May 25, 2010 4:55 pm

US energy policy: The ‘shale gale’ turns outlook on its head

In the wake of the oil spill in the Gulf of Mexico, offshore production of oil and gas is forecast to become more difficult and expensive, with expectations that the authorities will raise the hurdle to deepwater drilling and production to make it safer.

Scott Van Bergh, an energy expert at Bank of America Merrill Lynch, believes this might lead to more support for the onshore rush into shale gas.

“Shale gas hasn’t really caught on in Washington,’’ Mr Van Bergh says. But he said the negative publicity about shale seems to have slowed.

That negative publicity had been building last year. Critics increasingly questioned whether the combined horizontal drilling and hydraulic fracturing or “fracking” process used to extract gas from shale rock polluted the groundwater and created carbon emissions.

Congress is probing this issue, despite the industry’s insistence that the process is safe and has asked the US Environmental Protection Agency to complete a comprehensive examination of the safety of hydraulic fracturing.

Concerns that fracking has contaminated wells and caused livestock deaths have led regulators to consider measures to limit the scope of drilling, including buffer zones near reservoirs and aquifers.

Amy Mall, senior policy analyst at the Natural Resources Defense Council, the environmental group, believes that the problems of insufficient regulation and oversight offshore, that have come to the fore amid the leak in the Gulf, are also problems onshore.

And, as limits are put on drilling offshore and the industry increasingly shifts its focus onshore, that will increase attention on regulatory and environmental controls of shale, she says.

Extracting gas from shale involves drilling down, sometimes thousands of feet, and then sideways as much as 4,500ft.

Once a well has been drilled, water and chemicals with fine grains of sand are pumped in at high pressure. This fractures the shale and leaves behind the grains of sand, which prop open the fissures in the rock and allow the gas to escape.

“Hydraulic fracturing has been refined and improved over the past 60 years and has been used safely on more than 1m US wells,’’ says Regina Hopper, president and chief executive officer of America’s Natural Gas Alliance, representing 34 of the country’s independent natural gas exploration and production companies.

The industry insists the process is the key to boosting US energy security. Shale extraction could increase the country’s natural gas supply to 100 years at current usage rates, versus the 30 estimated just a few years ago.

And new shale fields are being found regularly across the US.

“It’s continued use is crucial,’’ says the American Petroleum Institute, the national trade association. “It is enabling access to massive new supplies of natural gas trapped in shale formations across the US.’’

Indeed, Daniel Yergin, chairman of IHS Cambridge Energy Research Associates, the energy consultancy, calls the growth of shale gas “the most significant energy innovation so far this century.’’

He explains that as recently as 2007, it was widely thought natural gas was in tight supply and the US was going to become a growing importer of gas.

“This outlook as been turned on its head by the shale gale,’’ he says.

ExxonMobil’s $41bn deal late last year to buy XTO Energy, the shale specialist, shows that the industry recognises the potential.

Indeed, European energy companies, such as BP, Total and Statoil, have been investing in US shale for several years.

In recent months, Asian sovereign wealth funds also have moved in, as expectations grow that the US government will increasingly turn to natural gas as a way to reduce carbon emissions.

Gas is about 30 per cent less carbon-intensive than oil and about 50 per cent less than coal.

But the industry complains that the administration and Congress have yet to recognise the benefits of gas, by offering significant incentives for fuel switching from coal to gas power plants and for gas-powered vehicles.

It has been lobbying extensively in the hope that gas will be afforded a big role in climate legislation currently under development.

But Ms Hopper was disappointed with the latest energy bill to be presented in Congress – by Senators John Kerry and Joe Lieberman. “We appreciate the inclusion of language aimed at helping move toward the greater use of natural gas in merchant power generation and vehicles,’’ she says.

However, she quickly adds: “While a useful starting point, we believe much more could be done right now significantly to reduce greenhouse gases and other pollutants by providing clean energy transition incentives to electric utilities as well.’’

With the offshore industry coming under increasing pressure amid the oil leak in the Gulf of Mexico, shale gas might finally find a way to move to the top of lawmakers’ agendas.

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