30 may 2014

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.


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