The WSJ editorial was a great point-wise rebuttal of the major advocacy efforts against fracking, while still highlighting the need for industry to be extra-vigilant on safety and environmental risks.  It was refreshing to see an editorial focus on facts versus unsubstantiated opinion.  The NY Times article — based on a ~450-page archive of emails and documents — highlighted concerns around decline curves, asset valuations, economics, and the hype-driven transactional activity.

Shale gas in North America is a nascent yet dynamic industrial enterprise.  It is too early to make calls around a number of uncertainties although they do provide stakeholders — companies, service providers, investors, and regulators — with a framework to evaluate and address these plans.

Notwithstanding the promoters’ enthusiasm, it is hard to be optimistic of such ventures for three reasons.

First, although shale gas supply in the U.S. has increased dramatically and more could be produced at short notice if prices rise, natural gas continues to be dominated by three regional markets:  Americas, Europe and adjoining areas, and the Middle East.  Historically, there has been little exchange between these markets.

Second, structural changes in demand such as a global climate change accord are not on the horizon.  A global climate change accord could dramatically drive demand for natural gas, which is a lower-carbon fuel relative to coal and oil and could serve as a “bridge fuel” during the transition to a word dominantly supplied by renewables.

Third, demand growth in Asia, in particular China and India, are not sufficient to justify gas export models because shale gas supplies are not limited to the U.S.  Significant exploration is underway and discoveries are anticipated in the emerging economies too.

Cheap cars for the masses in the emerging economies of Brazil, Russia, India, and China is a key signpost we must watch to paint and comprehend energy futures.  Infrastructure — or the lack thereof — has never diminished car sales in emerging economies because a car is no longer a tool of personal mobility.  Instead, it is evidence of “having arrived” for the teeming middle-class millions of the world’s emerging economies.  Rapid development and penetration of cheap cars will significantly impact fuel demand, trade flows, emissions, and product quality.

This happened a lot sooner — at least five years — than projected thanks to the disproportionate impact of the Great Recession on the U.S. relative to China.  More significantly, this is an inexorable phenomenon as the IEA announcement notes:

Since 2000, China’s energy demand has doubled, yet on a per capita basis it is still only around one-third of the OECD average.  Prospects for further growth are very strong considering the country’s low per-capita consumption level and the fact that China is the most populous nation on the planet, with more than 1.3 billion people.

Of course, this is no surprise to energy industry observers.  In the recent past, energy growth in China has been the subject of numerous anecdotal tales.  More importantly, it has cast a long shadow on energy dynamics in the developed world.

For example, higher power prices in the first half of this decade were attributed to the 10% annual growth rate of coal consumption in China.  Two years ago, the high diesel-gasoline price differential was because of China’s dramatic spurt in diesel imports to fuel marginal power generation capacity in the wake of  an unusually harsh winter.  In the past year, energy circles have been abuzz with China’s green energy plans.  The “Green Giant,” as it has been dubbed, built 12 gigawatts of wind capacity in 2009, has retired or plans to retire up to 35 gigawatts of small and relatively inefficient coal-fired power plants, build 20 nuclear reactors, and has committed to reduce its energy intensity by almost half.

In addition, it is implementing an aggressive outreach program to access energy assets globally.  Recovering from a failed bid to acquire Unocal in 2005, China has purchased oil and gas fields in Central Asia, South America, Africa, and the Gulf of Mexico.  It has supplemented asset acquisitions with a concerted diplomatic effort.  As a result, it now attracts more barrels of Saudi crude oil than the U.S. and gas from places such as Australia, Malaysia, and Qatar, and even coal from the U.S.  In similar vein, it continues to invest in critical energy infrastructure.  For example, it has just completed a 1,100-mile pipeline to import gas from Central Asia and is amplifying its R&D and technology development capabilities in energy.

Interestingly, China has disputed IEA’s conclusion “highlighting the lack of clarity in China’s energy sector as well as the country’s unease at its growing global impact.”  The IEA and China have been at loggerheads regarding data quality and access.  Even so, China’s official estimate of energy consumption is a measly 1% lower than that of the U.S., a difference that would be most likely met in 2010.

While energy consumption per capita is much lower, China’s energy consumption per GDP is much higher than that of the U.S.  Further, its energy mix is heavily dependent on coal, which contributes 66% of total demand in comparison to 22% in the U.S.  Collectively, these two pieces of data show the intense draw of energy by the Chinese manufacturing sector.

Altering this energy mix will be very expensive but far more doable than suggested by some observers.  This is because China’s energy infrastructure is not at a steady state and the large investments it will need to support higher energy demand per capita can be directed far more easily (given its political economy) to renewable energy sources.  Indeed, the country’s on-going investments in green energy and its commitment to reduce emissions intensity reflect this thinking while responding to global pressure around climate change.

China as the New Energy Dragon is just the beginning of a fascinating story in the future of energy.

Unlike China where its government is carefully orchestrating the new green revolution, India’s cleantech story is being fueled by entrepreneurs and venture capital.  Although India’s government is increasingly supporting the cleantech industry with policy, regulatory, investment, and tax incentives, its deeply democratic institutions ensure that it will be a slow albeit sure story.

The article takes a rather conservative perspective and suggests that investors should look at oil not for growth but for dividends.  So they consider the super majors a better bet than the independents.

While several points in the article are valid — e.g., depressed gas prices, surplus capital availability, and an uncertain short-term outlook for the oil industry — it is probably premature to write-off further growth in the oil industry.  Investors still value exploration over production based on the appreciation companies have enjoyed when reporting new discoveries.  Further, gas prices do not seem to have adequately reflected the drop in unconventional investment.

Interesting times.

That India does not fit ‘Big Oil’s’ strategy need not be disappointing. As the country’s economy grows, ‘Big Oil’ will have to find new business models to engage an emerging market of more than a billion people.