The impact of the shale revolution

 The success of the shale revolution in the US and its looming penetration into Chinese energy production is a major threat to current and potential African energy exporters. The development of hydraulic fracturing, or fracking, has already led to a significant decline in African oil and gas exports to the US.

The downturn in revenue from the US and the threat of a similar trend in China, if that country is successful with its fracking efforts have placed African leaders under significant pressure to preserve the revenue gained from oil and gas exports before a potentially considerable drop in national earnings occurs.

In its 2014 Annual Energy Outlook, the US Energy Information Administration (EIA) estimates that the net import share of total US energy consumption will reach 4% in 2040, compared with 16% in 2012 and 30% in 2005.

Oil from unconventional "tight" deposits increased fourfold in 2008‑12, during which time its share of total US crude oil production increased from 12% to 35%, according to the EIA. This rapid rate of production growth has prompted speculation in the US that net imports could even fall to zero by the 2030s.US imports in decline.

The development of shale production in the US has reduced the country's traditional reliance on energy imports from Africa, leaving countries such as Angola, Algeria, and Nigeria (as well as numerous smaller producers) exposed to damaging trade shocks. A recent report by a UK think-tank, the Overseas Development Institute (ODI), on the impact of fracking on developing countries calculates that the total estimated effect of a reduction in US oil imports from African countries amounts to US$32bn since 2007—including US$14bn in Nigeria, US$6bn in Angola and US$5bn in Algeria. The report goes on to show that exports to the US from those three countries have dropped to their lowest levels in decades, declining by 41% in 2012, mainly on the impact of shale oil production.

Going east China looks set to be the dominant driver of global energy consumption growth in the coming years. Rising demand in that country has resulted in imports of gas reaching 30% of total gas consumption in under a decade. China's existing energy consumption is 70% coal-based, but its government is eager to endorse cleaner forms of energy, because of ongoing environmental and health issues, and looks set almost to triple its gas consumption by the end of the decade.

Shale gas fits within this remit and is a vital part of the country's 12th Five-Year Plan (2011‑15). The government has set a challenging production target of 6.5bn cu metres of shale gas production by 2015, increasing to an estimated 60bn-100bn cu metres/year by 2020, which could lead Chinese imports of gas to drop by 30-40% if successful fracking operations occur. It is a similar case for the potential production of shale oil. China's plans to increase its current low-level production of shale energy could ultimately release (or, at the very least, reduce significantly) the country's dependency on foreign energy supplies.

Trade shocks would be widely felt

The impact of lower Chinese demand for energy imports would be keenly felt in Africa. The larger current producers—Nigeria, in particular—would feel the impact most sharply. Nigeria's fiscal revenue is dominated by oil, but it has failed to save sufficiently to cover the potential gap in revenue collection between a significant drop in energy exports and the necessary reorientation of the economy that this would require.

Oil savings have been eroded in recent years by government profligacy and an overvalued fixed exchange rate. Nigeria's much-delayed sovereign wealth fund (SWF) contains just US$1bn; by comparison, Botswana, with a population just 1.2% the size of Nigeria's, has an SWF worth close to US$7bn. However, these funds pale in comparison next to those of oil producers such as Saudi Arabia, Norway and Abu Dhabi, which each have more than US$600bn in assets. If a drop in oil productivity was to occur, it would create further fiscal and social challenges.

Angola, the second-largest oil producer in sub-Saharan Africa after Nigeria, also stands to lose substantial revenue should oil exports be hit by declining demand. In 2008 the US imported an estimated 513,000 barrels/day (b/d) from Angola, but that dropped to 217,000 b/d in 2013, highlighting the country's vulnerability to external trade shocks. Although China is a more important export market than the US (Angola is the source of 14% of Chinese oil imports), oil exports account for around 46% of Angola's GDP and 96% of its exports, and the country would be heavily exposed if China followed the US example of declining demand for energy imports. 

The impact would also affect smaller and newer producers. Ghana began oil production in 2010, with gas soon to follow. Oil will overtake gold to become Ghana's largest export in the next five years, highlighting the threat posed by lower global demand. Equatorial Guinea—where hydrocarbon sales represent more than 95% of total exports—has seen exports to the US drop by nearly 75% between 2008 and 2013. China has replaced the US as the main destination for its hydrocarbons exports, and a drop in Chinese demand would hit the country hard. 

Any potential slackening in Chinese demand may also have an impact on the continent's new oil and gas exploration frontier in East Africa, where Uganda, Kenya, Tanzania and Mozambique are all developing ambitious plans for oil and gas production and exports, mainly targeting Asian markets. Concern over a possible global supply glut of liquefied natural gas (LNG) is already causing some projects to be reassessed, and while East African countries are well placed geographically to serve the growing Asian market, they are also heavily exposed to changing Chinese demand growth trends.

Exports continue to count

It is, however, important not to overstate the threat of unconventional production in China. Indeed, China's landmark gas deal with Russia (signed on May 21st) will see a natural-gas pipeline send 38bn cu metres/year of gas from Russia to China for 30 years, starting in 2018, thus illustrating that independent energy production may grow more slowly than hoped for in Beijing.

It is likely that African energy exporters will not be marginalised as suppliers to China, but they will face competitive pressure if sustained shale growth continues. Africa's oil and gas production is evolving as its economy grows, and large, unexploited reserves are being tapped. Nonetheless, the fall in revenue from US exports should serve as a wake-up call for African exporters to look to other markets for export opportunities, in order to sustain the current rate of revenue created from energy exports.

UK shale gas

Beyond the debate for and against fracking lies the important question of
whether the prospect of shale gas exploitation in the UK is such that we
should pin the future direction of our energy policy to it.  Following the
publication of a report by the House of Lords’ Economic Affairs
Committee on the economic impacts of shale gas, it seems fit to
examine this issue from an economic, energy security and climate
change perspective.

While we won’t know the exact production cost of UK shale gas until
exploration is under way, major analysts, including the International
Energy Agency (IEA) and Bloomberg New Energy Finance, have
provided some educated estimates on the issue based on known
differences in regulation, geology, population density, property rights
 and industry maturity that exist between the US and the UK. 

What comes out clearly from those estimates is that UK shale gas is
unlikely to be extracted fast enough, cheaply enough and in enough
 volume to have a material impact on either gas prices or the UK’s
rising exposure to gas imports.  This is especially the case as the
UK gas price is influenced by the dynamics of supply and demand
 in the European gas market, of which the UK is an integral part.
 Bloomberg estimate the cost of UK shale gas to be in the region
 of US$7.10/ to US$12.20/MMBtu, close to the level of UK gas spot
prices over the last 2 years at a time where these have been at the
 heart of the cost of living debate.

Consumers are likely to be better served in the long term if the
UK makes a rapid move towards a low-carbon energy system,
 with technologies that have a significant potential to go down in
cost and reduce consumers’ exposure to the volatility
(and possible increases) of  future fossil fuel and carbon prices.

The Committee on Climate Change (CCC) recently concluded
that the UK could save between £25bn and £45bn by moving to
a low-carbon power sector by 2030 compared to remaining locked
in a system mainly based on gas.  

Turning to energy security, the idea put forward in parts of the UK
 media that domestic shale gas could play a major role in offsetting
 the UK’s dependence on imported gas just doesn’t stack up.
Even in its very optimistic Golden Age of Gas scenario for Europe,
 which envisages a significant production of shale gas in the region,
 the IEA still sees the EU being a major and gradually increasing
importer of gas out to 2035. 

This leads to one conclusion. If the UK wants to permanently reduce
its fossil fuel import dependence and vulnerability to future price
shocks, then the priority must be to reduce its dependence on
fossil fuels in the first place.  The best way to do this is to move
rapidly towards an efficient and low-carbon energy system.

In its 10 year Annual Gas Statement in 2012, National Grid,
the gas grid operator, found that meeting the UK’s renewables
and emissions targets would cut our gas consumption by
around 40% by 2030 compared to 2010 levels, a figure that
could increase to 50% under a more ambitious roll out of
low-carbon and energy efficiency technologies.
This would be a genuine game changer for energy security.

Let’s now turn to climate change. According to the IEA,
two-thirds of “currently proven fossil fuel reserves” need to
 stay in the ground if we are to have a 50% chance of
keeping average global temperature increases to within 2ᵒC,
thereby preventing the worse impacts of climate change.
This, of course, requires leaving most of the world’s coal resources
 in the ground. But it also requires leaving just under 50% of
currently proven gas reserves in the ground, despite it being
less carbon intensive than coal.

Making this observation isn’t about being anti-gas. It’s simply
 making the point that if gas is genuinely going to play a
 “transitional” role in efforts to prevent dangerous levels of
climate change, then it must be used instead of – not as well as
 - coal , for a limited period of time only and without delaying 
investments in low-carbon technologies.   Critically, this “transitional”
 role will vary from region to region, being more important in
coal-heavy countries like China than in countries like the UK
that have already done a lot of coal-to-gas switching in the 1990s.

If the UK Government genuinely sees shale gas forming part
of a low-carbon transition, then it urgently needs to accept and
 implement the CCC’s recommendations on the Fourth Carbon
 Budget, which set out how the UK can put itself on a rapid and
cost-effective transition towards a low-carbon energy system.

It would therefore be a strategic mistake for the UK Government to see
shale gas as the key solution to the country’s energy security,
competitiveness and climate change challenges.  With or without
 domestic shale gas, moving rapidly to an energy system that’s more
efficient, low-carbon and better integrated with those of our European
 partners should remain the UK’s highest priority when it comes
to energy policy. 

Bleriot´s Channel Crossing by Plane (1909)

On 25 July, the English Channel was crossed  by plane for the first time.

The pilot was a 36 year old French engineer, Louis Bleriot. He himself built the 24-horse power monoplane with its three-cylinder engine and what from the photographs look like pram wheels.

He flew the unpromising-looking machine from Sangatte  on the French coast near Calais to Dover Castle in just 37 minutes, landing in a field near Dover after a 43 minute flight. In doing so, he won the Daily Mail prize of  £ 1,000  for piloting the first heavier-than-air machine across the Channel. His average speed was 40 mph (64 Km /h ). It was a huge success in every way, and Bleriot was surrounded by crowds of admirers.

Fellow aviators warned Bleriot that cross-winds could bring his plane down the Channel, but the as confident that he could do it. He was very sure that his monoplane was a sounder, sager machine than the biplanes that other aviators were using.

A French destroyer waited mid-Channel, in case Bleriot was forced to ditch in the sea and needed to be rescued. In fact it was not needed, as Bleriot waited for several days until the weather conditions were just right for the attempt. The flight went without any hitch at all.

 This short flight was an historic moment. Britain´s main defence, and an incredibly effective defence, had always been the English Channel Now that it could be crossed by air, there was a new vulnerability.  By the time of the Second World War, when aircraft had improved enormously in reliability and range, it would be possible for whole fleets of planes to cross the Channel, bomb the Channel ports and cross South-east England to bomb London itself. The Battle of Britain proved how the new technology put Britain´s national security at risk.

It was Bleriot´s innocent-looking flight that heralded the Battle of Britain.