United States Fracks its Way to An Energy Revolution

From Sydney Morning Herald

By Malcolm Maiden

LAST Saturday I wrote about America’s gas and oil shale fracking boom, and the risk-reward trade-offs involved, including those revolving around environmental concerns. This column is about the broader implications of the fracking boom, and they are huge.

Reports about the boom being a game-changer have proliferated since last month’s prediction by the International Energy Agency that the United States will overtake Saudi Arabia and Russia to become the world’s biggest oil producer in about five years’ time, and be energy self-sufficient by 2030.

Tectonic shifts are occurring, but there is no clear consensus yet among bankers, economists and energy analysts about what the world and the world’s energy markets will look like when they are finished moving.

The US, for example, was paying for about 13 million barrels of foreign oil a day between 2004 and 2006, before the fracking boom accelerated. By 2011 it was importing 11.5 million barrels a day to help meet domestic consumption of 18.8 million barrels a day, and that decline reflected two things: a decline in domestic demand in the wake of the 2008-09 global financial crisis, and increasing US oil production from America’s shale fracking fields.

US domestic oil production has jumped by 18 per cent in the past year as the shale boom has expanded, and in the first eight months of this year oil imports were 800,000 barrels a day lower than they were a year earlier. America’s oil exports rose over the same time by 300,000 barrels a day, so net imports have fallen in just one year by 1.1 million barrels a day, or about 6 per cent of total consumption. If that pace is sustained the International Energy Agency’s prediction of self-sufficiency for the US by 2030 will prove to be conservative.Oil production from shale in the US is rising much more strongly than expected because the boom itself is working to shift production into liquids. The shale contains a mix of gas and liquids including oil, and enough gas has been discovered to produce a structural downshift in the price of US domestic gas, which by law cannot be exported.

Companies that have bought into the shale boom, including Australia’s BHP Billiton, have reacted to this by pulling drilling rigs out of fields that are gas-rich and relocating them in ones that are rich in liquids for which the price is roughly four times higher, pushing US shale oil and liquids production up. It is now running at about a million barrels a day, and is predicted to reach about 3.5 million barrels a day by 2016.

That’s enough to underpin a fall of about 25 per cent in oil imports that is worth $US100 billion ($A95.5 billion) a year at the current oil price. But the bottom line for the US is bigger. Bank of America Merrill Lynch calculates there is already a combined value shift or ”energy carry” of more than $US300 billion a year in America’s favour, as the US oil import bill falls, oil exports rise, and as gas reserves have expanded to underpin cheap energy generation. On top of this is an international cost advantage for US heavy industry, which can buy US gas currently at a price of $US3.60 per thousand cubic feet, between a third and a half of the price being paid in the rest of the developed world.

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