America Is Blowing The Shale Revolution

We recently declared the fracking debate was over. Despite clear evidence of the shale boom's local environmental impacts, it's probably added around 50 basis points to GDP, shrunk the trade deficit, and created tens of thousands of jobs.

Despite all that, Goldman Sachs believes America has left tons of figurative barrels and cubic feet on the table by not more aggressively investing in spurring demand. While the U.S. share of global upstream (i.e. production) investment outpaced funds into Saudi Arabia and Russia by 10:1, the rest of the world outspent the U.S. on demand-side investment - places to put all those resources - by 15:1.

"...Far less attention has been paid to the economic opportunities North America has failed to harness from the revolution," Goldman's Steve Strongin, Jeff Currie and Daniel Quigley warn. "Instead, the United States seems more on track to export shale, as the United States has lagged other countries in generating the demand - and the high-value manufacturing jobs that come along with this demand - needed to consume shale gas. In this respect, we believe that the shale revolution may stall and not see the full longevity of the "demand response" phase."

What we are experiencing, the Goldman team says, is a failure of ambition and foresight on the both public and private sides of the energy policy equation.

"To successfully develop domestic gas demand over the longer term, business and government leaders need to work together to solidify the confidence that is required to attract capital over the next 30 years," they write.

How big could the missed opportunity get? Goldman projects up to 2 million new jobs could be created over the next decade, 1.0% of additional GDP, and at least a 5% incremental reduction on greenhouse gas emissions.

Goldman sees three main areas where demand for shale resources could be expanded. First, manufacturing. Despite what you may have heard about a manufacturing renaissance, Goldman says that on a comparative basis the U.S. has massively underspent to transition its manufacturing base toward its newfound shale stocks.

Next up is transportation. Goldman says that spending up to $5.1 trillion to boost gas-based capacity in our vehicle fleet would allow us to reduce our energy bills by as much as 10% by 2035. Consumers would see the most immediate return on natural gas-based ethanol, for which, as it currently stands, there is almost no refining capacity in the U.S. Plus, the renewable fuels standard makes no exception for this kind of ethanol, further impeding its adoption. While the cost of doubling down on gas-based ethanol could run as high as $3.7 trillion, "... Just because something costs a lot does not mean it's not worth doing," Goldman argues.

There is another scenario whereby the U.S. doubles down on electric vehicles. This would cause electricity demand to surge, which in turn would stimulate demand for more natural gas power plants. Even a gradual shift would accomplish this:

Based on our supply/demand analysis of the US power market, we believe the new capacity our base case forecast includes could meet gradual increases in electric vehicle demand for power, but could add 8-10 Bcf/d in natural gas demand from the US power sector. We also assume that this incremental natural gas generation would lead (relative to our base case) to a minor increase in CO2 emissions from the power sector, albeit an increase of only 5%-10%.

Finally, there's the power and environment case: If we switched out all unscrubbed coal plants with natgas plants (a scenario not likely to be fully realized, but a version of which is not out of the question) natural gas-fired power generation would grow by 22 Bcf/d over the next 25 years, to 40% from 23% of the overall power mix. Goldman:

Natural gas plays two important roles in a successful environmental power strategy. First, it provides the bridge away from coal toward cleaner renewables - gas is more able to respond in the short term to coal retirements (for example, by increasing utilization at current facilities). But second, it is an important complement to renewables, able to respond at short notice to the intermittency of renewables generation.

We're already begun to feel the effects of our lack of investment. While there was ample natural gas around to get us through the grueling winter, electricity prices spiked anyway because the gas could not be delivered to where it needed to go. While much of the country enjoyed the standard price of $4/mmBtu, prices in large metro regions in the northeast soared to above $120/mmBtu due to lack of adequate infrastructure.

Policy and market design adjustments throughout the Northeast appear necessary to enable more potential gas/power customers - whether those of regulated utilities, merchant power companies or large commercial/industrial companies - to enter multi-year gas/power contracts that could then stimulate more gas infrastructure development. Alternatively, clarity to producers that pipeline expansions will be approved over an acceptable investable time horizon are likely be needed for producers to fund new pipelines. Both of these outcomes could lead to additional supplies of gas flowing to New England markets and accommodate greater residential/commercial use of natural gas, reducing the use of fuel oil.

So where do we wind up if the status quo persists? Goldman says we appear shockingly willing to allow exports to carry American resources outside our shores, and all because we can't be bothered to put in the effort to allow it to be consumed here. This will provide some growth, but far less than what could be accomplished.

A clear commitment to keeping the export ban in place would stimulate downstream refinery capex investment to catch up to the upstream investment, helping to absorb growing domestic light crude production. On the other hand, if the export ban was lifted, US crude oil production would realize its strongest growth potential. However, with domestic prices converging back to seaborne crude oil prices, the margin advantage of domestic refiners would diminish and limit capex growth in the downstream sector. While export volumes would increase, the United States would be exporting the "value added" of processing its shale oil along with these barrels.

A strong indictment.