Foreign Affairs Focus: Ed Morse on the Shale Energy Revolution

"Despite its doubters and haters, the shale revolution in oil and gas production is here to stay," writes Ed Morse in the May/June 2014 issue of Foreign Affairs. And "in the second half of this decade," he continues, "it is likely to spread globally more quickly than most think." To further parse the implications of the shale boom, Morse recently sat down with Stuart Reid, senior editor at Foreign Affairs. A transcript is available below:

REID: Welcome to another edition of "Foreign Affairs Focus." I am joined today by Ed Morse, the global head of commodities research at Citi and the author of an article in our most recent issue about the shale revolution. So, Ed, let's get straight to it. What is the shale revolution and why is it, to quote our cover, such a "big fracking deal"?

MORSE: It's a big deal because there's an awful lot of shale rock. If you think about oil, there's a simple way to define the geology. There's the original source rock, which is pure shale, and then at the other end there's the leaked hydrocarbon molecules that are trapped, usually by sedimentary rock. That's what we think of as conventional oil, large quantities under a lot of pressure gushes out. In between those semiporous rocks there's a lot of it, it's all over the place. The shale revolution is about finding ways through fracking and finding ways through seismic technology to find this rock, to drill it, access it, and get it out of the ground and there's an awful lot of it around.

REID: And it's dramatically transformed the American energy landscape in the past five years or so, as you argue, yet you also say that we ain't seen nothing yet, so to speak, why is that?

MORSE: Well it's dramatically changed the landscape because there's so much of it. We've increased our gas production by more than 30 percent, a lot more to come, probably 200-years' worth, oil production by 60 percent. But more is to come because it isn't over in America. We're probably going to see much more growth in the future than we've seen in the past and it's going to spread around the world. So it is truly a transformative phenomenon, tapping into an energy resource that people knew is there but didn't know how to get access to it.

REID: And one of the things that you write in your article is this is a quote, "made in America phenomenon." Why is that?

MORSE: It's made in America for three reasons. There are three unique aspects about it. First of all we've got a lot of greedy entrepreneurs who like to experiment with drilling techniques, that experimented with track fracking, we have 10,00 potential fracking companies in the U.S., 10,000 producers filled with greedy aggressive entrepreneurial people.

Secondly, we have capital markets where these greedy entrepreneurs don't have the cash flow, but the financial services sector provides the capital. They get a lot of the rents from it and they participate in the risk.

And thirdly, we have something that is really uniquely American, and that is we have ownership of resources under the ground, we're the only country in the world where this really can happen. And people lease their mineral rights and participate in the profits, too. So these three things are not replicable in any other country in the world.

REID: Yet you also argue, as you said, that it will spread internationally. Where will it spread and how much?

MORSE: Well it could be a very large spread. We know that technically recoverable resources in Russia on the oil side are greater than those in the U.S. On the gas side they're greater in China than in the U.S. So what needs to be found is some functional equivalent of these three elements, the entrepreneurial element, the financial element and the ownership of the resources.

And that can be dealt with by fiscal regime chance. So we're already seeing other countries having shale. And on the oil side the U.S. produces 3.3 million barrels a day out of oil out of shale. Canada is number two with about 350,000 barrels a day. Argentina is number three with about 10,000 barrels a day and it's just starting. It's going to spread to Mexico to Brazil to Russia. Saudi Arabia even has shale gas and they're now producing enough shale gas to fuel their first, very small albeit, powered generating system, and recently in China they've harnessed shale gas as well.

REID: And when you talk about fracking, I think a lot of people think of the environmental implications of that. How real are the risks and what, if anything, can be done to mitigate them?

MORSE: Sure. There are real risks, they are identifiable risks, there are risks associated with water supply, with the integrity of the water supply, there are risks involving above-ground waste, this is a very trucking intense business. Trucks tend to spread a lot of diesel waste on the ground. Truck drivers tend to have a higher than normal concentration of alcoholism and drug abuse, so drivers get to be very sloppy and there's risk of earthquakes actually from improper disposal of fracking fluids underneath the earth's surface.

All of these can be mitigated, probably the worst of the risks is really methane emission. Methane is the most lethal of greenhouse gases that requires regulation. Some places don't have it. Some places are unlikely to have it. Some places, they have too much. So we in New York State have seen it being banned altogether and in some states the regulations are not as tight as they could be.

Pennsylvania, which by the way now is the largest gas-producing entity in the world, bigger than Qatar, bigger than the Yamal Peninsula in Russia, has now very tight regulations. So there's a balance in populations and democracies have ways of expressing their views. Sometimes they'll end up not wanting it in their own backyard and sometimes they'll want it because of the employment benefits, the tax receipt benefits, tend to be pretty great.

REID: Fascinating stuff. Ed Morse, thank you very much for joining us today.

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