Assignment 1
Assignment 1
ASSIGNMENT 1
As projections of U.S. natural gas resources became increasingly optimistic, a
heated debate emerged over what the country should do with this new abundance
of shale gas and who should primarily benefit—producers or manufacturers. By
2013, U.S. natural gas prices hovered around $3 per thousand cubic feet, well
below $12 in Europe and $18 in Japan (see Exhibit 2). As U.S. prices remained
significantly below those in Europe and Asia, producers sought to arbitrage the
price differential by exporting LNG. Investors appeared willing to bet big on U.S.
natural gas; of the $135 billion worth of investments tracked by Ernst and Young
in 2011, 20% were directed toward the natural gas industry (excluding pipeline
transport).8
However, domestic manufacturers and utilities worried that exporting LNG would
globalize the natural gas market, pushing up the prices in the U.S (see Exhibit 3).
Some manufacturers had already expanded their domestic production sites, such as
Cenex Harvest States’ $1.2 billion fertilizer facility and Chevron Phillips
Chemical Company’s $5 billion ethylene production plant.9 Many utilities,
furthermore, had replaced planned nuclear and coal power plants with natural gas
combined cycle facilities. Yet, rising gas prices would drive up electric rates and
cause manufacturers to lose their current cost advantage, reducing
competitiveness in the international market.
President Obama was optimistic about the promises of natural gas: “The
bottom line is natural gas is creating jobs. It's lowering many families' heat and
power bills. And it's the transition fuel that can power our economy with less
carbon pollution.”10 Moreover, the shale boom gave a robust boost to
Obama’s goal of doubling exports by 2015; by June 2013, gas and oil exports
had grown 68.3% since the President’s announcement of the goal in January
2010.11
This left the Obama administration facing major policy decisions concerning
U.S. energy exports. Would American shale resources be capable of reviving,
or even transforming, the U.S. economy? Would the DOE place a cap on
authorized LNG exports, and if so, at what volume? Should Congress
liberalize crude oil trade? Given the growing controversy and potential
surrounding U.S. shale
At any point in time, shale gas and tight oil are only economically producible from
specific types of shale formations, which contain significant accumulations of
fossil resources and share the similar geological characteristics of enhanced
brittleness, layering and porosity. As such, determining the economic viability of a
particular geographic area often required a significant exploratory drilling
program. Some geographic areas lived up to their promise, while others proved
elusive, failing to have the “right” combination of characteristics.
The two most important shale gas plays were the Barnett play in Texas and the
Marcellus play in the northeast, while the most crucial tight oil plays were Bakken
in Montana and North Dakota and Eagle Ford in Texas. Shale plays were located
throughout the U.S., and shale resources were being produced in 16 states (see
Exhibit 5).16 The majority of tight oil produced in the U.S. was light crude.
Both shale gas and tight oil production were significantly more complex than
conventional production methods. The impermeability of shale combined with the
fluid properties of oil and gas often prevents the gas or oil in the shale deposits
from flowing easily into the well bore, such as in traditional production.
Consequently, the majority of shale formations have long been considered
commercially unviable. Due to these difficulties in production, shale gas and tight
oil were often referred to as unconventional resources.
3
The U.S. Shale Revolution: Global Rebalancing?
the shale formations. Once the resources are released, they begin to flow back to the
well bore for extraction.
4
The U.S. Shale Revolution: Global Rebalancing?