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'Epic' Challenges Facing Natural Gas, Oil Industry

The "unexpected expansion" of natural gas markets around the world from growing unconventional resources and a combination of industry changes, will require an "epic" response by the industry to grow and prosper, according to think tank Chatham House.

In a report issued last week the UK-based analysts detailed some of the challenges facing the producers and service companies in the years to come.

"In a world where technology and environmental threats are changing industries and society so rapidly, the slowly turning supertanker is not an image that excuses inertia in oil and gas companies and those who deal with them," wrote John Mitchell. He collaborated on the report with Valerie Marcel and Beth Mitchell. The global energy industry constantly has transformed itself over the years, but a "combination of changes that the industry now faces requires epic rather than incremental responses...to evolve and prosper."

The report doesn't offer quantitative predictions because the "future cannot be predicted with any confidence, especially while the present (2012) economic difficulties persist." In any case, industry strategies will be reliant on government policies, which today are driven by "climate change policies, as well as economic and physical security."

Natural gas reserve growth across the globe is a certainty, but the question is "where and when," said Mitchell. "New perceptions about the potential supply of conventional and unconventional gas (such as shale gas) at relatively low cost are creating the possibility of unexpected expansion of gas markets in most parts of the world," Mitchell wrote. "For this to happen each major region needs prices, which are low enough to increase demand but high enough to increase supply."

Two years ago Chatham House analysts said the U.S. shale revolution had created "huge uncertainties" for international natural gas markets that could inhibit investment (see NGI, Sept. 27, 2010).

Increasing natural gas demand will rely in part on government action, analysts said. Gas imports may seem "risky" to some countries. And to build power demand, which now consumes an estimated 40% of world gas production, "the market for gas depends on government policies for coal, nuclear and renewables rather than on factors intrinsic to the gas industry."

Many producers are switching their emphasis to gas from oil, but "the policies and dynamics influencing the utilities sector -- and potentially transport -- will be of growing strategic concern. Because a 'golden age for gas' may not prevail soon or everywhere, investors will be concerned about the cost-competitiveness of new projects." The International Energy Agency last year said the world was entering a "golden age" in part because of growing unconventional reserves, environmental concerns about coal-fired plants and less reliance on nuclear power (see NGI, June 13, 2011).

The term "peak oil" also no longer applies, said Mitchell. "The foreseeable problem is not finite resources but the rate at which these very large resources can be converted into reserves for potential production. Reserves of oil and gas have each more than doubled since 1980 -- faster than the increase in production. Technologies are developing which are creating new reserves of unconventional oil, as they already have for gas.

"These technologies have more places to go, many of them outside the existing oil-exporting countries. These new areas are opening a field of growth for private sector companies, which was not foreseen a few years ago...With demand vulnerable to other industries, and supply growing from unconventional sources and new areas, there is no long-term escalator for oil prices. There is no clear trend; all depends on investment by competitors for the transport market and on the creation of new reserves."

The oil industry won't be able to rely on its monopoly of the transport market in the future because it's being reduced by competition from other industries, according to the report. The role of OPEC also will change as the "oil security problem" moves to Asia. Asian markets are absorbing more oil than the Middle East can supply, noted the report. "This changes the security of supply problem. For Western countries, the risk is price, not supply, since disruptions to Asian supplies will affect the world oil price."

Mitchell questioned how far the United States would go to defend sea lanes that "mainly benefit Asian countries which import oil from the Middle East." Asian countries may seek to provide their own protection, individually or collectively. However, the questions "cannot be separated from the wider issues of U.S. military arrangements in Asia and conflicts there, which may prevent the development of cooperative Asian response mechanisms either for physical protection or in order to share supplies."

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