Shale Set to Split OPEC

Shale gas is the latest hot potato that is being passed around the world. Are you with the in-crowd or out on limb? Ready to take the dive and place your country’s future in shale gas or go it as usual with domination of our energy sources with the petrol industry? As the US has clearly embarked upon a program of hydraulic fracturing technology and horizontal drilling, with this new source of energy, in the face of depleting coal reserves and growing dependency on petrol, questions are still being raised as to the consequences on the environment and the destruction of the water tables.  The number of natural gas wells across the US is on target to continue increasing over the next seven years.

Fracking (or hydraulic fracturing) has been strongly criticized, but the US has embarked on a long program of putting business above environment for a number of years now. Obama believes that even if shale gas extraction is not great, it’s better than fossil fuels in terms of greenhouse gas emissions. Certainly, but maybe he has never heard of renewable energies! Will somebody tell him?

Of course some fracking occurs naturally, but in the extraction of shale gas large amounts of water are injected with sand into cracks and veins in the rock layers beneath the surface of the earth. Chemicals are thrown in for good measure too and they have varying recipes concocted depending on where and who is doing the brewing (hydrochloric acid, acetic acid, sodium chloride, sodium chloride, glutaraldehyde (disinfectant), amongst others). The high-pressure injection blast releases the hidden shale gas that is in the faults. Hey presto, we are rich! Or the USA is!

Which is more important, breaking free from the clutches of the world’s petrol producers to become independent or polluting the fresh water reserves and the air of the country? Looks like its catching too as the UK has closed a deal recently to provide 2 million households with shale gas energy by 2018. As North Sea Oil faces future depletion of reserves (or possible loss to Scotland if they vote for their independence!), the UK government is looking for new reserves that might be cheaper from elsewhere. It’s the US that is the harbinger of that news.

In three days’ time an OPEC (Organization of the Petroleum Exporting Countries) meeting will take place in Vienna (the 163rd (Ordinary) OPEC meeting on May 31st 2013). It looks like somebody has been fracking OPEC.

The US and Canada look to be on the road to increasing their oil output by 21% by 2018. That means that they will become less dependent on OPEC countries for oil reserves and that will cause a reduction in prices. But, the rift looks like it will set in, driving a wedge between certain countries such as Saudi Arabia and smaller countries such as Algeria and Nigeria.

Saudi Arabia will be able to deal with price reductions by adapting production. It also has higher revenue in comparison to other countries. Algeria and Nigeria for instance will have greater cause for concern. They risk not being able to deal with losing out (in particular since their own oil is probably considered as being on a par to that of the quality of shale gas in the US and Canada).  The smaller oil producers that believe that North-American shale gas production is a cause for grave concern look set to clash with the Gulf countries that are not so worried. The former clearly need that oil revenue to maintain domestic spending and deal with falling production.

The last time OPEC saw a split in its ranks was in 2008 when there were heated discussions about the number of barrels that were to be produced per day in the wake of the world financial crisis. It was once again the smaller producers (such as Algeria) that disagreed with the reduction as they were going to suffer. The rift doesn’t look like it has had any consequences yet on the market. Crude Oil (WTl) stands at $93.72/barrel and that’s up 0.07%. Brent is up 0.20% to $102.64 today.

Is all really fair in love and war? Maybe the good times are over for some of the OPEC countries and that rift certainly looks like it’s going to create a hullabaloo on Friday in Vienna. They won’t be waltzing, that’s for certain.

But, on the other hand, the US is suffering from the economic downturn and shale gas has boosted jobs by over half a million since 2010. That could double by 2025. Figures show that shale gas production will increase by 113% from 2011 to 2040 in the USA. The USA has an estimated recoverable resource of 862 trillion cubic feet of shale gas and that’s the second largest reserve in the world after China (1, 275 trillion cubic feet).

After 2015, the cost of production of shale gas will gradually increase (despite the fact that it is relatively low in comparison with oil today). Up until now, shale gas has been relatively easy to get to, but that will become increasingly difficult over the next twenty years. As a result, prices will increase on average by 2.4% per year.

Will we end up with just changing the geopolitical arena and shifting the control of energy from country A to country B in the world? The New York Times already investigated and published reports in 2011 related to the fact that the financial benefits of shale gas might not be as extensive as they had first been thought to be. They also showed that the size of reserves had been vastly over-exaggerated in the US. Nobody was prosecuted for trying to pull the wool over the eyes of the public.

Granted, all may be fair in love and war; but have the powers that be actually considered what the consequences might be on the countries that are the poorer producers of oil in the world such as Algeria, for example?  Probably, but their own benefits outweigh that, don’t they!

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