The Accidental Superpower

by Peter Zeihan

  Until costs are recovered, any investment that a firm puts into a shale project cannot be redeployed. Think of it like buying a house. Until you have paid your mortgage off it is difficult to gather the financial resources to get a second one. A good shale oil well only produces about seventy-five barrels a day across a span of twenty years. Even when you consider that a third of that output will be in the first year or three, it still takes at least a year (with oil prices at $100) to hit breakeven.

  This financial factor puts an onerous limitation on where a shale industry can develop. The broader economy must boast a financial sector that is so rich, liquid, and stable that all those scores of billions of dollars of committed funds do not crimp credit availability for the rest of the economy. You think shale is somewhat controversial now, imagine if the American credit system were sufficiently constrained that a successful shale industry meant your mortgage payment increased by half.8 If the local/national credit pool isn’t absolutely huge, shale just isn’t a viable industry. Luckily for the Americans, as the world’s premier capital safe haven, they have the largest, deepest, and most liquid capital market in the world. Europe could have pulled it off until their financial crisis struck. With the exception of Japan (which has no shale), there just isn’t enough money anywhere else in the world to generate a robust shale industry.

  2. Highly Skilled Labor

  Drilling a winding shaft into a complicated, variable-density geology several thousand feet underground in order to inject a pressurized fluid that will precision-crack a rock formation in real time so that the hydrocarbons trapped within are funneled up a well shaft is every bit as hard as it sounds. Moreover, every single well—even two wells on the same drilling pad—is different. This is not a job for the faint of heart or the faint of skill. Each well crew has to know precisely what they are doing and has to be in command of skills ranging from engineering to geology to chemicals9 to fluid dynamics. This is not a task for a handful of state-owned oil thugs who got their jobs as part of a nationalization program, but for people with years of experience who benefit from the trust of their superiors to make adjustments as they go. Each well requires a crew of high-skilled petroleum engineers and support staff able to operate in a variety of environments with minimal supervision.

  But there will never be shale gushers. A successful industry will be drilling thousands of wells a year. That means you need not one energy firm, or even dozens, but hundreds. And you also need thousands of extremely capable petroleum engineers.

  Only the United States, with its tradition of small businesses, low barriers to entry, and an advanced educational system that specializes in outside-the-box thinking, can generate the necessary labor pool for a shale industry to thrive. Over the life of the global petroleum industry some 5.5 million wells have been drilled, 4 million of which were completed within the United States. In the past five years 99 percent of the horizontal wells drilled globally are in the United States.10 Every other country might have the required staff to tinker with shale, but no one at present can even attempt to make it an industry.

  3. A Legal Structure That Rewards Landowners for Their Participation

  Any attempt at a shale sector is manpower-and equipment-intensive. Across a shale basin that is many tens of thousands of square miles there will be significant pressure on local infrastructure—most notably roads—as well as chronic demand for all of the items ranging from foodstuffs to entertainment to lodging that come with any highly localized economic boom. The cost of everything from rents to groceries can be reliably counted upon to at least triple, and the traffic and noise from rig crews constantly coming, going, building, breaking, and commuting is far from insignificant. For a shale industry to be successful, local buy-in is absolutely critical, and the best way to make sure that this happens is to give the local community a say in the development process and a slice of the profits.

  In the United States roughly two-thirds of all land is privately owned—a legacy of the country’s origin as a settler state and the smallholder tradition of the pioneer era—so firms must contract directly with landowners in order to drill. This does more than simply make landowners millionaires—typical contracts give leaseholders a 12.5 percent revenue share—it also pours money directly into local government coffers because they can tax both the energy production and the landowners’ income and land.

  To Americans this might seem obvious, but it is far from normal. In every other country in the world, the national government holds the subsoil rights. Local governments and landowners will not get a dime of direct money (whether from taxes, development fees, or production royalties) from the actual shale production—only the national government gets that. It also means that national governments decide when and where energy production happens regardless of the wishes of the landowners, much less the local homeowners’ association. In places like the Middle East and the former Soviet Union where desert and tundra drilling doesn’t impact a local population, this isn’t so critical a factor, but in China, Latin America, and Europe this factor alone dooms potential shale industries.

  4. A Preexisting Natural Gas Collection, Transport, and Distribution Infrastructure

  The final requirement has to do with the nature of the output. Shale wells produce not just oil, but oil and natural gas, and herein lies a problem. Oil is a liquid and so can be trucked, barged, railed, or piped anywhere you want. The multitude of transport options allow shale oil production to be very quickly monetized. And if you’re not quite ready for it, you can simply pump it directly into a tanker truck until the pipe infrastructure gets up and running. Well over 90 percent of the active well work going on in the United States right now is looking for oil and associated petroleum liquids11 that are nearly as easy to store and move.

  Natural gas, however, is, well, a gas. It cannot be trucked, barged, or railed efficiently except under extreme pressure, which poses extreme costs for additional equipment and not insignificant safety issues for all involved. It also cannot easily be stored. At standard pressure it takes 1,400 cubic feet of natural gas to generate the power of one cubic foot of crude.

  Unlike oil, which is omnipresent in usage, natural gas suffers from the chicken/egg conundrum so far as transport is concerned. A shale natural gas industry requires an infrastructure that links up preexisting pressurized pipeline networks to preexisting points of demand. If you do not have that, you not only have to build it from scratch but build the actual demand from scratch as well.

  The same holds true for other types of infrastructure. Shale wells require hundreds of truck trips, and truck trips require, well, roads. Shale developments in virgin territory first require the development of a spiderweb of interconnected transport arteries. In the United States where energy production has been colocated with populated territories for over a century in places like Pennsylvania, Texas, and Oklahoma this is already in place. But in most of the rest of the world energy production has long been in remote, unpopulated areas like the North Sea, the Arabian Desert, or Siberia.

  Europe and Argentina have solid systems nearly as good as the Americans’ on both the infrastructure and preexisting use questions. Russia and Australia have the long-range transport pipes, but not the grid of roads. Few other locations have either. However you slice it, the answer to the infrastructure question is multitrillion and multidecade.

  Put together these are exacting requirements. Few places in the world meet more than one of them, and only the United States has all of them.

  The Benefits of Shale

  Many of the benefits of shale energy are fairly obvious.

  Like any new industry, its mere existence generates jobs. Back in 2010, the most recent year for which there is reliable data, the sector had generated 150,000 fresh jobs itself, plus another 200,000 jobs in related industries such as transport, mining, and steel. Additional induced jobs—those created by other sectors that take advantage of all the new local energy sources—probably added another 250,000.12 W
hy so many? Since per-well production levels drop off so radically, maintaining output requires maintaining drilling. A large and growing shale industry, therefore, requires ever more engineers along with ever more of everything else associated with production.

  Environmentally, natural gas is the cleanest fossil fuel from the point of view of emissions, whether those emissions be carbon dioxide, sulfur, or mercury. Because of shale, New York City was able to switch en masse from fuel oil—which is right up there with coal in terms of its pollution profile—to natural gas in less than a year. Specifically, burning natural gas releases about one-third less carbon into the atmosphere than oil and half that of coal—in addition to the fact that there is no attendant sulfur, nitrogen oxides, mercury, or other contaminants.13 This is where the methane leakage issue becomes critical. Unburned methane is a powerful greenhouse gas, trapping twenty times more heat than carbon dioxide over a hundred-year time horizon. The EPA estimates that even with the massive increases in shale gas output, U.S. methane emissions are actually down about 5 percent since the onset of the shale era. That, of course, is not the same as saying that shale-related methane emissions are zero. For the argument that using natural gas is better for the environment than coal to stick, shale-related methane emissions need to be below about 3 percent of total production. Currently the EPA estimates that the industry is slightly below half that level. Driving that number down further is probably the best way the industry can not only claim to be green, but also gain the public trust. The way to do that is through better well completion—which will, among other things, prevent the natural gas from leaking into aquifers.

  And even though shale seems water-intensive on the production side, shale natural gas is actually one of the least water-intensive energy sources over the entirety of its fuel cycle because it requires no water in its processing and transport. Total water usage as measured against the amount of energy generated comes out to about 1.1–1.6 gallons per million Btu. That’s roughly one-fifth that of coal or nuclear, and one-sixth that of oil.14

  There is also the price factor. Shale has produced so much oil in the American heartland that it has slashed oil prices by $10–$15 a barrel in the United States compared to the world as a whole. Even being very conservative with the math, that is saving the American consumer $100 million a day.

  Then there is the security factor. If shale energy expands output in the Lower 48, then only events in the Lower 48 can disrupt Lower 48 energy production and consumption patterns. Rebelling Chechens, marching Russians, striking Norwegians, rioting Nigerians, exploding Palestinians, and chest-thumping Iranians don’t get as much of a vote in U.S. energy policy as they used to. And within a few short years they won’t get a vote at all.

  So those are some of the obvious benefits. Now let’s turn to some of the less obvious ones.

  Shale and Geography

  Spatially, the most notable thing about shale energy is where it is (and will be) produced in comparison to traditional forms of energy. The following map highlights the world’s major producing basins, both for oil and natural gas. It is a familiar map with concentrations in places like Siberia, the Persian Gulf, the northwestern Australian shelf, Nigeria, the North Sea, and the Gulf of Mexico—all places that are difficult to operate in, whether technically or politically. I’ve placed this information on the same map as the Earth at night. Why? Because the lights are where the people with money live. Much of the geopolitical angst of the past seventy years has been about getting the energy from where it is produced to where the lights are. Everything from the Arab oil embargo to the European-Russian squabbles over Ukraine to the Iran-Iraq War to all things Israeli are at a minimum heavily tinged with international energy politics.

  Shale changes that, and it is very easy to see—and I mean literally see—how.

  My personal shale eureka moment came a cold night in December 2012. My partner, Wayne, a pilot, had seen something out on one of his many airborne adventures that he insisted I needed to see for myself. So he loaded me into a Skyhawk 172R and off we flew. For an hour I watched the blazing I-35 corridor below our right wing while he chatted intermittently with various air traffic controls. At one point their discussion got decidedly lively, prompting us to plunge a few hundred feet just in time to dodge an aluminum whale barreling through at half the speed of sound. Wayne let fly a string of less than complimentary comments about a certain Dallas-headquartered airline.

  As I finished relocating my stomach from the plane’s ceiling to where God had intended it to be, Wayne directed my gaze outside. Apparently the descent—if not its rate—was part of the plan. We were now south of San Antonio, flying over some of the least populated parts of Texas. Aside from a thin, irregular spiderweb of roads and small towns, it should have been dark. Instead an array of lights like some incredibly lost aurora boiled up from the horizon. As we continued to the southwest the aurora did the damnedest thing. It stayed on the ground.

  Wayne shouted an explanation over the engine roar: “It’s natural gas flaring from the Eagle Ford shale.” He pronounced it like a northerner, as two words. Not like the “Eagleferd” that I’d become used to hearing. “They’ll break up into individual spots here in a minute.”

  And so they did. The diffuse, horizony glow coalesced into hundreds of dots of light, a bright yellow-orange clearly distinct from the whites and white-greens of the car headlights and streetlights that they shared the ground with. Constellations of constellations stretched to the horizon all around us, with hints of that misplaced aurora lingering beyond the ten miles of detail that we could see.

  It is one thing to crunch the numbers and gain an academic appreciation for what shale means, or to visit a shale pad site and witness the sheer intellect required to make shale a local reality, but seeing it like this made it all just seem so… big. I may be from Iowa, but I’ve lived in Texas for over a decade. I’d like to think my appreciation for size has evolved.

  Upon our return to Austin I pulled up some more recent maps. Shale development maps. Population density maps. It occurred to me that the Eagle Ford wasn’t the only shale basin in Texas, much less the United States, which took me to more recent Earth-at-night satellite photographs. You can see them—the Barnett, the Permian, the Haynesville, the Woodford, the Fayetteville, the Niobrara, the Antrim, the Marcellus, the Bakken, all of them—from space, hundreds of thousands of well lights that are bit by bit remaking how the United States sees the world.

  Which led me to make this:

  I’ve replaced the traditional energy basins with the known shale basins. There are two takeaways. First, there is very little overlap between the traditional basins and the shale basins, so any current energy producer who might due to geological blessings be able to try their hand at shale will still need a decade or three to build the infrastructure required. That, at a minimum, suggests a reshuffling of the global energy deck.

  Second, and far more important, nearly all of the United States’ “lights” are close to, if not on top of, shale basins. For the Americans, this means that the role of international energy supply chain guarantor is no longer something that they are doing for themselves at all—it is only something they are doing for their Bretton Woods allies. It also means that the Americans are one of a small handful of countries that has managed to colocate their production and consumption of energy. That has obvious security implications—if your city’s energy comes from wells that are just outside the suburbs, it would take a particularly aggressive (para)military effort to impact energy prices, let alone knock the lights out. But less obvious is that it isn’t cheap to move energy. It takes oil to move oil. In all it takes about 1 million bpd of crude oil—refined into various fuels, of course—to move the rest of the crude oil around the planet. Oil that the U.S. ships in from the Eastern Hemisphere travels on one of the longer shipping routes of the modern day. As shale output ticks ever upward, fewer long-haul trips need to be taken, meaning that the American shale revolution has a
lready sliced about 50,000 bpd off of global energy demand simply from transport savings.15

  Shale, Transport, and Electricity

  Despite the radical difference in transport difficulty and market price between oil and natural gas, natural gas is being produced anyway because in shale the two petroleums are often found commingled; production of the oil inextricably results in production of natural gas. Even though many energy firms now see this associated natural gas as a waste product, it still makes economic sense to construct the necessary gathering infrastructure and link it into the national distribution system.16 The result is regional price crashes as shale gas supply overwhelms preexisting natural gas demand, or even overwhelms preexisting natural gas transport infrastructure.

  Even leaving aside the other factors that argue for a bigger future shale boom, such price crashes are not a short-term development. First, the break-even price for shale natural gas production keeps going down, and lower break-even prices make more basins profitable. Second, while no other country is likely to experience its own shale boom, U.S. firms can work in Mexico and especially in Canada with limited restrictions, potentially adding vast volumes to “local” supplies with the commensurate downward pressure on prices.

  Third, the cheapness of natural gas is inducing producers and developers to limit natural gas output where possible. In some cases this means that entire basins—like the Gulf of Mexico offshore—are shutting down. Such locations already boast all the infrastructure they need to produce, and so could be brought back online with a few months of work should prices rise. Shale basins are even better in that regard. Most shale developers are only developing oil-rich plays at present, but as part of that effort they must still install the road and legal infrastructure necessary for natural gas production. Drilling new shale gas wells in such areas would only take weeks to months—not years. And because shale well output rapidly drops over time, price crashes are somewhat self-correcting. Best of all, should prices spike, wells that have already been drilled can be refracked to bring up their output rates—a process that doesn’t require new permitting, contracting, or infrastructure.