Welcome to the golden age of shale gas

How once-unimaginable sources of new energy are about to transform economies and global politics
Texas, USA. Drilling Rig making a connection for Oil extraction from shale, after Hydraulic Fracturing was used, at the Eagle Ford Shale Formation in Southern Texas. Shuli Hallak/Corbis
The golden age of gas
Shuli Hallak/Corbis

To the handful of petrochemical scientists, engineers and industry executives who have spent a lifetime trying to unlock America’s domestic energy potential, the country’s current shale-oil and -gas boom is the result of a half-century of technological trial and error. But to the rest of the world, it has seemed like an overnight miracle. In less than a decade, the United States has gone from importing $30 billion worth of natural gas to the cusp of becoming an energy exporter.

Thanks to improvements in hydraulic fracturing and horizontal drilling, wells can be dug into rock formations that are nearly 100 m thick and tap reserves that are nearly two kilometres wide. That has the potential to unleash enough oil and gas to power America for nearly a century—a feat unthinkable just a few years ago.

The golden age of gas, as it has been dubbed, is already reshaping the economies of newly energy-rich states from California to North Dakota. It is helping to rebuild America’s industrial landscape and holds profound implications for global politics. “North America has set off a supply shock that is sending ripples throughout the world,” declared Maria van der Hoeven, executive director of the International Energy Agency (IEA), which, in May, issued a prediction that America’s oil and gas boom “will be as transformative to the market over the next five years as was the rise of Chinese demand over the last 15.

If soaring demand from Asia and political instability in the Middle East has defined the last few decades of oil politics, the agency predicts that America’s shale-gas and -oil revolution will define the future. The transformation is happening faster than anyone would have predicted. After decades spent tracking the global price of crude, North American natural-gas prices have recently become unglued from the rest of the world, plunging from $13 per thousand cubic feet in 2008 to below $2 last year. (They’re now closer to $4.)

The glut of cheap gas has helped drive the U.S. economic recovery by slashing the price of natural-gas by-products—valuable petrochemicals such as ethylene, propane and butane—that are used to manufacture everything from shampoo, to window panes, to fertilizer. That has unexpectedly brightened the prospects of American manufacturers and farmers, who analysts estimate now have the lowest cost of raw materials in the world outside of Qatar. Less expensive materials could slash costs to manufacturers by as much as $12 billion a year by 2025 and create a million new manufacturing jobs, according to an analysis by PricewaterhouseCoopers.

But the technological improvements that have enabled the U.S. to transform itself into an energy superpower could just as quickly do the same for the rest of the world. Globally, there could be as much as 16,000 trillion cubic feet of recoverable natural-gas reserves trapped beneath the rock and seabeds of countries from Tanzania to Brazil—enough to power the world for generations to come. “As a result of the shale revolution, the Earth can now provide us with about 250 years worth of gas supplies,” Nigel Lawson, former British chancellor of the exchequer, declared in December, urging the U.K. to move quickly to tap its own natural-gas reserves.

He’s not alone in calling for more countries to jump on the shale-gas bandwagon. “The global energy equation is changing fast,” European Commission President José Manuel Barroso told the European Parliament last week, urging it to develop policies to exploit natural-gas potential or risk falling behind the U.S. “If we want to avoid losing in this race for resources, we will have to step up our joint European efforts.”

The global energy revolution “will turn importers into exporters, energy laggards into leaders,” a report from Citi Research declared last year. “The industrial competitiveness of nations will be changed.” Israel, for instance, long reliant on energy imports from often hostile neighbours, began production on the first of two major offshore gas finds in March, leading the country’s politicians to talk about the potential of trading “gas for peace.”

But a world awash in so much energy also has far-reaching implications. Oil and gas industry analyst Infield Systems predicts the world will produce so much natural gas over the next four years that it will outstrip the entire global refining capacity. Meanwhile, the IEA expects the rush of unconventional oil production, led by America’s shale oil and Canada’s oil sands, to boost global oil production to 8.5 million barrels a day by 2018—roughly 1.5 million barrels more than we’ll be able to use. That could mean oil prices far lower than we have come to expect, which will produce a new set of global winners and losers—with Canada potentially winding up on the wrong side of the equation.

The U.S. shale boom is already having an impact here. By 2011, Canada was pumping out 16 per cent less gas than it did just five years before, according to a report last year by TD Economics. An analysis by CIBC World Markets in February predicted U.S. natural-gas imports from Canada will fall another 10 per cent over the coming decade, while the National Energy Board expects Canadian gas production will stay flat until at least 2020. For now, cheaper gas prices have been good for the economy, encouraging utilities to switch from coal-fired power plants to gas and lowering costs for oil-sands producers, whose operations are among the largest consumers of natural gas.

B.C.’s plans to expand its liquefied-natural-gas export industry are based entirely on the premise that North American gas prices will stay depressed—prices here are as much as four times lower than in Japan. But that price advantage could prove short-lived. Some analysts predict global prices will eventually converge as more countries start producing and exporting gas. More worrisome for Canada is the oncoming glut of global oil. PricewaterhouseCoopers predicts oil prices could fall 40 per cent, thanks to new oil projects on the horizon, from deepwater drilling in Brazil to China’s plans to develop its own shale-oil reserves. The South China Sea alone is estimated to contain nearly 200 billion barrels worth of oil. For Canadian producers, whose oil is among the costliest to extract and refine in the world, low oil prices could prove disastrous.

Canadian oil-sands companies need prices to stay above $80 a barrel to justify new in-situ drilling operations. Many of the other ambitious plans to drill for new sources of oil elsewhere in the world won’t materialize unless prices stay above $70 a barrel, according to Leonardo Maugeri at Harvard’s Kennedy School, who authored an influential paper on the future of global oil production last year. But Maugeri warns that recent high global oil prices ignore the reality of just how much is out there to be drilled, and are instead driven by little more than “a deep-rooted belief that oil is about to become a scarce commodity.”

Such beliefs are hard to shake. For so long, the idea that oil prices will inexorably rise as the world rushes to extract the last of its precious reserves has proved a self-fulfilling prophecy. But so, too, was the belief that the U.S. would forever be at the mercy of foreign oil benefactors. As the country’s energy boom has shown, even something as seemingly insignificant as figuring out how to drill a hole in a bed of underground rock can change the course of history.