Woodrow Wilson Center Talks Shale Gas With Jim Slutz

Jim Slutz, president and managing director of Global Energy Strategies LLC, talks on American shale gas production in this informative interview with Lynann Butkiewcz.

Some highlights:

• America has tons of natural gas. "[America's] natural-gas resource base, which includes proven and unproven reserves, is now estimated at 2203.0 TCF, or almost 90 years of supply."

•  Shale gas will soon be leading source of U.S. natural gas.  "EIA (Energy Information Administration) projects that from 2010 to 2035, natural gas production from shale formations will rise from 23% to 49% of the U.S. gas supply. The term “game-changer” is often used and is very appropriate for this development." 

• FTAs and U.S. regulation of natural gas exports.  The Department of Energy (DOE) authorizes natural gas exporters, using a two-tiered process.  For countries that America has free-trade agreements (FTAs), the export automatically considered in the public interest and, once all regulatory steps are taken,  DOE authorization is granted.  But for those nations with FTAs, a more complicated process follows.  In short, America's trade relations and review process has a direct impact on American natural gas exporters.  Learn more about DOE's natural gas regulation, which is governed by the Natural Gas Act of 1938.  Finally, check out Michael Levi's discussion paper, A Strategy for U.S. Natural Gas Exports, a publication of the Brookings Institute's Hamilton Center.  The paper reviews U.S. gas regulation, and puts forward a trade strategy for the U.S. to push for global market-based pricing and transparency.

• America and Canada's energy relationship--and Canadian pipeline concerns.  "The United States can be a partner to Canada as a market for additional crude oil from the oil sands. The only restriction is the need for added pipeline capacity. The United States has extra capacity in oil refineries, which are specifically designed to process heavy oil, so it makes economic sense to ship more oil to the United States. The regulatory delays by the U.S. government regarding the Keystone XL pipeline are directly responsible for Canada’s increased urgency in seeking oil-export opportunities in Asia. This has also raised concerns by Canadians about whether Canada is overly reliant on the United States as a trading partner."

• Challenges to exporting natural gas to Asia:  Asia's long-term gas lock & oil-pricing pegs. America's short-term contracts put barriers to exporting cheaper U.S. natural gas to Asia. 

"It will be a long time before a global gas market develops. While there may be movement in that direction, challenges exist to the development of a U.S.-style, Henry Hub–type market. Gas markets in Asia and the United States function quite differently. In Asia, much of the gas supply depends on LNG, which requires huge upfront investment and therefore is predicated on long-term contracts, typically twenty years. These contracts use oil prices as a basis for determining gas value. In the United States, gas is traded independently of oil price and on a much shorter-term basis. A typical contract in the United States is measured in months, not years. Long-term contracts will remain a key component of LNG project development because of the financing required to undertake the infrastructure construction. The other important component of pricing is to remember is that there is a significant cost to liquefy and transport LNG, in most cases more than the cost of the gas. Therefore, just because there is a current significant differential between U.S. and Asia prices does not automatically mean that exporting gas to Asia will be economically attractive for the long term." 

North America’s Shale Energy Stockpiles: Ohio Enters The Game—But Is it too Late, and Will State Politics Get in the Way?

by Keith Edmund White, Editor-in-Chief

With all the chattering over Canada’s oil sands, it’s important not to forget what natural resource literally ties Canada and the United States: shale gas. This resource, while perhaps not as pronounced on the public mind as black-gold brother, has gained prominence over the last decade. For most readers, T. Boone Pickens—and the numerous commercials he generated extolling naturally gas—may have been your first brush with shale.. But now even CNN’s Fareed Zakaria has seemingly blessed this energy shift: noting not only can shale gas production be done responsibly, but could serve as a geo-political stabilizer: with energy-hungry nations like the United States and China not having to be as dependent on keeping oil on the market from more volatile regions on the globe. And, as Canada’s showing, shale brings with it job and GDP growth (refer to page 27). While Canada’s oil sands grab the headlines, it’s clear the natural gas—promising less environmental impact—is trying to give it a run for its dominant role on the global energy stage.

And now Ohio is in on the game. And it’s bringing about its own interesting energy-state politics. First, the geology. Ohio sits—along with about 7 other U.S. states and Ontario—on the Utica shale gas reserves. How much is there? Apparently a lot. And in Ohio is pushing to up its 7-wells, and try to get in on the shale boom.

But this is where the state politics come in. Ohio Gov. John Kasich, not known as a moderate in his former Congressional career and now still-short tenure, has used the issue to show off his inner populist. His plan: finance a across-the-board income tax cut with increased taxes on drilling, which—it should be noted—admittedly Ohio already accessing this ‘severance tax scheme’ at a lower rate than other States. But, alas, Kasich finds himself fighting his own party over the tax proposal, with others calling the tax-proposal a possible killer of shale’s potential for spurring Ohio economic growth.  Whether Kasich populist pivot results from conviction or political necessity is debatable, but in the result is the same:  Kasich is pushing shale gas in a way that presumably will be supported by most Ohio voters.

Now there are two things to consider when assessing the virtues of natural gas. On the macro-scale, its undoubtedly true that natural gas is clean than oil—but, is using natural gas as a crush keeping the American economy from entering its green phase? On the ground in Ohio, there are two far less abstract questions. First, is the market to awash in natural gas?  As pointed out in John Funk's The Plain Dealer Nov. 2011 piece, Ohio might be too late to the party to enjoy a true shale boom:

The problem for Ohio is that the gas industry has been too successful over the last three years at developing shale gas in other parts of the nation, using technologies to drill horizontal wells and then fracturing, or "fracking," the rock to release the gas. 

Now there is too much of the stuff. The glut is growing and prices are falling. Those are the facts. Additionally, no one knows for sure how much gas -- or more valuable oil and other hydrocarbons -- lies trapped beneath Ohio. "The issue for the Ohio economy is whether there is enough demand for natural gas to permit development. It's not a question of whether it will create 150,000 jobs or 170,000 jobs but a question of whether it will happen at all," said Andrew Weissman, executive director of Energy Business Watch, a national private analytical service for energy investors. 

"It will happen on some scale," he added. "But the question is whether it moves quickly or whether it moves slowly so that it has only a modest impact on Ohio's economy."

And second, are Ohioans being over-sold on the economic benefits? Yes, with gas comes drilling operations, leasing and royalties, and pipeline infrastructure (all of which equal more jobs—especially for lawyers!). But, as this OSU report makes clear, while a short-term of income burst is to be expected in drilling areas, shale gas development’s ability to create long-term job-creation is dubious at best (and still comes with some not-fully understood environmental impacts) (refer to pages 15 and 27).  One fascinating statistic: Pennsylvania counties with drilling actually had less job growth than non-drilling countries, though both saw roughly equal income growths over 2000-2010.  Assuming this is trend  continues in Ohio, Governor Kasich’s plan makes sense: use the short-term income boast to simulate growth (income taxes) or some smart government-spending that can actually lead to sustainable job creation.

In any case, shale is here to stay. And with it, at a minimum, will come even more links between Canada and the United States.