Articles

Gas galore?
Posted on Thursday, January 19th, 2012

This article was first published in the New Scientist print edition of 21 January 2012, and will appear online at energyrealities.org.

It may come as news to hard-pressed European households, but the world is enjoying a glut of natural gas. European gas prices have almost doubled in the last two years, as production on the continent dwindles, yet it is widely thought the world is now awash with supplies that could transform the entire energy outlook.

Only a few years ago the gas supply looked tight and stood at the mercy of long-distance pipeline politics. European imports from Russia, for example, have twice been cut off in the depths of winter during its long-running dispute with Ukraine. Today, however, the market appears transformed by the rise of liquefied natural gas (LNG) delivered by tanker from the Middle East and North Africa, and unconventional shale gas production in the US.

This has moved some commentators to urge governments to ditch ambitious plans for wind turbines and build more gas-fired power stations instead, while others argue that natural gas should replace costly oil as a transport fuel. The International Energy Agency (IEA) has even developed a “Golden Age of Gas” scenario to reflect the fuel’s rising fortunes. It foresees the share of the world’s primary energy supplied by gas – which has the lowest carbon content of all fossil fuels –growing from a fifth to a quarter by 2035, overtaking coal and almost matching oil. Yet other analysts doubt whether this is either possible or desirable.

The transformation is starkest in the US, where gas production has boomed since the industry discovered how to retrieve gas from previously unworkable deposits using controversial hydraulic fracturing, or “fracking”. After drifting for decades, between 2005 and 2010 US gas production jumped by 20 per cent to 611 billion cubic metres. The nation’s output has risen almost twice as fast as demand, cutting the need for imports.

US fortunes have turned so abruptly that around a dozen LNG import terminals, built at an estimated cost of more than $25 billion, now stand largely idle. The terminals have the capacity to import almost 200 billion cubic meters per year, but last year handled just 12.

The import terminals were designed to turn the tankers’ liquid methane back into gas for distribution through the pipeline network. But increasingly the flow is in the opposite direction, as the industry starts to convert terminals to liquefy shale gas for export. Houston-based Cheniere Energy Partners recently signed an $8 billion deal to sell LNG cargos to the British oil and gas company BG Group from 2015.

Aubrey McClendon, the bullish chief executive of Chesapeake Energy, America’s largest independent gas producer, told investors in 2010 that any danger of long-term gas shortage in the US had disappeared “for good”. And since shale deposits are widespread, supporters claim the US shale gas “revolution” can be repeated around the world with similar results. Yet despite the excitement it is far from certain that the shale boom can continue at its present rate or that its global impact will be decisive.

The US Department of Energy predicts that national shale gas output will quadruple by 2035, raising total production by a quarter as conventional gas production declines. But the department acknowledges “a high degree of uncertainty” around its forecasts because of a range of potential obstacles. These are quite apart from an investigation by the US Environmental Protection Agency into the impact of fracking on drinking water, which could raise the costs of development by imposing minimum technical standards.

For a start, the amount of shale gas available may have been wildly overstated. The Department of Energy’s forecast is based on an estimate that the country holds 23.4 trillion cubic metres of retrievable shale gas, of which the massive Marcellus shale formation in the north east of the country holds 11.6 trillion cubic metres. Yet the US Geological Survey has recently slashed the Marcellus estimate by 80 per cent to 2.4 trillion cubic metres. The government has accepted the lower estimate and will use it to produce revised forecasts next year.

Others point to the steep rates of decline suffered by shale wells, where production can fall by as much as 85 per cent in the first year – twice the rate of a conventional gas well. That means the industry has to drill relentlessly to keep growing.

Yet major producers are now drilling fewer gas wells and shifting to more lucrative shale oil production, because the price of gas in the US has slumped by 70 per cent since 2008 to less than $4 per thousand cubic feet ($141 per thousand cubic metres) today. One industry expert, Art Berman of Labyrinth Consulting says the industry has produced a glut that is rendering most shale gas production uneconomic. He calculates that an average well will break even only when the gas price regains $8.5 per thousand cubic feet ($300 per thousand cubic metres).

Outside the US, shale gas development faces a range of additional obstacles, especially in Europe. Drilling has started in Poland, which has the largest deposits, and in Lancashire, UK, where Cuadrilla Energy has drilled three fracking wells and claims to have discovered an astonishing 5.7 trillion cubic metres. In theory that’s enough to supply Britain’s existing demand for 60 years, but this figure describes the amount of “gas in place”, of which only a small fraction is usually extractable.

Another transatlantic difference is that in the US landowners own the mineral rights, whereas in most other countries it is the state. So many ordinary people in the US have a financial incentive to allow drilling, while in other countries residents gain no direct benefit and are more likely to oppose it. The practice has been banned in France, and in Britain, Cuadrilla’s admission that its drilling caused minor earthquakes in Blackpool, Lancashire, will only increase public resistance.

Europe is also more densely populated than the US, making it harder for producers to drill the many wells needed, a point made by Shell’s Chief Financial Officer Simon Henry in October 2011. He pointed out there are fewer than 10 of the specialist rigs needed to drill shale gas wells in the whole of Europe. According to Professor Jonathan Stern of the Oxford Institute of Energy Studies, up to 150 new rigs would be needed to achieve even modest shale gas production of 30 billion cubic metres per year.

These constraints, says Stern, mean the most significant shale gas production in Europe will be in countries that feel especially threatened by their dependence on Russian imports, such as Poland and its neighbours. Even in these countries progress will be slow, he says: “We won’t see any significant production there until the 2020s.” Even then, Stern says, shale gas will make only a marginal difference to supply in Europe.

Other regions could see much stronger growth. In its “Golden Age of Gas” scenario, the IEA says gas production in China could quadruple to 300 billion cubic metres a year by 2035, behind only Russia and the US. But this forecast depends on China developing supplies of coal-bed methane, another form of non-conventional gas production. It involves liberating natural gas from pores within the coal and is subject to “considerable uncertainty”, says the IEA. Even if its forecast is achieved, the demand for gas in China is predicted to rise seven-fold by 2035 to 630 billion cubic metres, meaning the country would still need to import at least another 300 billion cubic metres from elsewhere.

It is soaring global demand that throws the shale gas revolution in a rather different light. The increase in US gas production of between 2005 and 2010 was slightly less than the combined increase in demand in China, India and Japan, so all those LNG cargoes that America no longer needs were simply swallowed up by Asia. The rise in US production was scarcely a quarter of the increase in global demand during those years.

Shale gas production may grow strongly in some parts of the world, but it is unlikely to be the “game changer” its cheerleaders claim. LNG output is also set to rise, especially in Australia where a slew of export terminals will come on stream towards the end of this decade, but the IEA forecasts global demand will soar by half by 2035, and that can only be supplied at a cost.

Even assuming “ample availability”, the IEA reckons prices will increase by a third in Japan and double in the US. In Europe, which needs to attract increasing amounts of gas by long-distance pipeline and LNG tanker, prices are expected to rise by half. Hard pressed European households should not expect early relief from soaring utility bills.

This article was sponsored by Statoil. All content was commissioned and edited independently by New Scientist.



One Comment on “Gas galore?”

Gas galore? « 3E Intelligence Says:
January 21st, 2012 at 2:58 pm

[...] journalist David Strahan ("The Last Oil Shock") provides a well-researched and critical article on the global natural gas [...]





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