Articles

Fracking Revolution and the Foreboding Signs

14 Jan 2013

Views: 6,117

Font Size: a / A

Goodluck-Jonathan-10099.jpg-Goodluck-Jonathan-10099.jpg

President Goodluck Jonathan

With the discovery of shale gas as an alternative energy source by the United States, a major importer of Nigeria’s crude oil, and shale gas drilling ban lifted in the UK, Ejiofor Alike writes that this may have ominous implications on Nigeria’s oil and gas exports, and its economy in no distant future    

Recent developments in the global energy dynamics have raised doubts over the capacity of crude oil to sustain the Nigerian economy in the next few years. As the mainstay of Nigeria’s economy, crude oil accounts for over 80 per cent of the country’s revenue.

Nigeria exports an average of 2.2 million barrels of crude oil per day and consumes roughly 286,000 barrels per day, according to United States Energy Information Administration (EIA).

However, the discovery of shale gas as a source of energy, especially by the US, China, India, United Kingdom and other major importers of Nigeria’s crude oil and gas, has fuelled concerns that the country’s oil and gas exports could suffer a decline in the next couple of years.

US Shuts its Doors

The US produces 10.128 million barrels of crude oil per day, emerging as world’s third-largest producer, after Saudi Arabia and Russia. It is however the world’s largest consumer of energy, with an average consumption amounting to 18.949 million barrels per day. To plug that deficit, about 8.821 million barrels per day are imported by the US from other countries.

Nigeria’s crude oil export to the US had accounted for over 40 per cent of Nigeria’s crude exports and roughly 10 per cent of US imports. However, horizontal drilling and hydraulic fracturing have made it possible for the US to produce large volumes of shale gas as a source of energy and this is impacting on the country’s crude oil imports from Nigeria.

Data from Energy Information Administration (EIA), the US government agency on energy statistics, also shows that for the last nine years, the US has imported between nine and 11 per cent of its crude oil from Nigeria. But the US import data for the first half of 2012 showed that Nigerian crude is down to a five per cent share of total US crude oil imports, as the production of natural gas from shale formations is increasingly providing an alternative source of energy in the country.

According to the data, Nigerian Liquefied Natural Gas (NLNG) exports to the United States substantially declined in 2011. Similarly, Brass LNG, a new liquefied natural gas production facility, which is scheduled for construction this year after the execution of the Final Investment Decision (FID), has had its gas supply agreement to the US cancelled.

When contacted, an official of Brass LNG, who preferred not to be named, confirmed the cancellation of the gas supply contract, stating: “The Brass LNG has responded by moving all sales from the US to Europe and the Far East.” 

He insisted, however, that the discovery of shale gas would not affect business and the FID. “The FID will still be taken this year. 

It will not affect the FID,” he said.

At the moment, an estimated 95 per cent of the natural gas consumed in the US in 2011 was produced domestically. As such, the availability of large quantities of shale gas would enable the US consume predominantly gas sourced from the domestic market for many years and produce more natural gas than it consumes. 

EIA’s Annual Energy Outlook 2013 is estimating that the US’ natural gas production would increase from 23.0 trillion cubic feet in 2011 to 33.1 trillion cubic feet in 2040, a 44-per-cent increase. Almost all of this increase is due to projected growth in shale gas production, which grows from 7.8 trillion cubic feet in 2011 to 16.7 trillion cubic feet in 2040.

The US has the world’s second largest technologically recoverable gas reserve estimates of 862 trillion cubic feet, after China’s 1,275 trillion cubic feet.

In the US, fracking, the process through which shale gas is released from rock formation, has slashed domestic gas prices and there could be similar effects on household energy in the UK.

Implication for Nigeria

With shale gas providing an alternative source of energy in the US, Nigeria’s crude oil export to the country, which stood at over one million barrels per day (bpd) in December 2009, has declined to 352,000 bpd as at February 2012, representing a loss of about 70 per cent of the US’ market.

Before the latest drop to 352,000 bpd, Nigeria’s crude exports to the US had previously plummeted to 580, 000 bpd in September 2011, with the country assuming the sixth position, after Canada, Saudi Arabia, Mexico, Venezuela and Russia.

Shale gas is no doubt a global energy game-changer for the US, accounting for about 25 per cent of the country’s natural gas supply. Acknowledging the ominous signs, the Coordinating Minister for the Economy and Minister of Finance, Dr. Ngozi Okonjo-Iweala, was recently quoted in a media report as saying that the Federal Government was concerned about the dwindling US crude oil imports from Nigeria. 

“These are some of the reasons we went for a sensible $75 benchmark price in view of the changing nature of oil supplies in the world’s principal markets and the possible impact on demand. The discovery of shale oil and gas in the United States are long-term fundamental factors that we must pay attention to. 

“Nigeria cannot afford to bury her head in the sand oblivious to changing energy trends in the world. It is in our best interest to respond proactively to these trends. The consequences of not doing so could be very unpleasant not only for us but future generations too,” she was quoted as saying.

But Nigeria appears not to be getting the message and is blind to the foreboding clouds on the horizon. Speaking on this development at the sidelines of a recent oil and gas conference in Lagos, the Group Managing Director of the Nigerian National Petroleum Corporation (NNPC), Mr. Andrew Yakubu, stated that China had become the alternative market for Nigeria’s crude oil, following dwindling imports by the US, which was a major buyer of Nigeria’s crude oil.

 “The decision by the United States is not driven by the fact that they don’t want to buy our oil; they have other issues. Shale gas has been discovered and it is a major source of energy. But of course, the good news is that there are other parts of the world that are interested. As you know, major demand growth is going to come from China and the east. So that is a very good replacement of whatever shortfall we have with the United States,” he said.

China Can’t Fill the Gap 

China is the world’s most populous country and the world’s second-largest consumer of oil behind the United States, and the second-largest net importer of crude oil. 

China is also the fourth world’s largest producer of crude oil, accounting for 4.288 million barrels per day. The country is also the second largest consumer, with 8.924 million barrels per day consumed internally. China’s crude oil imports account for about 4.635 million barrels per day of the country’s consumption.

In recent years, China has demonstrated increasing appetite for Nigeria’s oil and gas resources. The Chinese National Offshore Oil Corporation (CNOOC), one of China’s largest state-run oil and gas producers, bought a 45-per-cent stake in Oil Mining Lease (OML) 130 field, which is owned by South Atlantic Petroleum. CNOOC has also been scouting for overseas oil and gas assets to supply China’s growing demand for energy. 

But China, which has the largest technologically recoverable shale gas reserves, has also commenced the process of tapping this source of energy. Recent reports indicate that Chinese companies recently submitted fresh bids for licences to explore for shale gas in the second auction of its kind held by the country’s Ministry of Land and Resources.

According to one of the reports, the auction drew 152 bids from 83 companies, with some bidding more than 1 billion yuan, about $160 million, for licences in highly prospective areas.

China is said to have 50 per cent more shale gas than the United States and in March 2012, the Chinese government estimated that the country has 25 trillion cubic metres of potentially recoverable reserves of shale gas, which is enough to sustain demand for about 200 years.

The Chinese government has reportedly set a target of producing 6.5 billion cubic metres per year by 2015, and 100 billion cubic metres by 2020.

To equip Chinese companies with the technological skills to tap shale gas, China’s state-owned energy giants have invested billions of dollars in North America, where fracking was pioneered. For instance, in July 2012, CNOOC announced it would pay $15.1 billion to acquire Canada’s Nexen, which produces shale gas in British Columbia.

China’s focus on shale gas as alternative source of energy will not allow it play the role of an alternative market for Nigeria’s crude oil. Though refineries in China and the whole of Asia may desire to increase crude oil imports from Nigeria, it is however, more difficult to ship crude oil from Nigeria to Asian countries than to the US because of the long distance.

For instance, the distance from the Shell’s Bonny Export terminal in Rivers State, to Tianjin, China, is 12,172 miles, compared with 5,847 miles to New York Harbour in the United States. The implication is that with these long distances, Asian traders are already demanding discount for Nigeria’s crude oil.

India Supplants the US

India is another Asian country in dire need of energy, with consumption of crude oil estimated at 3.4 million bpd. With an average production of about 782,000 bpd, India is dependent on other countries for the imports of about 2.48 million bpd to meet its domestic requirements.

Though import figures are not readily available, it is estimated that India has overtaken the US as the largest importer of crude oil from Nigeria. Okonjo-Iweala confirmed this recently.

To buttress her point, the National Bureau of Statistics (NBS) data for the first quarter of 2012 showed that India had overtaken the US to become Nigeria’s major export trading partner. The Indian High Commissioner to Nigeria, Mr. Mahesh Sachdev, also recently told THISDAY of his country’s interest in higher volumes of term contracts of crude oil supplies with NNPC.

Sachdev stated that expanding the volumes of term contract of supplies with NNPC would reduce his country’s current huge reliance on spot market purchases of various Nigerian crude, adding that “if this is done, it would help engender greater stability to Nigerian crude exports to India, already their largest buyer.”

The NBS report, which put the total value of the nation’s exports in the first quarter of 2012 at about N4.9 trillion, showed that the total value of exports to India reached N688.5 billion compared to N607.7 billion credited to the US in the period under review.

The US was trailed by the Netherlands with N482.1 billion followed by Spain at N390.4 billion and Brazil at N328.9 billion.

However, the N4.9 trillion total export mark recorded with India in the first quarter however represented a decrease of about N2.1 trillion or 30.3 per cent over the figure in the preceding quarter. The NBS report attributed the decline in the value of exports to the decrease in the value of non-crude oil exports, especially from products of the chemical and allied industries, plastic, rubber and articles, wood and textile, among others.

Nonetheless, to reduce dependence on imported crude oil, the Prime Minister of India, Mr. Manmohan Singh, said in March 2012 that his country had started mapping out its shale resources, with plans to finalise exploration rules by 2013. India’s biggest energy explorer, Oil & Natural Gas Corporation (ONGC), and other companies may drill for at least four years before producing the first commercial shale gas in India, according to a recent Bloomberg report.

Chairman of ONGC, Sudhir Vasudeva, reportedly said the company was studying shale gas deposits and also waiting for the government to release the rules on commercial drilling for shale gas. “We are studying data, but it is still early days and may be four to five years before commercial drilling starts. If China and Australia can talk more about their reserves and production, it’s because they have been working on this for a while now,” Vasudeva said.

India holds 6.1 trillion cubic feet of technically recoverable shale gas reserves in three basins, according to the US Geological Survey, in its recent report. This estimate was however less than 10 per cent of the 63 trillion cubic feet estimate made by the EIA. 

As the new market for Nigeria’s crude oil, India’s focus on shale gas as an alternative energy source has disastrous consequences on Nigeria and her economy. 

Don’t Place Bets on Japan 

Another potential buyer of Nigeria’s crude oil, Japan for instance, relied on oil imports to meet about 42 percent of its energy needs in 2010. Though the third world’s largest consumer of crude oil, Japan is not a major importer of Nigeria’s crude oil, as much of the country’s crude supplies come from Russia.

Japan is the second largest consumer of Russian oil in Asia, and there is no prospect of the country becoming self-sufficient. However, Japan imports LNG from Nigeria. In fact, Nigeria’s LNG exports to Japan more than tripled in 2011, according to the EIA.

As the world’s 47th largest producer, Japan accounts for production of only about 135,000 bpd. But with a daily consumption of 4.464 million bpd, the country plugs the gap through imports of 4.329 million bpd. With this volume of imports, Japan is a potential market for Nigerian crude oil.

However, Japan recently discovered its first domestic shale oil deposits and about 100 million barrels of shale oil could be extracted from the deposit, the equivalent of about 10 per cent of Japan’s annual consumption.

UK Lifts Ban on Fracking

The United Kingdom is the largest producer of oil and second-largest producer of natural gas in the European Union (EU). According to the EIA, after years of being a net exporter of both fuels, the UK became a net importer of natural gas and crude oil in 2004 and 2005, respectively. Production from UK fields has declined steadily over the past several years, as the discovery of new reserves has not kept pace with the maturation of existing fields. The UK produces 1.157 million bpd and imports 450,000 bpd to meet internal demand.

Aware of the country’s increasing reliance on imported fuels, the UK government has developed key energy policies to address the domestic production declines. These, according to EIA, include: enhanced recovery from current and maturing oil and gas fields, ensuring energy security, promoting cooperation with Norway, and decarbonising the UK economy by investing heavily in renewable energy.

Also recently, the UK government lifted restrictions on the controversial practice of fracking used in extracting gas from shale rock. This development could lead to the production of billions of dollars of gas and reduce the country’s dependence on imported crude oil from Nigeria and other major exporters. It is estimated that the UK has about 200 trillion cubic feet of shale gas reserves.

According to a recent report in the UK’s Daily Mail, David Cameron, the British prime minister, believes shale gas would eventually bring down prices of gas in the UK. 

About Shale Gas

Shale gas, according to the Energy Information Administration (EIA) of the US, is a natural gas that is trapped within shale formations, which are fine-grained sedimentary rocks that can provide rich sources of petroleum and natural gas. 

Shale gas is extracted by hydraulic fracturing or fracking, a process in which water, chemicals, and sand are pumped into the well to unlock the gas trapped in shale formations. By opening cracks or fractures in the rock, natural gas is allowed to flow from the shale into the well. 

The two top importers of Nigeria’s crude oil – United States and China – have commenced production of shale gas as an alternative source of energy. From a strategic point of view, the production of shale gas will lower the US dependence on oil from the Middle East, a goal it is already achieving with the recent announcement that oil imports to the country have been reduced by 25 per cent.

Shale gas has become an increasingly important source of natural gas in the US since the start of this century, and interest has spread to potential gas shales in the rest of the world. In 2000 shale gas provided only 1 per cent of US natural gas production; by 2010, it was over 20 per cent and the US government’s EIA predicts that by 2035, 46 per cent of the US’ natural gas supply will come from shale gas.

Environmental 

Concerns Persist

Despite increased production of shale gas worldwide, extraction of the resource as an alternative energy fuel has raised environmental concerns due to the emissions of harmful gases during the drilling of the gas. In other words, the gases emitted from the drilling of shale gas are more harmful than the gas encountered from the drilling of conventional gas.

According to the British Geological Survey (BGS), the volumes of water and the chemicals used in fracking and their subsequent disposal also pose environmental risks. BGS also raised concerns over the possible risk of contaminating groundwater; competing land use requirements in densely populated areas and the physical effects of fracking in the form of increased seismic activity that could lead to earthquakes.

Fracking was earlier suspended by the UK government, following concerns by environmentalists that the chemicals used were harmful but was lifted last December by the country’s Energy Secretary, Ed Davey.

Through hydraulic fracturing - the injection of large volumes of water, sand and chemicals at high pressure into the ground to shatter rock formations – this action releases trapped gas.

However, environmentalists have linked fracking to small earthquakes in Canada, the US and UK. Apart from the fact that chemicals used in the drilling technology could contaminate water supplies, there is also concern that extracting more gas would also speed up the unwanted process of climate change.

Technologically Recoverable Global Shale Gas Reserves Estimates

Country

Shale Gas

Reserves

(Trillion)

(Cubic feet)

China

1,275

US

862

Argentina

774

Mexico

681

S/Africa

485

Australia

396

Canada

388

Libya

290

Algeria

231

Brazil

226

Poland

187

France

180

Others

647

Source: World Shale Gas Resources: An Initial Assessment of 14 Regions outside the United States, EIA, April 5, 2011; Primary Source:  KPMG report.

World Crude Oil Consumption, Country by Country

Country

Barrels

per day

US

18.9m

China

8.9m

Japan

4.5m

Brazil

2.8m

Canada

2.3m

Germany

2.4m

Iran

2.0m

S/Korea

2.2m

Mexico

2.1m

Russia

2.7m

S/Arabia

3.0m

Australia

1.0m

France

1.8m

Indonesia

1.1m

Italy

1.5m

Netherlands

1.0m

Spain

1.4m

UK

1.6m

Source: United States Energy Information Administration

Top Importers of Crude Oil

Country

Barrels

per day

US

8.9m

China

4.635m

Japan

4.329m

India

2.48m

Australia

505,000

UK

450,000

Indonesia

124,000

Brazil

106,000

           

Source: EIA

Tags: Featured, Fracking, Goodluck Jonathan, Nigeria, Business

Comments: 0

Rating: 

 (0)
Add your comment

Please leave your comment below. Your name will appear next to your comment. We'll also keep you updated by email whenever someone else comments on this page. Your comment will appear on this page once it has been approved by a moderator.

comments powered by Disqus