Recent advances in production techniques unlocked long known but previously untapped natural gas resources of immense scale. We believe these newly recoverable gas resources can provide the U.S. with at least an additional 100 years of supply at current usage levels. This presents a truly transformative change in America’s energy supply picture, and one with potential to grow the economy, reduce energy import dependence and enhance national security, lower household energy bills, reduce emissions, and spur a manufacturing renaissance. However, the ability to reap these benefits is far from assured, and significant challenges must be overcome to fully seize this historic opportunity.
The following white paper presents an analysis and assessment of what brought about this revolutionary advance in recovery techniques, the necessary conditions for full development of the opportunity, and a view of the transformative impact it can have on America’s energy infrastructure and economy if we successfully harness this vital resource. It also presents a view of key challenges that must be overcome, which include smoothing out the boom-bust cycle in gas prices that undermines consumer and producer confidence, and mitigating the environmental impacts and risks that limit social acceptance of the resource opportunity. More broadly, a national dialogue is needed to achieve consensus on the standards that must be met to secure and maintain the social license to develop this critical resource.
We believe the following key points must be addressed in order to achieve success:
- First and foremost, industry must continue to proactively engage with regulators, the local community, environmental and other stakeholders to develop appropriate regulation and best practices that reduce impacts and protect human health and the environment, including the reduction of fugitive methane emissions. For example, Anadarko, Encana, Shell, and ExxonMobil subsidiary XTO Energy’s work with the Environmental Defense Fund (EDF) on methane leakage testing to better quantify and eliminate methane emissions from the industry.Consensus is a necessary and desirable pre-condition for success and industry leaders must continue to actively seek to achieve this through open dialogue and demonstrated commitment to responsible stewardship.
- Second, expansion of natural gas-based transportation infrastructure including mid-sized municipal and corporate natural gas powered fleets, natural gas powered heavy duty trucks, and consumer vehicles should be encouraged through a variety of incentives, including where appropriate federal, state and local policy initiatives. This infrastructure is particularly capital intensive, but will also yield important benefits, such as reduction in oil consumption.
- Third, procedures for securing permits on federal land need to be clearer, expeditious, and more consistently applied to provide greater certainty and transparency regarding the rules, criteria and procedures. This clarity should expand access to federal lands where significant oil, gas, liquids and unconventional gas is present and can be responsibly produced.
- Finally, there must be support for, and action to encourage development of a natural gas export infrastructure. In our view, Liquefied Natural Gas (LNG) exports are expected to play an important and constructive role in maximizing the domestic economic benefits of the shale gas revolution. The U.S. now enjoys significant comparative advantage relative to many of our energy import dependent trading partners, and LNG export sales to these partners will directly reduce our trade deficit. We believe the U.S. can capture these benefits of trade without ceding its energy price advantage to purchasers of LNG exports, as these exports will be priced significantly higher than prices paid in the U.S. market. Additionally, because the resource base is so large, these exports are expected to have only a modest impact on domestic prices while providing a steady source of demand to support expanded production and delivery infrastructure.
Referred to as shale gas, these newly accessible resources are trapped deep below the surface in shale formations. As a low-porosity rock, the shale formation must be broken, or fractured, to release the gas trapped within. Advances in integrating two mature exploration and production technologies, horizontal drilling and hydraulic fracturing, have progressed to the point where these resources may now be economically recovered. While this paper focuses on dry gas recovery from shale formations, it is important to note these techniques are also being used on a significant scale to exploit natural gas liquids and oil opportunities. The challenge at hand is to successfully mobilize the financial, technical, environmental risk mitigation techniques and policies necessary to bring these gas resources online and into the economy in a manner that stimulates sustainable economic growth, while preserving and protecting the environment.
The U.S. and Canada are not the only countries with significant shale gas resources; Poland, China and India possess significant resources, as do other nations. Yet, these countries currently lack the resources, technology and infrastructure necessary to safely, effectively, and efficiently extract the resource and bring it to market.
We believe successful recovery of this resource will have a tremendous economic impact. It would dramatically increase gas’ market share in the electricity generation sector, make inroads as a transportation fuel, reduce petrochemical production costs, and improve U.S. manufacturing and overall economic competitiveness. The U.S. would also potentially shift from being a net importer of natural gas to a net exporter, creating a balance of trade benefits.
Tapping the full potential of this resource is not yet a given and requires significant changes to, and investment in, our basic energy infrastructure, including significant expansion of the U.S. natural gas pipeline and storage system, the gas-fired generating fleet and, potentially, development of compressed natural gas fueling and other forms of transportation infrastructure. Transformation at this scale will require significant capital mobilization to finance the recovery of the resource, the expansion of gas delivery, storage infrastructure and investment in the plant, and equipment that will consume the growing gas supply.
As discussed below in Chapter 2, we estimate if we do what is needed to successfully exploit the resource, gas production should increase by 44% from 2011 to 2035. Developing the resource and the delivery infrastructure to bring this new supply to market will require:
- $2 trillion in upstream investments for natural gas production (including associated volumes of condensate and NGLs) between 2011 and 2035, with $1.7 trillion needed for dry gas production alone.
- $205 billion in capital expenditures between 2011 and 2035 for gas infrastructure development.
- Expansion of the mainline gas transmission system by approximately 35,600 miles and an additional 589 billion cubic feet (bcf) of working gas storage by 2035.
Similar to other recent growth opportunities in technology and biotech, exploiting the opportunities presented by natural gas carries with it tremendous basic industry and skilled-labor employment growth potential. Extraction and delivery of natural gas requires significant material inputs including steel and concrete, and skilled construction workers, welders and operating engineers to build and operate the new wells and infrastructure.
In addition to expanding the gas production and delivery system, skilled workers, machinery and inputs will also be needed in gas-fired power generation, construction of new ammonia, liquefaction, methanol plants, and new transportation infrastructure. In short, exploitation of the newly accessible gas resource holds the potential to shift us to a cleaner-energy economy and spur an industrial and manufacturing renaissance that would provide significant new employment opportunities for America’s skilled labor forces.
A recent study found that recent improvements in hydraulic fracturing and horizontal drilling techniques used to produce shale gas could lead to the creation of 835,000 to 1.6 million annual jobs throughout the U.S. economy by 2017, due to the significant multiplier effect associated with investment and employment in the gas sector. To put this in perspective, the low range of this estimate exceeds total employment in the entire U.S. auto manufacturing industry (including parts suppliers).
If the nation joins together to make successful development of this resource a shared national priority, even greater employment gains may be expected over the longer term. Some projected economic and employment gains from these new production techniques include:
- Increasing annual GDP between 1.2% and 1.7% by 2017;
- Improving the U.S. trade balance by increasing net exports by approximately $120 billion annually by 2017. This is equivalent to nearly one-quarter of the U.S. 2010 trade deficit;
- Saving consumers $41 billion in 2017 as a result of lower gas prices, enough to cover the electricity bill of 30 million homes. This figure includes direct savings to natural gas consumers, indirect savings from lower electricity prices, and lower prices for industrial products;
- Creating hundreds of thousands of well-paying jobs, including:
- 330,000 direct jobs in natural gas, oil, and natural gas liquids production;
- 120,000-210,000 manufacturing jobs; and,
- 33,000-40,000 construction jobs.
While the potential economic benefits of increased natural gas are hard to dispute, efficient and effective realization of these tremendous opportunities is not yet a given. Significant technical, market, policy and environmental risks and challenges must be addressed to successfully capture the opportunities presented by the shale gas revolution.
The views expressed in this publication are the personal views of Marc Lipschultz of Kohlberg Kravis Roberts & Co. L.P. (together with its affiliates, “KKR”) and do not necessarily reflect the views of KKR itself. This document is not research and should not be treated as research. This document does not represent valuation judgments with respect to any financial instrument, issuer, security or sector that may be described or referenced herein and does not represent a formal or official view of KKR. It is being provided merely to provide a framework to assist in the implementation of an investor’s own analysis and an investor’s own views on the topic discussed herein.
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