Talk evolution, not revolution, when it comes to shale use

The so-called Shale Revolution is more of an evolution - and one that has little chance of deposing the Middle East as the most important energy supply region in the world.

The so-called Shale Revolution is having a significant impact on the consciousness of the global energy industry.

But in reality it has one letter too many and is more of an evolution - and one that has little chance of deposing the Middle East as the most important energy supply region in the world.

It may appear as a revolution, because companies and governments have identified that with US$100-a-barrel oil they can extract reserves that were previously thought uneconomical.

And you've seen in the United States a dramatic change in the energy landscape with an entire service sector building up around this new shale industry.

The economics are improving for shale gas and shale oil, but we need to separate the two when it comes to the implications for the Middle East, which is very much dominated by crude oil production.

In the US, the new production is predominantly shale gas and some associated fluids. The reality is that it's very complex to extract the shale hydrocarbon, making it much costlier than developing conventional reservoirs in the Middle East.

It's still far cheaper to produce the oil here and transport it across the world, and sell it to a market in North America or in Asia-Pacific than it is for them to locally extract their own shale hydrocarbons.

So, yes, you will see an increase in shale production, particularly in North America, of associated fluids coming from shale gas and shale oil. However, the economics will eventually balance things out. We're seeing some of the largest players slowing down their drilling activity because the natural gas price has collapsed.

It is such macroeconomic checks and balances that eventually will cause things to normalise as we move forward. The increase in demand for hydrocarbons in the US has been levelling off. However, there's been increased domestic supply of oil.

Shale is, by its very name, an unconventional energy source. We don't know as much about these particular types of reservoirs as we do about conventional reservoirs, such as the ones producing most of the hydrocarbons in the Middle East.

An energy-independent US narrative is being touted by politicians and the media, but a big question remains whether that is a realistic possibility.

And of course, if we talk about shale gas or oil, it's not just a US story as the headlines would indicate — it is in South America, Europe, China and we have it here in the Middle East as well.

We're in a region where we're investing in nuclear energy to meet the soaring demand for power generation. And the development of the natural gas reserves, conventional and unconventional, will result in having to burn less diesel oil at power stations during the peak summer demand period.

This will enable the national oil companies to release more crude for export. They can effectively generate more revenue from their existing energy reserves by exploiting another hydrocarbon resource, shale, to burn in their power stations.

Some analysts argue that the surge in shale supply could trigger an oil price collapse as it has done to natural gas prices in the US, but big drops in oil prices are typically associated with some form of economic shock such as the Asian economic collapse in the 1990s that sent oil prices crashing to $8 a barrel.

I was based in the North Sea at the time and that was the reason I ended up coming to work in the Middle East because this region could continue to flourish with single-digit oil prices as the cost of exploiting the hydrocarbon here is so much less than everywhere else in the world.

Deep water exploration and production in the Gulf of Mexico will become uneconomical long before exploiting onshore oil reserves will in the Middle East.

The sudden supply gluts that some analysts forecast will result from the development of shale, take a very, very long time to build up, if ever.

It not only takes a long time to drill and exploit the hydrocarbon, but it also takes a long time to build the infrastructure to bring that hydrocarbon to market.

So we're not going to see a sudden dramatic oversupply, particularly when Opec will be managing its production capacity to minimise these kinds of shocks in supply and demand.

Stuart Walley is regional manager for Senergy - a global energy services company