Increasing supply of LNG from the US expected to lower global gas prices
Cheaper gas-fuelled energy could slow development of renewables
By Sreerema Banoo
Shale gas is one of the fastest-growing forms of natural gas. Industry observers say shale gas, along with other non-conventional forms of natural gas such as tight gas and coalbed methane, has had a significant impact on the overall supply scenario in North America and pushed natural gas prices to historic lows. And as an International Gas Union (IGU) report points out, the impact will be even greater if the US exports shale gas as liquefied natural gas (LNG) or if shale gas has the same transformative impact on other markets.
The US Energy Information Administration (EIA) estimates that the US possesses more than 2,500 trillion cubic feet (70 trillion cu m) of technically recoverable natural gas resources, of which 33% is held in shale rock formations. Although the energy industry has long known about shale gas resources in the US, it was only in the past decade that energy companies unlocked this resource.
Until as recently as 2005, shale gas contributed less than 5% of the US domestic production of natural gas. Today it makes up about a quarter of domestic production and is projected to grow to half of domestic production by 2035.
Prices brought low
The boom in supply has kept US natural gas prices down; in March the benchmark Henry Hub was below US$2.30 per million British thermal units (mBtu), and the EIA is projecting an average price of US$3.70 per mBtu for the year.
“The impact of shale gas on the North American market has been significant. North America is currently very long on supply (as a result of the shale gas boom and a mild 2011/2012 winter that has reduced overall consumption) and as a result, natural gas prices have dropped to historic lows,” says Mel Ydreos, chairman of the geopolitics and natural gas task force for the IGU, a non-profit organisation that speaks for the natural gas industry worldwide.
Mel Ydreos, chairman of the International Gas Union’s geopolitics and natural gas task force (photo credit: IGU)
He tells Green Prospects Asia that the drop in price has resulted in significant savings to residential, commercial and industrial customers. “North America has not experienced price volatility for several years. We are now seeing energy-intensive industries return to North America in view of the favourable long-term supply and price outlook.”
To scale up extraction of shale gas, large investments will be required, likely in the range of US$120 billion to US$180 billion a year. “This will have significant total economy benefits by creating hundreds of thousands of jobs,” Ydreos adds.
The US shale gas boom has important implications for the LNG industry. As recently as 2005, many experts believed the US would need more LNG imports, but today it looks as if the US is readying to export LNG. The IGU, in its World LNG Report 2010, notes that the lack of more imports to the US, combined with a recession-induced drop in gas demand, has produced a glut in gas supplies, leading to two key implications on pricing: First, the disparity in gas prices in the US and elsewhere in the world is now more pronounced (Japanese buyers are paying around US$16–17 per mBtu while in the US, gas prices are below US$2.30 per mBtu). Second, as a result of this disparity, a number of companies which own regasification terminals that are currently idle are proposing to start exporting LNG from North America.
While there has been much talk that cheap gas from the US will one day reshape global gas markets, recent reports indicate how this may already be playing out. In February, a report noted how forward prices on the UK gas market suggest that traders are already pricing in expectation of a flow of gas from the US to Europe. In March, Japan – the world’s biggest importer of LNG – was reportedly in talks to begin shipping the fuel from the US to meet its energy needs following the Fukushima nuclear fallout.
The glut in North American gas supplies has also resulted in growing pressure on the linkage between oil-linked and spot prices in Europe. The IGU report says buyers have sought to renegotiate terms with sellers, and have succeeded in linking some of the volumes they purchase to spot prices rather than oil. In addition, several new entrants have also sought to procure gas directly from the spot market.
The shale gas boom in the US has generated strong interest in unconventional gas across the world. The question is, can the success of shale gas in North America be replicated in countries with significant shale reserves? China, for example, recently announced that it has 886 trillion cubic feet (25 trillion cu m) of exploitable onshore shale gas reserves, and it plans to begin development of these resources by 2015.
Ydreos believes that the key question isn’t necessarily what is technically recoverable but rather what will ultimately be economically recoverable. “There are many factors that ultimately will impact what will be economically recoverable and these factors include, the specific characteristics of the geological formations around the world, the operational and environmental issues, particularly access to water, government and social acceptability over the development of the resource and finally, the overall economics, including the proximity of the resource to the pipeline networks,” he says.
Replicating the North American shale gas boom will also depend on the industry addressing environmental and safety concerns in the production of shale gas. In the US, concerns about hydraulic fracturing or “fracking” – injecting large volumes of water, mixed with sand and chemicals, deep underground to break open rock formations – have caused several local and state governments to consider restricting or, in a few cases, banning shale gas drilling. In Europe, France and Bulgaria have already banned the extraction of natural gas via hydraulic fracturing.
There are also those who believe that the rise of shale gas will slow the development of renewable energy resources.
So is shale gas a friend or foe to renewables? Ydreos believes that there are two sides to the argument.
“On one hand, the significant reduction in price that has resulted from shale gas extraction is putting pressure on the economics of renewables and makes renewables more difficult to economically justify. On the other, the lower prices of gas and the use of natural gas in electricity generation is helping contain the overall cost curve of electricity generation and as such is actually helping the development of renewables within the electricity generating capacity,” he says.
Laying of pipeline for transporting natural gas from a hydraulic fracturing facility in Pennsylvania, US (photo credit: Cobris Images)
What is shale gas?
Shale gas is natural gas found in very fine-grained sedimentary rock. The gas is tightly locked in very small spaces within the reservoir rock, which is characterised by low permeability that limits the flow of gas or fluids through the shale formation. However, by using techniques such as horizontal drilling and hydraulic fracturing, companies have been able to create sufficient permeability to extract the gas from deep subterranean reservoirs.
China expects to commence commercial shale gas output this month while India could be at least four years from its turn. Australia is seen to be even further from large-scale output due to significant infrastructure and geographical challenges.
Why is “fracking” controversial?
Hydraulic fracturing or “fracking” is the process of injecting water and chemicals deep underground and at high pressure into shale rock deposits to extract gas. Concerns over the use of this gas extraction method include:
• Contamination of groundwater
• Radioactivity in fracking wastewater
• Release of methane into the atmosphere during shale gas production
• Manmade earthquakes linked to large underground wastewater disposal wells.
France and Bulgaria have banned the use of fracking over concerns about risks that it might pose to the environment and human health. Moratoriums have also been imposed in parts of the US and Canada pending further investigations.