Greed and ingenuity in US turns drillers into gas-price killers


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Somehow it felt right to arrive at Opec's biannual seminar at the Hofburg Palace in Vienna in a gas-guzzling Mercedes.

There were plenty of electric trams available, not to mention the ubiquitous bicycle, but to attend the gathering of the world's pre-eminent oil exporters, it seemed appropriate to expend a few drops of the precious stuff to get into the feeling of petroleum power.

If there was any lingering guilt over the decision to resort to the use of a fossil fuel to get me to the seat of the Austro-Hungarian empire, it was soon dispelled by the keynote speakers.

Electric cars, declared the distinguished energy economist Michael Lynch, were "bad toys for rich boys".

Phew! There went a guilty feeling washed away by science.

The thrust of his argument was that some "clean" technologies were simply a waste of effort at a time when oil still offered such obvious value.

By the time I left the neo-classical hall venue, I was struck by how the petroleum industry, so out of favour with the public and heavily taxed by governments, had reinvented itself over the past decade.

The rising price of oil and gas, it turns out, has not just paved the streets of the Arabian Gulf with gold. In the United States, the bonanza spawned an explosion of drilling and, more importantly, innovation.

While the Gulf states used the windfall to build new cities, aluminium smelters and financial hubs, private landowners in the US have been drilling into huge oil and gas deposits previously locked in inaccessible rock known as shale.

It took time and money, and provoked a backlash over contamination fears, but the prospectors finally cashed in.

Over the past five years, production of natural gas in the US has jumped by 30 per cent while reserves have swollen by 70 per cent. Cracking the shale-gas code has turned the world's energy outlook upside down.

The US, which once combed the world, and even embarked on wars to secure energy supplies, is now expected to be self-sufficient in gas by 2020. Some think it might even declare independence on oil by 2030.

"It was driven by little guys drilling holes," says Roger Diwan, a partner at PFC Energy consultants. "It shows the power of greed and ingenuity." Gas prices in the US have since collapsed under the weight of the new supply, spawning an explosion of power-hungry industries across the Midwest.

The price trigger for all this innovation may have disappeared, but the leap in technology is here to stay.

Now these drillers are applying the same techniques to oil, unlocking billions of previously inaccessible barrels worth of crude.

Analysts are extrapolating the US experience around the world, and the certainties that once put the Gulf at the centre of the energy map have been shaken to the core.

"The potential for unconventional oil and gas is much bigger than conventional," says Wang Dongjin, the vice president of China National Petroleum Corporation.

Even as estimates of "ultimately recoverable" conventional oil reserves have more than doubled over the past 20 years, from 1.5 to 3.5 trillion barrels according to the US Geological Survey, analysts now believe unconventional deposits could multiply that figure again.

"The impact on the global balance needs to be discussed," Christophe de Margerie, the chief executive of Total, told the audience in Vienna.

North America, it turns out, has a resource base comparable to the Middle East when shale deposits are counted, while Asia is also hugely endowed.

Analysts are still trying to absorb the full implications of this drilling revolution. Shale drilling has decimated the price of gas in the US, but has yet to affect Europe or Japan where prices are more than five times higher.

In the oil space, wells drilled in these rocks break even only at US$80 a barrel, for now, so analysts are not predicting an imminent collapse in the price of crude, even if the trend is down.

But how the coming US energy independence will affect global politics is an open question. Mr Diwan expects a more isolationist approach from Washington, with less at stake in the Middle East.

For the rest of us, it probably means the era of petroleum will be here for several more generations.

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Contributed by Thomas Vanhee and Hend Rashwan, Aurifer

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