December 2009 Vol. 236 No. 12

Features

No Back Seat For Natural Gas At WGC

If you had to use three words to describe the atmosphere at the 24th annual World Gas Conference in Buenos Aires, they might have been “brimming with optimism.”

As most of the world still struggles to emerge from the deep economic recession and tries to cope with the new and increasing demands of global climate control, it is abundantly clear natural gas will play a vital role on both counts.

One phrase you didn’t hear at the conference was the use of natural gas as the “bridge” fuel until prospective non-fossil alternatives take over. Today, with a seemingly unlimited supply of natural gas coupled with stricter environmental mandates designed to combat global warming, many proponents insist natural gas should be “the baseload fuel for the 21st century.” They are quick to point out the drawbacks of intermittent wind and solar power among other suggested renewables. But are they truly realistic in their appraisal of natural gas? As noted author and consultant Dan Yergin pointed out, for natural gas to transcend all other fuels it must become a useful transportation fuel.

Yet even Yergin could not avoid staring out the windows of Argentina’s Royal Convention Center and noticing that a large percentage of the city’s vehicles, particularly cabs, are fueled by compressed natural gas. Indeed, nearly 2 million cars in Argentina (15%) are fueled by compressed natural gas and the air of this teeming metropolis of 12 million seems remarkably clean. Granted, that here, as in other countries where natural gas is used as an automotive fuel, government subsidies give it a big advantage over gasoline.

The big questions that ultimately emerged were how much natural gas is out there and what are we going to do with it? Apparently there is much more than anyone thought possible. The Colorado School of Mines’ Potential Gas Committee reports recoverable volumes in the United States have risen nearly 60% in the past four years to 2.074 Tcf. As evidenced by the low prices for natural gas in the U.S., there is no longer a need to import new supplies.

At a press conference, Tony Hayward, chief executive of BP, said it was clear that a “quiet revolution” was thanks to unconventional gas development, particularly in North America where BP is a major producer. Still-to-be-found unconventional gas could contribute another 4,000 Tcf to reserves over the next few years, he said. This would add 60% to BP’s 2008 estimate of conventional world gas reserves of 6,500 Tcf.

Yergin’s HIS CERA group said Hayward’s 4,000 Tcf estimate is at the bottom of his firm’s estimates for unconventional gas. He said their top estimate is 16,000 Tcf, or a 250% increase in reserves.

What’s fueling this quiet revolution that may eventually change the balance of the global energy picture? New drilling technologies that allow developers to reach enormous deposits of shales, coal-bed methane and tight formations at much lower costs than were originally anticipated.

Rhodri Thomas, unconventional gas service project manager for Wood MacKenzie, said unconventional production in the U.S. lower 48 has risen from 33% of total output in 2000 to 59%, and this is expected to rise to 73% in 2020. North America now has the potential to be self-sufficient in natural gas over the next decade or more.

Oddly, even though LNG is playing its designed role as a swing fuel available to the neediest and highest bidder, basic regional differences have complicated efforts to create a truly global natural gas market.

“Continents are being connected in ways that were not expected, but we’ll also have a much more diversified energy portfolio,” Yergin said. Hayward’s BP is in the forefront of unconventional technology, using these techniques throughout the world. Still, most of this activity remains centered in the U.S. and Australia.

In a Nov. 2 opinion piece published in The Wall Street Journal, Yergin and co-author Robert Ineson of IHS CERA, suggest that at current levels of demand, the U.S. has about 90 years of proven and potential supply and that figure will steadily rise as the shale revolution spreads throughout North America. They say the long-term impact will likely affect the electric power industry which needs to build new generating capacity with fewer CO-2 emissions; states such as New York and Pennsylvania that have traditionally been energy importers are now becoming producers which could lead to bus and truck fleet conversions to CNG, and energy-intensive manufacturers preferring to remain in the U.S. in view of cheaper energy supplies.

But they and others are quick to point out that natural gas – the most volatile of commodities – has been frequented by cycles of shortages and excess supply – conditions which make utilities and industries dependent on gas wary. And how fast the revolution will spread to the rest of the world is uncertain because of numerous factors, including government control, long-term contracts, costs of new pipeline networks and infrastructure, and the fact that many regions still have ample conventional gas ready to develop, Yergin and Ineson said.

It is too early to forecast when unconventional gas will take off, although it is unlikely to have a substantial effect on regional energy markets outside North America and eastern Australia for more than five years. But from the middle of the next decade, output in China could begin to make an impact, particularly if government support remains in place.

In Europe, India and Southeast Asia, unconventional gas is unlikely to have a significant effect on regional markets for the next decade, but local supplies could ramp up over this period. And other areas should not be overlooked, including Latin America, southern and northern Africa and the Middle East,” said Thomas in an article published in Petroleum Economist’s daily WGC News.

However, today’s low prices will have to rise before investors will risk putting their money into natural gas infrastructure. George Kirkland, vice president of upstream and natural gas for Chevron, told delegates that investment over the next two decades is critical if natural gas is to meet forecasts by the International Energy Agency that world gas demand will increase 50% by 2030, requiring additional investment of $5.5 trillion or $227 billion a year.

Kirkland cited three prerequisites for meeting demand growth: continued decline of development costs; long-term investment by the industry, and “we must focus relentlessly on superior project execution.” On the positive side, the industry has seen capital costs decline 12% this year.

At the WGC, most of the attention centered on development of those existing conventional gas sources, as more than 3,000 attendees representing 80 countries met for the tri-annual week-long conference. No other company made its presence felt more than Gazprom, which coincidentally, was opening up its first North American office in Houston at the same time and is preparing to open another office in Brazil. Gazprom’s enormous pavilion seemed a signal that its executives are determined to position the Russian company center stage in the natural gas business.

Alexey Miller, deputy chairman of Gazprom’s board of directors, boldly declared their goal of capturing 10% of the U.S. gas market within five years. He said Gazprom would build its U.S. operations through a pattern of “organic growth” that it has used in the United Kingdom.

“We are now following the same method in the U.S. We know how to work in fully liberalized markets,” Miller told reporters. Gazprom has contracted to supply LNG to the U.S. from its Sakhalin-2 facility and later could send LNG from the Shtokman field once it’s developed (though even one of its partners, Total, says that field cannot be developed at current gas prices). Miller scoffed at the suggestion that the shale revolution would hurt LNG exporters.

“There are many myths about shale production,” Miller claimed, citing environmental costs and the need for continuous drilling to retain high production levels. They insisted that LNG supplies in the U.S. would be competitive in a price range of $6-7 per Mcf.

In response, Hayward and Tom Skains, chairman of the American Gas Association, questioned how Gazprom could promise to create such a huge market share in an open and fully transparent market. Hayward said “hard facts and reality” are underlining the rapid transformation of the U.S. natural gas industry. He pointed out that production in the U.S. rose nearly 4 Bcf/d in 2008 despite production losses from two major hurricanes in the Gulf of Mexico. Without those disruptions, he said production growth would have approached 5 Bcf/d or nearly 10% year-on-year growth.

Skains also offered reporters a U.S. perspective on LNG imports, which several years ago were expected to comprise an increasingly significant share of U.S. supplies. He noted a study by the U.S. Energy Information Administration which sees LNG supplies peaking in 2025 and then declining, mostly because of the growth of unconventional plays and other domestic supply sources from the deep water, the Intermountain West and Alaska.

Perhaps the lack of long-legged models to hand out literature or the unsettling uncertainty over their nation’s dubious energy strategy caused visitors to shy away from the Iran’s oversized but sparse pavilion. Yet they seemed insistent on proving that they, too, plan to be a big player in the world of natural gas as befits a country that has the world’s second-largest reserves after Russia. For instance, Deputy Oil Minister Azizollah Ramazani told WGC News that Tehran not only planned to fill half the capacity of the planned Nabucco pipeline to Europe, but also must invest $200 billion in its energy sector over the next five years with 70% of that targeted toward gas projects.

Much of that money would come from foreign investors, he said, although Iran faces numerous sanctions from the West because of its nuclear ambitions. Ramazani said the Iranian energy reserves could eventually move Iran closer to the West. That was why he pushed hard for participation in Nabucco, which Western Europe and the U.S. have endorsed as a counter to Russian-supplied pipelines while also avoiding troublesome Ukraine.

Ramazani claimed that without Iranian gas, Nabucco is unlikely to proceed, although Nabucco officials said they were unaware of any deal with Iran. In fact, Ramazani insisted Iran would be able to supply both the Nabucco link and a planned export line to Pakistan by 2014. A final decision on moving forward with Nabucco, whose proponents were also very visible at the conference, is expected early next year.

Whereas demand has dampened in Europe because of economic conditions, producers are looking to the Far East and finding that China represents another growing gas giant with a maze of major transmission and distribution pipelines either in the construction or planning stage. In fact, construction activity in China has literally kept the pipeline construction industry afloat during this prolonged recession. With Australia on deck as a steady supplier of LNG followed by Indonesia, Russia and Myanmar among others, China seems capable of meeting consumer demand for gas which is forecast to grow 6.5% annually between now and 2030.

By 2020 China should become the world’s third-largest gas market. As an example, China National Petroleum Company was able to raise $30 billion in loans for oil and gas acquisitions. When it comes to meeting its thirst for energy, China is not choosy who its friends are. As more Western nations drop ties with Iran or further delay development projects, China is more than willing to take their place.

One report said Iran has invited Chinese national oil companies to invest in a refineries and pipeline package valued up to $42 billion. China is also spearheading a multibillion-dollar oil and gas pipeline project with the military dictatorship of Myanmar. Published reports say plans call for a 2,800-km, 1.2 Bcf/d pipeline and a 1,100-km oil pipeline carrying 400,000 bpd that will route supplies from the Middle East and Africa to China.

Politics and regional differences aside, maybe the right slogan for natural gas should be “Stay tuned. You haven’t seen anything yet.”