The Gift: Energy Security and Economic Growth from Unconventional Oil & Gas

CAPP 2025 Forecast

The latest economic reports paint a discouraging picture of our anemic economic recovery.  Our politicians in Washington seem more interested in scoring points with each other than resolving the problems that prevent a return to sustainable growth.  Back home on Main Streets across America the locals are (1) worried; (2) angry and (3) ready for change we can really believe in, this time.

Meanwhile, right before our eyes are regular reports about profound changes taking place in our energy markets as a result of advances in technology.  I’m talking about the spectacular growth in domestic oil and natural gas production from unconventional sources.  This week saw another signpost of this transformation underway as the Canadian Association of Petroleum Producers released their 2011 Forecast which increases, yet again, the estimate of recoverable energy from oil sands north of the border by an additional 401,000 barrels per day by 2025 over the forecast a year ago to more than 3.7 million barrels per day by 2025.

Separately, Morgan Stanley said that the growth in unconventional natural gas production and the low relative natural gas prices in North American meant that we could expect LNG exports to exceed 6 bcf/d by 2015, or around 10% of the current US daily production of 60 bcf/day. Morgan Stanley said it expects the growth of LNG export to raise both the US and Canadian natural gas prices by creating a pull from global market demand for natural gas.

This is both good news and a warning.

Only a few years ago, the United States domestic natural gas production was waning as older conventional gas plays were being depleted faster than they could be replaced.  On top of this depletion rate acceleration was the US government resistance to off-shore drilling, to Alaska drilling and the prospect of cap and trade legislation making fossil fuel production much more costly.

We faced the very real prospect that natural gas would be imported to meet domestic needs as liquefied natural gas (LNG) from many of the same places we get imported oil compounding our energy security problems.  Russia, Qatar, Algeria and others seriously tried to create an LNG cartel modeled after OPEC to fix prices on global LNG supplies.  The Morgan Stanley report this month tells us there is a growing global market for natural gas that threatens to intensify the link between oil and natural gas prices.  Such a linkage is bad news for America’s economy and global energy consumers.  That bad news will be worsened by decisions in Germany to prematurely retire its nuclear power plants and in Japan where the aftermath of the tsunami impacts is causing a similar revisiting of reliance on nuclear energy.  Both nations are likely to increase demand for natural gas as a consequence.

The Gift: Unconventional Oil & Gas

What changed for America was the application of advanced technology in horizontal drilling techniques to gain access to smaller, previously uneconomic oil and gas deposits in shales.  Combined with hydraulic fracturing to improve shale oil flow through the rocks and better 3D seismic E&P practices to locate even more potential sources of oil and gas around the world, the energy business has been turned on its head.

America today is the undisputed global leader in unconventional oil and gas production and the results of that technological prowess are on display in the results from the Barnett to the Bakken Play from Texas to Canada.  Even the depressed Midwest coal regions of the Appalachia have new hope from the shale deposits in the Marcellus Shale beneath Pennsylvania, West Virginia and New York.

Use It or Lose It

But as with many such opportunities the market rule is ‘use it or lose it’ to others willing to step up so today America has a choice.  We can continue to allow the government to resist, frustrate and regulate into a standstill the advancing domestic oil and gas production from unconventional sources like these shales doing the same thing to them that has been done to the Gulf of Mexico and Alaska—virtually shut it down while President Obama goes off to Brazil and promises to be a good customer for the offshore deepwater production made possible because the US government drove the oil rigs out of the Gulf by its moratorium on drilling.

Domestic energy production brings domestic energy security and growth.  Secure, reliable, low cost domestic energy production re-opens the door to American manufacturing and further advances in technology.  Look at North Dakota’s thriving state economy and the impact that expanding domestic energy production can mean to the economy.

The gift of domestic energy resources and the technology to turn them into sustainable economic growth is one way out of our current economic funk.  But it is more than that it begins to break the back of American dependence on imported energy supply.  It restores the competitive advantage of American manufacturing. It reduces the constraints of OPEC and China on our economy and keeps more of America’s dollars at home by putting them to work again.  And that rising tide of economic recovery whittles away at our huge deficit and national debt.

We only need one thing to make it work—-our own government must get out of our way!