied natural gas (LNG). Ryan Lance, the Chief Executive of ConocoPhillips, told the Organisation of Petroleum Exporting Countries in June last year that shale and oil sands could make North America “self-sufficient in oil by 2025”. A US Department of Energy study suggests that US shale gas supplies could last for 110 years2. China, Argentina, Mexico, Canada and South Africa also have substantial shale prospects. Shale basins in 32 countries could hold 6,622 trillion cubic feet of recoverable reserves, according to the US Energy Information Administration, which is enough to increase global reserves by more than 40 per cent.

Some countries, notably France and Germany, may leave their shale untouched because of fears over the potential environmental impact of “fracking” on groundwater and the countryside. However, if global resources are developed, energy markets will change profoundly. In contrast to crude oil, which hit a record average price of more than USD111 per barrel during 20122, US gas prices fell to a ten-year low.

Estimated shale reserves technically recoverable
  Trillion cubic feet
China 1,275
USA 862
Argentina 774
Mexico 681
South Africa 485
Australia 396
Canada 388
Libya 290
Algeria 231
Brazil 226
Poland 187
France 180

Source: US Energy Information Administration,
5 April 2011

This is beginning to affect global trade. Gas prices in Europe and for LNG in Asia are at least three times the current US level. As the US starts to export, Western Europe’s heavy dependence on Russian gas may weaken and so may Russia’s export revenues. Gazprom, the Russian exporter, which is 50 per cent owned by the state, has already cut prices.

Shale assets have also attracted major acquisition activity in North America, with Asian companies leading the way. China’s CNOOC, India’s Reliance Industries, Japan’s Mitsui, Korea Gas, and Malaysia’s Petronas have all sought access to shale reserves.

China is only beginning to exploit its vast shale potential. The first shale gas was extracted in May 2010 by Sinopec, partnered by BP. China’s 12th Five-Year Plan sets ambitious targets for shale production. Progress so far has been slow, but last year’s Ministry of Land and Resources auction of exploration blocks attracted 152 bids from 83 companies.

Questions about shale have yet to be answered. Will increased “fracking” raise the risk of earthquakes, groundwater pollution and community disruption? Will US reserves continue to be developed quickly, maximising the impact on prices and trade flows around the world? Will shale sceptics in Europe change their minds as economic pressures grow?

What is clear is that shale oil and gas has already brought change in global energy supply and trade and has the potential to offer significant benefits.

1 BP Statistical Review of World Energy, June 2012
2 US Energy Information Administration

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