Fracking – Time to play catch-up?

Hydraulic fracturing or fracking (as commonly known) is a technique for extracting natural gas from hitherto unreachable sources such as shale rock deep within the earth and many sources looking to its origin have mentioned Halliburton’s 1947 experimental use of Hydraulic fracturing in the Hugoton fields in Kansas. Visitors to Halliburton’s corporate website can see a timeline in which the company has spent many decades investing in vertical and horizontal drilling technology to become an industry leader and a standard bearer for Hydraulic fracturing.

During the fracking process, natural gas is released when water and chemicals under high pressure are pumped deep underground to create fissures and fractures in shale (fine grained sedimentary rocks of low permeability). Shale plays or shale formations with significant accumulations of natural gas around the world have been estimated at a total of 7795 trillion cubic feet of recoverable gas by the Energy Information Administration (EIA) and they are found in various continents around the world including North and South America, Europe, Asia, Australia and Africa. North America has the largest estimates with 2279 tcf, of which the US makes up 51% of that total and China is listed next with 1116 tcf.

It is possible to point to a benign regulatory environment and a permissive population which has since 2005 allowed shale gas to grow from a negligible proportion to about 33% of US dry natural gas in 2011, and the US Energy Information Administration estimates that by 2040, that half of all US dry natural gas would be from shale gas. This current and possible future state of affairs not been accidental, because, shale has been chosen by policymakers as a means by which the US would reduce its dependence on oil. A goal supported by the Obama Administration which in March 2011 signed the “Blueprint for a Secure Energy Future”, involving the US Department of Energy, Department of Interiors and Environment Protection Agency in a multi-departmental initiative to coordinate collaborative efforts towards a responsible and prudent exploitation of unconventional energy sources such as shale.

But in the rest of the world, regulation spans from hostile, for example France where the practice has been banned, to cumbersome, for example England where prospective explorers need a license from DECC, the Department for Energy and Climate Change, they need seek planning permission from Minerals Planning Authority, obtain permission from the Environment Agency, notify the Health and Safety Executive and file an intention to drill under the S199 of Water Resources act of 1999. Even when all these are met and the prospective explorer has in their hands a license to drill from the DECC, there’s still a major hurdle to cross – the public, who have to be consulted. As Caudrilla found out in summer amid the lengthy protests at Balscombe, West Sussex, the UK public opinion is yet to be won over on the benefits and safety of shale gas exploration.

Nevertheless, for the United States, the benefits of fracking have been what PWC calls a “renaissance of manufacturing” as they find that exploration of shale has brought savings to US manufacturing and estimated annual savings of 11.6 billion in the next decade. In an economy where unemployment remains stubbornly high, PWC predicts shale would add a million new jobs by 2025. The PWC report chronicles investment initiatives from companies like Dow Chemicals, Chevron Phillips Chemical, Nucor, Bayer Corp, US Steel and other companies benefitting from the cost advantages brought about by shale gas. The Economist also notes that European consumers are paying twice what the Americans are paying for gas as a result of shale gas exploration. But, to crown it all, Fatih Biro, the IEA Chief Economist, speaking to Reuters observed that by 2015, shale exploration would make the United States the largest oil producer in the world – above Russia and Saudi Arabia – sweet music to the ears of the US Administration who have not disguised their ambition for US energy independence.

However one man’s harmony is another’s dissonance and Europeans are not so convinced of these benefits or if they are, find them outweighed by the perceived costs to the environment and there’s no shortage of groups ready to make the argument against fracking. From more established groups like Greenpeace and Friends Of The Earth to newly formed internet pressure groups such as “Frack-off”. According to these naysayers, fracking is bad news for the environment. They base their argument on claims on water pollution, tremors, increased traffic, noise and emissions. But the objections are not only coming from direct action on the street like that Caudrilla faced, but also in the courts.

The case of Star Energy and Star Weald vs Bocado S.A. freehold owner of the Oxted Estate in Surrey is widely quoted by fracking antagonists not only because of the high-profile beneficiary of Bocado, Mohammed Al Fayed, but also for its ruling in which the Supreme Court judges awarded £1000 Bocado. The damage for “past and continuous trespass” for the three pipes some 800 to 2800ft beneath the Oxted estate has served to embolden the anti-fracking lobby who want landowners to assert their rights to object to drilling operations and hence create fracking free zones across the country or at the very least bog down fracking operations in a multitude of lengthy litigation.

Yet in that dark cloud lies a silver lining for fracking proponents because the ruling placed limits on what landowners could seek by way of compensation when suing on the grounds of trespass. Additionally, there is little fear that landowners could scupper drill operations because operators could ultimately apply to the courts for “ancillary rights” where a landowner was obstructive. As in the latter case, Bocado may have owned title to the strata beneath the estate but it had no rights to the petroleum found in the strata – this claim has historically resided with the Crown and its licensees as per the Petroleum Production Act 1934.

There is scant disagreement that fracking has transformed the US energy sector, for example the US is now poised to export gas to countries like the United Kingdom and Japan and many analysts expect the US to move from being a net importer of gas to a net exporter of gas. But, this change is not confined to the US because, the EU Commission notes the widening gap between the US and European energy prices is eroding European competitiveness and also that shale gas exploration has also meant that the US has more coal for export, some of which ends up on the shores of Europe as European coal imports from the US increased 9%, in the first 11 months of 2012 when compared to 2011.

While countries like Nigeria, Algeria and Angola have of recent witnessed declines in revenue as a result of a drop in US oil imports and from soft oil prices, Professor Mthuli Ncube, Chief Economist and Vice President of the African Development Bank does not expect these disruptions brought about by lower US demand to adversely affect African economies and he argues that the high demand from rapidly growing economies such as India and China would take up the slack.

However with Bloomberg reporting that an estimate of 400 shale wells are to be sunk outside the US in 2014, the majority of which would be in China (1115 tcf of shale gas reserves and 32 billion barrels of shale oil). With the report going further to suggest possible shale booms in China, Argentina and Russia, there is cause for concern for Africa’s exporters of oil and gas whose recent economic revival have been founded on China’s cavernous demand for commodities like crude oil.

The total African shale reserves may not match those in North or South America, but, there’s enough shale gas in Algeria and South Africa to warrant them fourth and eighth in the world respectively. Additionally, Libya also has shale oil reserves estimated at 26 billion barrels which places it 5th in the world. These shale accumulations represent immense potential wealth and there are encouraging signs respective governments are taking the tide at the flood.

In Algeria, the government is using tax-breaks to entice exploration companies like Exxon and Royal Dutch Shell, which according to Bloomberg have already signed shale exploration deals to release some of the estimated 707 tcf of shale gas reserves. The country is looking forward to doubling its gas production by 2030 satisfying its domestic and particularly export market which could earn it crucial foreign currency from the EU, whose shale gas exploration is being scuppered by environmentalists.

South Africa which has hitherto not been a major gas producing nation has recently lifted its moratorium on shale gas exploration to embark on a “reindustrialisation of the South African economy”, according to the Mineral Resources Minister, Susan Shabangu. In spite of a substantial level of protest from environmentalists, the urgency to create jobs and boost the economy must have weighed heavy with politicians reading a report by the research firm Econometrix which showed South Africa stood to boost their economy by about 20 billion US dollars annually through the exploration of just 10% of its shale resources estimated at 390 tcf.

Hydraulic fracturing the favoured method of shale exploration continues to evoke passions on both sides of the debate. The antagonists’ environmental arguments are founded on noise and water pollution, coupled with their claims that shale is a costly distraction, in terms of greenhouse emissions, from investment in renewable energy such as wind, solar, hydroelectric, biomass etc. However, in a world where GDP growth in many economies flatlines at best, the proponents of fracking make their arguments in terms of reduction of energy costs, boosts to manufacturing, jobs, investment and reinvestment by corporations and the ultimate competitiveness of economies. This far, the United States has established a competitive advantage over the world in recognising and exploiting the benefits of shale accumulations. However, having a competitive advantage always serves as an invitation for others to raise their game and with that in mind it would be interesting to see what happens as the rest of the world plays catch up.

Lloney Monono,
Bristol, UK

Sources:
EIA/ARI World Shale Gas and Shale Oil Resource Assessment (June 2013)
Prepared by: Advanced Resources International, Inc. 4501 Fairfax Drive, Suite 910, Arlington, VA 22203 USA P: 703.528.8420 Prepared for: U.S. Energy Information Administration U.S. Department of Energy

PWC, (December 2011) Shale Gas, A renaissance in US manufacturing?

Econometrix (Feb. 2012) KAROO SHALE GAS REPORT
A SPECIAL REPORT ON ECONOMIC CONSIDERATIONS SURROUNDING POTENTIAL
SHALE GAS RESOURCES IN THE SOUTHERN KAROO OF SOUTH AFRICA

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Categories: Energy, Environment

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