The Shale Gas revolution: hype and reality

September 28, 2010 | 00:00

The Shale Gas revolution: hype and reality

The recent ‘shale gas revolution’ in the United States has created huge uncertainties for international gas markets hat are likely to inhibit investment in gas – both conventional nd unconventional – and in many renewables. If the revolution continues in the US and 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 an illusion, the world ill face serious gas shortages in the medium term.

The gas context and expectations of fture developments u to the 1990s, outside the former Soviet Union, gas failed o increase its share in global primary energy consumption. Yet the 1990s saw many of the earlier constraints on its use begin to erode. Together with its natural advantages as an energy source, this opened the prospects of much greater use of gas in the future. At the same time, economic and technical developments in liquefied natural gas (LNG) suggested that the international gas trade was likely to expand. Many observers began to speculate that these developments could encourage gas to become more of an international market. Questions began to be asked about whether the increasing globalization of gas might carry significant consequences, as had been the case with oil in
the 1970s and after. However, (largely) unexpected developments in unconventional gas in the US have confused the picture, in what has been dubbed the shale gas revolution.

Since 2000, shale gas production has leapt from accounting for only 1% of US production to 20% in 2009. However, there are doubts as to whether this ‘revolution’ can spread beyond the United States, or even be maintained within it. The technologies that made this possible – horizontal drilling and hydraulic fracturing – are now coming under increasing scrutiny for their negative environmental impacts: drilling moratoria are being sought while environmental impact studies are completed. Also, although unconventional gas resources are estimated to be five times those of conventional gas, there is concern that their depletion rates are much faster. The US experience was triggered by many favourable factors connected with geology, tax breaks and the existence of a vibrant service industry.

There are serious doubts about whether such favourable conditions can be replicated outside the United States, especially in Western Europe where there is much current interest. In Europe 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. Finally, 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.

The gas market and investor uncertainty An immediate consequence of the shale gas revolution has been a reduction in LNG capacity utilization, now reflected in dramatic reductions in forecasts of LNG capacity. In particular, investors in the United States who poured money into LNG regasification plants in anticipation of larger US gas imports have been seriously hurt. Gas prices have been falling, although decreasing gas demand following the global recession has also contributed to this. In many markets these lower prices have raised questions over the traditional link between gas and oil prices. Lower prices have also given rise to speculation over whether major gas-exporting countries may try to protect their interests by collective action through the creation of an Organization of Gas Exporting Countries (OGEC). Because of the shale gas revolution there are now huge investor uncertainties at all stages of the gas value chain. Whether to invest in gas production – conventional or otherwise? Whether to invest in new pipelines, LNG plant and storage? Whether to ‘invest’ in long-term supply
contracts? All of these uncertainties are likely to lower future investment levels. There are already signs of gas export projects being cancelled or postponed. The implications From this uncertainty two major problems arise. First, as the world recovers from global recession and as constraints on gas use continue to erode, demand will grow and gas will probably gain ever greater shares in the global primary energy mix. However, given investor uncertainty, investment in future gas supplies will be lower than would have been required had the shale gas revolution not happened, or at least had it not been so hyped up. If the ‘revolution’ in the United States continues to flourish and is replicated elsewhere in the world, this inadequate investment matters less. Consumers can look forward to a future floating on unlimited clouds of cheap gas as unconventional gas fills the gaps. However, if it fails to deliver on current expectations – and we will not be sure of this for some time – then in ten years or so gas supplies will face serious constraints. Of course markets will eventually solve the problem as higher prices encourage a revival of investment in conventional gas supplies. Yet given the long lead times on most gas projects, consumers could face high prices for some considerable time.

The second problem concerns investment in renewables for power generation – a necessary consequence of the general agreement that the world must move to a low carbon economy if climate change is to be controlled. The failure of the Copenhagen talks has already injected considerable uncertainty into the investment climate for power generation, not least because of uncertainty over the future price of carbon. The uncertainties created by the shale gas revolution have significantly compounded this investor uncertainty. In a world where there is the serious possibility of cheap, relatively clean gas, who will commit large sums of money to expensive pieces of equipment to lower carbon emissions?

Full report here.

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