The shale revolution: Environment and trade implications

13 May 2014

Shale gas has become not only an energy exploration and production issue, but has been catapulted up national policy agendas, now impacting macro-economic policy, global environmental debates, public health and safety concerns, as well as energy security questions and potential trade flows.

The basics of the geology of shale gas deposits have been known for more than half a century, so there is no revolution in the sense of a sudden and unexpected discovery of the existence of shale gas. The technological challenge has been to extract it at commercially viable costs from rock formations that are deep underground or buried under bodies of water. In this respect, the relatively recent development of two extraction technologies – hydraulic fracturing and horizontal drilling ­­– have made recovery economically feasible. In an earlier article in BioRes, I outlined some of health and environmental concerns, as well as presented preliminary reflections on the potential for trade in liquefied natural gas (LNG) derived from shale gas. This article explores reservations around fugitive methane emissions and the changing energy mix, as well as digs deeper into the trade landscape.

Leaky methane

Although shale gas supporters tout the climate change mitigation potential of an increased consumption of shale gas – due to lower greenhouse gas (GHG) emissions than those from coal consumption – serious questions do remain about emissions related to exploration, extraction, and transport. During these three processes there can be significant emissions of methane, a GHG long-known to be much more potent than carbon dioxide. As of early February 2014, the range of estimated methane leakage rates in the US was from less than 1 percent to as much as 19 percent.

Important studies by large teams of experts with diverse backgrounds reported in papers such as Miller et al. [Ref 1] have found that US Environmental Protection Agency estimates of national methane fugitive emissions are too low. A study by Allen et al. [Ref 2]and in a series of ongoing studies sponsored by the Environmental Defense Fund and nine energy companies, methane emissions rates were measured directly at more than 500 wells nationwide. Because the nine energy firms participating in the study were voluntary funders, the study was not based on a randomly selected, representative sample of firms. Nevertheless, based on the results from the wells that were studied, plus estimates for other wells not in the study, the total national methane fugitive emissions rate for natural gas was estimated to be 0.42 per cent, slightly less than the previous US Environmental Protection Agency (EPA) estimate of 0.47 percent. However, for certain stages of shale gas production, in particular, the results for well completions were lower than previous EPA estimates, but higher than EPA estimates for valves and equipment leaks. Although this study added significant new data to the discussions, clearly many more studies will be needed before there is a consensus on the methane leakage rates from the shale gas segment of the industry and from the industry as a whole, and other studies are in progress.

Shaking up the energy mix

Over the longer term, a key issue is whether cheap, abundant shale gas will undermine investment in renewable energy sources. Already in the US, with the significant decrease in the price of natural gas and a consequent decline in electricity prices produced in natural gas-fired power plants, the competitive position of wind, solar, and other renewable energy sources has been weakened. The future shares of those technologies in the energy mix are thus also undermined. In some scenarios, therefore, while the substitution of shale gas for coal to produce electricity may yield a net reduction in GHG emissions in the short run, the increasing share of shale gas and concomitant smaller share of renewables may yield a net increase in emissions by deferring deployment of low-carbon energy sources. Yet, cheap natural gas may also indirectly support investment in renewables by lowering the overall price of electricity and thus reducing opposition to renewable subsidy costs. [Ref 3]

When it comes to shale gas’ effect on coal use, thus far in the US, there has been a significant decline in coal consumption for electricity power plants. At the same time, domestic consumption and production of coal have also declined, while coal exports have substantially increased in recent years. For example, 2012 was a record-setting coal exporting year looking at the last half century since 1950, and during the first half of 2013, exports were at about the same level as in the first half of 2012. The implications for climate change, of course, is that declining domestic US coal consumption and thus falling carbon dioxide emissions are at least partially offset by increasing consumption of exported coal and thus higher carbon dioxide emissions outside the US.

Trade implications

When discussing shale gas trade and international price differences, it is also important to understand the differences in the cost of production. Because shale gas production on a commercial basis has thus far occurred only in the US, it is not yet possible to make international comparisons on the basis of actual production data. Even if shale gas deposits in other countries turn out to be as great as or even greater than current estimates, it will be as much as a decade or more before the entire gamut of facilities and skills will make many countries’ shale gas internationally competitive with the US. This is likely to be true even after taking into account changes in exchange rates and their relationship to cross-national differences in inflation rates, together with international transportation costs. Given these conclusions, there are reasons to think that the US will continue to be a low-cost supplier for many years and, therefore, that some industries will experience significant shifts in international patterns of competitiveness.

Many questions still remain about the future of trade in natural gas. Will Australia be a principal source of internationally traded natural gas in the Asia-Pacific region, especially through exports to China, India, and Japan? Will Argentina, Brazil, and Mexico become major exporters and to whom? Will the US become an important shale gas exporter? What impact will US shale gas use have on the international competitive positions of firms in industries, such as chemicals, steel, and aluminium in the US and other countries? Will European dependence on natural gas imports from Russia and Qatar decline? Even though this is not an exhaustive list of questions, it is sufficient to convey the diversity and importance of potential trade patterns emerging over the next many years, maybe decades.

So far, the international gas market has consisted to a great extent of three regions — Europe, North America, and increasingly, the Asia-Pacific region — with a great deal of intra-regional trade within them, but with some significant inter-regional trade as well, especially exports from North Africa, the Middle East, and West Africa. These regionalised pipeline and LNG patterns — plus regional differences in pricing practices — have combined to create a “balkanised” world trade system in natural gas, with pipeline trade in Europe and North America physically separated from each other and the rest of the world.

In that system, there have been large inter-regional differences in prices. However, the rapid increases in US production of low-cost shale gas, the prospect of eventually significant production of shale gas in other countries and exports of it in other countries, the potential for large-scale shipments of LNG at great distances, and the continuing growth in energy demand in Asia are all creating pressures toward more inter-regional trade.

These patterns are relevant to the future of international trade in several respects. First, they are indicative of countries that already have in place the physical infrastructure and associated skills for importing or exporting. Individual LNG gasification facilities for export and de-gasification facilities for imports cost in the order of US$10 billion to construct. Of course, they will need to be scaled up if there is significant additional trade in natural gas. Moreover, the differences between pipeline transport and LNG maritime shipping will be crucial determinants of the types of scaling up required. Second, the current patterns of trade provide benchmarks against which new shale gas trade levels can be compared to gain a better perspective on the energy and economic significance of absolute magnitudes of trade.

All this means that US government policies concerning LNG exports are now under increased scrutiny after having been the concern for decades of a limited circle of industry specialists. The Canada-US Free Trade Agreement (CUSFTA), agreed in 1987, included a chapter on energy trade that guaranteed open access to bilateral imports and exports of oil, gas, and uranium. Exports of natural gas are generally subject to authorisation on a case-by-case basis by the Department of Energy under the Natural Gas Act. Under the terms of the FTA, however, Canada was exempted from this requirement. This treatment was extended to 17 partners in later FTAs. [Ref 4] These include Australia, Bahrain, Chile, Colombia, the Dominican Republic, El Salvador, Guatemala, Honduras, Jordan, Mexico, Morocco, Nicaragua, Oman, Panama, Peru, Republic of Korea, and Singapore. There has been intense discussion and lobbying about the possibility of loosening these restrictions. Domestic chemical firms and other manufacturers that use natural gas have put pressure on the US government to limit exports in order to maintain the current relatively low price of natural gas, which is an important feedstock in their production processes. Some key members of the US Congress — including the Chairman of the Senate Energy Committee, Senator Ron Wyden — have also called for restrictions on exports. In May 2013, however, President Obama approved the construction and operation of a new export LNG facility to be developed by Exxon in Texas at a cost of about US$10 billion. Another project has been approved and yet others are in the application/approval pipeline.

All this means that US government policies concerning LNG exports are now under increased scrutiny after having been the concern for decades of a limited circle of industry specialists. 

Addressing opportunities and challenges ahead

Given methane’s potency as a GHG, all of which have inherently global impacts, fugitive methane emissions require global solutions. As a first step, this implies a need for a comprehensive and precise system of measurement, reporting, and verification within the context of the UN Framework Convention on Climate Change (UNFCCC).

Furthermore, there should be a comprehensive, worldwide system of verifying the levels of natural gas emissions associated with any international trade transactions in natural gas. Importers should be required to certify methane emissions levels, based on exporters’ declarations, with the exporting government’s confirmation and independent third-party verification. International standards of emissions for pipeline and LNG transport ought to be developed and implemented. This will probably require the involvement of two sets of industries, governmental agencies and international agencies—the former concerned with pipelines and the other with maritime shipping. Several international institutions, including the International Maritime Organisation (IMO) in particular, will thus need to be involved in such efforts.

And as the production of coal for export replaces production for domestic consumption—in some countries at least—the challenges of computing, analysing, and reporting the sources of CO2 emissions and the allocation of them to producing-exporting countries and importing-consuming countries becomes more pressing. Thus, there is a need to refine the MRV systems of the UNFCCC as well as other international agencies’ reports and databases and in national government reports of emissions, in order to incorporate explicitly the GHG emissions that are embedded in international trade.

Finally, subsidies can be legitimate means to address the positive externalities associated with renewable energy sources and enhance economic efficiency. While local content requirements attached to subsidies may be problematic, non-discriminatory subsidies are in a different category. Better understanding is needed concerning whether and how WTO rules would conflict with the use of non-discriminatory subsidies for renewable energy.

As well as the institutions mentioned above, others such as the Organisation for Economic Co-operation and Development (OECD), the International Energy Agency (IEA), the Major Economies Forum on Energy and Climate (MEF), and the associated Clean Energy Ministerial (CEM) have a role to play in addressing these issues. The negotiations for a Trans-Pacific Partnership (TPP) and a Transatlantic Trade and Investment Partnership (TTIP) are also obvious venues for international cooperation on natural gas trade, investment, and technology transfer questions. The expertise of the secretariat of the Energy Charter Treaty on topics associated with international trade through pipelines and in the form of LNG — and its work more generally on international trade and investment issues in natural gas — should enable it to make additional contributions to the understanding of technical issues associated with pipeline and LNG trade. The International Standards Organization (ISO) should address standards and certification issues about fugitive methane releases.

In Europe, the combination of regional-level EU discourse and policymaking, plus the diverse array of the EU’s national members and non-members as natural gas exporters and importers, offers a rich opportunity for developing approaches to industry practices and government policies that are sensitive to intercultural differences in attitudes toward sustainable development and to modes of international cooperation. The US will have a special role moving forward, given the relative advancement in its shale gas technology, exploration, production, and infrastructure – as well as policy discourse in some respects.

At the local level, key questions about shale gas are largely about the implications of exploration and production for local public safety, health, employment, and quality of life. These questions ought to be addressed in local political processes to decide according to local priorities, within relevant subnational and national political-legal frameworks. At the same time, where there are nationwide concerns about these problems, national policymaking processes ought to be engaged, and indeed scaled-up to the international level where appropriate. In fact, where shale gas basins transcend international boundaries, safety, health, and environmental concerns are truly both local and international.

This paper is adapted from a longer research piece published by ICTSD: The Shale Gas Revolution, Implications for Trade and Sustainable Development, ICTSD, March 2014.

 

[Ref 1] Miller, Scot M. et al. (2013), Anthropogenic emissions of methane in the United States, Proceedings of the National Academy of Sciences, vol.110.

[Ref 2] Allen, David T. et al. (2013) Measurements of methane emissions at natural gas production sites in the United States, Proceedings of the National Academy of Sciences.

[Ref 3] Baron, Richard (2013), Renewable Energy: a Route to Decarbonisation in Peril? Paper prepared for the 29th Round Table on Sustainable Development, OECD, Paris.

[Ref 4] NERA Consulting (2012), Macroeconomic Impacts of LNG Exports from the United States, Report for the US Department of Energy, Washington. 

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