How can the development of shale gas production influence the global energy market?
Anatoly Dmitrievsky, Academician of RAS, Director, Oil and Gas Research Institute RAS
Shale gas production is currently underway in the USA and Canada only. Shale gas plays in the USA are thoroughly investigated. In 2009 some 67 billion cubic meters of gas was produced there. The annual production buildup is evaluated at 5.3 per cent.
Shale gas fields are being searched for in Europe currently. Largescale activities are carried out in Poland by such trans-national companies as ExxonMobil and Marathon. Work is ongoing in France, Germany, Sweden and Austria. However, it is difficult to speak about the prospects for shale gas production in Europe.
Meanwhile, the USA says that in future domestic shale gas production will allow for liquefied natural gas (LNG) imports reduction. According to the US forecasts, by 2030 LNG imports may drop down by 30 to 40 per cent. Even if these forecasts come true, according to our estimates Russian gas will be demanded on the US market anyway as the USA is interested in reducing the dependence on LNG supplies primarily from the Middle East and Central Asia.
The prime cost of shale gas production is estimated to be quite high, some USD 100–150 per 1,000 cubic meters. This is a number of times higher than the prime cost of conventional gas production. The prime cost of gas production on Yamal will be lower – some USD 42 per 1,000 cubic meters, but considerable costs are required for gas transportation. Thus, the prime cost of shale gas production is suitable for its utilization near the production area – in case it is transported even not that far, it becomes uncompetitive.
At the same time, the phenomenon of shale gas should be carefully investigated and taken into consideration when shaping the export policy, as non-conventional gas has started displacing conventional gas, LNG in this case, for the first time ever.
Irina Gaida, Boston Consulting Group
North America concentrates some 75 per cent of discovered reserves of non-conventional gas. According to some estimates, this gas is enough to satisfy the US consumer demand within 20–25 years. Thus, it is capable of competing with conventional pipeline gas and LNG imports in the USA.
Nobody expected so speedy development of shale gas production. From 2005 to 2009 production grew 50 per cent a year. This ensured substitution of about a half of LNG imports. For example, in 2008 LNG demand in the USA dropped versus 2007 by 10 billion cubic meters substituted with shale gas.
Shale gas production in the USA resulted in excessive LNG amounts, which has changed the balance of Western European supplies. In general, as a result of the 2009 crisis Europe reduced gas consumption by 6 per cent. Production was primarily cut by domestic producers, particularly in the Netherlands, where expensive gas recovery enhancement techniques were applied in aged fields. Meanwhile, LNG consumption was increased. LNG supplies grew by 14 billion cubic meters, nearly as much as Russian gas consumption dropped. The reason for that lays in the pricing system provided for in the Russian gas supply contracts, namely – in the contractual price pegging to oil derivatives with a 6 to 9-month indexation.
However, shale gas was actually an excuse but not the reason for changes in the situation. The reason is that the European Union pursued the integration policy in various countries, liberalized access to the gas pipeline system and diversified supply sources. The access to so called liquidity hubs (borderline nodes of the gas transmission and storage systems) was gained by ultimate consumers – for example industrial companies and power stations. Thus, ultimate consumers can choose whether to buy LNG or pipeline gas. Excessive LNG amounts made a number of suppliers discount their prices considerably and those suppliers who failed to change their attitude to pricing lost their sales amounts.
The prime cost of shale gas is much higher than that of conventional gas – the break-even point of most of the projects is at the gas price of USD 4 to 8 per million of BTUs (some USD 144–288 per 1,000 cubic meters). Production requires continuous drilling, the pay period of wells is short. At the same time, the prime cost may vary greatly within a single field. These opportunities are investigated in the regions where there is no alternative to imports. The main advantage of shale gas is proximity to consumption regions with a branched gas infrastructure saving delivery costs.
However, shale gas or LNG may be more advantageous for ultimate consumers than pipeline gas since pipeline gas pricing is not related to its prime cost.
Shale plays in Europe have not been investigated so far. There are two most common, though opposite, opinions. According to the pessimistic opinion, shale gas reserves account for a half of the onshore gas reserves being developed in Europe. While the optimistic opinion states that these reserves are commensurate with the conventional gas reserves in the operating fields and reach a half of all the discovered but not developed conventional gas reserves. The deposits could be large enough for Europe to repeat the US experience. It should be noted that many countries and international associations initiated additional research still unaccomplished. According to some estimates the potential of non-conventional gas production in Europe by 2030 could be comparable with today’s gas production in the Netherlands. Another question is whether Europe possesses the required skills, capacities of petroleum servicing companies, and whether this is permitted by their environmental legislation?
In this situation Russia should in any case think of how to maximize the profit from gas exports to Europe. One of the options is to change the gas pricing mechanisms by detaching the formula from oil derivatives. Meanwhile, it is most likely that the amount of gas supplies to the European market well be maintained. Another option is to keep the price formula intact with a high probability of reduction in supply amounts. In order to select the best option, it is necessary to carry out serious analysis based on the market development scenarios and the actions of other market players.
Nikolai Ivanov, Energy and Finance Institute
The economics of shale gas and conventional gas production differ. For example, gas inflow is obtained much quicker in a horizontal well drilled in shale if compared to a conventional gas well. At the same time, initial gas inflow rates may be quite significant. However, they decrease before long and it is necessary to drill ever more wells in order to maintain production. Thus, the actual prime cost of shale gas may turn out to be several times higher than the figures voiced by mass media.
It is estimated that the actual cost of shale gas production reaches USD 265–282 per 1,000 cubic meters, and the investments required for wells drilling and maintenance in the US Barnett shale play only total an immense amount of USD 75 billion.
We believe that the current US market is rather speculative. The equity market evaluates the companies that drilled the first shale gas wells on the basis of the conventional gas production economics with no consideration of the need for considerable investments in maintaining production. In 2009 this resulted in a twofold upsurge in the capitalization of the major US shale gas producer – Chesapeake Energy Corporation.
Meanwhile, some experts have questioned the feasibility of shale gas production projects. The estimated recoverable gas reserves in the Barnett shale play turned out to be several times lower than had been expected before. At the same time, the productivity of wells was declining much faster if compared to conventional fields. Some 15 per cent of wells drilled in 2003 exhausted as soon as in 5 years.
Another important problem is environmental protection. Shale gas production technologies are not perfect in this context. For example, in the New York State there is a moratorium for shale gas production in a number of Marcellus play fields for half a year. The farmers of the State believe that shale gas production is associated with a risk of ground waters pollution with the hydraulic fracturing fluid.
The amount of European non-conventional gas reserves is unknown. According to the International Energy Agency (IEA) estimates they are equal to 35 trillion cubic meters. This is less than in the USA or Russia but still 6 times higher than the amount of conventional gas reserves in Europe. Approximately a half of the reserves are shale deposits, the rest are contained in coal seams and sandstone. IEA supposes it is enough to substitute gas imports for 40 years.
Meanwhile, according to some estimates, shale gas production in Europe will be feasible in case the price is some USD 340 for 1,000 cubic meters, which is much higher than today’s spot prices.
Europe faces a number of challenges in shale gas production. Exploration work in shale gas fields requires drilling of numerous wells, which may be quite difficult in densely populated Europe. Environmental issues may emerge as well. Even a low risk of ground water pollution may lead to a ban on shale gas prodcution. However, one should not forget that a lot of promising shale gas resources are located in the countries most dependent on Russian gas supplies – in Poland, Hungary and Ukraine. Their desire to become independent from gas imports may surpass all the negative factors.
It is still difficult to speak about how strong shale gas production may influence the global energy market. Skeptics and optimists argue on this issue.
There are two parallel processes running in the USA: non-conventional gas is becoming cheaper and conventional gas is becoming more expensive. The bulk of conventional gas reserves in the USA are expensive and difficult to access. The major onshore reserves are concentrated in small deposits or on the fringes of aged fields. Over the recent 7 years only some 57 billion cubic meters of gas per annum was produced offshore. Associated petroleum gas production is rapidly decreasing.
At the same time, non-conventional gas production is increasing. There is the only matter for argument: whether non conventional gas will supplement or replace the gas deemed conventional today? Much will depend here on the price behavior and political decisions of the US administration. However, the trend toward the replacement of “conventional” gas with the “non-conventional” one is likely to persist.
It is important that the market has started moving. Even if the shale bubble will turn out to be a bubble in fact, such market disturbances do not vanish. They give an impetus to the development of technologies for utilization of the alternative energy sources not related to gas production. This is it – the intelligent and technological boom to become the main outcome of the so called “shale gas revolution”.
The USA has understood that it may get rid of the dependence on the unfavorable regimes. These are, mainly, the Middle Eastern regimes that traditionally supplied LNG to the North American market. In case the market changes in America, it will change globally.
Russian energy suppliers in this situation will have to prove that stability of supply is more important than the instantaneous benefit for the customer. Gazprom has many advantages – long-term rules of play; no risks, neither technological nor economical. The question is whether this stability and confidence in future will be heavier on the scale than the adventurous attempts to find an alternative to conventional gas.
In any case it is too early to make categorical conclusions that the days of Gazprom on the European market are numbered, and liquefied natural gas will not be demanded. The rumors of the Russian gas exporter’s death are evidently exaggerated.
Svetlana Melnikova, Global Energy Markets Research Center under the Energy Research Institute of the Russian Academy of Sciences
The world was twisted by the “shale gas hurricane”. At least, this impression is shaped on the basis of the recent information field analysis. The point is that a considerable growth in gas production in the USA is primarily stipulated by the development of shale gas, a non-conventional energy resource. And this fact is reasonable. The advantages of the technological break-through in gas production are apparent. Are the subsequent numerous forecasts predicting changes on the global gas market so real?
It is important to understand that even the USA being a pioneer in this area, has been dealing with non-conventional gas production, in general, and shale gas, in particular, for a number of recent years only. This business is the youngest one in the world practice, it lacks production experience. In fact, the talks of the “shale gas revolution” are based on 3 to 4 years of operations in a single field – Barnett Shale, being the first one to be developed. Operations in other fields were launched later and still fall behind the leader in terms of production volumes.
However, despite the evident youth of the shale gas production industry, the structure of the North American gas market has begun evolving. Although it is not only about shale, but coalbed methane and tight sand gas as well, accounting for a half of the US production volume so far, gradually substituting conventional gas. With a growth in domestic non-conventional gas production the forecast LNG imports to the continent are steadily decreasing. Starting from 2008–2009 gas is actively substituting coal in power generation.
However, there is an uncertainty area further. At the initial stage of production, the flow rate of shale gas wells is very high and the profit is high, respectively. The United States seeks the answers to the following questions – how will the cost curve behave at further stages of development, how will numerous developers shape their strategies, what will the environmental impact be? Other regions have to start from the very beginning to get beneficial use of the shale gas reserves. So far exploration work is at the early stage, the rest of estimates are based on benchmark comparison of similar geological structures.
It is obvious that serious conclusions on the prospects for shale gas production development are premature. The phenomenon is young and has no “deferred result” when you can estimate long-term consequences. Will this factor become so influential to make a considerable impact on the global markets and the global energy policy, or will it remain just a regional phenomenon? This will be clear at least in five years.
Vladimir Vysotsky, VNIIZARUBEZHGEOLOGIYA
The world’s total non-conventional gas resources, according to the National Petroleum Council, account for 922 trillion cubic meters. Some 456 trillion cubic meters, i.e. nearly a half, is the gas contained in clay shale, the so called “shale gas”. I believe this figure is overestimated. The world’s total non-conventional gas resources, according to the National Petroleum Council, account for 200–250 trillion cubic meters. In any case, unexplored shale gas resources are commensurate with any forecast resources of conventional gas (350 trillion cubic meters).
The US shale gas resources make up 17.4 trillion cubic meters. The proven amount of these resources haven’t been published. I believe these can reach 1 to 1.1 trillion cubic meters. European shale gas resources, on the assumption of geological similarity with the USA, may slightly exceed 11 trillion cubic meters, with 12 and 20 trillion cubic meters in China and Russia, respectively.
The USA has been the first country to start shale gas production. The first commercial inflows were received in 1981 in the Barnett play. In the late 1990s 13 billion cubic meters of shale gas was produced in the USA. In 2002 the first horizontal well was drilled in the Barnett play leading to an increase in gas production. In 2009 it reached 67 billion cubic meters, which was 11.3 per cent of the total amount of gas produced in the USA.
According to the Energy Information Administration under the US Department of Energy, shale gas production in the USA will grow till 2035 with the annual average growth rate of 5.3 per cent and the overall gas production – 0.5 per cent only. In 2015 shale gas production will be equal to 109 billion cubic meters, and by 2030 – 156 billion cubic meters. The share of shale gas in the total amount of gas production in 2015 will be equal to 20 per cent, and in 2030 – 24.6 per cent.
Gas imports will be reduced due to the production growth. For example, in 2009 the USA imported 107 billion cubic meters, including 13 billion cubic meters of LNG. By 2020 gas imports will shrink to 72 billion cubic meters, by 2030 – to 52 billion cubic meters. At the same time, it will decrease mainly due to a drop in pipeline gas supplies. LNG imports, in its turn, will grow to 42 billion cubic meters in 2020 with a subsequent slow decline to 25 billion cubic meters in 2030.
Simultaneously with the growth of shale gas production, conventional gas production from deep waters in the Gulf of Mexico will decrease quite rapidly, since its prime cost in this regions is considerably higher if compared to onshore areas. Thus, shale gas production will gradually substitute conventional gas production.
The shale gas production technology differs from the one for conventional gas and features broad utilization of horizontal drilling and a lot of hydraulic fracturing operations required with injection of water and proppants (granulated aluminum silicate keeping the micro-fractures open after hydraulic fracturing).
The prime cost of shale gas production is estimated by experts at some USD 100–150 per 1,000 cubic meters at the well head. In West Siberia the prime cost of gas is a number of times lower – some USD 20–30 per 1,000 cubic meters. Meanwhile, due to a branched network of gas pipelines, transportation costs in the USA are insignificant in the gas price breakup, while in Russia the costs for transportation to the western regions of the country reach USD 70 per 1,000 cubic meters.
The production rate of shale gas wells at the initial stage may reach 500,000 cubic meters per day. At the same time, the rate is rapidly falling down – by 70 per cent within a year, slowly decreasing to 15 per cent and settling on the level of 9 per cent of the initial rate. Thus, the plateau production rate of shale gas wells equals to 50,000 cubic meters per day, which is dozens of times lower than the average flow rate in conventional gas fields.
The shale gas well life cycle is 8 to 12 years. At the same time, conventional gas wells may be operated during 30 to 40 years. In general, I would not speak of the “shale gas revolution”. Shale gas has been commercially produced since the early 1980s, novel technologies allowed to boost production volumes. For those who have been keeping abreast of this matter, there was no “revolution”. An upsurge in the interest in shale gas among the professional community occurred in 2008 when the oil price exceeded USD 140 per barrel and the gas price grew respectively.
It is too early to speak of changes on the global market, since shale gas production is not carried out either in Europe or in Asia-Pacific. Therefore, we should wait with patience for five years until the changes occur beyond North America.
The opinions expressed in this section may not necessarily coincide with the official position of Gazprom