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Page added on April 21, 2014
Shale gas — the real game changer?
When natural gas prices in the US soared in January on the back of another cold snap in a long and weary winter, it wasn’t simply due to an imbalance in supply and demand.
Sure, gas consumption had been climbing in light of the freezing arctic air hitting large parts of the US, including as far south as Louisiana and Texas. But with the US, holder of some of the world’s largest unconventional gas deposits, having emerged as a major producer of shale gas over the past five years — shale production accounted for almost half of domestic gas output in 2013 — the problem wasn’t a lack of supplies. The real issue was that much of the gas wasn’t available where it was needed most.
The gas price spike in New York on Jan. 22 was a case in point. That day, prices for next-day delivery in and around New York City soared to a stunning $120 per million British thermal units (BTU) – roughly 20 times higher than the price at the time in southern US states where fewer bottlenecks exist in the regional gas distribution infrastructure such as pipeline systems and storage facilities.
In the northeast, however, the situation is different. The region is more densely populated and, at the same time, facing supply constraints because of the distribution and storage system’s limited capacity, which prevents it from delivering enough gas to the main consumption centers such as New York during seasonal demand spikes. Despite unprecedented gas production levels from shale reserves, the resource simply can’t be made available all over the country all the time.
To be sure, shale gas developments in the US have revolutionized the local energy sector in a way that few would have expected only five years ago. But with US gas demand set for further growth in coming years on the back of higher usage in transport and industries, more pipeline exports to Mexico, and planned liquefied natural gas (LNG) shipments to Asia and Europe, the infrastructure bottlenecks need to be resolved urgently if the country as a whole is set to reap the benefits of the shale boom in the form of cheap and widely available gas.
The situation in the US goes to show that the development of shale reserves can potentially be a game changer – but it won’t happen easily and certainly not overnight.
Among the greatest challenges for the global gas industry has always been putting in place the infrastructure to deliver the fuel from its source to the main consumption centers, in particular covering long distances cross-country. The situation is even more complex when extracting shale gas because it requires extensive midstream pipeline networks to gather the gas recovered. That’s before the gas enters the downstream systems for transportation and distribution.
In the US, with its 305,000 miles of inter- and intrastate transmission pipelines, the distribution network is among the world’s most advanced. This existing infrastructure, and open access to it, has been a key facilitator in the growth of the domestic shale gas industry. Yet, it is in urgent need of expansion to prevent bottlenecks mid- and downstream.
The Interstate Natural Gas Association of America (INGAA) estimated in 2012 that the US will need to add gas transmission pipeline capacity to the tune of 43 billion cubic feet per day and 414,000 miles of new gas-gathering lines over the next 25 years to handle rising production.
In China, a shale gas hopeful, infrastructure is an even bigger challenge. The country may sit on the world’s largest potentially recoverable shale gas reserves at an estimated 1,115 trillion cubic feet (tcf) according to the US Energy Information Administration, compared with 665 tcf in the US. But the total length of its gas pipeline network is just around 32,000 miles.
Building out the mid- and downstream pipeline systems and related infrastructure to accommodate the gathering and distribution of shale gas will be an enormous and costly task. To address this, independent producers will need to be given pipeline access at a fair price as an incentive to enter the unconventional market. At present, China’s pipeline network is controlled by three state-run companies.
There are other challenges to the development of shale gas. In China and Saudi Arabia, another potential shale gas heavyweight with more than 600 tcf of estimated recoverable reserves, the bulk of the resources are located in semi-arid or arid regions. Since the production of shale gas via hydraulic fracturing requires vast amounts of water, this could present an obstacle to recovering these reserves – at least until water-free fracking becomes commercially feasible. This is still some way off, however.
Add to this the need for advanced technology, skilled personnel, and sound regulatory frameworks covering land rights and pricing, and it becomes clear why many shale gas plays may still be years, or even decades, away from materializing. After all, it took the US some 20 years to bring shale gas within the realm of technical and economic feasibility.
So is shale gas truly a game changer? It has, without a doubt, added a new dimension to the US energy industry and the economy at large. Lower gas prices translate into cheaper electricity production and industries such as petrochemicals are getting an unexpected shot in the arm. There are other benefits. But unless the structural challenges will be overcome, shale gas will predominantly play out on a regional level. The times of winter gas price spikes aren’t over just yet.
— James McCallum, CEO & chairman,
LR Senergy Group.
7 Comments on "Shale gas — the real game changer?"
rockman on Mon, 21st Apr 2014 11:43 am
“Lower gas prices translate into cheaper electricity production…”. Perhaps I misread but the implication seems to be that shale gas will bring/continue lower prices. It won’t and has been proven so. I was at Devon when the shale gas plays began to boom. They boomed with expectations of prices above $10/mcf. As prices began to slide in ’08 the panic set in. By early ’09 Devon paid $40 million in cancellation penalties to drop 14 of the 18 drill rigs hey had under contract chasing the east Texas shales. And the price drop led to 75% of the rigs chasing the shales in the country to go idle.
But some shale gas plays, such as the Marcellus are still processing. But when prices hit around $6.50 mcf (2008 $’s) and continued falling interest significantly dropped in most trends. So yes…a big future for the shale gas plays to boom again. All it will take is another 50%+ increase in NG price IMHO. So much for “lower gas prices”.
As far as winter time price spikes/shortages: “But unless the structural challenges will be overcome, shale gas will predominantly play out on a regional level.” And that will never be the case. The national NG distribution system was never designed to handle max demand and never will be. Pipeline profits are determined by AVERAGE through put volumes. While local retail prices might boom during the winter the tariffs for NG transport tend to stay fixed as per the contracts. Thus little incentive to expand the system if much is left idle during lower demand periods. The only way to alleviate local shortages is to expand local storage. And that cost is the burden of the local utilities and their customers. If they want all the NG they need during the winter all they have to do is pay for that option.
Davy, Hermann, MO on Mon, 21st Apr 2014 11:59 am
Rock brings up good poinst on gas prices, storage, and expanded supply. We as a society and economy better be careful in the dismantlement of too much coal and nuk generation capacity or one day the grid may not be stable. It is poor policy to put too many eggs in one basket. The happy talk about gas is one aspect of this dangerous trend we are seeing the lobbying arm of the markets promoting.
Nony on Mon, 21st Apr 2014 2:57 pm
Moronic story and format the DAMNED paragraphs.
1. If the January price spike were systemic, not incidental to weather, than the futures prices rather than spot prices would show it. They don’t.
2. The Northeast prices have to do with supply bottlenecks (pipeline capacities). And the Donks are too liberal to “invest in infrastructure” when it’s evil petroleum and get the damned permitting done and allow the extra pipelines. They’re even holding hearings with little old ladies saying no pipelines if the gas is from fracking! Well…have fun in the dark, Yanks.
3. Coal is cheaper than gas even at very low gas prices. Well…if we didn’t have the coal market being killed with higher regulations. Fine…you want stuff clean…pay the cost. It’s not painless.
4. There’s an equilibrium price for gas. Obviously 10 was too high (and anyone investing based on that, got raped). But 2 is too low also (since prices have recovered). Is it 8 like Berman says or 6.50 like Rockman says or 5 or what? Donno.
Price seems pretty conmfortable for last year in that 4.55 area. I think with build out of more Marcellus infrastructure, we might have that for a while. Are reports of eastern Ohio pricing in the 2s, because the gas can’t all get out.
We’ll see. Maybe it creeps up to Rock’s 6.50. Or maybe it doesn’t. Definitely Hubbard and Berman and the “gas cliff” TODsters of the mid-2000s look pretty flipping wrong.
***
“Sit down before fact with an open mind. Be prepared to give up every preconceived notion. Follow humbly wherever and to whatever abyss Nature leads, or you learn nothing. Don’t push out figures when facts are going in the opposite direction.” -Rickover
Makati1 on Mon, 21st Apr 2014 3:35 pm
To hold or fold. That is the question. Any gamble is win/lose. Always a winner and the rest are losers.
Build out the infrastructure and hope the need for it will last the 20 or so years to make a profit. From what I see in many articles is that fraking NG is not going to last 20 years. Especially in any one area. But, how do you chase gas fields with fixed pipe lines? The hydrocarbon drama is getting interesting. Pass the popcorn Ma!
rockman on Mon, 21st Apr 2014 4:56 pm
M – A painful lesson learned by companies that expanded the NG pipeline systems in E Texas and N La just in time to see the shale gas bust in late ’08.
Nony on Mon, 21st Apr 2014 5:04 pm
M-I think price drop uncertainty is even higher than geological uncertainty. The Haynesville and Barnett are slowed more because of the price drop than because “there ain’t no more left”. If we get above 6.50, drilling will turn on again in the Haynesville. Definitely if we recover to the $10 range from the mid 2000s (when the boom happened).
Essentially what is happening now is the Marcellus kicking the Haynesville’s butt. For once the Rust Belt beats the Sun Belt. Go Yanks and old Pennsylvania (home of the first oil boom). How interesting it is to watch the worm turn. Who’da thunk it 10 years ago!
rockman on Mon, 21st Apr 2014 6:09 pm
Yep. I’ve seen the price advantage of saving the transport cost of getting NG up from Texas to be as high as $2/mcf. They just need more pipelines up there…like the one some folks in Boston are opposed to because they don’t want to burn “frac’d gas.”