By Dr. Latha Ramchand, Dean at the C. T. Bauer College of Business, University of Houston In early January, China Petroleum Corp. struck a multi-billion dollar deal with Devon Energy for five major shale oil and gas plays. This is the third billion-dollar-plus investment in U.S. oil fields by a foreign oil company in the last three weeks -- Spain's Repsol YPF (REP.MC) entered into a $1 billion pact with SandRidge Energy Inc. (SD) to jointly develop oil fields in Kansas and Oklahoma, and France’s Total SA (TOT) paid $2.32 billion to Chesapeake Energy for a stake in its Utica shale discovery in Ohio. These foreign firms are on a buying spree in a mission to hedge against volatile energy prices and uncertain supplies. The interest in the shale plays stems from an asset acquisition strategy, but also from a move to obtain the technology and the management expertise that must be in place for shale drilling. In an effort to emphasize the importance of shale exploration, the Chinese government has categorized shale gas as a separate natural mineral resource, as opposed to including it in the general oil and gas category. In June 2011, the government held its first auction for shale plays and a second one will soon follow. In the U.S., we are dealing with a conundrum. The origins of fracing technology and horizontal drilling are not new and the technology has finally come of age. The data makes a powerful statement. In July 2011 for instance, the Bakken shale produced 424,000 barrels of oil a day (b/d) compared to 453,000 b/d in Alaska. The Eagle Ford play in Texas produced 190,000 b/d in August 2011, compared to 3,100 b/d two years ago, and this output is expected to quadruple in the next five years. If these trends continue, daily U.S. output could increase (by 1.0 million b/d) to 6.6 MMb/d. Shale gas production is leading to new jobs in construction, chemicals, plastics, fertilizer and steel. IHS Global Insight expects the industry to support 870,000 jobs in 2015 and 1.6 million by 2035. Furthermore, in a recent study, PriceWaterhouseCoopers estimates 1.0 million manufacturing jobs being created in the next 15 years as a multiplier effect of these new developments. Today, shale gas accounts for more than 33% of U.S. natural gas production and by 2035 will account for 60% (IHS Global Insight). The shale gas industry contributed $76 billion to GDP in 2010, and this is expected to rise to $118 billion by 2015 and $231 billion by 2035. The increase in production of natural gas due to shale is leading to lower electricity prices and also helping utilities and refiners. For instance, Dow Chemical is planning to build two new chemical plants near the U.S. Gulf Coast and upgrade others. Some of the chemicals will be exported to Latin America. The lower natural gas prices driven by larger supplies of natural gas will lead to a 10% lower electricity cost nationwide. On a per capita basis, lower gas prices will add an annual average of $926 per year in household disposable income by 2015 and $2,000 by 2035. The elephant in the room of course is the environmental impact of shale gas. Concerns have been raised about the chemicals used in the water that is used for fracing. These concerns are magnified if the water is then dumped into treatment plants where the partially treated liquids are discharged into rivers leading to contamination of drinking water supplies. Recently, the earthquakes in Ohio suggest that drilling or injecting brine water near fault lines can cause earthquakes. Furthermore, the effects of seismic activity related to these injections can last for a year. The environmental issues are not trivial and must surely be addressed. At the same time, blanket moratoriums on shale drilling will not help. We cannot afford to negotiate from a position of fear. Discussion of these concerns must promote further scientific inquiry, which can lead to improvements in technology. The real problem with shale is that if the technological improvements do not happen here in the U.S., they will happen in the countries that are now acquiring shale plays for the technological know-how. The environmental concerns must be juxtaposed with the concerns over losing first-mover advantages to wealthy buyers that can then import the technology, refine it and maybe sell it back to us. It is like selling your house that has some plumbing problems to your neighbor who knows less about plumbing than you do but is willing to take the risks, only to have him fix the problems and sell it back to you at a higher price. At the end of the day, the bigger question that policy makers need to pose is: how safe are we with tankers moving through the Strait of Hormuz versus moving oil or gas out of shale formations? In this case, the Chinese cannot be accused of being the lowest cost imitator. At least they are willing to pay for the technology when we seem to be ambivalent about its value.
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