Friday, April 27, 2012

Shale oil & gas paradigm shift drives US, world energy outlook

—Alan Bailey

Like the proverbial hurricane triggered by the flapping of a butterfly’s wings, the emergence of horizontal drilling and hydraulic fracturing techniques for the development of shale oil and gas is blowing a gale-force wind of change through the U.S. energy scene.

A recent report to Energy Secretary Steven Chu by the National Petroleum Council said that North America could increase oil production by 10 million to 12 million barrels per day by 2035, a prediction that may be an underestimate, Lou Pugliaresi, president of the Energy Policy Research Foundation, told the Alaska World Affairs Council on April 20.

With massive increases in production in North Dakota, Montana and Texas, for example, the official government data cannot keep abreast of what is happening, he said.

Surging production

Pugliaresi said that the Energy Policy Research Foundation has been monitoring four U.S. shale plays and predicts that, with increased production of 2 million barrels per day from these plays, by the end of 2013 no more light sweet crude oil will be imported into the Gulf of Mexico. It is reasonable to assume that North America as a whole can increase oil production by 500,000 barrels per day each year, he said.

Also taking into account new oil production from Brazil, within 10 to 15 years there will be no further need to import Middle Eastern oil into the Western Hemisphere, Pugliaresi said.

Yet as recently as 2008 the Energy Information Administration testified to Congress that, regardless of how much land was leased for oil and gas exploration or how actively people pursue new resources, the United States would need to import substantial new supplies of natural gas, he said.

And, anticipating a surge in gas imports, companies invested $30 billion in liquefied natural gas receiving facilities. But as U.S. domestic shale gas production flourishes, those import facilities are now operating at about eight percent capacity, Pugliaresi said.

Abundant sources

With oil and gas source rocks already being essential ingredients for conventional oil and gas production in the United States, source rocks with the potential for shale oil and gas development are abundant in the country. And the simple models used for government resource forecasts cannot nimbly adjust to paradigm shifting breakthroughs such as the emerging technologies for exploiting source rock shales, Pugliaresi said.

The rapidly evolving technology is causing the cost of finding new resources to drop and the estimates of resource recovery volumes to climb.

“There are source rocks everywhere. It’s a manufacturing process. Nobody drills a dry hole anymore,” Pugliaresi said. “The technology is moving very fast.”


Moreover, the production of relatively low-cost ethane, for example, from shale plays will place the United States in a strong position in the global petrochemical industry, Pugliaresi said, adding that the United States is now becoming competitive with the Middle East in this arena and has the lowest petrochemical feedstock costs in the world.

“The United States is the most competitive country for value-added processing in the petrochemical business,” Pugliaresi said.

Shell is considering the construction of a very large U.S. ethylene cracker, with the states of Pennsylvania, West Virginia and Ohio vying to provide a venue for the project, he said.

And, although the United States is a net importer of petroleum, including imported crude oil, the country is a net exporter of refined petroleum products such as diesel and gasoline, with refineries on the Gulf Coast especially well placed to act as export platforms, Pugliaresi said.

Cultural shift

The shale oil and gas revolution is also causing a change in the culture of U.S. oil and gas production, with production migrating away from the Gulf of Mexico region. Shale gas production started in Texas and rapidly moved to Oklahoma, West Virginia, Virginia and Pennsylvania, eventually leading to shale oil production in North Dakota, Pugliaresi said.

He attributed the rapid migration of shale development technologies and ideas across these states to the relative ease and speed of land leasing and industrial development in regions with little federal land.

However, infrastructure development for the transportation of oil has become something of an issue, especially with the need to ship oil to coastal refineries. Pugliaresi commented that he views the Keystone XL pipeline debacle as particularly unfortunate, since that pipeline could assist with the transportation of U.S. oil as well as carrying oil from Canada.

Because of pipeline bottlenecks, 100-car trains are shipping some North Dakota oil at considerable expense to Louisiana, while choke points for oil shipment are depressing oil prices quite dramatically in some North Dakota locations, Pugliaresi said.

“We really have to fix this problem,” he said.

Government regulation

Pugliaresi said that government regulation and permitting also need to keep up with the rapidly evolving oil and gas situation.

“This is happening so fast and so quick that the way we traditionally regulate and permit new projects in the U.S. is not going to work,” he said.

For example, it will likely be necessary to export some U.S. oil into Canada or Mexico, to enable the appropriate combination of crude types to be delivered to Gulf of Mexico refineries. But at present companies are very unlikely to be able to obtain export permits, Pugliaresi said.

Asked about the prospects for a pipeline to export Alaska natural gas to the Lower 48 states, Pugliaresi said that it will likely be a long time before Lower 48 gas prices attain levels sufficient to support the transportation of gas from Alaska. However, the economics of exporting U.S. gas to the Pacific Rim are intriguing at present, he said.

When it comes to Alaska oil development, it is necessary to find a way to deal with oil price uncertainty and to align the interests of those with capital to invest with the interests of the state and the federal governments, Pugliaresi said.

Environmental questions

Criticized by a couple of people in the World Affairs Council audience for not including the cost of environmental factors such as global warming and ocean acidification in his analysis of expanding oil and gas production, Pugliaresi responded that it is necessary to carefully consider the trade-offs between the economic value of oil and gas development and the cost of any resulting environmental impacts.

The value of oil and gas production for a state such as Pennsylvania is very significant, and to make comparisons with alternatives such biofuel production it is necessary to assess the value and cost of these alternatives, he said, adding that any form of energy production has some environmental impact.

Pugliaresi had earlier commented on the relative economics of fossil fuels and renewable energies. A fairly recent world view that oil would become short in supply and high in price is being reversed, thus raising questions over the relatively high cost of technologies such as wind power, solar energy and electric cars: While the value-added processing of petroleum products can create new jobs and fuel economic growth, the development of goods whose value is less than their cost of production is problematic, he said.