Activity Report

June 05, 2013 The Rise of a new fossil fuel and the Revival of the US Economy

In Japan, shale is mainly used as the material to make ink stones, but in the US, the geological layer of shale in the ground has long been eyed as a potential source of natural gas and other fossil fuels. It is quite recently that cost-effective methods for extracting this natural gas and oil were finally developed, bringing about the so-called ‘shale revolution’ in the US. These developments have become widely known in Japan from around 2012 when newspapers and television made major coverage of it.

TKI has been following the ongoing events in the US, and investigating the broad impact that the shale revolution will have on the world. Below, we explain how the shale revolution will bring about a rejuvenation of the US economy, and the contrasting effect it will have on Japan.

Natural gas, crude oil, and coal are major fossil fuels that currently provide 80% of the world’s primary energy. Fossil fuels are a finite resource, and it has been said that reserves of natural gas will be depleted in 60 years, crude oil in 45 years, and coal in 130 years.

Natural gas mostly refers to methane gas, which is either transported by pipelines or cooled/liquefied then transported by special tanks. Of the 3 major fossil fuels, natural gas contributes the least amount of CO2 emissions *1, but the cost is high for the cooling and liquefaction process that is required to make it transportable by tanks. In contrast, crude oil is naturally liquid and easiest to handle among the 3 fossil fuels, and is widely used as fuel for automobiles. However, due to the effects of recent political turmoil around North Africa and the Middle East - the so-called “Arab Spring” - the price of crude oil remains at very high levels, at about 100 USD/ bbl. As for coal, handling is difficult because it is a solid, and removing impurities is not easy, but it is still the cheapest fossil fuel.

Up until the 1970s, the US produced large amounts of oil as well as accompanying natural gas, but production has since declined, and there were increasing imports from the Middle East. For natural gas, unconventional forms in tight sand and coal bed methane were starting to be produced in recent years, but the amount did not meet demand, and the US was planning on further increasing imports from the Middle East. However, it was in the midst of these plans that the shale revolution occurred, and from around 2008, production of shale gas increased sharply, and the price of natural gas in the US plummeted. From a pre-Lehman shock price of 15 USD/ MMBtu, it fell to 3USD/ MMBTU, and has been at this level ever since. Traditionally, natural gas price moves together with crude oil price, so the recent disparity is seen as a surprising anomaly.

As can be seen in Figure 1 below, shale gas and oil plays are dispersed widely around the US.

Figure 1: Shale plays in the US 48 states.
Source: US Energy Information Administration

Because price of natural gas remains low in the US, production is shifting to the higher-priced shale oil, which can be obtained by similar mining methods. In the US, layers of shale oil often exist alongside shale gas plays, and with development of technologies that has brought down the cost of mining to below 50USD/ bbl, there has been a dramatic increase in its production. Thus, the US is returning to its former ways of producing its own oil.

Putting into consideration the oil obtained from the Gulf of Mexico as well as imports of oil sand from Canada, it is predicted that the US will not need to import oil from any place other than North American countries by the year 2020, and is set to become energy-independent. Because the US can now produce its own fossil resources cheaply, it is reemerging as a natural gas and oil producing nation. Its petrochemical industry is also being revived and regaining international competitiveness, and many new factories and plants are being planned for construction. Electricity and heating, which are fueled by natural gas, is also expected to become less expensive, which will give all areas of the manufacturing industry a boost, and an overall lift to the US economy.

Japan, in contrast, is anticipating imports of cheap shale gas from the US. However as mentioned, natural gas must first be cooled and liquefied to transport, which greatly increases cost. Bringing US natural gas to Japan would require an additional 3USD/ MMBtu for cooling, and another 3USD/ MMBtu for transport, making it approximately 6USD/ MMBtu more expensive than in the US. For example, if natural gas costs 4USD/ MMBtu in the US, it would cost 10 USD/MMBtu in Japan, making it 2.5 times more expensive.

On the other hand, currently the price of natural gas in Japan is linked to the price of crude oil, and at 18USD/ MMBtu, is extremely expensive. If imports of shale gas become possible, its price in Japan will still be much higher than in the US, but it is anticipated that it will be half the current price of 18USD/ MMBtu.

Japan has traditionally been poor in natural resources, and excavation of shale gas in Japan so far looks to be unpromising. Technology for methane hydrate also seems to be far from practical use. Production of renewable energy remains on a small scale, so is still very expensive. Therefore, what Japan in its position can do now is to work on developing renewable energy technology to bring its cost down and to increase its scale, while aiming to procure fossil fuels from other countries as cheaply as possible. Although it is a rather low-key effort, Japan should also steadily and patiently continue striving to improve energy-saving technology and products (improve end-user energy efficiency).

*CO2 emissions per unit of energy for the major fossil fuels: Coal = 100, Oil=80, Natural gas=55