Golden age of gas comes at a price

Shale gas: from anarchy to "golden years" - but the climate challenge remains

If the unconventional gas revolution that started in the US can be replicated worldwide, the result would be a future of abundant supply, low prices and considerable economic benefits. But this can only be done if the industry adheres to strict environmental rules. Otherwise widespread social and environmental objections are like to slow the growth of unconventional gas, or even "halt it in its tracks", says the International Energy Agency.

It is appropriate that the rapid growth of unconventional gas production began in the American states of Texas and Louisiana - "the Wild West". Because of the way the industry grew in the years following the turn of the millennium, it began as what many have described as a "silent revolution". It was not until around 2007/08 that the aggregate effects of numerous relatively small developments began to add up to a surprising - even shocking - trend, now regarded as one of the great energy developments of our time.

In those early days the independent, relatively small, gas producers that were driving the revolution in the Wild West largely escaped the notice of regulators and governments. Some companies were clearly not as careful with the various techniques used to develop these new gas sources as they should have been. It was an anarchic time, which led to a proliferation of incidents that caused major concerns for local communities and environmental regulators.

Even today regulators and governments are struggling to rein in the industry, not least because they face a dilemma. Concerns that the techniques being used to drive the revolution - such as hydraulic fracturing or "fracking" - could contaminate water supplies or cause earthquakes are real and legitimate. On the other hand, the economic benefits of an abundance of cheap gas are helping to pull the United States out of the economic mire - and no-one wants to be accused of getting in the way of that.

It is to address this dilemma that the International Energy Agency has been analysing what measures are necessary to address social and environmental concerns so that the economic benefits of the unconventional gas revolution can be realised. Its conclusions were announced in London last week with the launch of a report entitled "Golden Rules for a Golden Age of Gas" - a follow-up to a report the agency published a year ago posing the question "Are We Entering a Golden Age of Gas?"

Seven golden rules

The over-arching message of last week's report, as expressed by the agency's executive director, Maria van der Hoeven, is that: "The technology and the know-how already exist for unconventional gas to be produced in an environmentally acceptable way." In other words, the potential for a golden age of gas is real.

However, she warns that: "If the social and environmental impacts are not addressed properly, there is a very real possibility that public opposition to drilling for shale gas and other types of unconventional gas will halt the unconventional gas revolution in its tracks."

Public opposition is widespread and growing. It has quickly spread from North America to Europe and a number of countries have already banned some of the techniques used to extract unconventional gas. The IEA hopes that this trend can be reversed if gas producers, governments and other stakeholders implement seven "golden rules" that it has formulated.

Fatih Birol, the IEA's chief economist and lead author of the golden rules report, concedes that following these rules would increase the cost of drilling wells. However, he argues that the increase is relatively small in the case of a single well - around 7% - and that this number could be reduced in a development with multiple wells, as investment in measures to reduce environmental impacts may in many cases be offset by lower operating costs. "For example," he says, "instead of using trucks to bring in water, a well designed pipeline system to get water in might require some significant investment to begin with but the return would be very positive."

So what are the IEA's seven golden rules?

• The first is to measure, disclose & engage. This is about engaging with local communities and reassuring them, ensuring that each phase of a development is well understood, and that concerns are listened to. The IEA suggests that producers should establish baselines for key environmental indicators, such as groundwater quality, before starting work, and monitor and publish data during operations. Disclosure of fracturing fluid additives and volumes should be mandatory. And communities should feel economic benefits from developments happening on their own doorsteps. 
• The second is to watch where you drill. Well sites should be chosen to minimise impacts on the local community, heritage, existing land use, individual livelihoods and ecology. The geology should be properly surveyed so that "smart decisions" can be made about where to drill and hydraulically fracture, so as to minimise the risks of earthquakes and of fluids passing between geological strata. 
• The third is to isolate wells and prevent leaks. This is about having in place robust rules on well design, construction, cementing and integrity testing, "as part of a general performance standard that gas bearing formations must be completely isolated from other strata penetrated by the well, in particular freshwater aquifers". The IEA suggests that minimum-depth limitations be imposed on fracking to underpin public confidence in water quality. Producers should ensure that waste fluids and solids are disposed of properly. 
• The fourth is to treat water responsibly. This is about reducing the burden on local water resources by improving operational efficiency and re-using or recycling wherever possible. Use of chemical additives should be minimised and benign alternatives used where possible. 
• The fifth is to eliminate venting and minimise flaring and other emissions. There should be in place a target of zero venting of natural gas and minimal flaring during well completion and operations to reduce greenhouse gas emissions. Air pollution from vehicles and equipment should also be minimised. 
• The sixth is be ready to think big. In other words, seek opportunities for economies of scale and co-ordinated development of local infrastructure to reduce environmental impacts, while taking into account the cumulative and regional effects on the environment of multiple drilling and delivery activities. 
• The seventh is to ensure a consistently high level of environmental performance. This is aimed primarily at governments and regulators who should ensure that sufficient resources and political backing are in place for robust regulatory regimes. The IEA advises that an appropriate balance is found "between prescriptive regulation and performance-based regulation in order to guarantee high operational standards while also promoting innovation and technological improvement". Emergency response plans should be robust and match the scale of risk.

Climate change

The IEA believes that successful implementation of its rules would create the right conditions for a golden age of gas and has built a scenario to examine what such a future might look like.

In this trajectory, known as the "Golden Rules Case", world production of unconventional gas more than triples between 2010 and 2035 to 1.6 Tcm (trillion cubic metres) per year. The US becomes a significant player in international gas markets, while China emerges as a major producer. New supply sources help to keep prices down, stimulate investment and job creation in countries rich in unconventional resources, and generate faster growth in global gas demand, which rises by more than 50% between 2010 and 2035.

Conversely, the IEA has examined what the future might look like without golden gas rules in place. In this trajectory, called "the Low Unconventional case", a lack of public acceptance means that unconventional gas production rises only slightly above current levels by 2035. Lower availability and higher prices reduce the competitive position of gas in the fuel mix, so that its share barely rises. Energy-related carbon dioxide emissions are 1.3% higher than in the Golden Rules Case.

Unfortunately for policymakers, the IEA stresses that neither scenario is sufficient to deal with one of the great preoccupations of our time: the need to do all we can to keep greenhouse gas emissions within limits that will achieve the globally agreed goal of limiting the rise in temperature to 2 degrees Celsius above pre-industrial levels.

The golden rules, if implemented as the IEA hopes, may lead to a golden age of gas - but a lot more needs to be done, and soon, if human kind is to successfully address the issue of climate change. That will be a central theme of the IEA's 2012 World Energy Outlook, which will be published on the 12th of November.

Chart 1 - World primary energy demand by fuel in a golden gas age

In the IEA's Golden Rules Case, demand for natural gas grows by as much as demand for oil, coal and nuclear combined, driven by abundant supply and low prices. This leads to gas becoming the second-largest component of the primary energy mix by 2035.

Chart 2 - Unconventional natural gas production by type in the Golden Rules Case

In the Golden Rules Case the share of unconventional gas in total production rises from 14% of the total in 2010 to 32% in 2035. Tight gas is rapidly overtaken by shale gas, which rises to almost 60% of the total, while coal-bed methane also grows, though not as rapidly.

 

Chart 3 - Natural gas net trade by major region in the Golden Rules Case

In the Golden Rules Case, rising unconventional gas output in China and the United States has major impacts on gas markets and security. Growth in China’s import needs slows down, while North America’s exports grow. These developments would together increase the volume of gas looking for markets after 2020 – particularly LNG.

Chart 4 - Cumulative change in energy demand by fuel and sector in the Low Unconventional Case relative to Golden Rules Case, 2010-2035

In the Low Unconventional Case, the competitive position of gas deteriorates, compared with the Golden Rules Case, as a result of lower availability and higher prices. Its share in the energy mix increases only slightly, from 21% in 2010 to 22% in 2035. The fall in gas demand is mostly compensated for by higher coal consumption.

Chart 5 - Natural gas balance in the European Union in the Golden Rules Case

In the Golden Rules Case, unconventional gas production is slow to take off in Europe but accelerates in the longer term. Unconventional gas contributes almost half of the European Union's total gas production and meets just over 10% of its demand by 2035. Growth in unconventional production offsets continued decline in conventional output from 2020.