Gas Market & Demand: Unconventionals Hit Home

Global supply and demand impacting European gas markets

John Corben, Senior Technical Advisor to the Office of the Chief Economist at the International Energy Agency (IEA) was frank in why he was speaking before delegates at the Global Unconventional and Shale Gas Plays Forum in Vienna, Austria.

“I’m here to set the stage and talk about the gas market and demand,” he explained.

First, he told a bit about the IEA, which he described as the “rich countries’ energy watchdog.”

“It’s a government policy advisor set up in early 70s,” he said, giving mention to the organization’s World Energy Outlook publication which prognosticates on energy in the future.

“There are lots of other publications on the oil market, including lots of statistics going back years,” added Corben, who said they were for public and government consumption to get energy policies more adapted to today’s world.

“Today our biggest drive is in the emerging economies, so we engage them actively in everything we do.”

To add a bit of context, Corben described the present global gas market as “a time of unprecedented uncertainty,” and questioned whether gas markets were in the middle of a revolution. “Will it herald a golden era for gas?”

He questioned whether the Copenhagen and Cancun Accords could be fully implemented and noted that developing economies like China were going to drive demand.

“Today the world is using something like 12 billion tons of natural gas equivalent – which will hit 16 in 25 years’ time. The rate of growth is 1.2% per year. The last 20 years it was 2% per year. This vision of the future is the most likely scenario we see happening as we go forward,” Mr. Corben explained.

He said that if total energy over that period was growing by 1.2% per year, gas would grow by 1.4% per year. “As an annual growth rate, that’s a significant quantity.”

While coal use and oil use would increase in the OECD countries, in all areas of the world gas would continue to expand.

“Fossil fuel subsidies are distorting price signals,” Corben contended. “Countries go through political troubles when trying to remove those subsidies. They total US 600 billion in the next five years, a huge proportion of GDP.”

He added, “The bigger problem is that those subsidies don’t get to the people who really need them. If they could be removed, we’d see global energy demand decrease by 5% - one of the biggest effects that could happen on global energy demand.”

He said renewables were seen today to be in competition with gas, but they were actually complementary.

“You just have to walk around Europe and see the wind farms. We have to deal with this. It’s not competition, but there will be a symbiosis. Most of the renewable sources are tripling and they’re intermittent and need back-up generation capacity – and you can turn gas on and off.”

According to Corben, it may come as a surprise that China would become one of the biggest renewable players, in both solar and wind. “Partially as a manufacturer and its central planning needs all the forms of energy they can get if they’re going to grow their economy. Yes, there’s still a lot of coal in China, but we’ll see more renewables and a lot of gas.”

In 2009 governments had to put in 60 billion dollars into renewables to make them competitive - up to 200 billion dollars by 2035, he said.

“Let’s talk about climate change,” said Corben who described the World Energy Outlook’s “450 scenario” which aims for a greenhouse emissions reduction target of 450 parts per million of CO2 equivalent. “Believe it or not, most governments have committed to this climate change goal. There are many techniques the world could use.”

Today, he said, it was a little bit more than 400ppm and it would go over 450 before it went down.

To get to the 450 scenario, assuming governments roughly do what they say they would in Copenhagen, Corben showed countries that needed to reduce, and the necessary technologies; efficiency of energy use, he said, was about half. “Across all of the countries. that beginning half is very cheap to do: better appliances, better standards of fuel efficiency, etc.”

Corben pondered whether, in this context, gas was entering a golden era.

“Today the world’s using about 3.1 trillion cubic meters of gas, which will grow to about 4 by 2035. It doesn’t look like there will be any comprehensive climate change measures in the US in the next two years.”

“In our most likely scenario,” he continued, “gas demand is growing by 44%. Unconventional gas should fulfill about 35% of that. The gas glut will peak soon. It’s an overabundance of transport facilities: LNG and pipelines are well underutilized. The biggest surprise in the last 2 years, is that the oil market has rebounded very very quickly; it hasn’t happened in gas yet.”

“The gas glut is putting pressure on exporters to change long term contracts, and we’re seeing more movement in moving out of coal, but more coal powered generators were put in last year than ever. So is gas replacing coal? Not yet,” he concluded.

According to Corben, there were three good drivers now for unconventional gas to make its break: the techniques horizontal drilling and hydraulic fracturing had been around for 20 years, the entrepreneurs involved, and the optimal economics.

“In Europe, economic production has a question mark on the end,” he said. “What will it cost and is it worth it to do that?”

Corben went on to list some of the barriers to developing unconventional gas in Europe.

“There will be resistance,” he predicted, “as local communities are seeing what’s in it for them.” He said it also depended on how environmental issues were perceived, as well as use of water and access to land.

“I don’t personally believe cost and the availability of services are problems,” said Corben. “Maybe they’ll be 10-15% higher, but I don’t think it’s an issue.”

He spoke about the knock-on effects of current short-term issues, noting that half of the gas being produced was at break even.

“Actually economics at the Henry Hub price today are not good. What shale gas looks like in 3-4 years time will be different,” explained Corben. “Up to now it has been developed in an empirical fashion, but we’ll see a more sustainable method going forward.”

He added that LNG kept coming in and there was more to come.

“We’re at 70% of usage of transport capacity. The excess in transport capacity is still there in 5 years’ time.”

Corben continued, “The longer this transport capacity glut exists, the more pressure there will be on players to change long term contract conditions. What’s the future pegging of those going to be? Oil? I don’t know.”

He said unconventionals would grow and more than a third would increase globally; shale and CBM were looking to grow strongly.

“It will affect Europe, it already has in terms of prices, the amount of people looking for it, and on contracts. The long-term scenario is not certain, if developed in other places. It will reduce pressure for developing unconventional gas in Europe if more is transported here.”

Corben said he believed that shale gas could change the Polish energy balance, but it was unlikely Europe would see something in the order of what had happened in the US regarding production.

As for unconventional gas’s prospects in Europe’s former East Bloc, he opined: “Energy security and having a domestic gas source are important there, which is an aiding factor. You have a lot of landlocked countries in Europe where LNG import is not as easy.”

A conference participant asked Corben’s opinion on the sustainability of unconventional gas.

“It’s unsustainable that we are using so much water in fracturing shales,” he replied, “the fact that 60-70% of that water doesn’t come back after you’ve fractured. We don’t know where it’s going and this is not sustainable. We still don’t understand the mechanics of what’s happening in the subsurface. The fact that we’re not getting the flowback, does that mean we’re not recovering as much as we could?”

He concluded that moving such a quantity of water was not sustainable in Europe today, and added that governments would have to look at the fear of drinking water contamination much more seriously than they have thus far.