Unconventional gas is poised to revolutionize the world’s energy future, but a number of concerns specifically as they relate to policy could easily change that scenario, International Energy Agency (IEA) Executive Director Maria van der Hoeven recently told GAS POWER.
Natural gas could usher in a "golden age," the IEA has projected. The Paris-based autonomous agency, whose mission it is to ensure reliable and affordable energy for its 28 member countries, in June 2011 forecast that natural gas’s role in the future global energy mix could surge from 21% to 25% by 2035, but that this growth will rely on four key assumptions becoming reality: increased gas use in China; greater use of natural gas in transportation; slower growth of global nuclear power capacity; and a more optimistic outlook for gas supply—primarily driven by the availability of additional unconventional gas supplies at relatively low cost. The latter is already under way: Advances in upstream technology have led to a surge in the production of unconventional gas—shale gas, tight gas, and coalbed methane—in North America in recent years and improved prospects for the emergence of a large-scale unconventional gas industry in other parts of the world, where sizeable resources are known to exist.
"The most dramatic change, in my opinion, of the American energy story in the last decade is certainly unconventional gas," van der Hoeven told GAS POWER on August 17. The U.S. is seeing prices that "hover above rock-bottom" at about $3/MMBtu, but in Europe, prices are in the middle range, around $9 to $11/MMBtu. In Asia, the lack of adequate spot markets and prominent oil price indexation has led to a "very high" price level—in Japan, as much as $18/MMBtu, she said. And at the same time, Asia is intensely looking for new energy resources. "None of the major supplier options—Australia, Siberia, and East Africa offshore—is cheap or easy. North America can be a competitive source, but it will take industry to make that happen. As long as low prices continue, it will allow North America to be competitive for a long time."
The possibilities are vast. According to the IEA’s baseline scenario, presented in its latest World Energy Outlook, the share of unconventional gas in total gas output will rise from 13% to 22% in 2035 (four times U.S. gas production). About 40% of that gas will be used for power.
That would be the "golden scenario"—one that would require drilling of more than 1 million unconventional gas wells globally between 2012 and 2035. For comparison, about 700,000 oil and gas wells have been drilled in the U.S. over the past 25 years, about 500,000 which are producing gas. Under this scenario, the U.S. could still account for around 500,000 of the new unconventional gas wells required by 2035, with the yearly drilling requirement rising from around 7,000 wells per year to 25,000 per year by 2035. China, meanwhile, would have a cumulative requirement of some 300,000 unconventional gas wells, increasing from the current 1,000. The European Union would need to drill 50,000 wells, a massive expansion from the 50 existing today (only half which are capable of horizontal drilling). The scenario also calls for significant development of upstream investment.
Though the IEA projects that unconventional gas will diminish the need for long-distance gas transport infrastructure "to some degree," growing trade would require additional liquefied natural gas (LNG) facilities and new long-haul pipelines at a cumulative investment of $0.7 trillion. Investment in gas transmission and distribution infrastructure, including smaller-scale networks to connect end users, absorbs another $2.1 trillion. Countries that were net importers of gas in 2010 would make up to 75% of these investments—U.S. spending alone on exploration and development is expected to double total upstream spending of any other country.
Growing Demand Will Drive Changes
Asked whether the U.S. can be ready to meet global demand that has been projected to skyrocket within the next five years, van der Hoeven expressed optimism, saying, simply, "It’s business. You can look at it from an ideological point of view, but I’m practical. It’s market fundamentals. There’s demand and there’s supply."
Van der Hoeven pointed to the April approval of Cheniere’s Sabine Pass LNG export terminal, located in Sabine Pass, La., by the U.S. Department of Energy and the Federal Energy Regulatory Commission. That company has proposed to liquefy and export up to 2.2 billion cubic feet, or 16 million tons per annum (mtpa), of domestically produced natural gas. At present, the U.S. has only one existing LNG export terminal, located in Kenai, Alaska. Three of the country’s 12 LNG import facilities have been authorized to re-export delivered LNG. These measures showed the U.S. government recognized that unconventional gas could bring "money, jobs, and wealth," van der Hoeven said.
Competition for the U.S. will be rife. In the "golden scenario," total gas production grows by around 55%, from 3.3 tcm in 2010 to 5.1 tcm in 2035. Over the same period, unconventional gas production increases from around 470 bcm in 2010 to more than 1.6 tcm in 2035. Natural gas demand increases between 2010 and 2020 by more than 700 bcm, by a further 1.1 tcm in the period 2020 to 2035, and reaches a total of 5.1 tcm (4,230 Mtoe [million tons of oil equivalent]) in 2035.
About 80% of the growth in gas demand comes from outside the Organisation for Economic Co-operation and Development: China, India, and the countries of the Middle East require an additional 900 bcm of gas in 2035, compared with consumption in 2010. Australia, Poland, Russia, China, and even South Africa have vast reserves, and though, as in the U.S., measures are under way to set regulations and build infrastructure to export unconventional gas, van der Hoeven said she thought the U.S. would be able to work out its issues and meet the demand surge projected in the medium term.
A Grim Alternative
In contrast, the agency paints a grim picture if the unconventional gas revolution is not realized. The IEA this May set out several principles in a report, "Golden Rules for a Golden Age of Gas," to tackle these issues. The report, the latest in the agency’s World Energy Outlook series, examines two cases: the Golden Rules Case, or "golden scenario," in which the "highest practicable standards" are adopted, gaining industry a "social license to operate"; and conversely, one in which constraints facing unconventional gas extraction prove too difficult to overcome.
In its Low Unconventional Case, the report prepared by the Office of the Chief Economist at the IEA assumes that—primarily because of a lack of public acceptance—unconventional gas production in aggregate rises only slightly above current levels by 2035, from 21% in 2010 to 22% in 2035, the lower availability of gas prompting gas prices to surge. That scenario would raise the volume of inter-regional trade compared to the Golden Rules Case and critically, reverse trade patterns, with North America requiring significant quantities of imported LNG. "The Low Unconventional Case reinforces the preeminent position in global supply of the main conventional gas resource-holders," the report says. That is a prospect that could have immense geopolitical impacts, van der Hoeven explained.
"In our opinion, [the Low Unconventional Case] would be undesirable. Severely curtailing the production of unconventional gas would impact the security and the environmental sustainability of energy supply. For instance, the U.S. would return to the prospect of large-scale energy imports. China’s imports would double, and Europe’s import dependency would increase," she said. "Those imports would increasingly derive from conventional sources in Russia and the Middle East. And the largest producers of unconventional natural gas—China, the U.S., and Australia—would all be likely to return to coal."
Foremost among a multitude of "certain and serious uncertainties" that could turn the fate of the world’s gas future toward the Low Unconventional Case are those surrounding policy, said van der Hoeven. These stem from "legitimate public concerns" that production might involve environmental and social damage; that unconventional gas extraction could have major implications for local communities, including those involving land use and water resources; and that there could be "serious hazards" connected to potential air and water pollution, she said.
The report outlines several principles that could allow governments, industries, and other stakeholders to address these environmental and social impacts. These include calls for transparency and engagement with the public. "We all have to realize that these concerns are legitimate. The risks to companies producing and prospecting for unconventional gas assets are real. Managing public perceptions is good business—and it’s not only about communications, it’s also about good practice," said van der Hoeven.
These principles, called the "Golden Rules," won’t come cheaply, the IEA concedes. They could increase the overall financial cost of developing a typical shale gas well by an estimated 7%. "However, for a larger development project with multiple wells, additional investment in measures to mitigate environmental impacts may be offset by lower operating costs," it says.
A Need for Balance
Meanwhile, van der Hoeven said she believes the only way the Golden Rules could be achieved is by striking a delicate balance between "good governance, good management, and good oversight."
"Industry and government are both in this—they have to cooperate. Industry must win public confidence by demonstrating exemplary performance, and governments must ensure that appropriate policies and regulatory regimes are in place," she said. It is delicate, because "excessive regulation" could "choke innovation and threatens the viability of the industry." The energy security benefits of the "golden age of gas" as well as gas’s role as a bridge to a low-carbon economy both depend on technological development, a healthy competitive market, and the widespread development of unconventional gas, which would lead to broadly lower prices and distributed production. "Overregulation would imperil all of these," she said.
On the other hand, it is imperative to ensure that "safeguards and rules are effective and include a proper oversight mechanism," she said. "Politicians and the public must be reassured of that effectiveness; otherwise, we are likely to see a backlash of unconventional extraction methods and blanket bans [on fracking]. You don’t want that."
Asked for specific rules governments could implement, van der Hoeven pointed to those concerning transparency and mandatory disclosure. "If a company is not prepared to be transparent about what they are doing, then the question will be, Do they know what they are doing?"
"Companies have to realize that they need to be transparent about what they are doing, and they need to take people’s concerns seriously."
Her comments on transparency were made as a Bloomberg investigation of company disclosures on FracFocus.org, a website where oil and gas companies voluntarily report chemicals used on fracked wells, found that "energy companies failed to list more than two out of every five fracked wells in eight U.S. states from April 11, 2011, when FracFocus began operating, through the end of last year." The project, which received $1.5 million from the DOE, has been an alternative so far to mandatory disclosure. Federal legislation that could force companies to disclose fracking chemicals introduced in March 2011 has been stalled in both the U.S. House and Senate.
—Sonal Patel (@POWERmagazine) is POWER’s senior writer.