The "Next Great Game Changer" or Not?
Was the so-called shale gas revolution the "Next Great Game Changer?" That was the question grappled with by speakers at the Energy Security Summit 2014 in Berlin, Germany.
To place that in context, Christoph Frei, Secretary General, World Energy Council, said that uncertainty regarding energy security was what kept everyone up at night, pledging to speak about the transformation and the game-changing implications of the shale gas revolution as well. “We live in a time of unprecedented uncertainty regarding energy," he said. “Think 20 years back and ask yourself, 'what were investment signals 20 years ago?' There was one: the oil price.”
It was questionable today what investment signals were today: the price of oil, gas, the post Fukushima nuclear cost, solar prices, CO2 price uncertainty?
“All of those play into key uncertainties in energy, so from one signal into a multiplicity of signals – that's complexity.”
Speed was also something to consider from the past. He recalled, “The fastest segment that you could turn around relative to energy consumption 20 years ago was transportation – it takes 20 years to turn around a transportation fleet. That was speed 20 years ago,” he explained.
Today, he said, we could witness shale gas going from 3.2% to 32% of production within 8 years, solar prices had collapsed from 4.7% to O.6% in 5 years, and the nuclear outlook had been turned upside down by one instance.
Complexity and speed, he said, combined to foster uncertainty.
Mr. Frei said there were some myths that needed to busted, like the myth that there was a flattening of global demand. “We see an increase of between 30-70% in demand between now and 2050,” he said of the World Energy Council's estimate.
He said this was not true of every OECD country, that it was clearly being driven outside the OECD and showed that demand was shifting to the East.
His second myth was that there was no end to fossil fuels, no peak oil and today there were 80% of fossil fuels in the primary energy mix. “In 2050 this may be between 60-75%, but in absolute terms, given the growth, we are at best at flat fossil fuel contribution in 2050.”
But the proportions of fossil fuels in that percentage were set to change, with the oil outlook set to change +-15%, gas from +50-100%, and the coal outlook +-40%.
This, he said, had two implications: “The future of gas is obviously bright; second, were going from cheap coal to uncertain coal.”
Renewables comprised 0.2% of primary energy contribution from solar, he reported, with an estimated 6-16% by 2050. He commented: “That is absolutely dramatic growth, but even with that the absolute contribution from renewables in 2050 will be between 20 and 30%. So, yes we will make progress, but that's not enough to make the clean energy take over the additional demand.”
Regarding nuclear, he said that 60 out of 72 nuclear plants under construction were in China, making it a “Chinese story.”
Of the shale gas revolution, Mr. Frei told delegates that of the 45,000 wells drilled last year, only 3,000 of them had been drilled in the US. This was a North American story. “The question now is, to what extent can we take that out of the US?”
It must be understood, he said, that it was more a shale oil story than a shale gas one.
“At the beginning, the price of gas in the US that triggered shale drilling was $7 MmBTU; that has collapsed to less than half and obviously the only thing that kept the gas story alive was the fact that oil prices were the driving engine – the only gas was associated gas, which helped bring down prices.”
He asked if it could be replicated, mentioning numerous aspects that need to be in place like geology, water availability, road infrastructure, availabilty of equipment, among others.
He said, “The big 3 that have the potential to replicate this are China, Argentina and Russia.”
Even in 2030 it would still essentially be a US story.
Referring to competitiveness aspects, Mr. Frei said that about 2 million jobs had been created via the shale gas industry, even luring some Chinese manufacturers to the US and showing how competitiveness was a game-changing issue.
“On the climate side, we can obviously see the good news from shale gas is it can substitute coal on the condition that there's not too much leakage it can make a contribution to climate.
He observed, “Europe's emissions have gone up and US emissions have gone down.” America and even Asia may develop more positive attitudes toward the climate issue, he said. “I think those are game-changing issues on the climate side.”
The fact that there was more competition on the market, he explained, had shifted the focus from upstream to technology, in particular water issues, drilling issues and broader system issues like storage of electricity.
While LNG demand was set to grow by 5%/annum for the next decade or more, he said, it was still not enough to develop [12.30]
A transformation had occurred, according to Mr. Frei, who said that shale gas had clearly been a contributor towards this.
“If we are saying gas is such an important part of the future, for Europe and Russia both, not to stay close and constructive is a great loss to both sides. My organization is looking at regional integration, which we believe is truly the only way to move regional agendas ahead.”
Transformation, he said, meant massive capital requirements. “Energy infrastructure investment will be about half the world GDP over the next two decades. Money will not go everywhere; it will carefully choose where to go.
“Of political, market, technology, physical risks, 80% is political risk.”
If the issues of security of supply, environment and affordability were not addressed were not kept in careful balance, then there would be deadlocks which were very difficult to overcome, according to Mr. Frei.
Just a few years earlier, recalled Alexander Weiss, Director, Electric Power and Natural Gas, McKinsey & Company Inc., he had heard an acceptance speech by former US Secretary of State George Schultz, who began speaking on the in's and out's of horizontal drilling and hydraulic fracturing. “He said it was a trend that he deemed a 'rolling revolution', that if handled right, would change our lives for the better and change the geopolitical landscape.”
Today, said Mr. Weiss, that speech would not raise many eyebrows.
“Shale gas is clearly a hot topic, with many decision makers from Washington to Brussels and Beijing looking to shale gas as the silver bullet to energy security concerns – not all of these hopes are grounded in fact; some might even be considered on the very bullish side.”
With that in mind, he said he would do a bit of stock-taking, asking questions like what the nature of the global game of gas was, how had shale gas allowed the US to pursue an alternative course of energy, and would Europe's future be one of independence or inter-dependence?
“Should we also bet on shale gas to insure our energy security, or should we look elsewhere?” he asked.
He noted that increases in inter-dependence and diversification had made for a game-changing trend, especially in Asia and emerging markets.
“A decade ago, there were only nine main export routes and three main markets. Suppliers served one market each.”
Today, he said, there was a much denser web of linkages: 20 main export routes, five new import markets. Middle East, West Africa and Russia all served multiple markets, he reported.
“We expect trade, pipeline growth and LNG flows between regions to continue to grow. Gas is becoming a regional and increasingly global as buyers and sellers strengthen bonds and exploit diversification opportunities.”
Mr. Weiss cited the recent Russia-China gas deal as a “case in point,” creating a significant geopolitical link between two political giants, linking their economies via 38 BCM/annum of gas for 30 years.
He commented, “At risk of stating the obvious, such deals are not decided politically overnight. At heart, these are some of the biggest capital allocations and investment decisions that companies and economies take, taking years and decades to prepare until they are finally signed, underwritten of course at the end with political will.”
In this game of inter-dependence and regional dealmaking, he said, Europe did not seem to have a coherent strategy for securing its energy security, which was odd because Europe was highly dependent upon imports and would be increasingly so to replace domestic energy production.
“Some obvious partnerships present themselves, but is Europe ready to engage? To the contrary, most hope rests on more energy independence, some in the form of shale gas, either in the form of imports from the US or as a European project for the future,” said Mr. Weiss, who asked what Europe might learn from the American shale revolution.
“For gas and for oil, it has clearly been a major disruptive force. Global shale gas resources are estimated at roughly 200 TCM, which is 46% of the conventional natural gas resource.”
He noted that the US had led the revolution and benefited tremendously, allowing it to nearly double its gas resources within 10 years. “As shale gas production has grown, US gas prices have fallen benefitting industrial customers through reduced electricity and gas prices and by now resulting in a $100 billion annual advantage to US GDP.
“In other words, there's no doubt that shale gas has indeed been an AMerican energy revolution,” he added, but said that there was likely to be less of an impact for Europe.
“We lack a lot of resource understanding. Europe has access to only a tiny fraction of the well data that is available in the US; Population density and fragmented land ownership complicate development in Europe, and drilling costs in Europe today are roughly twice the US equivalent,” he explained, saying that shale gas was not likely to have an impact on the continent before 2025-30.
Not only was Europe 15-25 years behind in fracking technology, but as for the prospect of LNG exports from the US driving down prices, he said the delivered cost in Europe would run $9-11 MmBTU.
“If you add a margin to that, it's above the price we are currently paying,” said Mr. Weiss, who concluded that shale would only have a minor impact on the European supply curve, even though Europe's reliance on gas imports was predicted to increase significantly. “In short, Europe is more likely enhance its energy security to inter-dependence, not independence,” he concluded.