Shale gas – powering an energy revolution

15 November 2019



The last IEA review of the USA’s energy policies was published in 2015. In the meantime, the shale revolution has become a major driving force for US energy policy, shifting its focus from coping with energy scarcity to exploiting energy abundance. This report is a summary of the IEA’s most recent findings.


The 2014 International Energy Agency review of USA’s energy policies reported on the early stages of the shale revolution. The exploitation of this resource has become a major driving force for US energy policy, enabling it to shift gear from an energy scarcity mind set to one of energy abundance. The effect of shale gas abundance has been profound, in the USA and in its impact on world gas markets.

Development of shale products

Further innovation in oil and gas extraction through additional refinements in horizontal drilling coupled with hydraulic fracturing has made oil and gas production a mainstay of the US energy landscape and, indeed, the world. Domestic oil production1 in the United States was 15.5 million barrels per day in 2018, a remarkable 124% increase from 2008, led by light tight oil production from shale formations. Meanwhile, indigenous natural gas production experienced a remarkable 40% growth to 760.4 billion cubic metres over the same time frame.

Notably, the shale revolution is expected to turn the United States from a net energy importer to a net exporter by 2020 as production growth of crude oil, natural gas and natural gas liquids exceeds consumption. As the United States is poised for further production growth over the coming decade, facilitating the build-out of supporting infrastructure will be a key factor to maximise the benefits of shale, both at home and abroad.

Moreover, the abundance of low-cost natural gas has resulted in gas-fired generation overtaking coal-fired generation in the power sector. Added to this, falling costs and policy support for renewable power have motivated a surge in wind and solar generation capacity. Coincident with the growth in natural gas generation, both coal and nuclear – previous cornerstones of US electricity markets – are facing closures. Policy and regulatory responses will be needed to ensure a smooth transition
in the electricity sector that accommodates the growth in variable renewables while also ensuring reliability and resilience of the overall power system.

Energy security remains a priority issue for the United States. The country continues to demonstrate a strong focus on reliability and resilience, recognising that its national and economic security depend on the reliable functioning of its energy infrastructure. The government has taken steps to update its security frameworks, including the introduction of processes to address new trends such as cyber-threats. US energy exports are already playing an important role in diversifying global energy supplies and mitigating the potential impact of disruption events. In this regard, continued careful consideration is required when examining proposals to modernise and sell down its Strategic Petroleum Reserve, given its critical role in a future IEA collective response.

Energy dominance strategy

As the shale revolution has made the United States not only the world’s top producer of oil and gas but also a major exporter, the US approach to energy policy making has shifted from a scarcity mindset that emphasised energy security to one that is attempting to maximise the benefits of energy abundance. To this end, current US government policy centres on the concept of “energy dominance”, which reflects a strategy to maximise energy production, benefit from larger energy exports, be a global leader in energy technologies and keep consumer energy bills in check.

Deregulation

A central implementing plank of the energy dominance strategy is to eliminate regulatory hurdles to expanding US energy production and boosting the competitiveness of the US energy industry. To this end, the administration has undertaken a strategy to revisit or rescind a number of environmental regulations applicable to broad segments of the energy sector, including the power, transport and upstream sectors.

As part of the energy dominance strategy, the US administration has made several key regulatory moves. It has repealed and replaced the Clean Power Plan to cut carbon dioxide emissions from the power sector; is revising Corporate Average Fuel Economy standards for automobiles; has ended a moratorium on new coal leases on federal lands; rescinded regulations on hydraulic fracturing on federal lands; and plans to reduce regulatory requirements to cut methane emissions from oil and gas production.

In 2017, the United States also announced its intention to withdraw from the Paris Agreement on climate change, effective in 2020. Still, US carbon emissions have fallen across all sectors – notably the power sector – in the past decade. While emissions are expected to continue to decline over the coming decade, there remains a risk that, over time, the trend will reverse as nuclear retirements, continued use of coal-fired generation and increased consumption of oil for transportation – coupled with less stringent emissions regulations – offset gains from the move towards natural gas and renewables for electricity generation.

Energy infrastructure

The energy dominance agenda also includes a focus on expanding US energy exports. Since the last IEA in-depth review, Congress lifted a ban on crude oil exports at the end of 2015. Moreover, the Department of Energy (DOE) streamlined the government’s approach to liquefied natural gas (LNG) export approvals in 2014, helping to support the United States’ becoming a major global supplier of LNG and a net exporter of natural gas. The administration is also supportive of coal exports, though coal export infrastructure is limited, especially from the West Coast.

However, future production growth and exports depend on a complementary buildout of oil and gas pipelines. While private companies decide on whether to develop new energy infrastructure, the government plays an instrumental role in permitting. Energy infrastructure projects often require approvals from various federal, state and local authorities. Though the government has made efforts to streamline federal licensing for energy infrastructure (including rapid approval of projects such as the Keystone XL oil pipeline), there remain cases of midstream infrastructure struggling to keep pace with shale production growth due to permitting setbacks, local opposition and court challenges. Timely siting of gas pipelines will also benefit efforts to reduce associated gas flaring rates from oil production.

Innovation

The United States is a global leader in energy-related research, development and demonstration (RD&D), and places a high value on innovation in the energy space. Federal government efforts to finance and support energy innovation are largely led by the DOE, including through its 17 national labs, which are considered world-class energy research and development centres. Current focus areas for DOE research include battery storage, small modular nuclear reactors, and carbon capture, utilisation and storage. With the growth in variable renewable electricity generation, greater deployment of electric vehicles, and increased extreme weather events and cyberthreats, research into modernising and strengthening the power grid is also becoming a more important focus area. The United States is also engaged in energy RD&D internationally, including its participation in most of the IEA Technology Collaboration Programmes and as a founding member of the Clean Energy Ministerial. In line with US global leadership in clean energy technology innovation, these and other international collaborations are expected to receive continued support.

Power sector transition

The fuel mix of US power generation is undergoing a considerable transition. Coal power, which produced nearly half of total  electricity generation in 2008, has declined in the last decade to less than a third of the power mix in 2018. One of the main drivers for this development has been the shale gas boom, which has made natural gas-fired generators more cost-competitive than coal power plants. Natural gas-fired electricity production increased by over 60% in ten years, and now exceeds coal’s share in the power mix. Meanwhile, renewable electricity has seen rapid growth as well, driven by reduced costs and policy support. Nuclear, which has been the most stable power source over the last decade, is challenged by cheap gas power and new renewable sources in some markets, and it struggles to remain cost- competitive.

As the US power mix shifts, and as more variable renewables are introduced into the system, bolstered by state policy goals, the question of smoothly and cost-effectively connecting new generation sources to the grid has already become more pressing, and will become increasingly so in the coming years.

Considering that the United States has a complex electricity system with a mix of competitive markets, vertically integrated markets, and private and publicly owned assets, regulatory responses to ensure a smooth transition of the power sector will vary across US regions. In particular, grid operators are increasingly integrating flexibility resources such as storage, demand response, transmission planning and capacity markets into market designs to safely accommodate larger shares of variable renewable sources such as wind and solar into the electricity system.

At the same time that renewable power is expanding, the other major source of low- carbon electricity – nuclear power – is facing growing economic pressure, prompting several plants to prematurely shut down. Looking ahead, the value of nuclear power as a stable, low-carbon generation source for overall power system resilience should be considered more closely.

Policy co-ordination

Under the US federal system of government, individual states also have considerable scope to establish energy and climate change policy, though they are required to be in compliance with federal policies.

Twenty two US states plus the District of Columbia have adopted greenhouse gas reduction targets (though not all have been legislated), with policy tools ranging from carbon pricing to efficiency mandates and support for clean energy. Nine Northeastern states participate in the Regional Greenhouse Gas Initiative cap-and-trade programme, while California runs a separate cap-and- trade programme for carbon emissions. The disparities among state targets can lead to diverging regional outcomes for emissions reduction, and they can have implications for electricity markets that span several states.

A number of US states have in place renewable portfolio standards (RPS), which require retail electricity providers to source a certain share of supply from qualified renewable sources. While emissions reduction goals are a driver of state RPS policies, they are also enacted to harness local energy resources, diversify the fuel mix and support local economic activity. Twenty-nine states plus the District of Columbia currently have mandatory RPS policies in place, and they have been an important driver of renewables expansion in the United States.

In addition to renewables targets, states are considering support to nuclear power in the form of zero emissions credits, which have passed in states such as New York and Illinois.

Energy security

Globally, the United States has been a cornerstone of energy security through its participation in the IEA as a founding member. The United States has participated in global oil stock releases through reserves held in the Strategic Petroleum Reserve (SPR), which is the world’s largest stock of emergency crude oil. US oil stockholdings are well in excess of its obligation to hold 90 days of net oil imports, though the government in recent years has authorised sales from the SPR over the coming decade. After the authorised sales, the SPR will still be well above the IEA’s 90-day obligation. As the United States quickly becomes a net exporter of petroleum liquids by the early 2020s, however, its IEA stockholding obligation will rapidly decline towards zero. Should the United States further draw down its SPR levels, there could be a challenge to the future effectiveness of the IEA stock system, particularly in the case of a large collective action, if the US no longer holds a substantial level of SPR.

For natural gas, the US president is authorised to declare and respond to a natural gas supply emergency. Provisions include authorities for emergency purchases and emergency allocations to protect high-priority users of natural gas. The shale revolution has significantly changed the role of natural gas in the country’s energy mix, especially increasing its share in electricity generation. In this context, co-ordination between the electricity and the natural gas systems takes on special importance when dealing with gas supply disruptions, but also electricity blackouts.

The United States has for many years maintained a robust system that assesses and manages grid reliability to avoid power shortages. Yet in the face of rising extreme weather events, new cybersecurity threats, a growing share of variable generation, and retirement of older coal and nuclear plants (due in part to lower wholesale natural gas power prices), the country has recently entered into a renewed debate on power sector reliability and resilience.

Energy systems resilience

The United States continues to strengthen its preparedness and response mechanisms to threats, such as natural disasters, extreme weather, climate change, cyberattacks and accidents, in a move to reduce risks and bolster resilience as a matter of national security.

While emergency response mechanisms are strong in the United States, preparedness is becoming even more important. Energy resilience does not just address the ability to withstand and recover from disruptions, but also emphasises prevention of and preparation for a potential crisis, flexible adaptation, and efficient recovery. The regular assessment of vulnerabilities is vital in this context and needs to encompass the entire energy sector, notably oil, gas and electricity.

Since the last IEA review, the US government has adopted a suite of policies and mechanisms that have reinforced preparedness. The energy sector is one of the 16 sectors classified for critical infrastructure security and resilience. Interagency co-ordination was strengthened under the 2015 Fixing America’s Surface Transportation Act and by the National Response Framework under the Federal Emergency Management Agency and the Department of Homeland Security. Moreover, the creation of the Office of Cybersecurity, Energy Security, and Emergency Response (CESER) in the DOE in 2018 marked strong progress towards building resilience capabilities. CESER, which acts as the sector-specific agency for energy in emergency situations, is responsible for leading sector co-ordination and enabling sector-specific technical assessments and assistance. Notably, with the creation of CESER, there is an excellent opportunity to strengthen effective collaboration to foster preparedness and response to cybersecurity threats. Furthermore, the Office of Electricity leads the department’s efforts – in partnership with industry, academia, national laboratories, and other government agencies – in developing next- generation technologies and tools that will improve the security and resilience of the nation’s critical energy infrastructure.

Key recommendations

  • Set effective and streamlined regulations to enable the United States to remain a global leader in emissions reduction and clean technologies.
  • Foster the system integration of variable renewable energy by pursuing market regulations that make the most of geographic diversity of resources, availability of transmission capacity, and flexible resources such as energy storage (including batteries, hydropower, pumped hydro and hydrogen) and demand response.
  • Evaluate the allocation of decision-making authority for the permitting and siting of natural gas pipeline projects in order to identify possible ways to shorten lead times and reduce uncertainty for investors. Provide adequate support to international collaboration efforts of US national laboratories and DOE RD&D programmes to maintain global leadership on energy technology innovation.
  • Conduct regular and comprehensive assessments of risks and vulnerabilities to foster preparedness, and maintain reliability and resilience in the face of new challenge.

Figure 1. Overview of the US energy system by fuel and sector 2018
Figure 2. Total Primary Energy Supply by source, 1973-2018
Figure 3. GHG emissions by sector, 1990-2017
Figure 4. Energy-related CO2 emissions by sector, 1990-2017
Figure 5. Energy-related CO2 emissions by energy source, 1990-2017
Figure 6. Emissions projections and outlook (based on EIA estimates)
Figure 7. Share of renewable energy in TPES, electricity and TFC, 1978-2018
Figure 8. Renewable energy in TPES, 2000-18


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