Golden age of gas comes at a price
In a stark message to gas producers and governments last week, the International Energy Agency (IEA) set out seven golden rules which it believes are essential to granting gas producers "a social licence to operate". The IEA's chief economist Fatih Birol estimates that applying the agency's "golden rules" to the drilling of unconventional gas wells will increase production costs by around 7%. There could also be a price in terms of climate change. In a world awash with cheap gas, Birol fears that governments may be tempted to eliminate much-needed subsidies for renewable energy technologies. The ideal energy mix is probably some combination of renewables with gas and carbon capture and storage, says Birol.
Clear message in the streets of Brighton (c) Alex Forbes
We said almost four years ago that we were going to see a silent revolution in the natural gas market, starting in the United States. That silent revolution has become rather loud. Last year we published a report that posed the question "Are we entering a golden age of gas?", looking at what the drivers of such a golden age might be. We put that question mark in because we thought that the environmental and the social implications of shale gas production could end up blocking progress to a golden age.
This year we have analysed the rules that the companies will have to follow to minimise - if not nullify - the social and market implications. What would this mean? How much would it cost? And what needs to be done by governments, by companies, and by the public?
In any case, we have also said that even a golden age of gas doesn't mean that we are going to reach a 2 degrees trajectory [in global warming].
The G8 has expressed an interest in your "golden rules" work. How did that come about?
At their recent meeting in Camp David the G8 countries said that they commended the book, that they would be reviewing it, and that best practices in line with the golden rules are to be shared by developed and developing countries.
As you say, what began as a silent revolution has become very loud - even in my home city here in the UK. On my way in today there was a big poster at Brighton station from an organisation called frack-off.org, protesting at the use of hydraulic fracturing to extract natural gas from shale rock. The pressure against the use of hydraulic fracturinghas grown enormously, in North America and here in Europe. Isn't it a little too late to introduce golden rules? Isn't the reputation of unconventional gas already so tarnished that it will be difficult to reverse the trend?
That's a very good question. The concerns of the public are in many cases legitimate - in terms of water
|"The concerns of the public are in many cases legitimate - in terms of water contamination, air pollution, flaring, noise, trucks and so on"|
One has to look, of course,at energy security issues,environmental issues and macroeconomic issues. But we must also consider this from the point of view of the citizens, the local communities.
You have said today that there is a danger that the golden age of gas could threaten the policies that governments have put in place to support renewables. How big a danger is that?
Today the growth of renewables is mainly driven by government subsidies. There are about $60 billion worth of government subsidies, about half of this in Europe, and in most cases these subsidies are well justified. However, if gas prices are cheap - which we assume they will be in a golden rules context - that may give wrong ideas to governments to eliminate those subsidies. This could lead to major consequences for the renewables industry, which would be bad news for climate change.
You have stressed that what you're presenting today are scenarios for a golden age of gas, not a golden age of climate. There has to be an ideal mix of policies. What would that ideal mix be? Is that something you will cover in your forthcoming World Energy Outlook (WEO)?
Yes. This year's WEO will again contain a 2 degrees trajectory. In that trajectory we think that gas,among other fuels, needs to replace coal and that a CCS (carbon capture and storage) and gas combination is needed. We will come up with our proposed energy mix.
It's difficult to see CCS technology becoming economic. Do you see CCS working better with gas than with coal?
It can work in both cases but when I look today at the gas industry and the coal industry I see more
|"When I look today at the gas industry and the coal industry I see more appetite in the gas industry to make use of CCS"|
You've said that the golden rules will probably increase the costs of drilling unconventional gas wells by around 7%. What kind of feedback have you had, or expect, from the producers?
I hope that they take our suggestions seriously. The book has been peer reviewed by many companies - including oil service companies and gas service companies - and our numbers found generally plausible.
If the companies ignore the legitimate concerns of the public they will be shooting themselves in the foot.
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.
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.
So what are the IEA's seven golden rules?
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.
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.
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.
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.
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.
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.