Shale Gas & Foreign Oil: How Realistic Is US Energy Independence?
- May 17, 2013 3:45 am GMTJul 7, 2018 12:53 am GMT
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“America is too dependent on foreign oil” is a frequent refrain of American politicians and policymakers with an agenda. Indeed, in 2011 and 2012 the US imported 40-45% of all petroleum consumed in the US – 8.5 million barrels per day worth of crude oil as well as refined products such as diesel and gasoline. The cry therefore shakes the American psyche because its apparent truth undermines the rugged American pioneering values of independence and self-sufficiency. The notion that liberal America is still reliant on buying oil from stark ideological and geopolitical adversaries such as Saudi Arabia and Venezuela is one that predictably rankles most energy hawks.
Fig 1: An oil tanker delivering crude
Now, it seems possible that the immense new discoveries of American shale gas and its liquid twin “tight oil” may be able to ride to the rescue of the American pioneering spirit. Hydraulic fracturing (“fracking”) and horizontal drilling have enabled the extraction of natural gas and oil in shale rock 8,000–11,000 feet below the earth’s surface and has revealed the US to be sitting on multiple oceans of underground hydrocarbons. A report by INTEK, commissioned by the Energy Information Administration (EIA), puts the technologically recoverable reserves of shale gas at about 750 Trillion cubic feet (Tcf) and those of shale oil at about 24 billion barrels. This represents multiple decades worth of consumption at current rates.
Fig 2: Distribution of US shale plays
Hence the question of the day is to what extent American shale gas and oil could displace imported petroleum from uneasy geopolitical bedfellows.
First, a quick look at the facts. In 2011, the US had net imports of about 8.4 million barrels per day (mmbpd) of petroleum. By far the largest supplier of petroleum to the US is its closest physical and ideological ally, Canada, which accounted for about 29% of net imports in 2011, then Saudi Arabia at 14% of net imports, Venezuela at 11%, Mexico at 8% and Nigeria at 10%.
It is worth noting that a shift is already happening – American imports of Saudi crude peaked in 2003 at 1.7 mmbpd, and have since fallen to 1.3 mmbpd in 2012.
Going forward we must be careful to avoid an apples-to-oranges comparison. Most of the imported hydrocarbons are liquid fuels and so we must first see how far tight oil could go towards meeting the gap, and then evaluate how far shale gas can go towards covering the balance, primarily through gas-to-liquid conversion.
Currently, tight oil from the Bakken and Eagle Ford Shale formation in North Dakota dominate production – producing 545,000 barrels per day (bpd) in April 2012, with national tight oil production hitting 720,000 bpd as at the end of 2012. This represents just over half the amount imported from a single importer such as Saudi Arabia, but only 8% of total imports.
There is an added layer of difficulty facing substitution. Refineries are highly specialized to optimally process a certain type of oil depending on the quantity of sulfur present (low sulfur crudes are known as “sweet” and high sulfur crudes are “sour”), and how “heavy” (highly viscous with a high specific gravity) or “light” (relatively lower viscosity and specific gravity) the crude oil is. Refineries on the Eastern coast of the US are designed primarily for West African crudes that are light and sweet whereas Gulf of Mexico refineries are tuned to process heavy and sour Middle Eastern, Mexican and Venezuelan crudes. It is worth reposting this great map from an article by Brad Plumer of the Washington Post earlier this year.
Fig 3: Where US refineries get their oil (sourced from the Washington Post, article by Brad Plumer)
In fact, the advent of cheaper crude from Texas has revived numerous moribund refineries such as Sunoco’s Philadelphia and Marcus Hook refineries and ConocoPhilips Trainer refinery in Delaware (recently purchased by Delta Airlines). Blue chip private equity firms are already placing big bets on these, with The Carlyle Group purchasing a share in the Philadelphia refinery.
Given the marginal additional tight oil from shale rock, private refineries in New Orleans or Houston are unlikely to re-tool their refineries at the cost of billions of dollars in order to accept sweet, light tight oil, when it is already finding a ready home in the Mid-Atlantic region. And so while some amount of import displacement by tight oil is occurring, it is at the expense of more friendly import partners such as Nigeria, Angola and Ghana.
The EIA expects total US oil production to peak at about 1.4 million bpd from tight oil deposits by 2020 and that even into 2040 there will be an import requirement of about 37% of consumed liquid fuel (see Fig 4).
Fig 4: EIA expectation of import consumption and domestic supply gap
The economics of converting gas to liquid fuels (usually diesel) also does not point to massive replacement of imports. South African energy and chemicals giant Sasol has announced tentative plans for the first gas-to-liquids plant in the US- a $14B facility to be built in Lake Charles, Louisiana, that would produce 96,000 barrels a day. GTL plants are of course only economical when there is a significant price differential between gas and diesel (with the sweet spot seemingly being a difference of at least $11/MMBTU) – and aided greatly when the gas does not have to be piped in and will be in plentiful supply for at least 20 years. Sasol has announced it will wait till 2014 to make a final decision. Even if the project is green-lit, the additional fuel produced would represent just over 1% of petroleum import substitution.
Without a doubt cheap shale gas promises to usher in other major benefits – one would say a new era of American industrial prowess. Already, electricity production by natural gas plants almost matches that from coal – leading to an overall reduction in carbon dioxide emissions. In areas of Pennsylvania (under which we find the Marcellus shale) consumer electricity prices have dropped 50%. Hundreds of thousands of “non-offshore-able” jobs are being created. The Marcellus Shale Coalition, an industry group consisting of 300 companies such as Chesapeake Energy, Cabot Oil & Gas, Chevron and others proudly proclaim that the Marcellus shale industry alone employs over 240,000 workers with an average annual salary of $65,000 per year. Cheap natural gas is forming the basis for a revived manufacturing industry, from fertilizer to propylene and ethylene (the world’s highest volume chemical, used to make everything from toys to clothes to car tires), and even the steel industry is feeling the positive impact.
Serious environmental concerns such as contamination of groundwater aquifers and induced seismic activity (mini earthquakes) still need to be quantified and addressed (my colleague Grant McDermott has written about some of this here). Fracking is far from a perfect technique for primary energy extraction, and documentaries such as Josh Fox’s GasLand are immensely important in drawing public attention to the potential dangers and making sure there are adequate safety regulations to prevent what seems like an early wild west era of shale gas drilling from destroying America’s waterways.
Shale gas and tight oil will not decouple America from the rest of the world. The bigger story is that with newfound cheap shale gas America may finally have what it takes to chase away the looming ghosts of an ongoing domestic recession and the specter of lost industrial dominance. That should be enough to quiet even the most adamant energy hawks.