How the shale revolution is reshaping world markets

The fast-growing industry in the US is proving doubters of its sustainability

wrong
NICK BUTLER 25 February 2019

The latest short-term outlook for US oil production published by the Energy
Information Administration shows output rising to 13.2m barrels a day by the
end of 2020. If this is achieved (and the EIA is traditionally cautious), the US will
be the largest producer in the world, by a clear margin over Saudi Arabia and
Russia. Two-thirds of that production will come from “tight oil” — that produced
by fracking shale rocks. Ten years after the shale business began, the revolution is
as dynamic as ever. Commentators who said shale was a marginal short-term
phenomenon that would be killed off by falling prices, or rapid reservoir
depletion, have been proved wrong. What began as a gas play now supplies the
US with the bulk of its oil and gas needs. Threatened by the downturn in prices
after 2014, the shale industry has achieved a remarkable reduction in costs. The
current outlook is for output to continue to rise until at least the mid 2020s even
at current oil prices. The impact on the global market and trade has been
profound. The US is now a net exporter of both oil and gas, and recent figures
from the International Energy Agency suggest that exports will continue to grow
steadily. That means US production growth is absorbing most of the annual
increases in global oil demand (around 1m b/d), leaving Opec and Russia little or
no scope to increase their own exports or revenue. US export growth is the main
reason why, despite the falls in production in Venezuela and Iran as a result of
sanctions and social disintegration, the oil price at just over $60 for a barrel of
Brent crude is below what it was 40 years ago in real terms. US exports are also
reshaping the world market for natural gas. The latest surge in gas exports, built
on the growing volumes of that produced as a byproduct of oil extraction, is
adding to a global glut. Prices can only fall further and expectations of a price
surge in the early 2020s now look misplaced. The past year has seen something of
a pause in shale development because the infrastructure necessary to move
additional volumes, particularly from the giant Permian field in Texas and New
Mexico, had to be put in place. Nevertheless, US output rose by over 1m b/d last
year. Shale gas has taken market share from coal in the US and despite the best
efforts of the Trump administration the gradual decline of coal will continue.
Shale gas has also undermined the US nuclear business. Oil from shale has
removed the US dependence on oil imports. Last year only some 1.5m b/d of oil
was traded into the US from the Middle East, clearly reducing the strategic
importance of an area that was once a priority for American foreign policy. The
revolution is live but has not yet been exported. The potential exists. There are
shale rocks in China, southern Africa, Russia and many other places around the

1
world. But progress has been slow, not least because additional supplies are
simply not needed in a saturated market. Now, however, the situation is
beginning to change. Shale development in Argentina and Canada is growing
and the big energy companies, including BP and Chevron, are investing at a
material level for the first time. The lesson of the US experience is that once a
new industry is in place with the necessary skills and infrastructure, output from
identified basins can grow beyond all initial expectations. The global shale
revolution has barely begun, and the changes to the pattern of trade that we have
seen so far are no more than a hint of the disruption to come. The writer is an
energy commentator for the FT and chair of the King’s Policy Institute at King’s
College London

https://www.ft.com/content/5b4cd4c6-34f7-11e9-bb0c-42459962a812