CSIS: unconventional resources altering global gas outlook

Nick Snow
OGJ Washington Editor

WASHINGTON, DC, Oct. 30 -- Production potential from tight shales and other unconventional resources has significantly altered the world’s natural gas outlook, experts said Oct. 28 at a seminar on the evolution of global gas markets at the Center for Strategic and International Studies in Washington, DC.

“Unconventional sources are likely to play a role in other parts of the world,” observed Glen Sweetnam, director of the US Energy Information Administration’s international, economic, and greenhouse gases division.

By 2035, shale gas could represent 62% of the total gas produced in China, 50% in Australia, and 42% in the US, Sweetnam. “They also have shale gas in Europe, but there’s increasing disagreement over whether it will be developed” because so few of the resources are on private property, officials must contend with a “not-in-my-backyard” (NIMBY) attitude, and the region does not have a particularly robust oilfield service industry to support it, he said.

Sweetnam said EIA is in the process of “tuning up” its first international gas outlook model, which will be included in the next annual energy outlook. Gas provided 26% of the world’s consumed energy in 2006 and should continue to supply a similar share, he said, adding, “In end uses, gas will compete against other fuels in stationary markets.”

When it released its initial estimate of yearend 2008 US oil and gas reserves on Oct. 29, EIA noted that gas reserves rose enough not only to replace production during the year, “but also to grow by almost 3% over [their level at the end of] 2007, largely due to continued development of unconventional gas from shales.”

Sweetnam said, “Low-cost US conventional gas has been depleted. We’re left with high-cost conventional gas deep onshore and in small pockets offshore. The unconventional resource is larger, but its costs will have to come down to about $4/MMbtu to be competitive.”

Local factors
Local conditions will determine the time and extent of shale gas development, other seminar panelists noted. The lack of existing infrastructure and water-handling issues will likely make Marcellus shale development move more slowly than other US gas-bearing shales, according to Jen Snyder, head of Wood Mackenzie’s North American gas practice in Houston. Europe could be “a game-changer” but only after 2019, she added.

Jim Jensen, president of Jensen Associates in Weston, Mass., warned against shale gas over-optimism. “Natural gas is the manic-depressive of energy, swinging from dwindling to abundant supply prospects,” he said, adding that shale gas development could be affected by cost questions as well as water disposal and NIMBY issues.

Snyder said the arrival of an economic recession toward the end of 2008 and a recovery that looks increasingly gradual influences the gas demand and price outlooks. “Demand retrenchment occurred as global liquefaction capacity grew, creating a complete mismatch,” she observed.

Through last year, Pacific Basin customers called on Atlantic Basin suppliers for around 1.8 bcfd of gas, Snyder said. Now, it’s around 400 MMcfd. New North American shale gas production growth through 2015 could negate its pull on Atlantic Basin LNG, she suggested.

“What we’re seeing over the next few years is that even through European supplies are under take-or-pay contracts, volumes will contract to protect the price through periods of excess supply,” Snyder said. LNG prices in Europe and the US could stay close through 2013, but may climb in 2013 in Europe but not in the US because of its shale gas production. “Essentially, a wide gap could open when more LNG supplies are delivered into Europe. We also see Qatar continuing to deliver baseline supplies to the US to protect prices,” she said.

‘Upstream very blurred’
Investment costs for developing new global gas supplies vary, the panelists noted. “A lot depends on the size, distance, and location,” said Jensen. “The upstream is very blurred. In places like Qatar, some of the opportunity costs are negative because all the money is in liquids and the gas might be flared to save reinjection costs.”

Snyder noted that long transportation costs also raise some questions. Jensen added that new gas development is increasingly occurring away from coasts, while customers avoiding some potential producers for political reasons also could affect costs.

Panalists also questioned whether a gas cartel could emerge. “We see individual incentives with producers like Russia,” said Snyder, adding, “Going forward, with European shale gas development and a wider supply base, there could be a movement away from oil price-based contracts.”

Jensen said, “I’ve always been skeptical that a gas cartel could work. [The General Agreement on Tariffs and Trade] stipulates that countries can’t exercise export controls, which is why [the Organization of Petroleum Exporting Countries] sets production quotas. Because the major gas exporters export only 36% of their total production, controls would affect their domestic markets.”

He said Russia could continue to be a leader gas exporter, once it resolves whether OAO Gazprom, its national gas company, is a commercial or political entity. Iran also could be significant because it has the world’s second-largest reserves, but its growing domestic demand and need to reinject gas into oil-bearing formations could limit exports, Jensen said. Caspian Basin gas producers face significant pipeline transportation issues while China, which has substantial gas resources, may find them more expensive to produce and consumer than coal, he added.

Sweetnam said, “It’s difficult to increase market control if you’re facing competition from other stationary sources such as nuclear and coal.”

US exporting LNG?
Panelists also were skeptical of US prospects to become an LNG exporter if its shale gas resources are aggressively developed. Jensen said liquefaction plants require substantial customer commitments, and that US exporters would be competing in a global market with suppliers with lower overhead.

“I think North America is much likelier to export LNG technology than product,” added Snyder. “We also might see some revival of the domestic petrochemical industry.”

One audience member disagreed. “With enormous pipeline capacity between the Marcellus shale in the Northeast and the Gulf Coast, LNG exports don’t sound so far-fetched, particularly to Europe,” said Benjamin Schlesinger, president of Benjamin Schlesinger & Associates LLC in Bethesda, Md.

Contact Nick Snow at nicks@pennwell.com.

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