Shale gas revolution shaking up the world

A revolution is under way in the United States that is predicted to have significant consequences for the global economy and geostrategic affairs.

It is not a political revolt nor is it the development of new weapons.

It is the discovery of large reserves of shale gas and the development of technology to enable its extraction that is underpinning a radical change in the energy market in the United States.

Two technological breakthroughs are driving this shale gas revolution – hydraulic fracturing (fracking) and horizontal drilling.

Gas in the vast shale deposits in the US has been until recently “trapped” in the rock formations.

New drilling techniques have allowed resource companies to drill along shale deposits and then fracture the rock structure, using high pressure water mixed with other chemicals, thus releasing the gas.

This is considered a controversial practice in many countries, including in Australia where it has been used to access coal seam gas reserves.

While there are concerns about fracking in the United States, this has barely slowed development of shale exploration and gas extraction.

The first and most immediate impact is that domestic prices for natural gas have tumbled.

Industrial users of gas in the United States in 2008 were paying an average price of $9.65 per thousand cubic feet of gas, but this has fallen to an average price of $3.67 per thousand cubic feet in 2012.

Gas prices for residential users have fallen from $13.89 in 2008 to an average of $10.54 this year.

According to US government and private sector representatives with whom I have met recently, these price falls have the potential to transform the US economy.

Plentiful gas supplies for the domestic market will allow US manufacturing to be more competitive with products produced in lower-cost centres in Asia, for example.

There is growing speculation of a manufacturing revival in the “rust belt” States of Ohio, Michigan and Indiana.

If this does occur, it will be a longer-term trend as it is no easy challenge to reverse decades of steady decline.

The US has long had a heavy reliance on imported oil and gas.

A more immediate impact will be a transformation of the US energy market from a deficit to a surplus – meaning a reduction of energy imports into the US.

A United States that is self-sufficient in energy production has the potential to affect the globe’s geo-strategic balance, particularly with regard to the Middle East and Europe.

There is serious speculation that the US will become a significant net exporter of natural gas.

President Obama said recently that shale gas would enable the US to "develop a hundred-year supply of natural gas that's right beneath our feet. Cut our oil imports in half by 2020 and support more than 600,000 new jobs in natural gas alone."

This could make the US competitive with other gas producing nations and may, for example, undermine Russia’s virtual monopoly in supplying gas to Europe.

Russia has been exporting gas at a price equivalent to $10 per thousand cubic feet, significantly higher than the wholesale price in the US which has dipped below $3 at times in recent months.

Nervous executives at Russian gas company Gazprom are reportedly putting plans on hold for gas field exploration in sub-arctic zones, which would not be profitable should prices fall on the back of shale gas flooding the world market.

Fracking is currently banned in France, but there is interest in shale gas development from other European countries.

A recent report by the United Kingdom Institute of Directors has forecast the creation of more than 35,000 jobs from shale gas development in the UK, on the assumption that government approval for fracking is granted.

China has large shale reserves and is reportedly taking a deep interest in the US shale gas revolution and the underpinning technology.

Of course Australia could also be affected by the entry of the US into the gas export market, given the significance of our LNG exports into Asia.

One of the more interesting outcomes of the shale gas revolution is that the US appears to be on track to meet Kyoto targets for emissions reductions.

There is more than a little irony involved given that the US did not ratify the Kyoto targets and has imposed neither a price on carbon nor an emissions trading scheme.

European nations face the prospect of rising emissions due to increased reliance on coal for electricity production, with much of that coal coming from the United States.

Australia would be well advised to heed the approach of US policy makers who have long argued that technology and innovation are the pathways to reducing emissions, rather than punitive taxes.