The growth in production from U.S. natural gas shale basins will keep the country supplied for decades, but the global market for liquefied natural gas (LNG) will continue to grow, which may prove to be a detriment long term, a Rice University economist said last week.
Prize-winning economist Kenneth B. Medlock III on Tuesday explained the implications of the domestic shale “revolution” on the second day of Rice’s Baker Institute Energy Forum in Houston. He and Peter Hartley, another Rice economist, last week issued “Energy Market Consequences of Emerging Renewable Energy and Carbon Dioxide Abatement Policies in the United States” (see related story).
Shale led to a “paradigm shift” in how the United States views its domestic energy resources, the economist noted. “Ten years ago we were talking about massive levels of imports in the United States to meet natural gas demand.” He estimated that 47 LNG terminals were given U.S. certificates to move forward with construction.
How quickly the U.S. gas markets have changed.
“Quite frankly, the country doesn’t need it,” Medlock said of LNG. The price signals that led developers to push for new LNG capacity also led producers to “push the frontier, look for new resources…,” which led to a technology that opened up the vast shale reserves spread across the continent.
But it’s worth noting, said Medlock, that the “shale revolution…has uncertainties that drive the outcomes…Shale is different from traditional gas production in that…in terms of timing the development process, once the shale is tapped, it’s a virtual source of storage. It’s difficult to get your head around that, but it’s different from traditional gas development. It has implications for long-term and short-term pricing.”
The current pace of shale development is “sustainable,” he said, but “a lot is timed to the cost. And a lot of concerns arise from a misinterpretation of the data, driven by the fact that the shale process is different.”
Costs “are important,” Medlock explained. “They do cycle. It’s never OK to just say ‘current costs are X and will be X forever.'” For example, “if we assume the cost to develop a [shale] well today is similar to 2008, you are overestimating the costs. The point is, we need to be cognizant that these things do cycle.”
Shale explorers are crisscrossing the world in a quest for new deposits, which has “significant implications for the global gas market,” said Medlock. “In a commercial sense, geopolitically it will have large repercussions…It abates the need to…import natural gas along the Eastern Seaboard, along the West Coast…It has turned thinking on its head in the matter of a decade.”
North America may have “close to 600 Tcf reported shale resources…by some accounts, this is low. Some are as high as 1,000 Tcf. The key point of all of this is you have to look at all of the assessments and how they have evolved in the past five, six years…the acceptable levels for shale. In 2005 shale reserves were estimated at 140 Tcf…We are still learning about this resource.”
For all of the resource positives, the ability of the United States to cocoon itself in shale gas may lead to negative implications for worldwide gas markets. At some point shale reserves will begin to decline, said Medlock. And countries that had been producing and exporting LNG may have an upper hand.
“When you are talking about shale, it’s extremely important to understand how it impacts imports,” Medlock said. “The Former Soviet Union and the Middle East also have a huge amount of resources and are typically low cost.” At some point, “in a world where we push the envelope in North America, imports will be the desired outcome because they will be the lowest-cost resource.”
The economists predict that domestic shale production will grow dramatically through 2030, with the Marcellus and Haynesville shales leading the growth. By 2040, shale gas could account for “roughly half” of domestic gas output. In Europe shale development is not expected to grow quite as dramatically, but it still may account for 25% of total gas production by 2040.
The outlook for U.S. imports of LNG over the next 20 years is not positive. “Until 2030, there’s not much happening,” said Medlock. “The bottom line is that there is sufficient domestic gas until then that will keep us supplied. Beyond that, we really start to push the envelope. Then LNG imports will rise, but even by the mid 2030s, there will only be a 35% load factor at these facilities.”
Worldwide the LNG market will continue to grow “rapidly,” he said, with the go-to destination “largely Asia and Europe…”
By 2030 “the gas markets become increasingly connected,” Medlock told the audience. “What happens in one part of the world will impact somewhere else. On the LNG export front, there are signals that some countries that are really not major players will become so by 2040.”
It’s “no surprise” that Australia and Qatar will be the largest LNG exporters in the world through the mid 2030s, but Iran and Venezuela are building their gas business and by then their LNG trade will become more dominant, said Medlock.
However, there are some things on the domestic front that “could upset the apple cart” in the economists’ gas forecast.
The “regulatory variety…that’s the biggest uncertainty on the horizon,” said Medlock. The Environmental Protection Agency is scheduled to issue rules regarding hydraulic fracturing in shale plays in 2012, and how those expected regulations impact shale development could be a major factor in future development.
States also may impose stringent production rules that discourage producers over the coming years, said the economist. And he’s not keen on proposed federal changes to the tax code to raise revenues. If higher taxes are imposed on producers, it could “have a dramatic impact on the shale resource base.”
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