Daily GPI / NGI All News Access

Regulate Gas Glut or Industry Stagnates, Says IEA

Natural gas is on the precipice of a global "golden age," but it could easily collapse under the weight of public opposition to drilling unless legitimate concerns are addressed, officials with the International Energy Agency (IEA) said Tuesday.

IEA officials delivered a press briefing in London to accompany the World Energy Outlook report, "Golden Rules for a Golden Age of Gas," which presents recommendations for worldwide unconventional gas drillers. The recommendations were developed by IEA with input from its 28 member countries and organizations, including U.S. and Canadian government and industry officials.

"The technology and the know-how already exist for unconventional gas to be produced in an environmentally acceptable way," said IEA Executive Director Maria van der Hoeven. "But if the social and environmental impacts are not addressed properly, there is a very real possibility that public opposition to drilling for shale gas and other types of unconventional gas will halt the unconventional gas revolution in its tracks.

"The industry must win public confidence by demonstrating exemplary performance; governments must ensure that appropriate policies and regulatory regimes are in place."

The "Golden Rules" recommended by IEA basically underline the:

At their recent U.S. summit, the G8 (Group of Eight) leaders welcomed and agreed to review this IEA work on potential best practices for natural gas development.

"If this new industry is to prosper, it needs to earn and maintain its social license to operate," said IEA Chief Economist Fatih Birol, the report's chief author. "This comes with a financial cost, but in our estimation the additional costs are likely to be limited."

Applying the golden rules could increase the cost of a typical shale gas well by about 7%, but for a larger development project with multiple wells, investment in measures to reduce environmental impacts may in many cases be offset by lower operating costs, according to IEA.

The way governments and industry respond to social and environmental challenges is different, and the authors posited two responses to the growth in unconventional gas.

In the "Golden Rules Case," the application of recommended rules underpins a worldwide expansion of unconventional gas supply, with big consequences: Global production of unconventional gas, primarily shale gas, more than triples between 2010 and 2035 to 1.6 trillion cubic meters; the United States becomes a "significant player in international gas markets, and China emerges as a major producer; and new sources of supply help to keep prices down, stimulate investment and job creation in unconventional resource-rich countries and generate faster growth in global gas demand, which rises by more than 50% between 2010 and 2035.

In the Low Unconventional Case where no rules are in place "means that unconventional gas production rises only slightly above current levels by 2035." In this case, the competitive position of gas in the global fuel mix deteriorates on lower availability and higher prices, and the share of gas in energy use barely increases. In addition, energy-related carbon dioxide emissions are higher by 1.3%, compared with the Golden Rules Case but in both cases, emissions are "well above" the trajectory required to reach the globally agreed goal of limiting the temperature rise to 2 degrees Centigrade.

Because of the North American shale revolution, the "IEA and others around the world see these benefits and are looking to the U.S. as the leader in safe and responsible shale energy production," said American Petroleum Institute's Erik Milito, who is the upstream director. "The release of this draft report offers an opportunity for global conversation on the best ways to continue responsible and efficient development of energy from shale."

According to Michael Levi of the Council on Foreign Relations, the IEA report doesn't address impact of the 7% higher costs of the wells on the price of gas, but he said at least in the United States the costs per well would be "even less because some of the cost of delivered gas has nothing to do with well expenses: distribution costs for example, would be unaffected by new drilling rules; severance taxes and impact fees wouldn't change; and corporate taxes would presumably fall a bit, since many compliance costs could be written off.

"If you think that delivered gas will ultimately cost $5.00/Mcf, the IEA is saying that its golden rules would add less than 35 cents. Contrast that with the much bigger impact of a backlash against drilling and you have a pretty compelling case."

Levi acknowledged that IEA's estimates are "extremely crude" and it wouldn't be surprising if compliance costs were twice or half what is estimated. "Either way the bottom line remains: smart regulation of shale gas looks like it would be relatively cheap. It's the excessively hands off approach that could turn out to be a lot more costly."

Although opposition to unconventional drilling in North America is strong in some states and provinces, it's especially significant in Europe. Hydraulic fracturing (fracking) has been banned in France and Bulgaria and for a period was halted in the United Kingdom.

Investors led by Boston Common Asset Management applauded IEA's recommendations, noting the proposed guidelines were similar to those published last year by Investor Environmental Health Network (IEHN) and Interfaith Center on Corporate Responsibility (ICCR) for energy companies engaged in unconventional operations. IEHN and ICCR are pushing for big U.S. operators to adopt more transparent unconventional drilling rules, including ExxonMobil Corp. and Chevron Corp., which are holding their annual shareholder meetings on Wednesday. The proposals are on both companies' proxy ballots.

"Investors require full disclosure in accordance with IEA's golden rules in order to make fully informed judgments about wise investments in the energy sector that take full account of companies' management of environmental risks and social impacts," said Boston Common's Steven Heim.

©Copyright 2012 Intelligence Press Inc. All rights reserved. The preceding news report may not be republished or redistributed, in whole or in part, in any form, without prior written consent of Intelligence Press, Inc.