With global shale reserves being estimated at around 6,600-trillion cubic feet, prices show remarkable volatility — ranging from about $3 per BTU in the United States to $10 per BTU for Russian Gazprom in European countries and up to $15 per BTU in Asia. Despite the growing global demand for gas, prices are very local.
There are four major factors that impact local markets: geology, population density, public policy/ national politics, and market conditions.
In geology, the devil is in the details (when is it not?). It is a matter of the amount of recoverable hydrocarbons, the type of product that is prevalent (oil, wet gas, or dry gas), the geo-physical properties of the shale and the depth of the formation. These factors set the economics of the game.
The second factor is very discrete, yet very powerful and population densities range wildly from one nation to the next: nine people per square mile in Canada, 22 in Russia, 83 in the United States (280 in Ohio), 147 in the United Arab Emirates, 197 in Ukraine, 309 in France, 316 in Poland, 593 in Germany and, finally, 656 in the United Kingdom.
“Urban” is a very powerful word in this context. Infrastructure and distance are two important variables when you consider the extraction and provision of shale gas. Density defines not only the physical infrastructure and markets, but the influence of local politics on shale gas extraction, especially when it comes to issues of negative externalities of fracturing, water usage and environmental preservation.
Concerns over the environmental impacts of shale drilling and hydraulic fracturing have a louder voice when population densities reach 200 or 600 people per square mile compared with 80. The density of dissenting voices amplifies opinions about energy security as well. Germans are greatly concerned about 36% of their gas being imported from Russia. Poland (with about 48% of its supply originating from Russia) and many other Baltic nations with even higher densities (some importing up to 100% of their supply from Gazprom) are finding those voices growing louder and louder.
Population densities vary greatly -- and so do sentiments toward the environment and energy securityAlthough Europe has a developed and evenly distributed infrastructure for gas, policies relating to the environment and sustainability are major concerns when it comes to new shale development. The realities of an aging energy infrastructure — in concert with a lack of new plant construction and pledges by many European countries to shutter nuclear and coal electric plants in favor or wind generation — converge on a new reality, where the numbers might not be adding up.
Germany announced it would close its nuclear plants within a decade and increase its renewables to account for 35% of their power by 2015 — at a cost of close to $780 billion.
The UK aims to close eight coal plants to reduce emissions while increasing offshore wind-generating share of electricity to 17% by 2020. That is equal to the world's entire existing wind-generation operations. For now, France and Bulgaria forbid hydraulic fracturing on their land.
Yet, while this energy cliff approaches, there have been no meetings of the E.U. on a comprehensive energy policy, while the Union met more than 20 times over the financial crisis.
Population density brings us into the continuum of the next factor, policy and politics. While local public policies primarily discuss sustainability and energy independence relative to economic security, geopolitics frame the world map of oil suppliers and imports and define countries' energy and national security. Each country tries to leverage its own advantages for power on the global stage.
This begs two questions: How will booms in domestic U.S. production impact the value of free trade with the United States, and will America shifting away from the Middle East, and Europe shifting away from Russia, cede a monopoly to China in those markets? With the United States becoming a gas exporter and potential world leader in petrochemical production, the value of free trade agreements with America is increasing. Countries obtaining access to U.S. shale gas also are getting access to our greater landscape of business and market opportunities.
Who will be the next world superpowers and manufacturing giants?On the other hand, a boom in domestic production leaves neglected foreign suppliers seeking new buyers and partners.
In 2005, the United States imported 60% of its oil; in 2012, we imported around 42%, and that share is decreasing. With the United States becoming less dependent on the Mideast for oil and projected to export oil in future, all of that foreign oil is up for grabs. Nothing prevents China from grabbing that oil to satisfy its growing demand, and with 20 million new cars on the road every year, Chinese demand is strong.
Russia is another supplier that easily could sell to China if it finds itself losing its traditional market in Europe. Although energy independence is a worthwhile goal and an admirable accomplishment, being the largest consumer gives some leverage over the supplier. The question is: are shifts in the west toward self-reliance inadvertently helping China to gain unprecedented leverage over the largest producers in the Mideast and Russia? Are we inadvertently priming the path for a new world superpower?
Finally, the fourth factor is market conditions. Outside of the United States, these are going to play, perhaps, the most important role. The free market in the U.S. economy rests on a foundation of property rights and their protection. The economic model of the United States also is based on normative assumptions reflecting democracy and personal freedoms.
There are rules and regulations in place that define the proper functioning of all economic systems and institutions that operate within the realm of the formal economy. There is a free and open market for gas that by its very nature defines prices for buyers and sellers. There are flexible and fast-adopting market enterprises and entrepreneurs who are willing to take the necessary risks and there are financiers willing finance those risks.
Finally, there is an advanced ecology of innovation and commercialization, with a culture that fully supports it, and where intellectual property rights are protected and supported through public policy. How many countries in the world meet all of these conditions? I know of four: the United States, Canada, Australia and the United Kingdom. Other countries have many aspects of these conducive market conditions. Some may even be stronger in certain areas. But none match this powerful mix.
For example, China announced a development subsidy on shale gas produced there through 2015. China currently has 62 shale gas wells in trial development zones, but it's struggling to recoup costs (let alone chisel out a profit) due to high drilling costs (up to $16-million per well). Poland has issued 70 shale exploration licenses and recently offered new tax rates for shale gas producers, eagerly aiming to establish the most attractive business conditions in Europe so as to grow its service industry. Russia, finally realizing (and begrudgingly admitting) a threat to its gas markets has decided to cut duties on crude oil exports by 45% from new oil fields developed in some remote regions in hopes of spurring the development of new conventional oil fields there.
These incentives are not necessarily sufficient to compensate for an absence of pipelines, roads, electric and water lines, buildings, and support services. And these incentives have more to overcome than infrastructure. On top of political instability and unreliable market conditions, there often is a legal vacuum for licensing, exploration and production, intellectual property rights, and mechanisms to deal with government-owned land and subsurface rights. Immense investments in infrastructure are a multiyear business based on the reliability of returns guaranteed by property rights and good geological data.
All these factors — geology, density of population, policy and politics, and market conditions — will slow down development of shale outside the United States while giving us a chance to become a world petrochemical superpower. One large problem remains, though: Any modern manufacturing superpower depends on an ample supply of middle-skilled labor — and it will be a shame if that turns out to be the one resource the United States can't unearth.