Presenters provided several perspectives on the emerging shale gas sector in North America and around the world at the World Shale Oil & Gas Conference & Exhibition in Houston, Texas, last week. One general takeaway is that a number of unpredictable factors could widely alter the sector’s “game-changing” outlook.
Several forecasts, including the International Energy Agency’s recently released World Energy Outlook 2013, predict that the market for natural gas will gradually become more global as new sources of gas, both conventional and unconventional, bring greater diversity to global supply. Though the share of fossil fuel–fired generation is expected to decline moderately over the next two decades, natural gas generation is expected to see an expansion in most regions, even in Europe, where the fuel source could regain favor over cheap coal on the back of a gradually rising carbon price and the need for flexible capacity.
The Hazy North American LNG Outlook
According to Robert Stibolt, an advisor at Houston-based consulting group Galway Group, North American liquefied natural gas (LNG) exports are potential a game-changer, “not only from a price perspective, but also because of their non oil-linked pricing structure and its effect on supplier perceptions.” However, Stibolt forecast that while several U.S. export terminals will almost certainly receive non–Free Trade Agreement approvals over the next year, it is “highly likely” that less than half of the nation’s 20 proposed projects will be built. Some factors that could determine which projects will see fruition include commercial considerations and global market dynamics.
Uncertainty in the sector is prominent on the domestic front, too. It could be that North American demand growth and full-cycle marginal cost of North American natural gas could push natural gas prices too high to sustain the profitability of North American LNG export projects, Stibolt cautioned. He pointed out, however that other scenarios show that improved technology could decrease full-cycle marginal cost of natural gas, and that shale gas development in other parts of the world—Argentina, China, Poland—could prompt the decoupling of world gas prices and some delivery points from crude oil, which would mean they could converge to a lower price level. Significant uncertainty will remain over the next 20 years around market drivers, particularly as they pertain to how political/regulatory regimes outside of North America will impact shale gas development, and how much demand could increase for natural gas, specifically for power generation, as coal and nuclear plants are retired.
Frank Almaraz, CPS Energy’s vice president of corporate development and planning, said his San Antonio, Texas–based municipal utility is managing risk posed by the natural gas supply boom through diversification. That means retiring unscrubbed coal plants earlier and increasing investments in clean coal, natural gas, nuclear, and “affordable renewable power.” Almaraz is convinced the U.S. gas demand in the power sector will continue to grow because an estimated 70 GW of coal capacity is expected to be shut down in the 2011-2015 timeframe and nuclear plants will see headwinds posed by stalled license renewals, capital availability, and low power prices. Uncertainty is rife here, too: “Even with growing demand in the power sector, prices forecast are pretty bearish,” he said. “Will a regulatory challenge to hydraulic fracturing, industrial demand, or something unexpected change the game?” he asked.
Policy Vagaries and Technical Mirages
Meanwhile, big developments are hovering over the international horizon. Dr. Hector Rodriguez of Mexico’s oil giant PEMEX cautioned that passage of Mexico’s energy reform is hazy, but he expressed hope that it could provide the unconventional gas sector the framework it needs. Mexico, he noted, has some of the world’s highest industrial electricity prices—higher even than Germany’s—and the availability of natural gas in lieu of the coal, fuel oil, and diesel it predominantly uses could decrease fuel costs by 67%. However, the country is dominated by “inefficient” monopolies that “generate corruption,” and the country’s large shale resources can only be exploited with higher investment levels and greater operating capacity.
John Decker of South Africa’s Petroleum Agency, an arm of the Departments of Energy and Mineral Resources, said the country is expected to adopt new rules on unconventional gas exploration by the end of the year, which means the agency can recommence processing exploration applications. The southern Main Karoo Basin of South Africa is considered highly prospective for shale gas, he said, and preliminary deterministic scenarios suggest an undiscovered technically recoverable resource on the order of tens of trillion cubic feet.
Pricing and Pipeline Predicaments
Gas-bearing shale is also present across China, and exploration there is seeing swift progress both on land and offshore. At least 23 shale gas wells are producing more than 10,000 cubic meters daily, and 10 wells can produce more than 100,000 cubic meters per day, said Peng Qiming, an official from the Ministry of Land and Resources. Another Chinese official, Zhang Dingyu, noted that the exploitation of shale gas can help the country fill the widening gap between supply and demand for natural gas and effectively “relieve the pressure of energy conservation and emission reduction and enhance China’s energy security.” More gas was used for Chinese city gas and power generation this year: The natural gas share of city gas use jumped from 18% to 39%, while gas use for power generation jumped 0.64 bcm to 22.5 bcm—an astonishing increase from 4% to 18%. Chinese domestic output of gas has grown 12.1% annually, but so have its imports, which last year surged by 35% compared to 2011. What’s more is that gas demand for power demand in China is expected to increase by 9.2% annually until 2030.
But the realization of shale gas industrialization in China will be largely dependent on gas market prices and exploitation costs, Zhang said, pointing out that at present the exploitation cost for each well in China is about 80 million to 120 million yuan (roughly $13 million to $20 million). Meanwhile, the average price of natural gas in China in 2013 is about 3-3.5 yuan/cubic meters, which is 2.5 times that in the U.S.
Other presenters mentioned that China’s shale gas development will have to overcome a number of other hurdles, including sprucing up its now-inadequate pipeline infrastructure. The country’s existing gas pipelines are owned and operated by national oil companies, and no law is yet in force to allow third-party access. That aspect could deter independent oil companies from developing or producing shale gas, said Jeff Layman, a partner at Baker Botts. National oil companies also hold the “best prospective acreage,” and there’s limited access to geological data. “In China, oil and gas data are considered to be state secrets. This lack of data adversely affects the development of unconventional resources including shale gas,” he said. Laymen noted, however, that the country has several regulatory incentives for shale gas development, including financial, tax, and administrative benefits, exemption from tariffs when importing equipment for developing shale gas resources, and significantly, priority rights for power development from shale gas and preferential pricing for such power.
In Australia, unconventional gas is an emerging new industry in its early exploration phase. “If and when exploration proves successful, any significant production is anticipated to be five to 10 years away,” said Jeff Haworth, who presented the status of the fledgling sector that has the backing of the government of Western Australia. This will be a wide-ranging triumph for the country that has massive shale gas resources in multiple basins, a healthy economy, and a legacy of supplying Asia. With a scanty network of gas pipelines, Australia, however, lacks access to key infrastructure, Haworth said.
Overall, said Thomas Murphy, co-director at the Penn State Marcellus Center for Outreach and Research, all the world’s nations face these common unconventional gas development roadblocks: regulatory hurdles, to include coordination between local and federal jurisdictions; taxation issues; commercial predictability; infrastructure issues; public acceptance; transparency; and, particularly, workforce issues. One startling statistic Murphy pointed to is that drilling a single well (in the U.S. Northeast) requires 420 individuals working across 150 different occupations.
—Sonal Patel, associate editor (@POWERmagazine, @sonalcpatel)