High-Energy Innovation: The Case of Shale Gas

The Global Quest for Natural Gas

{photo_credit}

The recent boom in natural gas production in the United States, brought about through technical innovations in the recovery of natural gas from previously inaccessible shale rock formations, has helped lower electricity costs and reduced greenhouse gas emissions. Governments from around the world are eager to exploit their own shale resources, and some are leveraging the help of US firms to try recreate the US model. The large deployment of fracking technology faces significant hurdles outside of the US context, however, and three major lessons can be learned from the US experience.

The following case study is an excerpt from Breakthrough's latest publication High-Energy Innovation. The report illustrates how energy innovation will increasingly be initiated by developing (as opposed to wealthy) nations and will take place across international borders. The four technologies examined in the report – shale gas, nuclear, carbon carbon and storage, and solar – demonstrate how firmly emerging economies are committed to securing clean, cheap, and reliable energy to meet growing demand. The report focuses on these four technologies not to suggest that they should be the only energy technologies pursued by international efforts, but rather to illustrate the distinct challenges facing different technologies, including their innovation and diffusion in different national contexts.

SHALE GAS

The recent boom in natural gas production in the United States, brought about through technical innovations in the recovery of natural gas from previously inaccessible shale rock formations and land-use policies that favor private development, has helped lower electricity costs and benefitted the petrochemical and manufacturing industries.1 Even more significantly, it has contributed to a drop in US carbon dioxide emissions to their lowest levels in two decades,2 as inexpensive natural gas accelerates the closure of aging coal plants around the country.

Though hydraulic fracturing’s diffusion across the United States since 2005 was rapid,3 the actual innovation process occurred over decades. The technique of fracturing rock to recover fuels was invented in the late 1940s, but it required many additional innovations — the result of public-private partnerships and federal investments at many points in the process — to develop a method of fracking that was economically viable.4 The version of fracking that came to dominate was the one that took advantage of resources available to US companies, particularly the abundant water supplies that made feasible injecting millions of gallons of water into underground rock formations.5 Fracking’s economic success also depended on external factors such as the continuous improvements to the country’s energy infrastructure, especially its natural gas pipelines.

The possibility of cheaper and cleaner energy from shale gas has prompted interest from governments around the world. If it can achieve the necessary innovations for tapping perhaps the largest shale gas reserves on the planet, China may be able to reduce its dependence on coal and shift to a lower-carbon economy.6 European countries such as the United Kingdom are also exploring the possibility of exploiting shale gas.7

However, caution is warranted. The large deployment of fracking technology faces significant hurdles outside of the US context. China’s nascent industry is plagued by technical bottlenecks, lack of adequate water supply, and poor infrastructure.8 Drilling an exploratory shale gas well in China still costs much more than it does in the United States.9 In Europe, the challenges are more likely to be political and legal.10 Unlike in the United States, European landowners do not automatically own the rights to extract the resources from the ground beneath their property, making the building of new extraction plants fraught with political difficulties.11

From this example, three lessons are clear. First, incremental innovation within an existing and powerful segment of the energy sector has lowered American carbon emissions and reaped substantial benefits to the economy.12 The shale gas revolution has reduced US power sector emissions on the order of 150 to 200 megatons annually over the past decade, and cheaper energy costs have provided a $100 billion-per-year boost to the US economy.13 Second, the diffusion of energy technologies beyond the techno-economic system from which they emerge is rife with challenges. Third, and precisely because this process is so hard, the transfer of expertise and technical knowledge (rather than merely dropping in hardware) is critical to accelerating diffusion.

Countries have tried to do this by attracting the expertise of US firms. Mexico, for example, has opened up its oil and gas sector to foreign investment14 in order to acquire the horizontal drilling and hydraulic fracturing techniques that can help it access one of the world’s largest reserves of shale gas and tight oil.15 And a Chinese energy company, Sinopec Group, paid Devon Energy (which had previously acquired Mitchell Energy, the firm that co-created the shale gas revolution with the US government) billions of dollars to work with it on fuel extractions projects, in the hope of gaining access to the US firm’s expertise.16,17 Other countries are enthusiastically exploring the possibility of shale gas production, including Argentina, South Africa, and Poland.18
 

Footnotes

1. Richard Nemec, “U.S. Reindustrialization an Offshoot of Natural Gas Boom,” Pipeline & Gas Journal, Vol. 239, No. 7 (July 2012).  

2. Gold, Russell. “Rise in U.S. Gas Production Fuels Unexpected Plunge in Emissions,” Wall Street Journal (18 Apr. 2013).

3. Wang, Z., & Krupnick, A. “A Retrospective Review of Shale Gas Development in the United States: What Led to the Boom?”, SSRN Electronic Journal (2013).

4. Trembath, Alex, Jesse Jenkins, Ted Nordhaus, and Michael Shellenberger. “Where the Shale Gas Revolution Came from?“ The Breakthrough Institute. 2012.

5. Wang, Z., & Krupnick, A. “A Retrospective Review of Shale Gas Development in the United States: What Led to the Boom?”, SSRN Electronic Journal (2013).

6. Lei Tian, Zhongmin Wang, Alan Krupnick, and Xiaoli Liu, Stimulating Shale Gas Development in China: A Comparison with the U.S. Experience (Washington, DC: Resources for the Future Discussion Paper 14-18, Jul. 2014).

7. Dittrick, Paula. “UK government lifts hydraulic fracturing ban”, Oil and Gas Journal (13 Dec, 2012).

8. Desheng Hu and Shengqing Xu, “Opportunity, challenges and policy choices for China on the development of shale gas,” Energy Policy, Vol. 60 (2013), pp. 21-26.

9. Krupnick, Alan. Presentation at The Future of Fuel: Toward the Next Decade of U.S. Energy Policy, RFF First Wednesday Seminar, Resources for the Future (28 Nov. 2012).

10. Helm, Dieter. The Carbon Crunch: How We’re Getting Climate Change Wrong—and How to Fix It (New Have, CT: Yale University Press, 2012), p. 164.

11. Gold, Russell. The Boom: How Fracking Ignited the American Energy Revolution and Changed the World. Simon and Schuster, 2014.

12. Ibid.

13. Trembath, Alex. “U.S. Coal Exports Do Not Offset Massive Emissions Reductions from Natural Gas,” The Breakthrough Institute (19 Aug. 2014), available at: http://thebreakthrough.org/index.php/voices/energetics/us-exports-have-little-discernable-impact-on-massive-global-coal-growth.

14. Webber, Jude. “Mexico courts foreign investment with energy reform,” Financial Times (12 Dec. 2013), available at: http://on.ft.com/1j06xqs.

15. Moran, Michael. “Peso Me Mucho: Why Mexico is the new darling of emerging markets,” Foreign Policy (29 Oct. 2013), available at: http://www.foreignpolicy.com/articles/2013/10/28/peso_me_mucho_mexico_currency.

16. Trembath, Alex, Jesse Jenkins, Ted Nordhaus, and Michael Shellenberger. “Where the Shale Gas Revolution Came from?“ The Breakthrough Institute. 2012.

17. Polson, Jim and Benjamin Haas. “Sinopec Group to Buy Stakes in Devon Energy Oil Projects.” Bloomberg. January 3, 2012. http://www.bloomberg.com/news/2012-01-03/sinopec-agrees-to-pay-900-million-for-stakes-in-five-devon-shale-projects.html.

18. Aguilera, Roberto F., and Marian Radetzki. "Shale gas and oil: fundamentally changing global energy markets." Oil & gas journal 111.12 (2013).

Shale Gas Map References

Trembath, Alex, Jesse Jenkins, Ted Nordhaus, and Michael Shellenberger. “Where the Shale Gas Revolution Came from?“ The Breakthrough Institute. 2012

Burwen, Jason and Jane Flegal. “Case Studies on the Government’s Role in Energy Technology Innovation: Unconventional Gas Exploration and Production,” American Energy Innovation Council, March 2013. http://americanenergyinnovation.org/wp-content/uploads/2013/03/Case-Unconventional-Gas.pdf.

Manzi, Jim. “The New American System.” National Affairs 19 (2014). http://www.nationalaffairs.com/publications/detail/the-new-american-system.

OGJ Editors, “PGNiG, Chevron reach Poland shale gas exploration agreement,” Oil and Gas Journal, April 1, 2014. http://www.ogj.com/articles/2014/04/pgnig-chevron-reach-poland-shale-gas-exploration-agreement.html.

Easton, Adam, “Poland to invest $1.6 billion in shale gas exploration by 2016,” Platts, August 27, 2014. http://www.platts.com/latest-news/natural-gas/warsaw/poland-to-invest-16-billion-in-shale-gas-exploration-26867662.

“Dead-cow bounce: Politics is the biggest hurdle to developing the enormous Vaca Muerta field,” The Economist, August 23, 2014. http://www.economist.com/news/americas/21613314-politics-biggest-hurdle-developing-enormous-vaca-muerta-field-dead-cow-bounce.

Mainwaring, Jon, “South Africa Edges Closer to Karoo Shale Gas Development,” Rigzone, July 8, 2014. http://www.rigzone.com/news/oil_gas/a/133928/South_Africa_Edges_Closer_to_Karoo_Shale_Gas_Development.

Lane, Ediwin, “UK shale plans ‘substantial’ drilling expansion,” BBC, January 13, 2014. http://www.bbc.com/news/business-25714536.

Press Release, “Total Becomes the First Major to Enter into Shale Gas Licenses in the UK,” Total, January 13, 2014. http://www.total.com/en/media/news/press-releases/total-becomes-first-major-enter-shale-gas-licences-uk.

Gonzalez, Angel and Dezember, Ryan, “Sinopec Enters U.S. Shale,” The Wall Street Journal, January 4, 2012. http://online.wsj.com/news/articles/SB10001424052970203550304577138493192325500.

DiLallo, Matt, “China Ready to Reap Billions From U.S. Shale Gas Technology,” The Motley Fool, August 2, 2013. http://www.fool.com/investing/general/2013/08/02/china-ready-to-reap-billions-from-us-shale-gas-tec.aspx.

Saikia, Siddhartha P. and Siddiqui, Huma, “Shale gas tops PM Narendra Modi’s agenda for US visit,” The Financial Express, September 12, 2014. http://www.financialexpress.com/news/shale-tops-pm-narendra-modi-s-agenda-for-us-visit/1288069.

Chestney, Nina, “Britain far from primed for shale gas exploration, experts say,” Reuters, March 5, 2014. http://uk.reuters.com/article/2014/03/05/uk-shale-britain-idUKBREA240LE20140305


Comments