Over the last 10 years, the U.S. has emerged as a leading producer of shale gas. Thanks to innovative extraction techniques spearheaded by Texas entrepreneur George P. Mitchell, natural gas trapped in shale formations, previously too difficult and costly to recover, now provides a burgeoning domestic energy supply. By drilling horizontally underground to reach shale formations and then flushing those tunnels with water, sand and chemicals to break open the rock and force out the gas — a process called hydraulic fracturing (fracking) — U.S. companies have sparked a shale gas revolution: U.S. shale gas production climbed from virtually zero in 2000 to a level where it is contributing a quarter of U.S. natural gas today and is expected to comprise half of total U.S. natural gas by 2030, according to the James A. Baker III Institute for Public Policy at Rice University in Houston, Texas.

Blessed with the world’s second-largest reserves (behind China), according to the U.S. Energy Information Administration (EIA), the U.S. suddenly has a vast new energy source that could help it reduce its reliance on foreign oil. “The real positives from shale gas are what it does for U.S. energy independence,” says Gary Survis, a fellow at the University of Pennsylvania/Wharton School’s Initiative for Global Environment Leadership (IGEL). “It’s a huge paradigm shift.”

What’s more, natural gas, made up mostly of methane, produces half the carbon emissions that coal does. Fracking itself raises environmental concerns — such as groundwater contamination if the tunnels are not lined correctly and the chemicals used to keep the rock pores open are able to seep out. Not accounting for the environmental impacts of producing shale gas, however, “natural gas is the better hydrocarbon fuel,” notes Robert Giegengack, professor of earth and environmental Science at Penn. “It produces less sulfur dioxide and other contaminants, is easier to handle and manage, and is produced closer to the market” in places such as the Marcellus shale formation underlying New York, Pennsylvania and neighboring states.

Yet for all the virtues of shale gas, U.S. producers now are discovering that there can be too much of a good thing. Rocketing production, coupled with the economic slowdown, drove U.S. natural gas prices from about $7-$8 per million cubic feet in 2008 down to less than $3 per million cubic feet today. With oil at about $100 a barrel, gas drilling is leveling off, as the number of oil rigs in the field rise. In 2010, for the first time in 16 years, the number of oil rigs exceeded the number of gas rigs in the continental U.S., according to a UBS Securities report.

Today, operators are pulling back from more mature shale gas fields, such as the Barnett in Texas and the Haynesville in Arkansas, Louisiana, and Texas, and deploying to newer fields with the potential of producing gas along with oil — including the Utica in Ohio and Bone Spring in Texas and New Mexico, says Drew Koecher, KPMG’s U.S. energy leader in transactions and restructuring. With low gas prices, many shale gas developers are facing financial challenges. Chesapeake Energy, based in Oklahoma City and the nation’s second largest shale gas company after Exxon Mobil, needs to raise cash through asset sales, while managing a U.S. Securities and Exchange Commission investigation into CEO Aubrey McClendon’s alleged conflicts of interest, which involve taking loans against his personal stake in the company’s wells, according to news reports.

Still, the recent shale gas boom is far from over, and a full realization of the U.S. shale gas revolution is yet to come, say experts. For starters, the U.S. has significantly more resources to recover. “The U.S. has a long way to go before it depletes shale gas,” says Brandon Beard, KPMG’s managing director for U.S. energy transactions and restructuring. “It will take 10 to 20 years to play through.” Moreover, as new demand for gas develops, gas prices will recover and buck up the industry. “The glut of gas is somewhat temporary,” states Noam Lior, a Penn mechanical engineering and applied mechanics professor who is also on the graduate faculty of Penn/Wharton’s Lauder Institute. “As long as oil prices are holding above $100 a barrel or so, gas will be very competitive.” Jonathan Banks, senior climate policy advisor at the Clean Air Task Force in Boston, agrees. “Nothing cures low prices like low prices,” he says. Spurred by these low prices, demand from electric utilities, chemical manufacturers, natural gas vehicles and overseas markets will restore health to the shale gas industry, and relatively low natural gas energy prices could help buoy the U.S. economy, experts predict. “It’s a game changer,” notes A.J. Scamuffa, U.S. chemicals leader at PwC in Philadelphia.

In the short term, the biggest increase in demand for natural gas comes from power generation, says KPMG’s Beard. So many utilities have switched from coal to cheaper natural gas that U.S. carbon emissions in the first four months of this year fell to their lowest level in two decades, according to the EIA. Coal now powers only 34% of U.S. electricity, down from half in 2005, the EIA reported. In one of the largest announced coal-fired generator closures, the Tennessee Valley Authority said last year it would shutter 18 generators at three plants by 2020 to help settle a Clean Air Act complaint from the U.S. Environmental Protection Agency. It plans to replace those generators with ones powered by natural gas and biomass. In August, the TVA dedicated its fifth and largest gas powered plant, the 986-megawatt Magnolia plant near Ashland, Miss.

A Coming Renaissance?

Meanwhile, over the next few years, low gas prices could spark a renaissance in U.S. manufacturing, say experts. PwC predicts the shale gas revolution could add one million U.S. manufacturing jobs by 2025 and reduce manufacturing expenses by $11.6 billion a year through that time. “We’re seeing a shift in offshore chemical manufacturing back to the U.S.” to take advantage of low-priced natural gas feedstocks here, says PwC’s Scamuffa.

Today, many chemical manufacturers are switching from using oil-based to natural gas-based chemicals to make propane, butane and other basic ingredients in manufactured products from paints to semiconductors. Major companies are investing more than $15 billion in capital to upgrade existing facilities and to build new facilities in North America due to the abundance of natural gas here, notes Garrett Gee, PwC’s director of chemical advisory services in Philadelphia. According to a PwC report, such companies include Dow Chemical, Bayer and Westlake Chemical. “Over the next three to four years, as this infrastructure is built out in North America, we are hopeful that the lower cost of feedstock will translate into lower costs for everyday goods and consumer durables.”

Over time, cheap natural gas could even transform the U.S. transportation sector, which is responsible for about 30% of the nation’s carbon emissions. Worldwide, 14 million natural gas vehicles are on the road, 10 times more than a decade ago, according to an August 2012 National Petroleum Council report. But, the U.S., with only 130,000 natural gas vehicles, ranks eighth in the world after countries such as Pakistan, Argentina, Brazil, India and China. Most U.S. natural gas vehicles are energy-hogging trucks, buses and trash haulers. With only 1,200 natural gas filling stations around the country, compared to about 160,000 gas stations, widespread natural gas-powered family cars are still a long way off, notes Richard Kolodziej, president of the Natural Gas Vehicle Association in Washington, D.C. “For the mom and pop market to gain traction, you probably need 10% penetration in filling stations, or 16,000 stations,” he says.

One of the most controversial potential new sources of demand for U.S. shale gas is overseas markets. Historically, gas prices in each region of the world are “set differently for no rational reason other than tradition,” states Penn professor Lior, who is writing a paper on the subject. In the U.S., prices are set by demand and supply, but in Europe and Asia, they are indexed to the price of oil and other factors, he says.

With gas prices in Asia two to three times higher than in the U.S., gas exports seem a logical next step. Yet, many experts think large-scale exports are not in the cards. For example, political opposition is surfacing from those who want to keep gas at home to promote U.S. energy independence and the domestic economy, KPMG’s Koecher points out. Moreover, adds Michael Levi, senior fellow of energy and the environment at the Council on Foreign Relations, “The U.S. is likely to become a small exporter but unlikely to become a large one, because of the cost of moving natural gas from the U.S. to overseas markets.”

Many people are wary of putting money into multiyear build-outs of liquid natural gas (LNG) export terminals due to concerns that China, Australia and other countries will develop their own domestic shale gas production and wipe out the value of their investments. A liquefaction plant takes a lot of time to line up both money and building permits, says Levi. “If you are getting into that business, you have to be confident you can make money exporting five or more years after the facility comes into existence.” Levi notes that only a handful of companies seem serious about pursuing exports, including Golden Pass Products, a recently announced joint venture between Exxon Mobil and Qatar Petroleum, which plans to convert a Texas facility into an LNG terminal, and Houston-based Cheniere Energy, which is investing in a LNG terminal in Sabine Pass, La.

Environmental Questions

While the shale gas industry might boost the U.S. economy and energy independence, environmental advocates are concerned about its overall environmental impact. Complaints about groundwater contamination from fracking liquids are now making their way through the courts, and some anti-fracking advocates fear the practice can cause earthquakes. The jury is out even on air emissions, since methane is four times more harmful as a greenhouse gas than carbon dioxide.

“Natural gas can be burned more cleanly than coal, but not nearly clean enough for climate,” especially if affordable gas encourages greater consumption, says David McCabe, an atmospheric scientist at the Clean Air Task Force. “The best information we have now is that abundant, cheap shale gas will hasten warming.” While the EPA just passed rules to limit methane leakage at new shale gas wells built in 2015 and beyond, the U.S. has no regulations restricting methane leakage along other parts of the supply chain. “If we don’t have some effective regulations, we might have very difficult problems in the future [with regard to] contamination of air and water,” says Penn’s Lior.

Another major concern is the impact of shale gas on the emerging alternative energy sector, say experts. “The amount of carbon that natural gas puts out is significantly better than coal, but it’s not the same as wind or solar by any stretch,” notes IGEL fellow Survis. “Shale gas is only a bridging technology, not a sustainable technology. It’s not going to lead to long-term energy independence where we’re getting our energy from the sun or wind.” Unfortunately, the shale gas boom comes at a time when green energy is still struggling to lower its costs to be competitive with fossil fuels. “By bringing [gas] prices down, shale gas can absolutely crowd out and hobble alternative energy,” especially as the U.S. is phasing out many subsidies for this sector, says Survis.

For now, the shale gas revolution in the U.S. continues to gain ground and reach a more sustainable footing, remaking the U.S. energy landscape and economy in its wake.