Changing Global Energy Landscape with US Shale Gas – Part I

In the year 2009, United States surpassed Russia to become the world's leader in natural gas production, with production continuing to increase to 80 billion cubic feet/day in 2012. U.S. natural gas reserves are at their highest point since 1971, and year-on-year reserve additions doubled from 2010 to 2011, as a result of shale production. Shale gas, a natural gas found trapped in sedimentary rocks, made up only 1 % of U.S. natural gas production in 2000. It now amounts to 25 % of U.S. natural gas production and is expected to increase to nearly 50 % by 2035.  

Natural gas, cost-competitive with coal at half the carbon emissions, is becoming the fuel of choice for electricity generation. New EPA regulations on particulates, mercury, and other toxic emissions are forcing the closure or retirement of 28 GW or more of coal-burning capacity, or about 8.9 percent of total U.S. coal-burning capacity. Recent increases in coal transportation costs are also problematic for coal. In addition, demand for electricity is forecast to exhibit slow but steady growth over the next few decades. These factors, taken together, are expected to be the primary driver of demand for natural gas in electricity generation over the next several decades. Utilities and end users are choosing the lower emissions and lower capital requirements of natural gas-fired facilities over other fuels, sending the clear message that the risk of natural gas price volatility is a risk worth taking in the current difficult policy environment for coal.

The U.S. Energy Information Administration (EIA) estimates that 223 GW of new generation capacity will be needed between now and 2035, and that at least 60 percent of capacity additions are expected to be natural-gas-powered. However recently EIA has conceded that “the shale oil and shale gas resource estimates are highly uncertain and will remain so until they are extensively tested with production wells”, thus raising concerns the prospects of shale gas. Industry consultants and federal energy experts have privatelyvoiced scepticism about shale gas prospects. 

Scepticism also arises mainly due to the lack of marketability that has not only kept the natural gas price below $4/MMBTU, it has even resulted in the flaring of more than one-third of produced natural gas in 2011 in North Dakota. Without a pipeline, natural gas is not marketable. It's immobile, "stuck" near the production site. Pipelines are long-term investments that generate low returns. Revenue to the pipeline operators is generated by transmission fees on long-term contracts, insulating the operators from fluctuations in the natural gas commodity price.  

Notwithstanding the cynicism,  shale resources and other upstream assets continue to drive U.S. merger and acquisition activity, attracting foreign investors in the process.  In the next part we will look into some deals that validate that the potential of the shale gas discoveries.

Guest Post.

Related Post:
Changing Global Energy Landscape with US Shale Gas - Part II