Countries With The Highest Fracking Potential

Hydraulic fracturing or "fracking"--which refers to the practice of injecting fluid into the ground to break rock and access underlying fossil fuels--is highly controversial, particularly in the US. Environmentalists in particular have expressed concern about the huge amounts of water used in the process. But like it or not, fracking is practiced almost all over the world. This article explores economies of selected countries with significant fracking potential and its impact on the overall economy. (Already investing in fuel? You really should check out Investopedia's article, "How Shale Fracking May Hurt Your Investment.")

First things first. The "To Frack or not to Frack?" question only makes sense in places that have recoverable shale oil or shale gas resources to begin with. If there's no fuel in the ground, fracking is a moot point. As per the Energy Information Administration ( EIA) report, the following is the list of the top 10 countries for shale oil and shale gas resources:

A few of these countries have managed to explore the available resources efficiently (like US), while others (like Algeria, China and Canada) are in the initiation mode. European countries like France and the UK face environmental concerns and local bans, Argentina & Mexico struggle with geopolitical effects and unclear policies, rest like Pakistan have it untapped due to lack of technology. Let’s look at some key players:

USA

A well-structured initiative approach followed by the US for fracking has enabled a decline of around 37.5% in the natural gas imports between 2007 and 2013. Further fracking may lead to the US becoming a net exporter of natural gas and the largest oil producer in 2020, leaving behind Russia and Saudi Arabia. Much of America’s oil is in private land,s which enables the private sector to override government bureaucracy. This kind of shortcut is not available in all nations.

But what’s the reality at the overall national level? Has the US economy really benefited significantly?

A Washington Post report from 2013 indicates that since the oil and gas sectors account for only 2.5% of the GDP, the net contribution is only 0.6 percentage points of the overall 7.6% rise in GDP. This was the case when volume of oil and gas extraction rose by 24%, related mining machinery rose by 47% and output of mining support increased by 58%.

Another report, from the Paris-based IDDRI, suggests that the impact of hydraulic fracturing on the level of the US GDP will be a meager 0.84% between 2012 and 2035.

Analysts cite the US example as an unfortunate case of overproduction. One such analyst, Richard Heinberg of the Post Carbon Institute, writes in his book Snake Oil: How Fracking's False Promise of Plenty Imperils Our Future (excerpt on resilience.org): "Gas prices have been driven down to a level below industry’s production cost". From a national standpoint, "low prices can be viewed as one of the economic benefits of shale development, but fracking has resulted in the industry itself being hurt by low prices" and hence, the author claims, fracking makes no significant contributions to the economy.

Individual US State data, however, shows the ostensible side benefits of fracking:

• North Dakota – Per capita real GDP grew by 11% in 2011-12 and unemployment dropped to 3% (lowest in the US)
• Pennsylvania – A study indicates per capita income rose by 19% in counties having more than 200 wells and confirmed  observations that more wells in a county, the better improvement it had on the financials.
• California - $24.6 billion a year and 2.8 million new jobs expected by 2020.

The energy advancements have revitalized other sectors in U.S. like manufacturing, petrochemicals, and steel. Oil company Shell, German chemical company BASF, Austrian steelmaker Voestalpine, South African Sasol and France’s Vallourec are all expected to invest heavily in the US, riding on the associated sectors for facilitating hydraulic fracturing.

Algeria

The third largest shale gas reserves are estimated to be in the fossil-fuel rich Algeria, which has already taken measures to tap into its shale gas reserves. Amid continued local opposition, an 2012 amendment of rules allows foreign companies to invest in Algeria's shale gas sector, with tax breaks and variable royalty taxes. Algeria’s chemical company, Sonatrach, has entered into agreements with multinational corporations (MNCs) like Shell, ENI and Talisman, to sell the gas into European markets. This has resulted in increased employment opportunities, an increase in investments and better energy security for Algeria, apart from the positive impact on its economy.

European Countries

France and Bulgaria have banned fracking. Germany has raised concerns. The UK witnesses on and off behavior, with limited fracking activity - all due to environmental concerns and unclear policies.

The top list of fracking nations does not include these countries, but they do have fuel volume worth exploring. Most being developed countries, Europe's energy demands are higher. Apart from the economic impact, exploring the untapped potential of fracking in a balanced manner may result in energy efficiency for these countries.

Even British PM David Cameron has acknowledged the positive effects of fracking on US economy: “There is no doubt that when it comes to re-shoring in the US, one of the most important factors has been the development of shale gas, which is flooring US energy prices, with billions of dollars of energy cost-savings predicted over the next decade.”

China

The International Energy Agency (IEA) believes that China is currently the leader for shale gas and the third biggest in shale oil reserves. China has already embarked on exploring its fracking potential with local (CNPC, Sinopec) as well as international companies (Royal Dutch, Chevron CVX). National strategies, possibly a part of the government’s five year plan, are expected to have tax benefits and subsidies for fracking. As of now, no numbers are available, but these developments indicate China’s preparedness and willingness to explore its untapped potential to gain self-sufficiency and economic benefits on the energy front.  

However, a few challenges are also haunting the Chinese venture. Despite estimates that China may have much larger reserves than currently estimated, the basic infrastructure does not seem to be in place to support its exploitation. Lack of pipeline systems, water shortages, different chemical composition of extracts needing different treatment, the lack of technology, etc. will be major challenges to overcome. Eventually, though, China may become self-dependent for its energy needs.

Argentina:

Argentina already has over 150 shale wells in production and the nation continues to warmly welcome companies bringing in large ticket investments, looking at fracking as a road to economic recovery. Argentina is the biggest consumer of natural gas in the continent, with 10 billion USD worth of gas imports, a figure almost equal to its trade deficit. Irrespective of all environmental concerns and geopolitical challenges, the fracking business does have the potential to bring economic respite to Argentina, a country struggling with high inflation and financial stress.

Mexico:

The nation with the “closed” oil-sector where the state oil company Pemex has a monopoly, Mexico is expected to change gears and open up the sector to privatization. Between 2005 and 2013, the oil and gas sector contribution to overall government revenue has dipped from 41% to 30%. Opening up fracking ventures to private companies is expected to bring foreign investments and economic recovery for Mexico.

South Africa:

Fracking in South Africa has seen increased interest from international oil companies like Shell SA (RDS.A), Bundu Gas & Oil and Falcon Gas & Oil.

Reports suggest that fracking will fulfill the country’s energy needs and is expected to add 23 billion USD to the country’s GDP, with 700,000 new jobs to be created. Challenges to address will be building and maintaining the required infrastructure.

The Bottom Line

Depending upon local, geopolitical and infrastructure or global pricing factors, fracking may or may not contribute significantly to a state’s or nation’s economy. However, there is clear evidence on fracking benefits in terms of improved production, thereby leading to self-reliance for the energy needs of an economy. Countries that take a balanced approach to reap the benefits and address concerns for all stakeholders can be the clear winners.