Will China Miss Out on the Shale Energy Revolution?

Consider this striking paradox: Just as the Energy Information Administration announces that new shale discoveries are driving record increases in U.S. proved oil reserves and near-record additions in proved natural gas reserves, huge energy companies are reporting sagging production and profits.  Royal Dutch Shell, for example, posted a 60-percent drop in second-quarter profits, largely because of drilling disappointments at its North American shale assets.  Exxon Mobil, the largest American energy company, reports a 57-percent drop in quarterly earnings.  It, too, has had trouble capitalizing on the U.S. shale boom.  Ditto for Chevron.

Skeptics will point to Big Oil’s difficulties as evidence that what many have taken to calling the “shale gale” is more hype than reality.  But it more likely confirms the thesis set out a year ago by Philip Verleger, a noted energy expert.  He posits that the winners of the shale revolution will be nimble companies capable of quickly drilling on a vast number of low-cost sites, rather than “Exxon-type” integrated oil companies that “excel at developing a few very expensive, highly productive projects that yield high-cost supplies.”

Verleger’s point about organizational constrains is underscored in a new essay put out by the Center for Strategic & International Studies.  In it, Jonathan Chanis, an emerging markets specialist, argues that:

The proximate cause of the US energy revolution is technological, but the more important cause is better industry organization and a more agile and adaptable oil and gas business culture…

… One of the primary reasons the US natural gas industry is so successful is because it is composed of thousands of independent companies.  These companies are innovative and they are able to deploy nimbly hundreds of rigs and other exploration and production assets.

So far, much of the burgeoning U.S. production of shale oil and natural gas has come from independent companies, and not the well-known multinational giants.  Indeed, a recent survey of 50 of the world’s biggest energy producers found that they are facing sharply rising production costs and shrinking profit margins.  And yet for every Exxon and Shell, there are smaller, more fleet-footed energy companies that have managed to increase output, cash flow and earnings.

All of this has stark implications for China, which is making a big push to increase its shale gas production. Continue reading

U.S. Energy Boom: Thank You George Mitchell

UPDATE (August 2, 2013): The Energy Information Administration yesterday reported that, largely because of new shale discoveries, U.S. proved crude oil reserves increased 15 percent in 2011.  This represents the second consecutive year of record increases, and brings U.S. proved oil reserves to their highest level since 1985.  EIA also found that U.S. proved reserves of natural gas jumped 10 percent in 2011, the second-largest annual increase since 1977.

—–ORIGINAL POST—–

The future is not what it used to be due to George P. Mitchell, the Texas wildcatter who passed away last week.*  He helped usher in a new era of American dynamism by perfecting the hydraulic fracturing techniques (“fracking”) that have unlocked vast gas and oil deposits previously thought inaccessible within tightly-packed shale rock beds that underlie large sections of the United States.  As well-known energy Daniel Yergin puts it, “George Mitchell, more than anyone else, is responsible for the most important energy innovation of the 21st century.”

Along the way, he played a major role in demolishing two humongous chunks of the conventional wisdom that consigned America to a reduced position in the world. Continue reading