The “shale” energy revolution

The “shale oil” and the “shale gas” are the unconventional fossil fuels extracted with advanced techniques, such as fracking and horizontal drilling. Extracting oil from oil shale requires conversion of the solid hydrocarbons in the rock to liquid form, so that they can be pumped or processed. This is done by heating the rock to high temperatures, by separating and collecting the resultant liquid. This process is called retorting.

There are two ways of processing the shale oil: surface retorting and in-situ retorting.Surface retorting (also known as surface processing) has traditionally been the most common process, which consists basically of three steps: oil shale mining, thermal processing or above-ground retorting and disposal of the spent shale. The oil shale mining can be done using traditional mining methods, either by opening pit mining or underground mining (sometimes called room-and-pillar method). After the extraction, thermal process begins, In order to clean the materials, process the shale oil and obtain petroleum by-products andproducts ready for the refinery. The final step is the disposal of the spent shale. Surface processing has many disadvantages: both mining methods have a large land impact and consume large amounts of water (as the process requires water for operations and also requires pumping out groundwater to prevent flooding of the mines). Surface (or open-pit) mining involves a considerable land impact while approximately one-third of the resources is left behind pillars and/or unmined areas. In fact, the more resources are thick, the less mining processes are efficient. The disposal of the waste shale is the main problem for some processes, because of the large quantities of water required.

In-situ retorting is the technology used to process the shale oil underground.This process obviates the problems of mining, handling, and disposing large quantities of material, which is required for the above-ground retorting. In-situ retorting also offers the potential of recovering the deposited oil shale deeply. In an in-situ process, the shale oil is slowly heated underground and the resultant liquids and gas are directly extracted from the reservoir, in a way not so different from pumping crude oil. Utilizing slow heating methods and lower heating requirements than those used in surface retorting, holds another key advantage: the shale oil produced will have a superior quality that produced in above-ground retort facilities, which implies a reduction of the products (fuel) delivery times to the refineries and a greatest economic efficiency. In-situ technologies have been successfully demonstrated on a small scale. Various technologies differ about the method used to introduce the underground heat, but follow the same basic principle.

According to the latest report from PwC, entitled “Shale oil: the next energy revolution”, giving the green light to the extraction of unconventional oil could revolutionize the world of energy, adding 14 million barrels per day of production by 2035. This would lead to a decrease in oil prices between 25% and 40%. Some states and private companies have already sensed the potential big deal: China entered into negotiations with the major international oil companies in April; Australia welcomed the Norwegian Statoil and its drilling in July (and in January 2013 there was the first discovery of shale oil in the country), in September the government of New Zealand officially encouraged the exploration of unconventional oil. In September 2012, in Argentina, YPF signed an agreement with Chevron in order to develop the field of Vaca Muerta shale. In the same period, in northern Alaska, took place the first findings. Finally, in October the United States began to think about the exports of shale oil, Mexico promised 242 million dollars for investments in that sector in Colombia and Exxon obtained exploration rights in two blocks^[1].

According to a new EIA-sponsored study (Table 1), estimated shale oil and shale gas resources in the United States in 137 shale formations represent 10% of the world’s crude oil and 32% of the world’s natural gas technically recoverable resources, or those that can be produced using current technology (without reference to economic profitability).

If we take a look outside the U.S. shale formations, we note that slightly more than half of the identified shale oil resources are concentrated in four countries: Russia, China, Argentina, and Libya.

If we take a look at the shale gas, more than half world formation is concentrated in five countries: China, Argentina, Algeria, Canada, and Mexico. The United States ranks second after Russia for shale oilresources and fourth after Algeria for shale gas resources, if compared with the 41 countries which have been assessed (Tables 2-3).

New technology for shale extraction is ushering in an era of lower energy costs in the United States that will have an impact around the world.

Reducing the energy costs creates a virtuous economic circle, downward pressure on inflation and manufacturing costs, more money left over for consumption and investment in the us and overseas. Skeptical policy-makers and investors about shale energy extraction need to consider its longer-term implications. Extracting oil and gas from shale rock through hydraulic fracturing or fracking has already transformed the U.S. energy landscape. In fact, shale extraction combined with innovations in energy storage and the increasing share of green energy pushed energy costs down. The strong shale supply has helped keep U.S. West Texas Intermediate oil prices lower than non-U.S. Brent prices since late 2010, according to the U.S. Energy Information Administration. Since 2004, WTI had typically traded at a premium of $1 to $3 a barrel. The impact of lower energy costs on U.S. economic growth is not some one-off that has already been fully priced into the equity market. Over the longer term, the multiplier effects could be even greater. Lower energy costs mean U.S. manufacturing becomes cheaper and the United States becomes more attractive as an investment destination. This will become an even more significant factor if U.S. non-financial corporations invest even a fraction of their vast $1.8 trillion cash reserves and start employing more U.S. workers. Higher employment also means higher consumption and potentially more employment. Shale can contribute to a virtuous circle of self-reinforcing recovery in the United States. Overall, we estimate that shale could add 0.5 percentage points a year to U.S. gross domestic product (GDP) growth over the next 10 years. If the shale boom were to add 0.5 percentage points to GDP, it would create an $85 billion economy from scratch. Over the longer term, other technologies could help reinforce shale’s positive effect. Additive manufacturing or 3D printing could save more than half of U.S. manufacturers’ energy use, according to the U.S. Department of Energy. The combination of rapid manufacturing innovation and low energy costs were key factors in America’s industrial revolution during the 19^th century and could hold similar promise in the 21^st. The benefits and impact of U.S. shale production will spread globally. If cross-border agreements allow shale technology to be deployed more widely abroad, the global economic effects could be even more pronounced. Russia, for instance, has even more recoverable shale oil resources than the United States, or 75 billion barrels compared with 58 billion, according to U.S. Energy Information Administration. China has almost twice the United States’ recoverable shale gas reserves, with 1.1 trillion cubic feet compared with 665 trillion. Countries that can exploit their reserves sustainability in coming years may reap considerable economic gains. The exploitation of non-homogeneous shale oil fields on a global level, could bring big changes in the geopolitical relations among countries producing and non-producing shale oil and gas. The United States would become an exporting country certainly (but not only) to the detriment of Russia and Venezuela, even worsening relations between these states. Inevitably, the shale boom entails risks.

Risks

Some people think that the fracking method is a risk: the prohibition of the fracking within its territory was announced by Andrew Cuomo, governor of the State of New York, during the cabinet meeting of the year-end and during a conference. This decision marks a turning point, if you consider that it is the state with the largest reserves of shale gas in the United States. In fact, New York lies on the abundant gas formation called Marcellus, but its governor has preferred the economic benefits to safety and health. The results led to the conclusion that the risks are real, especially for the groundwater contamination and the increase in road deaths resulting from the construction sites, as occurred in Wyoming and Pennsylvania.

Energy companies or energy producing nations that fail to adapt to it could falter. A major accident or environmental incident caused by shale extraction could provoke a political backlash against the technique. If recoverable reserves prove to be lower than estimated or more expensive to extract, that could also hit the expected supply of shale energy or push up its anticipated cost. But if policy-makers and energy producers can minimize shale’s pitfalls, investors will enjoy its rewards for many years to come^[2].

Italian prospect

Angelo Camerlenghi, director of the Section of Geophysics of the National Institute of Oceanography and Experimental Geophysics (OEG) of Trieste, declared that in Italy it is impossible to replicate the energy revolution of the United States, which revolves around the unconventional natural gas. He and his team studied the distribution of natural methane hydrates in the ocean floor and monitored the effects of micro-fracturing of rocks during the extraction of shale gas. In other words, “along the Boot there are only small areas of argillaceous rocks, shale, which may contain gas, generally in layers from 2 to 20 inches thick, so small that they have no economic value. Few traces have been found in the Southern Alps of Lombardy, Veneto and Friuli-Venezia Giulia, and in Sicily. But it is a far cry from the American dimensions”. It is no surprise that the National Energy Strategy specifically excludes the use of shale gas extraction^[3].

Is this the end? Maybe for the unconventional gas.But it is not the same for “conventional” oil and gas, which in the future might give great satisfaction if National Energy Strategy achieves its objectives.Few people know that the Italian oil and gas reserves rank fifth in Europe (126 million tons), and that those “potential oil and gas reserves” (700 million tons) would ensure, in the current state of the Italian consumption, a five-year coverage^[4].

Winners and losers of the energy revolution

A consulting company created a forecasting model which shows that the shale impact will have different results: clear “winners” emerge when considering the impact at a national level connected to downward price of fuel. India and Japan, for example, could see an increase in GDP between 4% and 7% by the end of the projection period. Other net oil importers, such as the United States, China, Germany and the United Kingdom, could also see GDP gains of the order of 2-5% of GDP in the long term, due to lower global oil prices .

At the other end of the scale, some major net oil producers could see their current account balances deteriorate significantly as a result of lower oil prices (Russia and the Middle East).In fact, putting on the market of shale oil would cause a chain of collapse in the price of not shale oil. However, the NiGEM model takes no account of which particular countries will be producers of shale oil. And Russia could limit its projected losses to exploit its estimated resources, the largest in the world. A lower oil price acts as a boost to consumers’ real disposable income similar to an indirect tax cut, with a consequent positive effect on real household spending levels. In Japan, for example, the model results suggest a fall of $50 in the real oil price could increase private consumption per head at the end of the projection period by the equivalent of more than $3,000 per year (when compared to the EIA baseline with minimal shale oil production). Gains in the United States and the Euro-zone would also be significant, although net gains to UK consumers would be lower in part because there are also losses on existing North Sea oil and gas revenues if global energy prices fall^[5].

VITTORIO D’ALEO

Ph.D. candidate in Economic Sciences (University of Messina)

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