The Promise of Shale
Advanced drilling techniques have enabled the probing of vast amounts of shale gas. This newfound energy wealth has transformed the US gas industry. This American Revolution in natural gas is considered by many to be able to fuel much of the country’s electric generation for decades to come.
years of consumption at current rates. This according to a major new analysis of the leading unconventional gas plays in North America by IHS Cambridge Energy Research Associates (IHS CERA). The study, Fueling North America’s Energy Future: The Unconventional Natural Gas Revolution and the Carbon Agenda, concludes that the recent expansion of natural gas resources – the Shale Gale – provides the potential to transform North America’s energy landscape. A new gas market paradigm has emerged into clearer focus and one which may change the way the US looks at future energy choices.
T
Fueling North America’s Energy Future The Unconventional Natural Gas Revolution and the Carbon
Agenda, concludes that the recent expansion of natural gas resources – the shale gale – provides the potential to transform North America’s energy landscape. Growth in US power demand over the coming two decades will likely lead natural gas demand for power generation to nearly double by 2030 from its current level of 19 bcf per day. Moreover, the substitution of coal-fired generation with natural gas-fired generation will result in short-term GHG reductions. However, there is currently a limited pool of ‘spare’ gas-fired capacity which prevents wholesale fuel switching, the study says. Simply replacing coal-fired generation with natural gas-
fired units will not, however, allow the often discussed target of 80% reduction in GHG emissions by 2050. This will require the deployment of non-carbon emitting technologies including nuclear and renewable power as well as significant advances in carbon capture and storage (CCS). “The shale gale has shifted natural gas from a constrained
resource to an abundant one with wide-ranging implications for the energy future,” says David Hobbs, IHS CERA Chief Energy Strategist. “This new abundance of natural gas provides a crucial additional ‘shock absorber’ for supplies, providing greater flexibility to react to disruptions and market imbalances.” However, the stringency of any future carbon reduction legislation and the viability of CCS (yet to be demonstrated at scale) are the two major uncertainties facing natural gas’ future place in the generation mix, the report concludes. “The power industry has a multiple-decade planning
horizon,” according to Lawrence Makovich, IHS CERA Vice Present and Senior Advisor. “Because the uncertainty of the stringency of climate changes policy and the viability and cost competitiveness of CCS, there is the possibility that new gas-fired power plants may not run for their intended life spans. For the industry the most prudent way to protect itself against future uncertainty remains through a resilient, diversified portfolio.”
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he ‘Shale Gale’ sweeping North America over recent years has more than doubled the size of the discovered natural gas resource – enough to satisfy more than 100
Global Gas Demand
Gas markets will be in surplus for at least the next four years, and even after the glut eases, US and European prices will not achieve parity with oil, energy companies told the Reuters Global Energy Summit held in May, 2010.
“Gas faces a bubble – especially in the Atlantic Basin,” Jean-
Jacques Mosconi, head of strategy for Total SA. “It is coming from the economic crisis plus a surge of unconventional gas production from the US ... We have a view that the bubble will last until 2014.”
The gas market has been hit by a collapse in demand since
the onset of the global financial and economic crisis in 2008, which coincided with a surge in output of gas in the US. As a result, gas prices have collapsed.
Based on its ability to generate heat – ‘calorific value’ –
natural gas should be worth around one sixth of the cost of oil, which with oil prices around US$70/bbl should put gas close to US$12 per mmBtu. But the benchmark US gas futures prices have not been close to US$12 for almost two years [currently trading around US$4.12 per mmBtu].
Energy companies see little chance of an easing of the
glut. “We don’t see it ending for the time being,” said Martin Fraenkel, head of commodities at Credit Agricole CIB.. “Clients, particularly in North America, have been interested in increasing their exposure to the oil price and reducing their exposure to gas prices.” Ulrich Jobs, CEO of RWE Group, was equally gloomy: “Oversupply might be ending by 2015. Some people say five years, some people say two years.”
Carlo Malacarne, head of Snam Rete Gas, continental
Europe’s leading regulated gas operator by assets, agreed: “I don’t think oversupply will remain in place beyond 2015.”
Mosconi said that even after global gas demand picked up
and the gas market bubble eased, prices would still not recover properly in western markets. While Asian gas prices may stay within striking distance of parity with oil, prices in the US and Europe would be much weaker in what would effectively be a two-tier market. “At the end of the bubble, we believe in oil parity for the Asian market but not for the Western market,” Mosconi said. “Because of the surge in shale gas in the US market we will remain driven by the break even point of shale gas and we see that at roughly US$6-7/mmBtu.”
“The whole market is taking a new shape,” said Shokri Ghanem, the Chairman of Libya’s state oil company. “There could be a two-tier price in the making ... The longer-term market will have it’s own shape and the spot market in another way will maybe have different prices.”
worldPower 2010
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