Is Shale Energy the Future?

Shale gas is being widely tapped in the U.S., but whether and to what extent other countries, ―particularly in Europe and China, ― will adopt it remains unclear. Although estimates vary as to how much of this unconventional and controversial fuel is bound up in domestic shale formations, natural-gas prices are likely to remain low for the time being. In this interview, Harvard Business School (HBS) professors Rawi Abdelal and Forest Reinhardt discuss the implications of shale-gas fracturing (fracking) for the global energy landscape. 

Q. What will it take to solve the logistical limitations on the storage, transmission, or distribution of shale gas?
Reinhardt: Today, there’s no world gas market. There’s a world oil price. West Texas Intermediate may cost more or less than Brent, but basically their prices move together. If prices diverge too widely, companies ship it from where it’s cheap to where it’s expensive.

By contrast, you can’t build a gas pipeline under the ocean. It’s not cost-effective. There are not enough ships to transport liquefied natural gas and thus equalize prices. Someone has to build a ship, and someone needs to run the fleet. Historically, pipelines, ships, and operators have been three separate entities, and because of lack of coordination, there have not been enough ships and processing facilities. There’s no point to building a gasification plant if your trading partner is not spending a few billion dollars to liquefy the gas in the first place. This is not a new problem. The way we used to solve this problem was through vertical integration, with one entity controlling the whole chain.

Abdelal: Quite apart from these infrastructure challenges, the geopolitical logic for a nation’s exporting gas is clearly different in countries that are more dependent on energy imports versus countries that are more dependent on energy exports for revenues. For example, it appears that China, a large energy consumer, may have its own reserves of unconventional gas. But if that turns out not to be the case, most likely it would find itself entering into a relationship with Russia to import natural gas, which it has never done before. How China manages its unconventional gas reserves will help determine the kinds of geopolitical and commercial relationships that it has with other nations.

Q. Do firms that use hydraulic fracturing to extract shale gas have a first-mover advantage, or sustainable competitive advantage? How big or specialized could this industry become?

Reinhardt: It’s true that U.S. companies were the first to use hydraulic fracturing on a widespread basis. Some companies claim to have proprietary, closely guarded technologies or recipes for the fluids and materials they use in the extraction process, but drilling is fairly competitive. The firms that make money usually know something that’s defensible and hard to replicate, like how to drill wells in deep water. There may be a temporary advantage, but I don’t think that’s going to be the salvation of the industry. The big effects are going to be on the downstream sectors, where the energy is going to stay cheaper for longer than we thought.

Historically, we’ve thought of gas being a low-capital-cost industry, requiring just a turbine, but having relatively high and possibly volatile costs for the fuel. Other, more capital-intensive technologies such as nuclear or solar have lower or even zero fuel costs. But if the variable costs of natural gas come down and become stable, then everything will change in the electric sector.

Q. Why is it important for senior executives across the energy industry to discuss issues like shale gas during the global energy seminar?

Abdelal: There’s tremendous value created by the mix of participants who attend. We get industry leaders from energy-producing, energy-exporting, energy-consuming, and energy-importing nations. We bring the world’s expertise into one room and have everybody learn from each other, to gain greater insight into the economic and geopolitical whole.

We want to be able to leverage the knowledge in the room to make judgments about how individual parts of the sector will interact with one another as a result of this ongoing revolution in unconventional gas development.

Reinhardt: Some argue that there are just two energy industries: oil and everything else. In truth, there are many energy industries. People don’t always give themselves the luxury of stepping back and figuring out how their part of the industry fits into the world. We bring together people from electricity, from gas, from coal, from nuclear, from renewables, from oil, from all parts of the value chain, from upstream, downstream, and from all over the world.

Executives who are interested in opportunities to make money in shale gas will learn why Brazilian sugar-cane ethanol is relevant to the gas business. They’ll be in a room with a lot of other really smart people who bring their own unique perspectives to bear on similar political, economic, and business problems. The diversity of industry backgrounds is one of the biggest assets this seminar has. It’s really extraordinary how much can be accomplished with the right people in the room.

• Rawi Abdelal is the Joseph C. Wilson Professor of Business Administration and a faculty associate of Harvard’s Weatherhead Center for International Affairs. He is a member of the Business, Government and the International Economy Unit; a member of the executive committee of the Davis Center for Russian and Eurasian Studies; and a faculty cochair of the Global Energy Seminar.
• Forest l. Reinhardt is the John D. Black Professor of Business Administration and a faculty cochair of the Global Energy Seminar.

Please visit our website to learn more about the Global Energy Seminar, an executive education program at Harvard Business School.