The development of shale gas and tight oil (shale oil) in the United States over a decade ago had a profound impact on the world energy market. The boom in shale oil and gas production, made feasible through the innovative technology of horizontal drilling coupled with hydraulic fracturing (fracking), opened up access to previously inaccessible reservoirs and unlocked the gas and oil deposits in shale rocks. In recent years, this unconventional revolution has enabled the U.S. to reduce its coal consumption by around one fourth, replacing the deficit with cleaner shale gas and, crucially, reducing the country’s dependence on imported oil.
Since the U.S. has pioneered shale oil and gas extraction in the world, other countries are beginning to realize the extent to which their own resource potential can be released by shale. As second users of this technology, these countries can benefit from the U.S. experience by replicating shale oil extracting techniques.
By looking at the reservoir capacities of countries which are rich in shale gas and tight oil and are capable of capitalizing on the U.S.’s fracking experience, their capabililty to replicate American fracking methods with innovative technologies can be assessed taking into account environmental and public health concerns.
According to the global consultancy firm, IHS, whose vice chairman is the world’s respected energy authority Daniel Yergin, the rest of the world has several times more technically recoverable shale gas and tight oil than North America. The global screening study conducted by IHS reveals the potential of a ‘shale boom’ outside North America, showing that “23 play areas can be considered as high ranking and to be of similar quality compared to North America, or even better in some cases.” Countries such as China, Argentina, Mexico, Canada and Russia are among these high ranking countries that have shale gas and oil deposits and, according to the report, could become major game changers in the energy market in the coming years.
In the EIA’s 2013 estimation, China and Argentina have more shale deposits compared to overall U.S. deposits, with China having a potential figure of 1,115 trillion cubic feet (tcf) of shale gas deposits while Argentina has 802 tcf, in comparison to the U.S. which has only 665 tcf. The IHS study also indicates that it is possible to exceed over 288 billion barrels of tight oil in the 148 analyzed plays around the world. However, questions remain as to how these countries can go about extracting these energy resources, why they are currently failing to capitalize on their national fossil fuel reserves and what kind of problems they are facing individually that limit their capacity for shale explorations.
It is, therefore, useful to evaluate these issues in light of those corresponding factors in the U.S. that gave birth to the shale boom. By clarifying the underlying reasons for the success of shale development in the U.S., it will become clearer as to whether corresponding shale booms could take place in other parts of the world in the coming years.
One major factor in the success of U.S. shale is to do with land rights and property ownership. In the U.S., once a piece of land is owned then the owner has the right to benefit from resources both above and below the soil. This includes any sub-soil mineral deposits, hydrocarbons and reserves that may exist on the property. The ‘private ownership of hydrocarbons’ creates incentives for companies as well as individuals to take risks for explorations in the U.S. As a result, companies, in particular small companies, are able to make meaningful investments in collaboration with property owners rather than having to enter negotiations with the state.
By contrast, in China, Argentina, Mexico and Russia, which are rich in shale deposits, mineral resource rights belong to the state. This nationalized resource ownership structure raises the stakes of speculative exploration and lessens the likelihood of international companies being prepared to take the initiative of the increased financial risk involved in shale exploration. As IHS‘s Rachael Seeley points out, smaller companies always need more economic incentives to risk significant investments, and in countries where major state companies have privileged rights of ownership of energy resources, small companies’ willingness to invest has been dampened.
Secondly, the lack of available and necessary technology and the necessary number of qualified personnel are also considered to be major impediments for shale development in countries other than the U.S. Geologists, engineers and staff experienced in drilling are prerequisites for shale production, as are the tools for modern oil rigs and the existence of accurate seismic data. The U.S. already had all these features before its shale boom; whereas other countries lack these necessary assets.
Another reason is that a shale revolution needs innovative, cost effective and advanced technologies for exploration and for extraction of oil and gas since a shale revolution is driven by innovative technology of horizontal drilling and hydraulic fracturing.
According to the IHS, entrepreneurial production and service companies in the U.S. are willing to invest more in innovative technologies, which lessen the cost of exploration and extraction and ultimately will improve production levels. Other countries are either unwilling or unable to match such levels of investment leading to a slowing down in the development of new and necessary technologies.
Finally, effective supply chain, logistics and infrastructure are fundamental parts of the US’s energy industry. An established supply chain and infrastructure increase the capacity of companies to produce more oil and gas in a very competitive environment. Established network systems such as pipelines, refineries and storage capacities allow companies to cut costs. The U.S. has the most advanced supply chain and infrastructure in the world, and in the set-up stages, this had a comprehensive effect on cost-savings and profit margins. For example, as Seeley states, “drilling a shale well in Argentina costs twice as much as drilling a comparable well in the U.S.” despite the fact that labor cost is much lower in Argentina.