The shale revolution in the United States has created “huge uncertainties” for international natural gas markets that likely will inhibit investments in gas — both conventional and unconventional — and in many renewables, London-based analyst Chatham House said Friday.
“If the revolution continues in the U.S. and extends to the rest of the world, energy consumers can anticipate a future dominated by cheap gas,” said author Paul Stevens, a Chatham House senior research fellow. “However, if it falters and the current hype about shale gas proves an illusion, the world will face serious gas shortages in the medium term.”
Horizontal drilling and hydraulic fracturing, the technologies that have driven shale expansion, now are being scrutinized for their negative environmental impacts, he noted. And even if unconventional gas resources prove to be five times those of conventional gas, “there is concern that their depletion rates are much faster.”
The United States experience with shale was triggered by several favorable factors: geology, tax breaks and the existence of a vibrant service industry, said Stevens. However, “there are serious doubts about whether such favorable conditions can be replicated outside the United States, especially in Western Europe where there is much current interest. In Europe the geology is less favorable, there are no tax breaks and the service industry for onshore drilling is far behind that in the United States.”
Stevens also pointed to a lack of “public acceptance” for shale development in some areas, especially where the gas “is the property of the state and thus the benefits accrue to governments and not local landowners.”
The “immediate consequence” of the shale boom has been the reduction in liquefied natural gas (LNG) capacity use, which is reflected in the latest forecasts, noted the analyst. “In particular, investors in the United States who poured money into LNG regasification plants in anticipation of larger U.S. gas imports have been seriously hurt.”
Gas prices have fallen, but Stevens said decreased gas demand in part followed the global recession.
“In many markets these lower prices have raised questions over the traditional link between gas and oil prices,” Stevens noted. “Lower prices have also given rise to speculation over whether major gas-exporting countries may try to protect their interests by collective action through the creation of an “Organization of Gas Exporting Countries.” But “huge” investor uncertainties, he said, question all stages of the gas value chain:
“All of these uncertainties are likely to lower future investment levels,” said Stevens. “There are already signs of gas export projects being canceled or postponed.”
From the uncertainty two problems arise, he said. “First, as the world recovers from global recession and as constraints on gas use continue to erode, demand will grow and gas will probably gain ever greater shares in the global primary energy mix. However, given investor uncertainty, investment in future gas supplies will be lower than would have been required had the shale gas revolution not happened, or at least had it not been so hyped up…”
If the domestic shale revolution continues to flourish and is replicated worldwide, inadequate investment will matter less and consumers “can look forward to a future floating on unlimited clouds of cheap gas as unconventional gas fills the gaps.” If shale fails to deliver on its current forecasts “and we will not be sure of this for some time…gas supplies will face serious constraints.”
The markets eventually would solve the dilemma because if gas were to be higher priced, it would “encourage a revival of investment in conventional gas supplies,” he said. “Yet given the long lead times on most gas projects, consumers could face high prices for some considerable time.”
A second problem, he noted, “concerns investment in renewables for power generation — a necessary consequence of the general agreement that the world must move to a low carbon economy if climate change is to be controlled.”
The questions worldwide over what to do about climate change are compounded by the uncertainties created by the shale gas revolution, said Stevens. “In a world where there is the serious possibility of cheap, relatively clean gas, who will commit large sums of money to expensive pieces of equipment to lower carbon emissions?”
Energy expert Robert Ineson of IHS Cambridge Energy Research Associates said recently there’s a possibility that gas prices could remain flat at about $5/Mcf through 2020 because of the shale resources. At that price, prospects would dim for Alaska or Canada gaslines, he said at the IHS Global Pacesetters conference in Connecticut.
For example, said Ineson, if the Marcellus Shale is found to contain 700 Tcf in gas reserves, that play by itself would be able to take care of U.S. gas demand for 30 years.
“You can’t in that time frame come up with enough demand to soak this up,” he told conference attendees.
The domestic shale boom also could kill plans for a proposed Alaska gasline or Canada’s Mackenzie Gas Project, Ineson said. “Why would you spend $40 billion to bring gas into a market that just accessed 10 Bcf of shale gas priced at $4?” he asked.
Globally, shale deposits could double the amount of currently estimated reserves, which are about 6,000 Tcf of gas, Ineson said. This “sea” of gas would then mock the idea of peak production that some believe is coming and would have “profound implications” for gas prices, including whether gas should sell in proportion to oil based on their Btu values.
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