The recent shale gas discoveries in the United States has created huge concerns and uncertainties for international gas markets that are likely to inhibit investment in gas both conventional and unconventional and in many renewable. If it counts as a revolution extends to the rest of the world, energy consumers can anticipate a future dominated by cheap gas. However, if it falters and the current hype about shale gas proves just an illusion, the world will face serious gas shortages in the medium term.
It’s obvious that shale gas is one of the most significant issues in the energy industry today, and it seems that has all the potentials to affect not only the natural gas market but also the entire energy mix of the world. Do not forget that the shale gas production has leapt from accounting for only 1% of US production to 20% and there are doubts as to whether it can spread beyond the United States, or even be maintained within it. In Europe, for example, the geology is less favourable, there are no tax breaks and the service industry for onshore drilling is far behind that in the United States. Additionally, there is concern that disruptions caused by shale gas developments will not find public acceptance, especially in a context where the gas is the property of the state and thus the benefits accrue to governments and not local landowners.
According to QEnergy report estimations, there’s 1,100tcf recoverable in North America alone, enough to supply the nation’s natural gas needs for the next four decades and Europe may have nearly 160tcf of its own. Studying the energy industry for many years I am not fully convinced that shale gas could revolutionize the industry and change the world in the coming decades. I strongly believe that it will prevent the rise of any new cartels, most probably it will alter geopolitics and for sure it will slow the transition to renewable energy.
Can shale gas water the flower of energy innovation?
The shale boom also is likely to upend the economics of renewable energy. It may be a lot harder to persuade people to adopt green power that needs heavy subsidies when there’s a cheap, plentiful fuel out there that’s a lot cleaner than coal, even if gas isn’t as politically popular as wind or solar. I am convinced that sometimes expensive energy can be a powerful medicine for all economies. It may hurt when is taken, but it brings long-term cures for a host of ills. Sometimes high energy prices can also water the flower of innovation, support energy saving initiatives, lead to investments in alternatives which pay off and encourage the reach for more energy resources.
I am sure that plenty of people aren’t convinced that shale gas has the potential to be such a game changer and the main arguments revolve around that the shale gas exploration is too expensive and that it carries huge environmental risks. Potentially, the shale gas will breed competition among energy companies and exporting countries, which in turn will help economic stability in industrial countries, and thwart petro-suppliers that try to empower themselves at our expense.
Can shale gas affect LNG and NG supplies?
QE reports that LNG expected to account for half of the international gas trade by 2025, before the shale discoveries. With the shale boom, that share will be more like one third and in US the impact of shale gas and deep water drilling is already apparent. Import terminals for LNG sit virtually empty, and the prospects that the U.S. will become even more dependent on foreign imports are receding. Additionally, soaring shale-gas production in the U.S. has meant that cargoes of LNG from Qatar and elsewhere are going to European buyers, easing their dependence on Russia. Russia has already started to accept far lower prices from formerly captive customers, slashing prices to Ukraine and Bulgaria by 30%, for instance.
I also agree that greater shale gas production in Europe will make it harder for Iran to profit from exporting natural gas, as it currently hampered by Western sanctions against investment in its energy sector, so by the time it can get its natural gas ready for export, the marketing window to Europe will likely be closed by the availability of inexpensive shale gas.
Middle East might get a bit poorer as gas eats into the market for oil and if the drop in revenue is severe enough, it could bring instability. Also, shale gas development could also mean big changes for China, as the need for energy imports has taken China to problematic nations such as Iran, Sudan and Burma, making it harder for the West to forge global policies to address the problems those countries create.
Shale isn’t good news for Africa?
It seems that the North American shale story isn’t good news for some African members of OPEC (especially Nigeria, Algeria and Angola), and non-OPEC members such as Ghana and South Sudan. The US has drastically reduced its oil imports, and it posted the biggest increase in oil production in the world and the largest in US history in 2012 when production reached 9.0 MMb/d, up 14.3 % from 2011, according to the QENERGY Europe Statistical Energy Review. US output, adding to the world’s oil supply, has contributed to keeping oil prices from rising sharply in spite of supply disruptions from Nigeria, Iraq, Libya, South Sudan, and other key producers. African countries need high oil prices to support local spending. US imports from Nigeria were more than halved to 406,000 b/d in March 2013, from 916,000 in March 2011 and exports from Angola to the US from April 2011 to April 2012 dropped 39% to 4.9 MMbbl. Shale oil has been identified as one of the most serious threats for African producers as they could lose 30% of their oil revenue as they are edged out of the US market.
Nigeria and Algeria are suffering the worst effects from the North American oil boom since they produce a grade similar to shale oil. US imports of Algerian crude have declined over the last five years. The value of Algeria’s oil and gas exports fell by 9% in the first four months of 2013 compared to the same period in 2012 due to lower global crude oil prices. Angola, which produces around 1.73 MMb/d of oil, is already looking for new markets.
What’s the price impact due to U.S. LNG exports?
According to QE Europe estimations US LNG exports are projected to impact prices globally, not just in the countries importing US LNG. The U.S. export volumes considered only a small fraction of the total global gas supply, their price impact might be much higher than their relative volume might indicate. The most important to be analyzed and discussed in the possible implications to the structure of long-term gas supply contracts and available regional supplies are important factors in determining the price impact.
The price impact of U.S. LNG exports is projected to be much higher in the import markets than in the U.S. For example, with U.S. LNG exports to Asia the price impact in Japan is projected to be several times higher than the impact in the U.S. Similarly, with U.S. LNG exports to Europe the price impact in the UK is projected to be several times higher than the impact in the U.S.
Furthermore, markets in Europe and Asia rely on imports that have varying delivered costs. For example, Russian pipeline imports are more costly than Algerian pipeline imports in Europe and Nigerian LNG imports to Japan are more costly than the delivered cost of LNG from Qatar.
What’s the impact to world gas demand and LNG production?
QE’s projections show more displacement of non-LNG supplies than of LNG supplies due to U.S. LNG exports, as most LNG supplies are tied up under long-term contracts with minimum take volumes. Furthermore, if U.S. LNG is exported to Asia, the displaced volumes that are LNG supplies are about 30% of the total displaced supply. If US LNG is exported to Europe, the displaced volumes that are LNG supplies should be a little less, about 25% of the total displacement. The results make sense given the higher portion of Asian supply portfolio captured by LNG.
Notice, that the Australian LNG shows a rapid growth from its current level of about 23 MTPA (3 Bcfd) to 136 MTPA (17 Bcfd) by 2030. Only for comparison, Qatar is currently the world’s largest LNG producer, has 80 MTPA (12 Bcfd) of LNG production capacity. Due to its high supply costs, particularly from coal bed methane sourced projects, and its distance from market, Australian LNG is partially displaced by U.S. LNG exports and comprises almost 20% of the total displaced volumes by U.S. LNG exports to Asia and 10% with exports to Europe.
What will be the impact on oil markets?
I am quite sure that US LNG exports might also impact global oil markets, although obviously to a lesser degree than gas markets. LNG could displace oil in markets in which oil is burned for electricity generation. In some regions, oil-fired electricity generation is utilized because of lack of natural gas supply. Because gas has lower environmental emissions relative to oil, gas-fired generation would be preferred from an environmental perspective if gas supplies and generating capacities were available. For example, due primarily to increase in gas-fired generation, carbon-dioxide emissions in the U.S. in 2012-13 have dropped to their lowest level in 20 years. Other countries could also realize substantial environmental benefits by shifting from oil to natural gas-fired generation. Potentially, there could be almost 5.3 million barrels of oil per day displaced if gas supply were more available.
If U.S. LNG exports contribute to the decoupling of global gas prices from oil prices, it will increase the incentive to use gas-fired generation instead of oil-fired generation and global oil consumption might decrease. For example, in the aftermath of the devastating earthquake and tsunami that hit Japan in 2009, Japan shut down its nuclear power plants and to replace the lost power generation, Japan has increased both gas and oil imports to fuel gas- and oil-fired generation plants. In fact, Japan imports oil from Iran, after the U.S. exempted Japan from its financial sanctions against Iran. At the current high, oil-indexed prices that Japan is paying for LNG, it does not have much incentive to switch to natural gas. However, if prices fall as projected by QE, the incentive will be much greater to switch to gas-fired generation and reduce oil consumption. Greater global LNG supply might even help reduce oil price volatility since more substitutable fuel would be available and thereby increase supply elasticity.
In the end, what’s important to understand is that shale gas may be the key to solving some of our most pressing short term crises, a way to bridge the gap to a more secure energy and economic future. It’s obvious that shale gas has much potential to affect the entire energy mix, positively contribute to the energy security of supply and lead the technology for more energy initiatives. Sources: IEA, US EIA, BP, Cheniere, Caye Global News.
by Dr. Theodore Theodoropoulos
CEO of QENERGY Europe
‘’Oil, Gas & Petrochemicals’’ 2011, by Dr. Theodore Theodoropoulos