Can  the  Shale  gas  revolution  wean  America  off  foreign  oil?  With  the  shale  oil  and  gas  boom  in  the  US,  what  amount  of  imported  foreign  oil  can  be  substituted?  

VK  Mallet,  Managing  Partner,  Arrakis  Group  

 

 Can  the  Shale  Revolution  wean  America  off  Foreign  Oil?  

 “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.        Author:  Victor  K  Mallet  is  a  partner  in  the  Arrakis  Group,  an  independent  energy  &  power  consulting  firm  based  with  offices   in  the  US  and  Ghana.  He  holds  a  B.Sc   in  Chemical  Engineering  from  MIT  and  an  MBA  from   the   Stanford   Graduate   School   of   Business.   He   is   currently   a   2013   Future   Energy   Fellow   and   has  written  articles  on  energy   sources   such  as   Liquefied  Natural  Gas   (LNG),  Compressed  Natural  Gas   (CNG),  shale  gas  and  other  primary  energy  sources  for  sites  such  as  The  Energy  Collective  and  the  African  Energy  Journal.      Article  first  published  at  The  Energy  Collective  May  6  2013.  Contact:  vmallet@arrakis-­‐group.com  Date:  April  30  2013