The Frackers: The Outrageous Inside Story of the New Billionaire Wildcatters (46 page)

THE GLOBAL VIEW—THE REVOLUTION CONTINUES

Never make predictions, especially about the future.

—Casey Stengel

Jack Stark, Continental Resources’ senior production executive, sat on a dais at the Hilton Americas hotel in Houston in early March 2013 before a standing-room-only crowd of hundreds of energy executives.

Just a few years earlier, industry leaders had little interest in what Stark or anyone else at Continental had to say. Now Stark was on a first-day panel at CERAWeek, one of the energy world’s most important annual conferences.

Alongside Stark were senior executives of several big oil companies, including Schlumberger, Apache Corp., and Statoil ASA. Their topic—the latest developments in oil production from “tight” rock, including North Dakota’s Bakken formation—was among the hottest on the day’s agenda. It was a sign of how much had changed for Stark, Continental, and the energy business.

Stark and his fellow panelists received loud applause when they finished, leaving Stark in great spirits. Descending the podium, he walked straight to the conference’s main hall, where hundreds of industry members had gathered, looking for someone to chat with. He didn’t recognize a soul, however. There were executives from China, the Middle East, and South America. But Stark couldn’t find a familiar face in the entire room. He walked the length of the hall once, but didn’t see anyone he knew. He searched again—nothing.

Eventually, Stark found someone, though she was no oil executive, engineer, or geologist. She was a reporter for a trade magazine.

Stark had received a glimpse into the future of the shale revolution. For more than a decade, headstrong wildcatters worked to discover techniques to extract oil and gas from shale and other challenging bedrock in the United States. Now the focus is shifting to whether energy can be pumped from shale deposits around the world.

Some foreign locales are packed with even more oil and gas than American formations, raising the possibility that the shale gale will have a tailwind affecting global economics and geopolitics. But there are good reasons to be skeptical about whether many foreign formations will produce significant amounts of energy anytime soon. For now, the new age of energy plenty appears to be a distinctly American phenomenon, creating the potential for a new era of U.S. economic outperformance.

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E
uropeans have been worried for years about where they might find future energy supplies. Almost every country on the continent is a net gas importer, and many resent a reliance on countries like Russia and Algeria, which in the past have turned off their spigots amid pricing disputes.

Now they have reason to be excited about ending that dependency. An estimated 470 trillion cubic feet of gas is buried in various European shale formations, or the equivalent of about thirty years of gas use on the continent, even excluding Russia or the Ukraine, which have nearly as much gas.

The continent has far greater population density than the United States, however, and more powerful environmental lobbies. France, Bulgaria, and a few other nations have already banned hydraulic fracturing due to concerns about environmental damage. A lack of experienced drilling crews and limited pipeline and other infrastructure also handicaps Europe. A sign of how little is going on is that the continent had about seventy rigs operating as of 2013, according to brokerage firm Raymond James, compared with seventeen hundred in the United States.

Poland, a fiercely independent nation that’s been under Russia’s thumb for centuries, has been among the most eager nations to tap its own shale gas resources. Poland’s natural gas prices were about 50 percent higher than those in the United States as of early 2013, another reason the country has pinned its hopes on shale drilling.

Early predictions pointed to an estimated 187 trillion cubic feet of proven, recoverable shale reserves in Poland, enough to satisfy the nation’s needs for three hundred years at current levels of demand. The reserves, which lie under Warsaw and Lublin and stretch all the way to the country’s Baltic Sea coast, were considered among the largest in Europe outside Russia.

Major players like ExxonMobil, ConocoPhillips, Marathon Oil, and others raced to Poland to buy up acreage in 2010, and the Polish government subsidized the development and handed out exploratory concessions covering a third of the country. The first flare from a shale gas well, dubbed the “Flame of Hope,” was religiously symbolic to many in the predominantly Catholic nation. The Polish foreign minister spoke about the country becoming “a second Norway,” referring to Poland’s wealthy, oil-rich neighbor to the north.

Air quickly came out of the Polish bubble. In early 2012, estimates for the country’s shale reserves were cut by 90 percent. The richest parts of Poland’s shale formations are so deep, at over sixteen thousand feet, and the shale has such high silicon content that extraction has proved difficult.

ExxonMobil, ConocoPhillips, and others beat a hasty retreat from the country, though at least part of the decision likely stemmed from a desire by some to avoid offending Russia, one of the largest energy players in the world. Chevron and others still seem committed to Poland’s shale formations, but by the spring of 2013 fewer than fifty wells had been drilled there.

The United Kingdom is a likely participant in the shale energy revolution, at least at some point, for a number of good reasons. The nation is seeing a marked slowdown in production from its prized North Sea oil beds. The country has been importing gas since 2004, relying on Norway and the Netherlands, and is in an increasingly precarious position when it comes to key energy supplies. In March 2013, Britain came within six hours of running out of natural gas entirely, the
Financial Times
reported, as wholesale gas prices surged to record levels.

Two tremors in the spring of 2011 around the town of Blackpool caused deep unease when they were linked to fracking efforts, leading to a ban on fracking. The government ended the ban in late 2012, however, and has announced tax breaks to kick-start shale drilling. Writing in the
Daily Telegraph
in August 2013, Prime Minister David Cameron argued that “if we don’t back” fracking technology, “we will miss a massive opportunity to help families with their bills and make our country more competitive. Without it, we could lose ground in the tough global race.”

The county of Lancashire is seen as a potential hotbed of shale activity, as is the area between Liverpool and Manchester, which was a major locus of the Industrial Revolution. That’s led to visions of an industrial revival in the area. Acreage about thirty miles south of London has also sparked excitement.

It likely will be years before a true gusher of oil or gas results from this dense rock, however. For one thing, it’s still unclear how much gas is trapped in the nation’s shale. Some estimates have placed the country’s recoverable gas reserves at a puny 26 trillion cubic feet; others judge there to be more than 130 or even 200 trillion cubic feet, enough to power Britain’s homes for over a hundred years.
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So far, few major, international energy producers have drilled in the country. Cuadrilla Resources, which shifted its sites to the UK after the cost of acreage in Pennsylvania proved too expensive, was one of the nation’s only shale gas driller as of the summer of 2013. The company, now chaired by Lord Browne, the controversial former head of oil giant BP, remains among the most bullish on the nation’s shale prospects.

The hurdles are high, though. In Britain, mineral rights don’t belong to landowners, as they do in the United States, but to the Crown. That makes licensing agreements to drill the rock very complex. Cuadrilla had drilled just six wells in the UK as of 2013. Britain is one of the world’s most densely populated countries, and unease among the populace remains high. When an energy executive visited Leeds University in late 2012, a group of protestors disrupted the lecture and mooned the speaker through the window, with “
FRACK-OFF
” written on their bums, a sign of the popular unease that likely will slow drilling. In August 2013, Cuadrilla suspended oil-drilling activity in Balcombe, a village south of London, after local police warned of threats against the exploration site, though drilling resumed within days.

It didn’t help that in 2013 Greenpeace taped someone it claimed was a Cuadrilla public relations executive saying, “I know that everything I say sounds like utter, fucking bullshit,” as he tried to argue that his company could drill safely in the densely populated region.

If environmental concerns can be addressed, the UK likely will pursue shale drilling, if only to help the nation shift from its growing dependence on coal, a dirtier energy source. The country relies on coal for more than 40 percent of its electricity needs, up from 30 percent in 2011.
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In fact, use of coal has grown even as the country’s production has slipped. The United Kingdom had to import nearly forty-five million tons of coal in 2012, up almost 40 percent in a year, according to the UK Department of Energy and Climate Change. Coal use is expected to fall, but for now the UK indeed is carrying—and importing—coal to Newcastle.

There’s more excitement over Mexico’s potential to become a serious shale producer, partly because the country shares similar geology with its northern neighbor. Mexico boasts 545 trillion cubic feet of recoverable shale gas, the sixth largest such reserve in the world, according to the U.S. Energy Information Administration. There’s also a serious amount of shale oil buried in Mexican rocks, helped by the fact that the Eagle Ford formation that’s proved so prolific in South Texas extends well into northern Mexico. Mexican officials have pushed to exploit the country’s shale as the nation’s net energy imports grow and a nation that once was an oil power frets about its shrinking stature in the energy world.

But there’s real concern that Mexico, which suffered a severe drought as recently as 2012, doesn’t have sufficient water supplies to expend on fracking. Just as important, Mexico’s state-owned energy power, Petróleos Mexicanos (PEMEX), doesn’t yet have the resources to drill in shale and has resisted working with U.S. oil and gas companies.

Foreign energy companies have been reluctant to make meaningful commitments to Mexico because they haven’t been allowed to gain any ownership of the company’s shale wells, though the government says it is committed to making that possible. There’s also limited independent data to verify how much gas is in the country.

Cheap gas might easily be imported from nearby fields in the United States, also reducing the urgency for Mexico to develop its own shale resources. As a result, fewer than a dozen wells have been drilled on the Mexican side of the border so far, with just a handful more expected by 2016.

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W
hen an American geologist named Charles Edwin Weaver visited Argentina’s western Neuquén province in 1931, he got a good look at a unique outcropping of shale that was black in color, but speckled with white. The formation, in the arid Patagonian province, resembled the hide of a cow, so Weaver named it the Vaca Muerta, or dead cow.

Today, the Vaca Muerta and other Argentinian shale basins have spurred more excitement than those of almost any other country. Argentina has an estimated 802 trillion cubic feet of recoverable shale gas, the second most in the world and enough to satisfy the nation’s consumption for a remarkable five hundred years, experts say. The country’s shale deposits are believed to hold twenty-seven billion barrels of oil, the fourth most in the world. Not only that, but Argentina’s formations resemble some of the most prolific areas in the United States. “The rock looks quite similar to the Eagle Ford,” says Mark Papa of EOG Resources.

Foreign investment was chilled when President Cristina Kirchner expropriated a 51 percent stake in Argentina’s state-run energy company, YPF SA, from Spanish energy giant Repsol in 2012. But in the summer of 2013, Chevron agreed to fund most of a $1.5 billion joint venture with YPF to develop the country’s shale deposits.
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Argentina’s ongoing dispute with Repsol could continue to dissuade foreign companies from investing in the country, and the cost of fracking and drilling Argentinian shale can be twice that of U.S. rock. “It’s too early to form a judgment about whether it will be commercial,” Papa says. “It’s the first inning.”

Russia is sitting on an estimated 285 trillion cubic feet of gas, as well as a humongous oil formation, the Bazhenov in western Siberia. It may be eighty times larger than the Bakken and stretches over an area larger than Alaska and California combined. The Bazhenov could supply hundreds of billions of barrels of oil, explaining why Exxon and others have been trying to gain a foothold in the area.

It may be a while before Russia gets around to tapping its shale reserves, however. Its reserves of conventional energy are so vast that the country hasn’t seen a need to focus on shale.

Even the most ardent environmentalist hoping to contain climate change through renewable energy might feel tempted to root for shale development in China. The nation, the world’s second largest economy, burns coal like it’s a national pastime. Coal accounts for as much as 80 percent of Chinese electricity production, resulting in persistent air pollution and reduced life expectancy.

China’s greenhouse gas emissions are almost twice those of the United States, and they’re growing at more than 8 percent a year. There’s really no way to make headway against global warming unless China can be weaned off coal, but the country is expected to boost coal-fired power by twice the total generating capacity of India by 2020. At that point, China will emit greenhouse gases at four times the rate of the United States. Even if American emissions somehow were to disappear, global emissions would be back to current levels in four years, due to China’s growth alone, according to Elizabeth Muller, cofounder of Berkeley Earth, a nonprofit organization focused on climate change.

Muller and others argue that the United States should take a more aggressive stance on helping China tap its shale. China has the largest measured shale gas reserves in the world at 1,115 trillion cubic feet, according to the Energy Information Administration, as well as the third largest reserves of shale oil in the world. In 2012, China’s state council opened the gates to limited foreign investment in local shale plays, and the government has been a fan of shale drilling. Chinese companies have invested billions in U.S. shale plays, hoping to learn the tricks of the trade.
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