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December 2011 Cover Story

Shale Gas Resource Plays Transforming Domestic, Global Energy Pictures

James Kohlhaas

MCLEAN, VA.–Major world leaders, including those in the United States, have attempted to accelerate the green energy industry through low-interest rate loans, feed-in tariffs, and tax incentives. As a result, both research and development and production-oriented systems have made tremendous progress. However, as the global economy slows further and government debt increases, will the nation stomach more government subsidies for energy? Instead, the focus may turn to a cleaner base load alternative power source that has emerged in 32 of the 50 U.S. states: shale gas.

The facts surrounding shale gas are impressive. The U.S. Energy Information Administration’s Annual Energy Outlook 2011 estimates that the United States possesses 862 trillion cubic feet of potential shale gas resources, and predicts that production will grow almost four-fold from 2009 to 2035.

On a global scale, shale gas wells already have been drilled in China, Australia, England and India, and a shale play has been discovered in Israel. It is clear that there is more at stake than U.S. energy independence. The development of shale gas will impact global security, global energy trade and global economics, and should have a net positive effect on greenhouse gas emissions until the day comes when renewable energy becomes nonintermittent and capable of competing without incentives. The transformative potential of shale gas is abundant and the impact may be profound.

The nation faces a significant opportunity to effectively bridge its power generation needs in a cleaner, cost-effective way on the journey to green energy, job creation, energy independence, and enhanced national security. What are 10 of the most significant global impacts of shale gas?

Energy Independence

At the top of the list is energy independence, on both national and global scales. For a tangible example of the real potential of shale gas, look no further than the trends in liquefied natural gas. Once thought of as the emerging primary mechanism for the United States to import gas to meet a forecast domestic production shortfall, industry leaders predicted activity growth at the country’s existing terminals with the potential for further expansion and new terminals. At one point, the EIA estimated that LNG imports into the United States would increase by 8.7 percent annually from 2005 through 2030. However, the discovery and development of natural gas from shales in basin across the lower-48 has caused LNG imports to stall.

In fact, LNG imports in July 2011 decreased to the lowest monthly level in more than eight years. In the future, existing U.S. LNG landing terminals may be better served as export terminals. With 2010 domestic natural gas production at the second-highest level in the nation’s history (allowing the United States to surpass Russia in 2011 as the world’s largest natural gas producer), EIA now is projecting LNG imports to continue to fall to 0.7 billion cubic feet a day by the end of 2012.

It is important to note that the forecast declining volumes of imported LNG are not related to reduced or stagnant demand in the domestic natural gas market. To the contrary, EIA estimates that U.S. demand has grown by 1.7 percent in 2011, to 67.1 Bcf/d. The simple reality is that continuing expansions in domestic production is squeezing the market share for LNG as well as pipeline imports. According to EIA, U.S. natural gas output is up by another 3.8 Bcf/d in 2011–to 65.6 Bcf/d–with 100 percent of that growth coming from onshore resource plays.

Outside of the United States, shale gas also may play a major part in other countries’ energy independence. While the United States is blessed with major shale gas reserves, its energy demand is substantial, and it will take time and effort for the country to become energy independent. Numerous countries, including Australia, China, South Africa, Poland, and Mexico, have plays in the same order of magnitude as the United States. As shale gas continues to develop across the globe, more countries may be able to set a course to energy independence.

Technology, Power Generation

Another major benefit is the ability to export U.S. technology and expertise. The combination of horizontal drilling and multistage hydraulic fracturing are uniquely U.S. technologies, so as the world begins its journey to energy independence, other countries may need help developing their reserves. The state of the art in horizontal drilling, hydraulic fracturing and other technologies key to shale play development have been gradually evolving for more than 20 years, and they certainly have been tested and improved with intensity over the past three years.

The operating conditions found in other countries may be even more challenging and require specialized skills and expertise for success, presenting tremendous opportunities. The evolution of horizontal drilling and hydraulic fracturing technology, and safe and environmentally sound practices in the United States will be immensely valuable as they can be applied abroad. For example, the U.S.-China Shale Gas Resource Initiative uses experience gained in lower-48 plays to assess China’s shale gas potential and promote environmentally sustainable development of shale gas resources. Additionally, the regulations emerging from shale gas development mostly has kept pace with industry best practices. As a result, even the regulations may be worthy of export.

Base load power generation represents one of the largest single market growth opportunities going forward for expanding shale gas production. As the world develops its shale gas reserves, natural gas could be the perfect fuel to aid in the retirement of coal. It is the cleanest of all the fossil fuels, and it is maintainable and reliable. In the past, price fluctuations created a risk for consumers, but the natural gas price horizon appears to be much more stable than at any point in recent history, with reduced seasonal volatility.

Of course, natural gas competes directly with renewable energy as a practical replacement of coal. Compared with wind and solar, natural gas requires no incentives to be profitable. In addition, natural gas power output can be scheduled to meet demand, whereas storage is a significant challenge for wind and solar at the utility scale. Therefore, large-scale replacement of coal with natural gas may do more to reduce the U.S. carbon footprint than wind and solar since a reliable power source must remain active to support demand during unforecasted weather events with intermittent renewables.

In addition to base load power, shale gas may be influential at a distributed generation level. One of the fastest growing nascent markets is “microgrids.” Microgrids need base load power, which frequently is generated with diesel generators. However, these generators often are expensive and can have negative environmental impacts. As an alternative, with the emergence of micro turbines and fuel cells, natural gas can play a significant role in distributed base load power generation. The natural gas infrastructure typically is considered secure and reliable, so microgrids may provide more reliable energy if fueled by natural gas.

Modern fuel cells are achieving reliabilities that make them worth considering for base load power on a microgrid. Specifically, fuel cells may be able to generate power even cleaner than combustion approaches. A likely future scenario could be a new building that replaces traditional backup power generators with fuel cells that provide higher reliability than the grid and base load power 24 hours a day, seven days a week.

Transportation Sector

Shale gas’ potential extends to the U.S. transportation sector as well. As outlined in the Pickens Plan, a large benefit of a domestic U.S. gas supply is transportation price stability. According to the July 2011 Clean Cities Alternative Fuel Price Report produced by the U.S. Department of Energy, compressed natural gas sells at a national average of $2.07 per gallon of gas equivalent (GGE), or nearly half the cost of gasoline or diesel. Natural gas filling stations have emerged in several states driven by both government incentives and the open market, and individuals and companies even have developed home filling station solutions.

One challenge CNG faces is energy density, which is less than traditional fuel types. This means, for the same volume tank, a vehicle’s driving range will be somewhat less, depending on tank design. However, many states have proposed legislation to incentivize the conversion to CNG. Additionally, the New Alternative Transportation to Give Americans Solutions Act of 2011 would provide further incentives for commercial transportation to make the conversion to natural gas.

Although a CNG conversion costs anywhere from $10,000 to $60,000, depending on the vehicle, engine and size of the CNG tank, fleet vehicles and heavy trucks often can justify the cost because of the significant fuel savings amortized over thousands of miles, along with the reduced emissions. With proper incentives, all 18 wheelers in the United States could be converted to CNG, reducing our dependence on imported oil by 50 percent.

In fact, another major potential benefit of shale gas is its potential to reduce the country’s dependence on foreign resources, which could significantly impact national security. In July 2011, the Baker Institute published a study that stated, “the full development of commercial shale gas resources in the United States will have multiple beneficial effects for U.S. energy security and national interests.” The nation is trying to balance its ability to project global force and the associated expense with the need to fulfill its energy demands and keep the country economically viable.

Much of U.S. foreign policy currently is influenced by the country’s need to import oil and natural gas. This dependence on foreign energy sources has caused tension across multiple borders and has been the catalyst for unpredictable national security events. As political leaders focus on keeping the nation secure, domestic energy is at the forefront of the discussion. Any domestic plan that reduces the country’s dependency will positively affect national security, and the current, hyperactive shale plays across the Unites States are producing these results.

Economy, Environment

Shale gas also is producing economic results. While economic development across the globe is stagnant, shale gas is one area offering direct economic benefits. According to the March 2011 American Chemistry Council report, “a modest increase in natural gas supply from shale deposits would generate more than 400,000 new jobs in the United States, more than $132 billion in national economic output, and $4.4 billion in new annual tax revenues. As a domestic energy source, shale gas brings jobs, it brings gross domestic product, and it pays taxes.

Within the natural gas industry, most of the economic development to date has been upstream, but as shale plays move into large-scale production, midstream and downstream industries also are benefitting considerably. For example, the chemical industry has announced plans to leverage the natural gas liquids that are being produced in the Marcellus Shale. In particular, ethylene is so valuable an asset that several new regional processing facilities and pipelines have been proposed. Another example is the steel industry. Whether it is developing greater capacity to produce the tubing used in shale gas development or developing high-efficiency steel plants that leverage natural gas as a fuel source, multibillion dollar investments are in the works. In addition to the economic development primarily driven by shale gas, there is more development created in secondary markets such as restaurants, hotels and transportation.

However, these major economic benefits are not without some concern. Although the movie Gasland provided a compelling set of circumstantial evidence that hydraulic fracturing is environmentally harmful, much of the evidence has been proven technically inaccurate, as natural gas operators know all too well. However, environment concerns are reinforcing the need for both operators and regulators to “do the right thing.” States such as Pennsylvania, New York and Ohio all are relatively new players in the modern oil and gas development, and they have the opportunity to fine-tune state regulations for local environmental concerns.

Meantime, proactive industry initiatives, such as publicly disclosing the chemical content of fracture water, and technological concepts such as microseismic imaging of frac jobs or applying advanced metering infrastructure to account for the life cycle of water usage, are necessary steps to responsibly manage resources and provide a chain of custody for a clean operation. Even with these proactive measures, however, homes in many regions already have impacted water wells independent of shale gas. This is the result of poor water well construction and design standards, not fracturing. Likewise, the majority of stray gas migrations is caused by either poor gas well design or faulty cementing. Pennsylvania is the first state to put regulations on gas well design, but the industry as a whole needs to come together to develop a better set of practices to address these issues. It is likely that the next round of debates may address the transformation of the landscape and air quality issues.

Alternative To Renewables

With environmental impacts in mind, many in the energy industry agree that some day the world will be powered by renewable energy. Whether it is harnessing the vast power of the sun, the waves, tides and currents, or the wind, governments, communities and businesses are investing in a renewable future. As an initial step, federal and state governments created incentives to accelerate renewable energy projects. As noted, however, with a still sputtering national economy and the increasing focus on federal debt reduction, it is becoming harder to accept incentives or carbon taxes as realistic, and renewable energy will lose momentum without incentives.

A scalable storage solution could change the calculus, but for now, shale gas in the United States may become the cleaner, large-scale energy alternative to wind and solar for the foreseeable future.

A final area that can benefit from shale gas development is community relations, a “grass roots” issue of vital importance that the industry should not risk overlooking. Shale gas is being explored in several basins and regions throughout the country. However, operators should realize that Pennsylvania is not Louisiana. Just like all states, the weather, environment and cultural norms are different. Each state involved in shale gas development has adopted its own set of regulations, and operators should try to adjust to each state’s differing parameters.

For example, a community that has never seen a drilling rig that suddenly has the lights, trucks and noise of a rig working locally every day will understandably need some help adapting. Many operators are moving in the right direction, whether it is a town hall meeting or a new road, and several shale gas communities are starting to engage. States clearly are applying lessons learned from other states, with Ohio being the most recent example.

The bottom line is that states and local communities stand to reap substantial rewards from shale gas development, but outreach to state and local administrators, landowners, and citizen stakeholders is critical to educating the public and maintaining community support. There is definitely room for growth to position shale gas as a success and allow the U.S. to access its full transformative potential.

JAMES KOHLHAAS

JAMES KOHLHAAS is vice president of strategic energy programs at McLean, Va.-headquartered Science Applications International Corporation (SAIC). With nearly 30 years of experience in large-scale systems integration and energy, Kohlhaas began his career in offshore oil production and exploration. He also held various leadership positions at Lockheed Martin, including serving as vice president of energy initiatives. Kohlhaas holds a B.S. in petroleum and natural gas engineering from Pennsylvania State University.

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