When I first wrote about shale gas in the FT, back in 2011, one very senior oil industry executive told me that I was badly wrong and that shale would never have an impact beyond perhaps a couple of small areas in the US. A year later he did have the good grace to apologise.
Now shale gas is everywhere – from Ukraine, to China to South Africa (those are just the places where major investments were announced last week). There are still those who deny the importance of shale development, but like those who deny climate change they are beginning to look increasingly out of touch.When a company such as Shell announces a $10bn investment in shale gas in one country alone (Ukraine) something big is happening.
Of course there is hype. A few days ago, the chief executive of a small Australian company called Linc Energy announced that their discovery in the Arckaringa Basin in South Australia could be worth $20tn. Give the man a cold beer. To be clear, shale gas is not a magic potion. It’s development involves complex technology that can do damage if misused. In some circumstances development can be costly. In all cases it takes time to develop. Projects starting now will come on stream typically in 2016 or 2017.
But despite these necessary caveats, shale gas is real. The potential volumes are huge. Many provinces have not been fully explored. Some have not been explored at all. But year by year the estimates of recoverable reserves go up and costs come down because the technology is still advancing.
What does shale gas do to the energy market? Consider the following just for starters.
- It adds further supply to the already well supplied gas market. Existing contracts for natural gas supplies often linked to oil prices are rapidly being shredded. There is now gas to gas competition and that will intensify.
- This competition puts a question mark over the more expensive natural gas and LNG projects. Some have been cancelled already. Several more, for instance in Australia now look very vulnerable.
- Then shale gas changes the geography of the world market. The US is already importing less and could soon be an exporter. China will develop its own supplies and future imports could be much lower than currently predicted. Russia is losing its market share, especially in Europe.
- Shale also has knock on effects. Cheap gas has started to displace coal in the US power generation market pushing coal exports into Europe at lower prices.
And then the emergence of shale gas poses a major challenge to the climate change lobby, which for the past decade has relied on predictions of ever rising fossil fuel prices to provide cover for the introduction of expensive renewables.
These are still early days. Each year from now will see more shale gas found and developed.
But even that is not the end of the story. The technology that enables shale gas to be developed is now being applied to oil resources trapped in shale rocks. Those resources are known as “tight oil”. That is the next big story in the energy market and something I will come back to.
