The debate on the end of oil, although more rare than on the end of the world, is a long-time and active one. However, the result is the same. The recent forecast – a warning about an imminent sharp decline in oil production by the middle of the century has not come true. Shale oil, according to Russian Energy Minister Alexander Novak, has shattered the gloomy expectations. The minister is right - shale revolution in the United States has instilled unbridled enthusiasm in many: the world’s hydrocarbons will last for another 500 years or so. US President Barack Obama is more reserved. He has guaranteed to Congress at least a century of energy wealth and independence. What is the difference, anyway – 500 or 100 years? This will be an absolutely different era and different life. Historians say jokingly that the Stone Age did not end for lack of stones, but because people overcame the Stone Age thinking and grew up and stepped into an entirely different era – of new materials and technology.
Wealth Under Our Feet
The development of shale deposits, in the view of many experts, is one of such unappreciated steps into the future. They give an opportunity to take the wealth under our feet. The United States and Canada have increased shale oil and bitumen oil production several times in the span of just a few years. The two countries now account for nearly half of the world’s total increase in oil output. It is a breakthrough beginning. However, not all scientists and analysts are that optimistic. “The so-called shale gas revolution is pure American Hollywood, it’s a well-planned PR campaign,” says CEO of Russia’s natural gas monopoly Gazprom Alexei Miller. He, like most of our experts, believes that the creation of inexpensive, safe, effective technology to develop new deposits will compensate for declining production on the traditional fields, reduce dependence of some countries on fuel imports. Nothing more.
There are also more radical assessments of the shale miracle. It is another financial bubble – this time inflated in the mining sphere. The question is only when it bursts, blowing up natural gas and oil production and leaving hundreds of thousands of people jobless. It would seem that the recent events confirm the imminent end of the miracle. The first company that develops shale deposits has gone bankrupt in the United States. The number of rigs drilling them has declined by nearly 20%. Nearly 300 rigs of the total 1750 have been stopped.
Nevertheless, there is no reason to dramatize the situation. A sharp decline in energy prices has hit the entire industry. In recent years, it has been rapidly increasing oil supply, the United States and Canada accounting for more than half of the growth, supplying high-tech oil, which is more expensive. The price decline has made it uncompetitive. So, quite logically, those who came to the market last have to leave it first. One of the reasons for the collapse in energy prices is collusion of certain countries against other group of countries, experts say. It is also not uncommon, this happens. However, as its initiator is the United States, which ushered in the shale era, it would be strange to suspect Washington of seeking to “close” it, laying bare its economic insolvency. America zealously guards its revolution from suspicion, criticism and ill-wishers. The CIA has recently called US environmental organizations “henchmen of the Kremlin” that are paid to hinder in every possible way the development of shale deposits.
Sharp contradictions on world fuel market do not give an answer to the question of principle: “is it a revolution or a bubble?” Let’s figure it out ourselves, referring to the facts and figures without which polemics is a futile if not destructive job. Let’s specify the main notions for a start.
Shale is the most common sedimentary rock formed in the deep sea. For geologists shale is the oil-producing, oil-source rock. It is the natural “maternity ward” in which organic matter under great pressure transformed into hydrocarbons over millions of years. Migrating from the shale rock, meeting more permeable, loose, porous sediments, under favorable circumstances they accumulated in the underground structural traps. Geologists have learned how to find them, estimate the reserves, and recommend field development methods.
There are 187.2 trillion cubic meters of available proven gas reserves in the world. Another 120 trillion cubic meters are prospective, yet undiscovered reserves. This amount will serve humankind for 60-65 years. It is more complicated with oil. There are 240 billion tons of oil in deposits, which guarantees less than half a century of habitual consumption. After that, the forecasted deficit necessitates the search for new, unconventional deposits of the fuel or a substitute for it. Scientists have long proven that such deposits exist. According to their calculations, shale rock contains 2-3 times more gas and as many oil deposits as migrated to the structural traps. Since shale rock is widespread, hydrocarbons exist practically everywhere to a lesser or greater extent. We literally walk on mineral wealth. The undisputed merit of American scientists is that they were the first to find a clue to shale deposits, overturning the common belief of their inaccessibility. Certainly, it is a revolutionary breakthrough.
Sources and Component Parts of Shale Revolution
America is lucky – it is rich in shale, filled, as has now been proved, with gas, condensate and crude oil. The US attempts to take them made in the past century were unsuccessful. This discouraged large companies that have enough conventional fields. And the small and medium businesses, the establishment and growth of which was promoted by the overall financial regulatory environment, were unafraid to take the risks. According to US law, natural resources are the property of the land owners (in Russia, as in most other countries, recovered raw materials belong to the state - Editor’s note.). Therefore, drillers could without problem take lease of the piece of land they selected, “cutting in” the owners.
The risk really existed. The well-developed technology of oil or gas recovery on conventional fields did not work on shale deposits. So, it was necessary to adapt the technology to new deposits or create a new one. And it was done. Any revolution, the more so technological, is strong with creativity of the masses. The destiny of George Mitchell also confirms this. A successful entrepreneur, holding a degree in geology, he invested his personal millions in the prospecting the result of which was far from obvious. In 1981, he drilled the first well on a land piece he took on lease. After that, he was engaged in drilling for the next 18 years – but without success. He was almost ruined, and only in the latter days of his life when he was 80, he realized that it was necessary to combine horizontal drilling with multiple hydraulic fracturing – fracking. Mitchell confirmed the American dream - every man is the architect of his own fortune. At the last moment, like in the movies, everything came together – the experience, knowledge, dedication and, finally, the shale as a reward. The well hit the mark. Two years later, Mitchell sold his company for $3.5 billion. A dream indeed.
In 2002, the country launched the recovery of shale gas, and in 2009 its production volume reached 230 billion cubic meters. The United States produced a total of 720 billion cubic meters of gas that year, for the first time outstripping Russia and becoming a world leader. America is in the lead also today, planning to produce by 2020 at least a trillion cubic meters per year. The country is turning from an importer to an exporter.
The flow of shale oil is growing equally fast. In terms of daily production, the United States has currently excelled Russia and, actually, Saudi Arabia as well. The oil sector has started to work like in the best of times. Also, it is very important that the fuel reserves are growing, not shrinking, despite the record-high production volume - they are replenished from the shale reserve. Today, one-third of the total gas reserves and 10% of oil reserves are unconventional hydrocarbons. The longtime idea of gaining energy independence is being actively fulfilled. A very favorable situation has developed in the economy: cheap money, cheap energy, cheap labor. With this margin of safety, neither European nor Japanese competitors should be feared.
The United States now has got an opportunity to oust Russia from all energy markets, first of all, the European market. This goal has always been pursued, but a lack of resources stood in the way. As soon as they appeared, the blockade of Russian companies began. Of course, something had to be offered in return, hence the shale revolution. The US Department of State and Secretary of State Hillary started an active promotion of nonconventional gas. The Guardian published last fall an article entitled “How Hillary Clinton’s State Department sold fracking to the world”. Judging by the publication, it was a heartfelt affair for her, not just an assignment.
Washington announced the beginning of the “Global Shale Gas Initiative” program as early as in 2010 – it is a program of assistance in the development of nonconventional hydrocarbon deposits. Fulfilling it, the US State Department held several conferences, it was taking delegations to American production fields, sending its experts to work out shale gas production plans. The US Energy Information Administration (EIA) scientifically substantiated the future changes. It published the shale gas reserves rating. (Russia, countries of the Middle East and Caspian were not covered – they have plenty of conventional reserves without that. However, even without them the research authors calculated 187 billion cubic meters of recoverable gas – editor’s note).
According to the EIA study, all the 32 countries under review had more than enough viable shale gas reserves that can be recovered. Naturally, with the help of major American companies and their partners. “The industry began fighting hard for access to shale fields abroad,” wrote The Guardian. Hillary Clinton’s efforts were not wasted. American companies came to Poland, Hungary, Ukraine. But alas, no shale miracle happened anywhere – first of all because the American experts highly overestimated the shale deposits in Eastern Europe. Maybe they did that intentionally or just miscalculated. Of the 50 wells that were drilled in Poland, only one gave 8000 cubic meters of gas per day. It’s next to nothing. It would be necessary to drill over 5000 more wells to meet the republic’s demand. Major problems arose with agricultural land and environmental organizations. Two of the three companies have quit Poland. They also left Hungary, having drilled two wells there. Also, no gas was found in Lithuania. Romania and Bulgaria banned using the hydraulic fracturing method in their territory. The UK, Germany, France also imposed a moratorium on hydraulic fracturing...
“There won’t be fracking of shale gas in Germany in the foreseeable future,” German Environment Minister Barbara Hendricks said. According to her, the protection of health and drinking water has the highest value.
According to experts of the International Energy Agency (IEA), the EU countries will be able to produce 15 billion cubic meters of shale gas by 2020 – a mere 9% of Gazprom’s supplies. What’s the point in risking human health in the densely populated Europe? One more unavoidable question: why at the conferences held by the US State Department, the “teachers” spoke much about the effectiveness of US technology, but did not bother to give a warning about the environmental risks?
The American environmental legislation is strict enough. The country’s ecological organizations are strong and influential, the authorities reckon with them. Perhaps this is why Vice President Robert Cheney pushed through Congress in 2005 a law that exempted the oil companies from the US Environmental Protection Agency (EPA) control. They were actually relieved from responsibility for the violation of the strict and costly environmental requirements, which immediately allowed them to cut production costs and increase revenue. This forestalled the shale boom the effects of which are not yet fully understood. The “Gasland” documentary directed by Josh Fox clearly and convincingly shows them. We can see beautiful farmland areas turned into “moonscapes.” We see the poisoned ground, emaciated people, bald animals, brown water streams, tap water that can be lit on fire. All this are the consequences of hydraulic fracturing, fracking. Why the technological operation that had been mastered back in the 1940s of the last century has become so dangerous? It has been and is now used by drillers to “loosen” the underground producing layer to increase production. The fracturing is made by hydraulic impact of a fluid, a chemical “cocktail” – more than 1000 tons of water and chemicals pumped into the layer. Any slightest irregularity results in the “cocktail” getting into ground waters, into permeable seams from where the fluid makes its way to the surface, poisoning everything around.
Unfortunately, such emergencies have always happened and still happen. They can be managed at conventional fields. Up to 6000 tons of the “cocktail” is pumped out from one vertical well and it can be cleaned. However, orders of magnitude more wells are drilled in the shale gas production. What is more, they are horizontal with the length of 1000 to 3000 meters, with up to 30 hydraulic fractures underground. Cemented pipes cannot resist such a massive “bombardment.” Therefore, in this case accidents happen 10 times more frequently. It is impossible to cope with them promptly: powerful plants would be needed to purify tens of millions of tons of contaminated water. Chemicals that remain in ground waters turn them into a time bomb and nobody can predict where and when it may explode. After Robert Cheney helped oil-producing companies to get exemption from the Safe Drinking Water Act (SDWA) and the Clean Air Act and other environmental regulations, shale production became less costly and more hazardous. So, The Los Angeles Times had every reason to warn that staking on oil brings ecological death nearer. Characteristic is the position of US President Barack Obama who says that he seeks to reconcile the environment with the demand of the economy for accessible energy resources.
The goal is certainly good, but even the president cannot please all. Environmental organizations have reproached him of inaction. They believe that he should not call on, but obligate the state services and oil companies to work out the standards ensuring safety of oil and gas production. However, the oil lobby argues that such standards would actually prohibit shale production. Tired of waiting for the federal authorities’ decision, many cities and states started to prohibit or impose a moratorium on fracking. The authorities in the European countries the “green” laws of which are incompatible with the appetites of producing companies have done the same. The permanent shale revolution has been deadlocked. For how long? US Secretary of State John Kerry continues the shale production development policy in Europe launched by Hillary Clinton. He is trying to solve the same problem of freeing Europe of dependence on Russian gas. However, the Europeans themselves prefer a different scenario: they want the Americans to produce shale gas in their country and ship the LNG in giant vessels to the European continent.
The United States has only one reliable foothold of shale revolution left – Ukraine. Here the American companies are still loved and welcome. Washington’s love for the Ukrainian authorities is also well-known. “Imagine where you’d be today if you were able to tell Russia: ‘Keep your gas.’ It would be a very different world,” US Vice President Joe Biden has recently said wishfully. Notably, his son Hunter Biden has become focused on natural gas business in Ukraine.
The United States knows the Ukrainian potential. The Americans are interested in the Dnepropetrovsk-Donetsk and Pripyat oil and natural gas bearing basins. Many analysts say that the bloody events in Ukraine’s southeastern Donbass region are linked with its energy resources, which had been studied very well back in the USSR period. Hydraulic fracturing of a coalbed for increasing methane output was applied there for the first time in the world in 1954. Certainly, the best Donbass deposits have been depleted. And developing the remaining ones is unprofitable, given the current gas prices and the taxation system. The US company Shell has received them for development. Of course, it will not operate at a loss. The company has signed the production sharing agreement for a term of 50 years. Kiev offered it major tax and customs privileges. It can export its share of natural gas, sell it without any quotas, without export dues, even without the VAT. It is allowed to import, export foreign goods and sell them without paying taxes or duties. It is even allowed to use water in Ukraine’s Kharkov and Donetsk regions that is in very short supply there. Ukrainian companies could not even dream of such delightful conditions. And what will Shell give in return? It will be producing conventional gas in a well explored area, but this gas will be cheap, exempt from all state charges. Will it get to unconventional gas reserves that also exist there? Let’s wait and see. However, it is absolutely clear that the American company and its Ukrainian partners will be able to make good money even without shale.
Instead of an Epilogue
And still, “a revolution” or “a bubble”? Neither. The comparison with a “bubble” is malicious insinuation – the Americans have proven that. They have unconventional gas and they will recover it, regardless of any speculations on international markets. The United States has very sensibly arranged everything: of 19.2 billion barrels of its daily consumed oil, it buys one half of it and produces another half. So, no matter how the prices fluctuate, the Americans will sustain no losses. Also, spending somebody else’s oil that has lowered in price and saving their own oil for the future also makes sense.
Why not a “revolution”? First of all because the technology has not been refined to the mass use level yet. The hydraulic fracturing technology is so far perceived by most people not as a technological breakthrough, but as ecological terrorism. And one more thing. There are some 4 trillion cubic meters of proven shale gas reserves in the United States. This potential is insufficient at all for a revolution, but sufficient for a thoroughly organized anti-Russian expansion, as we can see. And yet, the shale story is a serious warning to Russia. The development of natural deposits is becoming an increasingly complex and difficult task. They are available only to the countries that possess the superior technology. Those who cannot or do not want to create such technology are doomed to remain on the margins of development.