A World Awash in Natural Gas

Economic and National Security Implications of the

Coming Energy Revolution

“The world should take note of the dramatic increase in estimates of unconventional sources of natural gas in North America and elsewhere, perhaps the greatest shift in energy reserve estimates in the last half century”.

• So writes former CIA Director and now MIT professor John Deutch in the January-February edition of Foreign Affairs. According to Deutch, technological advances have made vast amounts of natural gas available. Specifically, this is due to using “fracking’—blowing up hard, often shale, rock, and new capabilities in horizontal drilling.
• As recently as two years ago we had no idea there were vast natural gas resources in unconventional reservoirs like coal seams, tight sand, and shale in the US and elsewhere. Natural gas has transitioned from being a “dwindling” to an abundant resource.
• The development is a boon for consumers interested in affordable energy, for environmentalists wishing to reduce carbon dioxide emissions (much less than oil or coal), and for governments that hope to reduce the political and market power of today’s major oil/gas producing countries.
• Countries that import natural gas (NG) should anticipate much lower prices as more sources become available than exist in today’s tight market. No longer will the world be dependent on a few nations—Iran, Russia, Qatar, Turkmenistan, Saudi Arabia—that control the bulk of conventional natural gas reserves.
• Countries that derive huge revenues from the export of NG must anticipate dramatic reductions of demand and a corresponding loss of geopolitical influence. Demand for oil will also drop as NG substitutes more for petroleum, causing negative impacts on oil producing nations and having a very positive economic impact on oil importing countries.

The Technology

• NG today is extracted principally from gas fields located in porous rock, tapping into the natural pressure of the reservoirs. Unconventional sources refer to “tight gas” found in impermeable rock formations, shale gas, or coal-bed methane absorbed into coal seams. Very difficult and costly to extract, or at least it has been.
• Two technological advances make shale gas economically feasible to produce: horizontal drilling and hydraulic fracturing (“fracking”). Wells are dug vertically up to 12,000 feet underground, and the drill is then steered horizontally for several thousand feet or more. Fracking fluid  is injected at high pressure, perforating the formation and creating cracks in the shale, allowing the trapped NG to escape.
• The new technology has driven down the cost of producing unconventional NG below what it now costs to extract NG from conventional sites! Enormous quantities of NG in shale deposits throughout the U.S. especially, but also in other regions of the world, have become commercially recoverable.

Extent of U.S. and Global Unconventional Natural Gas Reserves

• In 2007 the DOE Energy Information Agency estimated US NG reserves to be around 250 trillion cubic feet. Estimates today place that at least at 700 trillion cubic feet; Amy Myers Jaffe puts the reserves at 1,000 trillion cf (“Shale Gas Will Rock the World”, WSJ, May 10, 2010). It could be as high as 2,500 trillion cf! Whatever, the potential reserves are enormous.
• North America thus has sufficient NG that can be tapped economically to last for more than 200 years. In fact, the continent will likely shift from becoming a major importer of NG (through LNG tankers or pipelines) to a major exporter. Shale gas operations are also opening up in east and west Europe, currently major importers heavily dependent on shipments from Russia, Libya or Algeria.

Economic and Geopolitical Ramifications of the Natural Gas Revolution

• Because of the vast availability of unconventional NG, we will see gas increasingly being seen as a cheaper source of power generation than coal, and possibly even nuclear. Natural gas will also soon begin to replace oil, first in the power generation sector (minor player in the US now), but more importantly in the industrial, chemical and transportations sectors.
• This is likely to cause a serious reevaluation of the value of relying on “renewable” resources, particularly wind and solar, which will cost at least 5 times what power produced by NG generating plants will. However, “hybrid” plants that use both NG and solar to make electricity, will be more economically attractive.
• Solar and wind will be particularly under scrutiny. At present all sources receive subsidies, but one recent report indicated that NG and oil receive about $0.25 cents per megawatt hour; coal at $0.44; geothermal $0.92; nuclear $1.59; but wind and solar both around $24.00! Critics (such as the CATO Institute) of “forced use of more expensive renewable energy” argue that subsidizing “green energy” in the face of the NG glut will destroy jobs, raise food prices, medicines and consumer goods. Maybe, maybe not, but this may suggest allowing consumers to opt for more expensive green sources on their electricity bills as opposed to mandates.
• Nuclear will also come under more scrutiny, particularly after the near meltdowns of reactors in Japan following the earthquakes and tsunamis. Geothermal should remain competitive where it currently exists, but costly and speculative very deep drilling projects for geothermal will be less attractive. Expensive and controversial food to fuel schemes such as gasohol will fade away, as they should anyway.
• Countries that export large amounts of NG will suffer lower than expected revenues and a reduced ability to use energy as a tool of foreign policy. Countries that have been major energy importers will benefit from lower prices and lesser concerns over security of supplies.
• Countries that currently reap enormous revenues and political influence from exports of oil and gas will suffer (Iran, Russia, Venezuela, Saudi Arabia—my heart bleeds, of course, for them). Amy Jaffe believes that the explosion in NG availability could destroy the oil cartels (OPEC) and certainly reduce the leverage oil exporters now have.
• Russia will be hit hard, as it must expect a significant drop in revenues it currently receives from NG exports. It will have to rethink major planned LNG facilities (for export), exploration of conventional NG sites located off-shore or in the perma-frost areas, and its fiscal situation. Because of sanctions, Iran has little in the way of NG exports now, so won’t be hurt in that area as much.
• China is becoming a major NG and oil importer and apparently recognizes the importance of these shifts. Beijing is reportedly using its extensive hard currency reserves to by stakes in or whole companies located in the US and Canada which produce NG.
• Gas importers stand to reap major gains from the new availability of unconventional NG. Germany, which gets 40% of its NG from Russia, will have much to gain. The developed Asian states—Japan, S. Korea, Taiwan—major importers of NG now, can anticipate much more favorable terms.
• Planned investments in LNG ports and facilities, coal-fired generating plants, and long-distance gas pipeline projects will have to be reconsidered immediately. Likewise, because of costs and conversion requirements, it will be some time before the U.S. actually “exports” NG. (It will continue to import some despite the new availability simply because it is too expensive to get out of existing contracts).
• On the positive side, more attention in the US as well as globally will be given to gas to liquid conversion processes, conversion of motor vehicles to Compressed Natural Gas (CNG)powered vehicles, and more substitution in the chemical sector. CNG can power buses, medium-duty trucks and light-duty vehicles that operate in urban environments close to fueling stations. Cars that run on electricity will increasingly be relying on that generated by NG—so isn’t this a form of “fuel switching” for the automotive industry?
• Experts such as UNR’s John Scire argue that we should massively move to NG to power motor vehicles ASAP, and the personal transportation sector must switch as fast as possible to hybrids, plug-ins and pure electrics. This is not just because of economic rationality but that such a move would reduce our dependence on imported oil, especially from the volatile Middle East.

Environmental concerns

• There are both plusses and minuses with respect to relying more on gas produced by unconventional methods. Increased reliance on NG will be environmentally beneficial, as the emissions of carbon dioxide are much less than that from coal or oil plants/machinery. However, Deutch and Jaffe are too cavalier in dismissing the negative impacts from fracking, as polluted fluids permeate underground reservoirs and create serious health issues that are only now becoming visible. The documentary, “Gasland”, laying out the many environmental downsides of fracking, is already having an impact. I think the negative environmental consequences can be mitigated, but the industry to date has been slow to address this important concern.

What does this mean for Nevada and the U.S.?

• The United States will reap enormous rewards from the vast new sources of natural gas, as it shifts from being a net importer to exporter. The cost of electricity will drop, our dependence on imported oil will decline over time, and environmental impacts of using carbon fuels will drop.
• We will have decades of NG to rely on while we continue to develop renewable energy sources, with the hope of reducing the costs associated with them.
• The shift to domestic NG will could significantly improve our balance of payments position as we rely less on imported oil and gas. The leverage exerted by oil cartels or major exporting states will diminish. The perceived need of becoming involved militarily in distant conflicts could decline.
• In Nevada, the decision by NV Energy to increase its reliance on electricity produced by natural gas in its energy mix looks very prescient, and will enable the company to both reduce rates as well as feel more secure with respect to deliveries of source fuels (perhaps the company also ought to thank SEN Harry Reid for stopping the construction of the 1500MW coal-fired power plant in Ely!).
• In sum, the vast flows of NG coming to market domestically is a boon for consumers interested in affordable energy, for environmentalists wishing to reduce carbon dioxide emissions (much less than oil or coal), and for governments that hope to reduce the political and market power of today’s major oil/gas producing countries.

–Tyrus W. Cobb ([email protected]”). The author relied heavily on the articles written by John Deutch and Amy Myers Jaffe, and appreciates comments provided by UNR adjunct professor John Scire and NV Energy Executives Michael Yackira and Jeff Ceccarelli.