This companion piece to the Huge Unconventional Gas Finds likely to change US Gas Markets was commissioned by Oxford Analytica and published in the end of 2009.
SUBJECT: The impact of huge new US and Canadian unconventional gas developments on North American and global energy industries.
SIGNIFICANCE: Reliable private and government estimates suggest that proven US gas reserves from conventional and unconventional sources are likely to rise from just over 200 trillion cubic feet (Tcf) to well in excess of 1,700 Tcf (surpassing current Russian reserves) due to unconventional gas developments. This is certain to have major industry implications, particularly on proposed North American gas pipeline projects from the Arctic and the outlook for the global liquefied natural gas (LNG) industry.
ANALYSIS: US and Canadian gas producers are currently experiencing tough headwinds, as the recession and excess production have slashed prices:
- Storage sites across North America are full and the glut shows no signs of abating.
- According to data from Baker Hughes, the US gas rig count reached 1,606 in August 2008 — the highest total since July 1987, when publication of drilling rig data by fuel type began.
- However, producers have since cut back sharply — by April 2009, rig count had fallen to 760 and now stands at just 700.
Producers are grappling to come up with new strategies while policymakers are revising their forecasts and revisiting policy initiatives. Over the short term, sharply reduced production means that prices will certainly recover. However, the industry’s long-term prospects will be affected by massive new estimated unconventional gas reserves in North America, which have already upended the energy and policy-making environment on the continent and will have global implications.
Short-term gas prospects. The short-term prospects for the North American gas market appear bullish, although there are concerns that the industry’s prospects could be set back by pending environmental legislation in Washington:
- Price rebound? Prices will certainly recover over the short term. Exceptionally low gas prices have led to a slowdown in exploration and, in many cases, production shutdowns. Eventually the gas in storage will be utilised and supply will tighten. Meanwhile, low prices encourage demand, which should start to pick up as economic recovery slowly trickles down to the power sector and industrial gas users. Weather also has a role to play, as climate forecasters are predicting an unusually cold winter.
- Industry strategy. Some producers are endeavouring to speed the industry’s recovery. Three of Canada’s energy industry associations — the Canadian Association of Petroleum Producers, the Canadian Gas Association and the Canadian Energy Pipeline Association — have joined forces in an attempt to boost the use of natural gas in North America. They are designing a multi-component strategy to inform the public and policymakers that the supply scenario has changed drastically. Part of their plan is to push Canadian utilities, particularly in Ontario, to switch from coal to natural gas in order to cut greenhouse gas (GHG) emissions. They also plan to enlist the support and participation of the US Natural Gas Supply Association.
- Fighting ‘king coal’. It might be easier to convince Canadian provinces to embrace gas on environmental grounds than taking the same approach in Washington. On Capitol Hill, lawmakers working on President Barack Obama’s energy reform agenda are not inclined to give incentives for natural gas usage. Congressional delegations from coal producing states appear committed to defending coal as the primary fuel source. To this end, they are ready to invest billions of dollars in Carbon Capture and Sequestration as a solution to coal’s heavy environmental footprint.
- Gas and energy reform. If a cap-and-trade scheme to control carbon dioxide emissions eventually is enacted (which appears increasingly unlikely this year) there will be some benefits for the gas industry in the form of ‘pollution credits’ for utilities that use the fuel. However, the value of these credits is unknown. Another element of uncertainty is the incorporation of Life Cycle Assessment to the pathway of each fuel. As the California Low Carbon Fuel Standards legislation showed, the incorporation of this assessment mechanism can deliver unexpected results. The evolving environmental legislation adds a degree of uncertainty to the industry’s future.
Long-term scenarios. Over the long term, academic experts and gas industry analysts envisage two potential scenarios:
- Unconventional gas boom. When prices stabilise at around 6 dollars per million British Thermal Units (MMBtu), production from Marcellus Shale (principally in Pennsylvania) and other unconventional plays — including a huge new discovery made by EnCana in Horn River, British Columbia, with potential holdings of 500 trillion cubic feet (Tcf) — will compensate for the decline in conventional production, adding substantial volume to the North American supply. This will translate into a major decline in (already relatively small) liquefied natural gas (LNG) imports.
- Continued imports? Ziff Energy, a global advisory group, foresees an increase in shale gas production, but sees some estimates of unconventional gas production as overly optimistic. Under their scenario, by 2020 shale gas would supply just 19% of a total 31 Tcf of gas demand (for the United States and Canada combined, of which Canada accounts for 4 Tcf). To balance the significant declines for conventional gas, extra LNG imports would deliver 3.6 Tcf by 2020.