Offshore Drilling Backlash May Boost Shale, Oil Sands
*Date:* /15-Jun-10/
*Author:* Jon Hurdle and Jeffrey Jones
The massive Gulf oil spill may hasten the development of shale gas and oil
sands, North America's two most important emerging energy sources.
The risk of pursuing deepwater oil reserves dwarfs the environmental concerns
facing both onshore sectors.
Neither Canadian oil sands petroleum nor natural gas from U.S. shale beds will
immediately substitute for delayed Gulf of Mexico crude output in the wake of a
six-month drilling moratorium. Still, their development should speed up thanks
to the search for less-risky energy sources.
"If offshore development is slower because of this accident, the implication is
going to be that the world is going to need supply growth in other areas," said
Jackie Forrest, analyst with energy consultancy IHS CERA in Calgary. "So you
might see more growth in oil sands and other sources of global supply."
Both offer even more promise than the deep waters off the U.S. Gulf Coast.
Alberta's oil sands are the largest source of crude outside the Middle East,
with enough reserves to meet all U.S. demand for 25 years; shale beds beneath
many U.S. states could meet the country's natural gas needs for a century.
Both resources face environmental worries, yet they may be deemed lesser evils
compared to the worst U.S. oil spill in history. The spill has officials
reconsidering the drive to drill ever deeper in more difficult conditions and
should result in tighter and costlier regulations.
"Both shale gas and oil sands have their own challenges but the problems we have
seen in the Gulf could lead to a capital shift away from deepwater drilling and
toward other sources," said Robert Johnston, director of energy and natural
resources for Eurasia Group in Washington DC.
Whatever the reservations about developing the new fuels, they are attractive as
major new domestic energy sources that don't risk fouling the ocean and would
allow the United States to cut its dependence on imported oil, analysts said.
"I would expect to see more development onshore and less offshore," said
Benjamin Schlesinger, president of Benjamin Schlesinger Associates, an energy
consultant.
IN SHALE WE TRUST
It's neither a straight nor clear line from Gulf oil to other forms of energy to
the north, yet it is important for energy markets wondering whether fallout from
the BP spill will constrain future deepwater oil supply.
Even before the Gulf disaster, U.S. state and federal politicians were urging
tighter regulation of shale gas drilling. Environmental groups and some
neighbors of shale gas drilling operations fear that ground water is being
contaminated with chemicals used in the hydraulic fracturing ("fracking")
process, which extracts the gas from shale a mile or more underground.
A bill in Congress would require drillers to publicly identify the chemicals
they use in fracking. Drillers oppose this, saying they are reluctant to
disclose proprietary information.
The so-called Frac Act would also give the Environmental Protection Agency (EPA)
the option of oversight of the drilling industry, currently regulated by the states.
The EPA is getting ready to conduct a national study of the safety of hydraulic
fracturing. State regulators are cracking down on environmental violations in a
bid to calm public fears while nurturing a growing industry that already has
created thousands of jobs.
Fears over the safety of shale drilling mounted with the blowout of a
Pennsylvania well on June 3, prompting state regulators to suspend drilling or
fracking by the operator, EOG Resources Inc, amid a drilling boom in the state.
EOG said the cause appeared to be the failure of a seal on the blow-out
preventer (BOP), not directly related to the fracking process. Still, the
incident should prompt more questions about whether fracking is a safe process
that prevents chemical contamination of ground water.
SANDS TAKE TIME
In the oil sands industry, opposition has intensified. Environmental groups such
as Natural Resources Defense Council and Greenpeace have mounted campaigns to
put the international spotlight on the spread of toxic tailings ponds, high
carbon-dioxide emissions and cutting of boreal forests.
Developers say they are working to develop technology to deal with these problems.
High costs and the long lead time for production have limited oil sands
development, but it has accelerated with oil prices above $70 a barrel ensuring
profitability for key projects. (Graphic: link.reuters.com/fyz89k )
Alberta's energy regulator said last week that raw bitumen production from
Alberta's oil sands averaged 1.49 million barrels a day in 2009, a 14 percent
increase from 2008 -- despite a slowdown in planning after prices crashed in 2008.
The Canadian Association of Petroleum Producers said this week that oil sands
output could double to nearly 3 million barrels a day by 2020.
Increases in pipeline capacity to the United States and plans to ship large
volumes as far as the Gulf Coast were already in place long before the Gulf oil
disaster.
Not all analysts were convinced that the Gulf spill would be so positive for oil
sands and shale gas development.
"The environmental issues around shale gas pale in comparison with what's
happening in the Gulf," said Bill Durbin, head of global markets research for
the consulting firm Wood MacKenzie.
"But where you already have environmental concerns, those sources may be subject
to greater scrutiny and higher costs."
(Editing by David Gregorio)
