The fracking revolution might have important negative impact for oil and conventional natural gas producers in the South but a positive one on consumer countries and owners of shale gas reserves, points out a British survey.
In a study financed by the United Kingdom’s Department for International Development (DfID) called “The development implications of the fracking revolution”, five economists have assess its sizeable impact on development countries. It’s all about the extraction of the natural gas that has been trapped within rock formations known as shale using the process of “fracking” which involves pumping a mixture of water, sand and chemical additives into geological formations at high pressure in order to create or enlarge fractures which promote the flow of hydrocarbon resources for extraction. Beside the production of shale gas and shale oils, similar fracking technologies are used to produce “tight oil” from reservoirs with very low permeability.
The “fracking revolution”, reminds the report, is a new phenomenon although the extraction process itself is not particularly new, since in United States, it has already begun in 1821. However, technological advancement in fracking and horizontal drilling has led to a tremendous increase in the quantity of economically accessible shale gas production in the last decade, despite the environmental risks particularly for water resources.
The impact has been sizeable. The US shale gas production increased by US$16 billion over 2007–12. By 2012, developing countries were exporting 50% less gas than they would otherwise have done to the US market. This implies that they lost around US$1.5 billion in gas export revenue due to US shale gas production. Further developments of shale gas production in the US would reduce the supplies from a number of developing countries including Trinidad which accounted for 7.5% of United States imports in 2012, Algeria (1.3%), Brazil (1,2%), Qatar (0.9 %), Yemen 0.8% and Mexico (0.7%).
In the possible scenario of a further 50% reduction in US natural gas imports, Trinidad and Tobago would suffer an export revenue loss equivalent to 3.87% of its GDP. Other countries affected may include Yemen (0.18%), Egypt (0.11%), Qatar (0.08%), Equatorial Guinea (0.07%), Nigeria (0.04%), Algeria (0.03%) and Peru (0.01%). An even larger number of countries are exposed to a potential trade shock emerging from a change in US oil imports which is likely to happen. Indeed, US shale oil production increased by approximately 4 million barrels/day (MMbbl) over the period 2007–12. According to the report, developing countries export around 50% less oil to the US by 2012 than they would otherwise have done.
In the case of suppliers of US oil and related products a much larger number of countries are exposed to a potential trade shock induced by fracking than in the case of gas. A further 50% reduction of US imports would represent 13.97% of Chad’s GDP, 12.68% for the Republic of Congo, 7.67% for Gabon, 7.24% for Angola, 7.11% for Equatorial Guinea, 6.57 % for Nigeria, 5.43% for Iraq, 5.22% for Venezuela, 4.45% for Ecuador and 4.45% for Saudi Arabia. The total effects for African countries alone in terms of lost oil exports to the US are likely to amount to US$32 billion. Exports to the US from Nigeria, Algeria and Angola – have fallen to their lowest levels in decades, dropping 41% in 2012 from 2011, largely because of tight oil according to the US Department of Energy. This is important for Angola where oil exports account for about 46% of the GDP and 96% of its exports. In fact, the net impacts on exporters will depend on their ability to find other markets, and the conditions under which they do so.
But the fracking revolution is also happening in China where an increase in fracking with the same size in the trade shock would double the effect. Shale gas has indeed been listed as a priority in China’s 12th Five-Year Plan (2011–15). By 2015 the Beijing government aims to finalise a country-wide survey on the size and location of its shale gas reserves and on the suitability of the deposits for exploitation and production. In its Five-Year plan, the Chinese government has set an ambitious production target of 6.5 billion cubic meters (bcm) of shale gas production by 2015, rising to perhaps 60–100 bcm per year by 2020. Moreover, in 2009 the Chinese government signed a ‘Memorandum of understanding on collaboration on shale gas exploration’ with the US which was followed by an inflow of transnationals investing in China’s shale gas potential, including Shell and ExxonMobil.
As a result of fracking, Chinese imports of gas could be 30–40% lower in 2020. Natural gas supplier Turkmenistan would be affected since current exports to China are equivalent to 5.19% of the GDP . In addition, China plans to develop tight oil production. Oil producers Angola and Republic of Congo are estimated to experience a decline in GDP of considerably more than 1% if fracking in China has an effect on their exports similar to that estimated for the US.. The shock would be equivalent to 13.08% for Congo, 12.55% for Angola, 9.23% for Oman, 5.02% for Equatorial Guinea, 4.1% for Yemen and 3.08% for 3.08. Sudan and South Sudan combined would suffer a shock equivalent to 4.8% of their aggregated GDP.
The fracking revolution in China could even have geopolitical implications such as reducing tension with Japan over the Diaoyu/Senkaku Island dispute, which according to The Economist magazine is due to the unexplored gas underneath these islands. While the US and China should benefit from a greater energy independence, Europe will be faced with an imperative to reduce its dependence on energy imports from Russia which would pull the demand for shale gas, eventhough countries like France are still banning the technology. Meanwhile Russia, the Middle East and OPEC are expected to lose in political terms. For non-oil exporting developing countries the economic impacts can be expected to be broadly positive, through growth effects and reductions in the cost of importing energy. Net oil importers such as India, Senegal and Zambia could benefit from oil price reductions induced by fracking.
Other winners could be the other owners of substantial shale gas reserves. According to the Energy International Agency’s estimates, just after the US and China which have the most important technically recoverable shale gas reserves, with respectively 1,161 trillion cubic feet (tcf) and China (1,115 tcf) respectively, Argentina follows suit with an impressive total of 802 tcf, followed by Algeria (707 tcf), Canada (573 tcf), Mexico (545 tcf), Australia (437 tcf), South Africa (390 tcf), Russia (285 tcf) and Brazil (245 tcf).