Grupo de Economia da Energia

The future of shale gas and dynamics of the natural gas industry

In natural gas on 06/06/2011 at 00:30

By Marcelo Colomer

The development and improvement of horizontal drilling and hydraulic fracturing techniques have allowed the expansion for production capacity of natural gas in low permeability geological formations, especially in shale formations. In this new exploitation context, there is a growing shale gas production in the USA and Canada, where the increase in domestic supply of natural gas has completely changed the energy market.

However, despite the increase in Canada and USA shale gas production, there are still major uncertainties about the productive potential of natural gas in low permeability geological formations. This is explained not only by lack of geological data in specific shale formations, but also by high and still little-known environmental impacts of the shale gas production.

Between 2000 and 2010, the shale gas production in the USA increased from 30 million m3/d to 373 million m3/d, representing an increase of approximately 28% per year. Currently, about 23% of dry natural gas production in the USA comes from low permeability geological formations. Regarding the availability of resources, there was an increase of 1.6 trillion m3 in reserves of shale gas, in 2009, totaling about 20% of proved reserves of natural gas in USA.

The growing importance of resources from low permeability geological formations in the USA can be found in the Annual Report of the International Energy Agency (World Energy Outlook 2010) that estimates 24 trillion meters for technically recoverable resources of shale gas in the USA. Given a total estimated resource of natural gas in 71 trillion cubic meters, the shale gas resources constitute 34% of North American natural gas, according to IEA. As a result, the agency predicts that shale gas will be mainly responsible for the expected growth in domestic production of natural gas in the USA. By 2035, it is estimated that production of shale gas will correspond to 46% of North American production of natural gas.

The increased production of shale gas in both USA and Canada has been changing deeply the international natural gas market. Historically, the gas market was based regionally according to the physical characteristics of the transport. That is, other than oil, where high energy density under normal conditions of temperature and pressure led to the development of a global market composed of multiple sources of supply and many markets, the high costs for transportation of natural gas contributed negatively to the development of a genuine global fuel market.

However, in the 80s and 90s, the development of new liquefaction and LNG transport technologies allowed increased market flexibility by diversifying the routes of international natural gas trade and increasing the number of agents in the market. The massive expectations regarding the impact of LNG on the international natural gas market generated in academic debates the idea of establishing an OPEC for gas.

The expansion of shale gas production, however, has contributed to reversing the trend of integrating international natural gas market brought by LNG. For example, in 2009, 57% of international natural gas trade occurred regionally. This figure becomes even more significant, 76%, if Europe and Eurasia are considered a single region. With regard to modal, 72% of the international circulation of natural gas, in 2009, was through gas pipeline.

In the USA, the recent reductions in LNG imports are associated not only to the 2008/2009 economic crisis, but also to increased domestic production of shale gas. This is certified by unlinking of price at Henry Hub in relation to the price of WTI since 2009 when prices of oil reversed their drop trend.

The potential impact for the production of shale gas on the dynamics of international natural gas trade is linked to its impact on the geographic distribution of resources. If the data related to proved reserves of natural gas are reported by 2010 BP Statistical Review with estimates made by U.S. DOE regarding availability of resources from shale formations (Figures 1 and 2) it is evident that the shale gas contributes to a better geographical distribution of natural gas.

Figure 1 – Proved Reserves of Natural Gas in 2009

Source: Prepared according to 2010 BP Statistical Review data

Figure 2 – Proved Reserves and Technically Recoverable Resources of Natural Gas in 2010

Source: Prepared according to 2010 BP Statistical Review and 2010 EIA-DOE data

The difference between both Figures reflects the existence of large reserves of shale gas in countries with low reserves of conventional resources such as France, Poland, Mexico, South Africa and Argentina, according to Figure 3.

DOE preliminary data shows that shale gas resources worldwide are massive. It is estimated that there are 185 trillion cubic feet of technically recoverable shale gas in the world. This volume is even more impressive if we consider that the recoverable natural gas resources in the world (excluding shale gas) in 2010 totaled 448 trillion cubic feet. Accordingly, the addition of identified resources shale gas to 2010 resources is a 40% increase in technically recoverable resources in the world. Figure 3 highlights the main areas with potential for exploitation of shale gas in the world.

Figure 3 – Volumes of technically recoverable shale gas, proved reserves, production and consumption reported in 2009

Source: Prepared according to 2010 EIA-DOE data

Despite the great productive potential of the low permeability geological formations, there are still major uncertainties about the environmental impacts of the production of shale gas, which has led many countries to ban production in their territories. The hydraulic fracturing techniques, besides a large amount of water, employ chemicals such as benzene, which penetrates the soil contaminating water table next to production areas.

Moreover, the production of shale gas requires hundreds of thousands km2 of land compared to the tens or hundreds necessary for the development of conventional gas. This is explained by the need of drilling a large number of adjacent wells. In certain areas such as in Europe, for example, this characteristic of the production of shale gas becomes a problem as the population density (three times higher than in the USA) results negotiations concerning the production rights and rights to access land with hundreds of landowners.

In this context of uncertainty about the social and environmental impacts, the French National Assembly, in early 2011, banned the hydraulic fracturing technique until the conclusion of the environmental and economic impact report for the production of unconventional gas. In the same way, Switzerland has suspended indefinitely the authorization for production of shale gas in its territory due to environmental uncertainties.

Even in America, pressures made by society against the production of shale gas begin. In New York, where we find one of the largest shale gas reservoir in USA (Marcellus field), the production of shale gas was provisorily interrupted while environmental risks in the region are evaluated. In Texas, the first U.S. act was approved in 2011 requiring natural gas companies to disclose the amounts and types of fluids employed in hydraulic fracturing process. In this context, U.S. Environmental Protection Agency has been working to prepare a study on the impacts of the production of shale gas and disclose the initial results in 2012.

In short, what can be concluded is that despite the great productive potential of the low permeability geological formations (shale) the development of the production of shale gas faces environmental issues. Accordingly, we can state that the pace of growth in production of natural gas from shale formations will directly depend upon the balance of forces between energy security advocates and environmentalists concerned about the environmental and social impacts of the production of shale gas.

The fact is that the 2011 nuclear moratorium gives no alternative for many countries, mainly the European Community, in terms of energy source. This leads us to believe that the goals of energy security will be prioritized despite the increased enforcement and stricter regulation on the hydraulic fracturing process.

References

BP Statistical Review, 2010

IEA World Energy Outlook, 2011

EIA-DOE World  Shale Gas Resources: An Initial Assessment of 14 Regions Outside the United States, 2011

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