The Unconventional hydrocarbons revolution and its impact on the international hydrocarbons industry

Assignment - Internal and External Environments for the Oil & Gas Industries
(June-August 2014)
THE UNCONVENTIONAL HYDROCARBONS REVOLUTION AND ITS
IMPACT ON THE INTERNATIONAL HYDROCARBONS INDUSTRY
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Christian Carrillo - 30828
M.Sc. Oil & Gas Management
1
Module - Internal and External Environments for the
Oil & Gas Industries
Assignment (June-August 2014)
Prepared by
Christian Carrillo Brito
Student ID - 130828
M.Sc. Oil and Gas Management
Greenwich School of Management, London/ University of Plymouth

(June-August 2014)
1. Introduction
During the last years, the industry of oil and gas has seen an uncertain scenario.
For instance, sudden changes in alliances and politics, domestic tensions in key
areas of the world and in producing countries. In addition, governments and
worldwide companies share the steady fear of cuts of power supply. Without the
availability of brand new energy sources, stakeholders have focused their interest
on unconventional hydrocarbon sources in order to overcome the problem of
growing reserve scarcity.
Furthermore, although the world is constantly in pursuit of cleaner energy through
the use of eco-friendly renewable energy to cut CO2 emissions, USA has seen
more profitable and cheaper the production of shale gas. Thus, what gave rise to
the so-called ‘revolution’ in US was the fact that unconventional hydrocarbons
seem to provide a more affordable route to an economy of low carbon.
According to IFPEN (2012, pp.1), unconventional hydrocarbons are hydrocarbons
that are ‘very difficult to extract, either because they are located in beds of very
low permeability, or because their very nature makes them difficult or impossible
to move’. Thus, it does not relate to a special type of oil, it just underlines the
different extraction method
In United States the first shale gas well was fracked in 1947. This was possible
thanks to two key technologies: hydraulic fracturing (fracking) and horizontal
drilling (Stevens, 2012).
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2. Shale Gas Revolution
According to Stevens (2012 pp.2), the ‘shale gas revolution’ refers to a
phenomenon that emerged in terms of domestic gas supply in the United States.’
Shale gas is part of what is known as ‘unconventional gas’ and there are two key
technologies used for its production: hydraulic fracturing and horizontal drilling.
Unlike conventional gas, for unconventional gas is not enough the use of
traditional drilling technology, as it is required other stimulus and recovery
processes to produce commercial flow (Mitchell et al., 2009).
Shale gases are mainly formed by the methane contained in argillaceous rock with
a high content of organic matter. This gas remains trapped in the clays, because of
its impermeability. Thus, rocks need to be fractured artificially in order to obtain
gas (IFPEN 2012).
3. Origin of Unconventional Hydrocarbon Revolution
Shale gas was first produced by William Hart in 1821 in Fredonia, New York.
Since then its production was done by small operators as a cottage business. It did
not attract the interest of major companies as the profit margins were small. In
addition, exploration methods were basic. There was not availability of
infrastructure or pipelines. A well of shale gas used to be quiet, undemanding, and
silent and the risk for environmental damage was very small (Selley, 2012).
Furthermore, from 1981 George Mitchell persistently worked for more than two
decades to find a suitable way to extract natural gas from the Barnett Shale, thus
starting the unconventional boom in the US (Deutch, 2014).
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Shale gas production is possible through combination of horizontal drilling and
fracking. The latter was developed in 1947 (Santamaria, 2013). This process
involves the injection of water, chemicals and sand into the horizontal borehole of
the well at very high pressure to fracture the shale rocks and be able to liberate
the gas (Stevens, 2012). To have a clearer idea of the fracking process, an
illustration has been allocated as figure-1. Lastly, it was in the 1970s when the
first large-scale production of shale gas was seen in US (Santamaria, 2013).
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Figure 1: Hydraulic Fracturing Process (EIA, 2012)

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4. Causes of Shale Gas Revolution
The shale gas boom was produced by some factors that allowed firms to extract
shale gas profitably. In 1982, the government of United States began extensive
funding of Research & Development (R&D) programs, which provided
companies some incentives to produce shale gas. Indeed, this contributed with
fiscal policies and innovations in technology (Wang and Krupnick, 2013).
Another key factor is that land rights in the US give the rights to landowners to
exploit minerals of their properties (Stevens, 2012). Thus, it was a powerful
financial incentive to be able to lease mineral rights and lands across big areas at a
low price. Consequently, this fact allowed reducing costs of production.
On the other hand, the high prices of natural gas in the 2000s, which came from
economic factors and the decreasing extraction of conventional gas, also helped
make shale gas production profitable. Furthermore, among other important factors
that have made this revolution possible are as follows: existing natural gas
pipeline infrastructure, well developed supply chains, relatively light
environmental regulations, government policies, market structure, private
entrepreneurship, water availability, access to high technology and know-how and
a favorable geology (Wang and Krupnick, 2013).
5. Unconventional Revolution from its origin to the current days, as well
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as its future
Shale oil production has been carried out since the mid nineteenth century, but it
used to be more costly than conventional oil and it used to require more energy to
produce. However, it was in 1970s when the exploitation of shale oil gained
popularity again, after the oil spending as part of GDP reached high levels
(Downey, 2009, p49).

(June-August 2014)
In the United States, the extraction of unconventionals has led to a decrease of
18% of net petroleum imports, declining from 60% in 2005 to 42% in 2012 (IHS,
2012). In addition, according to Dreyer and Stang (2013), four years ago shale gas
represented 23% of US gas production. Taking into account that in 2013 this
figure reached 44%, it is noticeable that its natural gas production has almost
doubled in the last three years. In fact, it has had a significant surge since 2000
when it just accounted for 1%. Hence, the US seems to be on good track to be
energy self-sufficient by 2035, as said by BP (2014).
Furthermore, from 2007 to 2010 there was a decline of 5,5% in the share of
imports in US natural gas consumption, which decreased from 16.5% to 11%. It
is said that most of this drop was because of Canada, which has experienced its
own boom in terms of shale gas (Dreyer and Stang 2013).
Moreover, the shale gas revolution has significantly affected the natural gas
prices. As the surged supply has driven to a remarkable fall in US domestic gas
prices. For instance, four years ago prices at Henry Hub were less than $5.00
(MMBTU) despite the fact that high gas consumption was reported that year
(Stevens, 2012). In 2011, the average wellhead price was $3.95 per thousand
cubic feet (EIA, 2012) and in the second month of 2012 it dropped to $2.46.
Hence, under the current scenario future prospects for gas prices are tremendously
uncertain and likely to fluctuate.
Lastly, despite the fact that net US oil imports have fallen by 36% (or 4.5 million
barrels per day) since 2005 (Rühl, 2013), this country is still a net oil importer and
will remain this way for years to come. Figure 2 shows the decline on US net oil
imports.
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(June-August 2014)
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Figure 2: US, EU and China net oil imports (BP, 2013)
6. Geopolitical Impact on traditional conventional hydrocarbon
producers
According to the Bank of America Corp. (2014), the United States is now ‘the
new world’s biggest oil producer’. Consequently, as US is declining its oil
imports, a close alliance between US and Saudi Arabia might be losing
importance over time for the former. Furthermore, Saudi Arabia’s export
capability and declining spare capacity may lead to lose an oil price war against
Russia. However, there are still strong reasons for the United States to keep a
good relationship with Saudi Arabia. As for example, the fact that Saudi energy
policy still influences world energy prices as Saudi Arabia still is a major
producer of oil. Secondly, US allies in Asia and Europe will still depend on Saudi
exports. Moreover, billions of dollars are invested in the United States by Saudi
Arabia and its withdrawal could impact the economy of US.

(June-August 2014)
Lastly, both countries have a common interest, which is to fight terrorism and
impede Iran from becoming a nuclear power (Fang et al., 2014). Therefore, more
rigorous initiatives to keep peace between these nations would, apart from
preventing military escalations -that rise oil prices, cut down the opportunities for
Russia to take advantage of regional conflicts to negotiate for coalitions of energy.
On the other hand, US advance towards energy autonomy indirectly shifts the
outlook for Qatar and Russia’s gas trade. For instance, until recently, Gazprom
used to supply forty percent of Europe’s imported natural gas (Genté, 2014). As
US import needs have shortened, meaningful quantities of Qatar’s LNG once
shipped to US terminals will need to look for markets in Europe and Asia,
enabling the European Union to depend less on Russian gas. As a result, Russia
has focused its interest in other markets such as Asia: China, Japan and South
Korea. In fact, months ago China and Russia announced a 30-year natural gas
deal. This 400 billion dollars agreement ‘is the biggest single trade agreement in
history’ (Courtis, 2014). As the massive deal is set for a long term, in the future
this fact will probably bring problems for players seeking to export US rising
shale gas supplies to Asia. Additionally, despite the fact that the Russian supply of
gas for this agreement is significant - 38 billion cubic metres per year for thirty
years- it is still less than a quarter of the 162 bcm supplied by Russia to the EU
last year (Barton, 2014). Therefore, it is important for the former to seek new
markets to develop similar negotiations before Europe reduce drastically its share
in imports.
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7. Can Unconventional Revolution be replicated successfully elsewhere?
In order to replicate the US success in terms of unconventional hydrocarbons,
countries need to gather a number of conditions such as a favourable subsurface
geology, access to owner’s mineral rights, technical know-how, accessible and
innovative technology, light supportive legislation framework and huge
investment and exploration (Inkpen and Moffett, 2011).
Nevertheless, these factors have become difficult to imitate for the majority of
countries with high potential of unconventional gas and oil. For instance, although
current technologies are much more advanced than those developed decades ago
in the US. More innovations are required in order to adapt current technologies
and to evolve new technologies to produce shale gas profitably in any geography
where water resources or/and geology can be considerably distinct from those in
US. A good example is China, where they seem to be facing technological
challenges. For instance, the cost of shale gas drilling is said to be several times
higher than in the US (Wang and Krupnick, 2013). Additionally, while Americans
need about one month to complete a single drill, in China it can take up to four
months (Platt, 2013). Therefore, in order to lower cost, China will need
improvements in technical know-how and technology experimentation.
Europe has also presented obstacles that make it difficult to proceed with the
exploration and viable exploitation of shale gas. Firstly, some European countries
have showed environmental concerns regarding fracking. Indeed, countries such
as Bulgaria and France have banned this practice (Dreyer and Stang, 2013).
Furthermore, the lack of the conditions mentioned in the first paragraph such as
technical know-how, a common European energy policy and the different ground
conditions of its subsoil and so on, mean that it is far from certain that the US
shale gas revolution will be replicated by Europe (Boyle 2013).
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In addition, in Europe/UK landowners do not own mineral rights, thus the benefits
are for the government. This fact combined with relatively dense populations
create less incentive and unattractiveness to support shale gas developments.
8. CONCLUSIONS
The unconventional resource development in the United States has had
transcendental global impacts on the energy sector. It has changed the investment
panorama for energy projects, altered oil and gas geopolitics, modified the flows
of energy trade, and rearranged the climate-change debate to focus directly on the
role of gas as a means to meet low carbon goals. In addition, it has contributed to
exchange the energy posture of the US from one of increasing import dependence
to one where is significantly importing less hydrocarbons and has enhanced its
business competitiveness globally.
Although current technologies are much more advanced than those developed
decades ago in US. More innovations are required to adjust current technologies
and to evolve new technologies to produce shale gas profitably in any geography
where water resources or/and geology can be considerably distinct from those in
US.
The new energy agreement signed between Russia and China will probably bring
inconveniences for firms seeking to export US rising shale gas supplies to Asia.
And this is because the Russian gas is supposed to be exported to China from
2018, which is years before the US would be able to become a gas exporter.
If US reaches energy self-sufficiency, that freedom from foreign oil will lead US
to have the power to decide how and when to use the Strategic Petroleum Reserve
for geopolitical aims or to put extra oil into the market to have an influence on
global prices.
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(June-August 2014)
The factors which made possible the shale gas revolution, by contrast could
inhibit replication in countries that do not have proper conditions such as, access
to owner’s mineral rights, technical know-how, a favourable subsurface geology,
an accessible and innovative technology, a supportive legislation framework and
huge investment and exploration. Additionally, it is unpredictable whether Europe
will be able to imitate the shale gas revolution because of the conditions which are
significantly different.
Despite the fact that the EU is willing to limit CO2 emissions, it will not be
suitable for them to pay for the increasing costs of renewable energy. Thus,
natural gas is likely to be the best option for energy source if the EU wants to
avoid making coal a big part of its energy mix.
9. RECOMMENDATIONS
Countries looking to extract own shale gas resources should promote its
development through more flexible fiscal policies and a proper market
environment that attract foreign investment and maximizes production and
profitability.
Gas exporters and the government of US should create in conjunction strategic
conditions that secure future shipments to potential gas markets such as Europe
and Asia.
If developing countries with high unconventional potential want to replicate a
sustainable shale boom, an effective enforcement of regulations and law is
required, so that companies adopt enough measures such as proper cementing and
casing in order to prevent water contamination.
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(June-August 2014)
The United States should take advantage of its good relations with activists and
leaders of Saudi Arabia in order to promote the type of political reforms and
compromises that could encourage a soft landing for any Saudi political transition.
This will minimize the appeal of a coalition with Russia and cut down Saudi
concerns for sharp domestic instability.
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(June-August 2014)
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