Shale Gas Revolution Raises Questions On Future Of Gas Market And Renewables

Shale Gas Revolution Raises Questions On Future Of Gas Market And Renewables

Two significant circumstances have increased uncertainty in the international gas market since 2007: the global economic recession that led to a temporary fall in gas demand, and “the sudden and unexpected” development of unconventional gas supplies in the US – the so-called ‘shale gas revolution’.” In a recent Chatham House report, The ‘Shale Gas Revolution’: Hype and Reality, Paul Stevens states that these two factors have turned the relatively tight gas markets of 2006-07 into a buyers’ market and at the same time led analysts to regard the arrival of shale gas on the market as a ‘game changer’ that will have significant implications for the global supply and demand balances and for how gas markets work together with the underlying geopolitics.

Prof Stevens says the advent of shale gas in the US has created huge uncertainties for international gas markets that are likely to inhibit investment in gas – both conventional and 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,” he says in the report, but adds: “If it falters and the current hype about shale proves an illusion, the world will face serious gas shortages in the medium term.”

Since 2000 shale gas output has gone from 1% of US production to 20% by 2009, but Prof Stevens says there are doubts as to whether this ‘revolution’ can spread beyond the US, or even be maintained there. Shale production technologies – horizontal drilling and hydraulic fracturing – are coming under increasing scrutiny for their negative environmental impacts and, while shale gas resources are estimated to be five times those of conventional gas, there is concern that their depletion rates are much faster. Furthermore, the factors that contributed to the development of shale gas in the US may not exist in other parts of the world.

The shale gas revolution has led to the reduction in LNG capacity utilization, “now reflected in dramatic reductions in forecasts of LNG capacity,” Prof Stevens says. He notes that investors in the US who “poured money” into LNG regasification plants in anticipation of larger US gas imports have been seriously hurt. Gas prices have fallen, although this can also be linked to the global recession, but in many markets the lower prices have raised questions over the traditional link between gas and oil prices. He states that lower prices have given rise to speculation over whether major gas exporting countries may try to protect their interests through the formation of a ‘Gas OPEC’.

“Because of the shale gas revolution there are now huge investor uncertainties at all stages of the gas value chain,” he states. “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.”

Prof Stevens adds that from these implications, two major problems arise: gas is likely to gain a greater share of the global primary energy mix, but 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. He says that if the ‘revolution’ in the US continues and is replicated elsewhere, inadequate investment matters less. But if it fails to deliver on current expectations, at some point in the future gas supplies will face serious constraints.

The second problem, he says, is that it could affect 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,” Prof Stevens says. “The uncertainties created by the shale gas revolution have significantly compounded this investor uncertainty. In a world where there is the serious possibility of relatively cheap gas, who will commit large sums of money to expensive pieces of equipment to lower carbon emissions?”

Copyright MEES 2010.