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Shale a 'Grand Slam' for Demand Growth, Say Experts

Barring an intervention by policymakers to restrict hydraulic fracturing, and as long as there is a worldwide economic recovery, steady growth will continue within the natural gas industry through 2030 because of growing worldwide demand, energy experts said last week.

The World Energy Council, which met in Houston, brought together representatives from 20 countries to discuss oil and gas issues. Deloitte's Gary Adams, vice chairman of oil and gas, noted that in the past decade, "we've seen shale gas grow from 2% of U.S. natural gas production to 20% in 2010." The United States may never face a situation again where it struggles to supply gas for consumers and businesses, but the "days of the big find in natural gas are over."

What that means is that investments by the majors and national oil companies (NOC) in North American gas will continue, Adams told the audience.

"From 2011 to 2015 we see $314 billion more [in investments] in the United States. A lot of money is contracted to the U.S. The majors have come back. Foreign companies, NOCs are spending a lot of money in the U.S. They intend to learn the technology and take it back to different places...It's going to create a new world dynamic as shale is found in all kinds of countries around the world.

"The other benefit from the shale gas explosion is the fact that now we are seeing low-cost feedstock for manufacturing and chemical industries. This is making the United States more competitive." It's a "grand slam for gas."

As shale gas becomes the dominant U.S. supply source for natural gas, Deloitte is forecasting gas demand for power generation to grow "sharply," higher than Energy Information Administration (EIA) forecasts, said Adams. The consulting firm also is forecasting U.S. gas prices to rebound "counter to what some forecast." Meanwhile, the "basis relationships are dramatically altered."

The "cost of U.S. shale gas production is key," said Adams.

Deloitte analysts use a proprietary system to forecast what may happen in the global gas markets. Deloitte's Tom Choi, natural gas market leader, shared some of the latest findings.

"Natural gas has a diverse geography that is temporally connected," he said. "What is produced today may not be available for future production. Producers have to have a long perspective to make decisions. This shows why production increases even though prices are extremely low. Producers are using not just prices today but over the next 20 years."

Forecasters also have to use "multiple commodities" because natural gas doesn't "work alone," said Choi. Forecasters use integrated models for power, world gas, coal and emissions. Environmental regulations also come into play. The domestic gas model today is "connected to the world gas model," and North America can no longer be viewed in isolation.

Using the integrated model, Deloitte is forecasting that world gas demand will grow., with production led by the Middle East. Australia also "will surge" in liquefied natural gas exports, said Choi. "The results in the near term indicate more rapid firming of prices than do Nymex [New York Mercantile Exchange] futures prices. In the longer term we have prices significantly higher than Nymex. It's based on fundamental economics. If producer have a fixed dynamic, they make a decision on when to produce.

"Shale gas will be a future margin of source and will set market prices. Prices really have to be at a level that will make these shale gas plays economic, not just what the end price is, but you look at prices formed by the market decision."

Using Henry Hub price projections, Deloitte's forecasting tool determined that in all three of its reference cases, prices were not projected to return to the highs of 2005 and 2008. "Even in 2008 before we fully understood the shale gas revolution, there was forecasting that prices weren't sustainable," said Choi.

"With shale gas, the grand slam is demand for gas, not supply. In China supply is rising 14% a year; we see it moderating to 3-4% a year. The grand slam for gas case assumes demand growth at 7.5% a year, which is sustainable for 20 years. By 2030 China will have gas demand that is comparable to all of Europe. We also see a slowdown in nuclear power in Japan, Germany and the United States...All of these factors increase gas demand."

Deloitte assumes that there would be technical innovations to lower the costs to produce shale gas. However, "people are underestimating the cost of shale gas production," said Choi. "They assume that the capital costs for shale gas will fall by 50% over time. It's important to realize that in the long term, when the markets can recalibrate, supply calibrates price, not so much demand. The lead determinant, say producers, is demand. What they observe in the short-term markets is elastic supply. When producers look at the long term, they can moderate the impacts. The underlying marginal cost of gas will be the driver of future prices."

Deloitte's reference scenario also indicates rapidly increasing U.S. gas demand for power generation later this decade, a scenario that also is higher than EIA's. Carbon dioxide regulations "will greatly shift the balance further to natural gas generation," said Choi. "Whether there are sufficient shale gas reserves to meet incremental demand, it's pretty clear those volumes exist..."

Meanwhile, U.S. LNG imports are projected to "remain bleak for another decade before possibly rebounding. Over the long term, we see a slight rebound. The volume of imports largely depends on whether the oil-priced indexation of European and Asian supplies will persist in the future. Even in the long term and in the transition to competitive markets, LNG import volumes are likely to be seasonal and remain well below total existing U.S. LNG import capacity...If the costs to produce shale gas decline by 50%, imports of LNG largely disappear at today's prices and in real terms."

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