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From rags to riches: the revolution of shale oil and gas

By Miguel Braun
For The Herald

Unconventional fossil fuels are revolutionizing the energy sector and impacting geopolitics and the global economy. This revolution, though, is neither automatic nor straightforward: shale gas and shale oil face environmental, institutional, economic and geological complications which, so far, only the US has been able to bridge effectively.

The worldwide debate on new fossil fuels is relevant for Argentina as a country that consumes energy and should consume more if it expects to develop; which is already a producer of traditional fossil fuels; and which has the world’s second-largest reserve of shale gas and the fourth of shale oil.

Understanding how the world is changing with these new energy sources is important to understand the new opportunities and challenges our country will face.

Until recently, the standard paradigm regarding energy has been reasonably stable. In 1956, M. King Hubbert, a geologist, anticipated that gas and petroleum production in the US would peak in 1970 and decline from there on. The theory of Peak Oil or Hubbert’s Peak was highly influential for decades and is now in question because of the arrival of unconventional fossil fuels.

Some say the paradigm of scarcity is over and has been replaced with that of affluence. The latest report by the US Energy Information Administration (EIA) points in that direction: since the last report in 2011, the EIA finds in 2013 that the number of countries with technically recoverable shale oil and gas resources has gone up from 69 to 137. The EIA also saidshale oil and tight oil now represent 10 percent of total oil reserves worldwide, and shale gas 32 percent. In other words, there are shale resources aplenty and that technological advances rapidly increase the stock of recoverable resources.

Other voices curb this enthusiasm; this is the case of Richard G. Miller and Steven R. Sorrell who, in a recent issue of the Philosophical Transactions of the Royal Society, say that shale could provide some short-term relief but that the long-term trend described by Hubbert remains valid. Despite these contrarian voices, the new consensus is that of affluence, and this affluence will have serious consequences.

From 2005 to 2013, shale gas production in the US grew from 5 percent to 35 percent of total gas production, and something similar happened with oil. This has allowed the US to surpass Russia as the biggest gas producer in the world. Estimates suggest that by 2020 the US would be a net gas exporter and that tight oil production would increase in a way that would dramatically reduce the US dependence on foreign oil. For oil-exporting countries, this would mean having to find new clients and it would imply lower prices and less leverage in world affairs. Net importers, on the other hand, would benefit from this development. In Latin America, oil exporters such as Colombia, Mexico and Venezuela would be hurt, and net importers such as Chile and Uruguay would benefit.

Reality is a bit more complex, and there is a reason why only the US has so far been able to cash in on the shale revolution. The first concern is environmental. The process known as fracking has received criticism from environmental activists for several issues, including potential contamination of aquifers. One of the voices expressing this concern has been that of Michael R. Bloomberg, a former mayr of New York, in a recent piece in The New York Times. The debate rages on, with companies saying that these risks can be properly handled and opinion polls showing growing resistance. As Bloomberg says, strong regulatory frameworks and enforcement mechanisms are of paramount importance so that production proceeds following good practices and standards to guarantee environmental protection. Other concerns point to economic and institutional issues that increase the gap between “technically recoverable” resources and those which can effectively be recovered.

This debate is key for Argentina. According to the EIA, the Vaca Muerta formation in Neuquén holds 308 billion cubic feet of gas and 16.2 billion barrels of oil. How much is that worth? Federico Sturzenegger, an economist and congressman, estimates the value of the reserve at 7 times Argentina’s GDP. He arrives at that number valuing the reserves at the current WTI price for oil and the current prices of gas in the US.

The opportunity is huge, but some caveats are in order. Those estimates value the “technically recoverable” resources, which might not be economically recoverable, and if they were, other problems could surface.

In the most optimistic scenario, the investment flows would present the danger of a “Dutch disease” — an ultra competitive sector could lead to the appreciation of the currency and consequently to a loss of competitiveness for the rest of the economy. Managing this newfound richness prudently will require knowledge and political consensus, which have been in short supply in Argentina. In a less optimistic scenario, one would have to ask how likely it is to attract investment if only the US has so far been able to develop this sector.

The shale revolution represents an enormous economic opportunity for Argentina. The country could leverage investment in the energy sector and the consequent low gas prices to develop a competitive industrial sector and push the country towards sustainable development. However, the risks and complexities entailed will require serious planning and consensus.

@braunmi

* Miguel Braun is executive director of Fundación Pensar, a think-tank run by the PRO party.

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