Our future: A golden age for natural gas?

29 March 2011

Back in 2006, a handful of energy experts met on the fringes of the World Gas Conference to discuss the challenges of increasing output of ‘unconventional’ gas. Three years later the same subject was discussed at the same event, but this time the speakers found themselves at the heart of the conference and with a capacity crowd to contend with.

This transition of interest in ‘unconventional’ sources of gas, which are trapped deep underground by impermeable rocks, such as coal, sandstone and shale, is the result of recent astonishing growth in production in the US – mainly (but by no means exclusively) from shale deposits – where output has trebled between 2007 and 2010. The knock-on effect of this discovery has rippled throughout the world, with other countries, such as Australia, Canada, China and Poland investigating and developing their own resources.

The International Energy Agency (IEA) estimates that global recoverable gas resources, which will last around 130 years based on current consumption rates, could double if the potential of ‘unconventional’ gas is realised.

LNG trade

“The success story being enjoyed in the US is one of the reasons behind the current comfortable supply position in some regions,” explains Ian Cronshaw, Head of Gas, Coal and Power Markets at the IEA.

“Before unconventional production really took off, it was assumed that the US would continue importing large volumes of liquefied natural gas (LNG) to meet its national demand. But as this is no longer necessary, the US has virtually withdrawn from importing LNG and consequently this LNG is available to meet other countries’ energy needs.”

And this output of LNG has grown rapidly. Preliminary figures show that global trade shot up to 220 million tonnes – 300 billion cubic meters (bcm) – in 2010, a 20% hike from 2009. The main supplier is Qatar, while demand is primarily coming from Asia and Europe.

Asian gas demand has rapidly recovered since slowing during the global financial crisis, both in IEA members such as Korea and Japan (both up 24% and 5% respectively), and China’s consumption grew from 70 bcm in 2007, to approach 110 bcm last year, bigger than any IEA gas user bar the United States. Even in Europe, where the fragile economic recovery means gas use is still weak, LNG grew at nearly 30% last year to approach 90 bcm.

As well as trade increasing last year, a number of new LNG projects were under construction everywhere from Angola to Algeria, but most notably in Australia, which will start producing significant supplies over the medium term.

What’s the point?

Mr Cronshaw argues that countries see their efforts as necessary long-term investments “because gas is set to become an increasingly important energy source for future generations.”

In the World Energy Outlook 2010, the IEA’s flagship publication, all three scenarios of future energy use project that demand for gas will keep growing over the next two decades, particularly in non-OECD markets such as Asia and the Middle East.

A key driver behind this demand is electricity generation. Although gas demand from buildings, industry, transport, agriculture and other areas all rise over the next two decades, according to IEA projections, electricity generation has the biggest projected boost, accounting for 45% of the extra demand for gas.

Reliable investment

“Gas is a great source of electricity supply for a number of economic, operational and environmental reasons,” Mr Cronshaw says. “It is low-risk (technically and financially), lower carbon relative to other fossil fuels, and gas plants can be built relatively quickly in around two years, unlike nuclear facilities, which can take much longer.”

“Also, gas plants are flexible both in technical and economic terms so they can react quickly to demand peaks, and are ideally twinned with intermittent renewable options such as windpower,” says Mr Cronshaw. “Over the course of a month, various spikes in demand have a sizeable knock-on effect on the cost of delivering electricity, so having a source of energy – namely gas – which can cope with these spikes is a significant advantage.”

Future cost?

As long as ‘unconventional’ sources continue to be tapped in the US, the cost of gas will remain relatively cheap in North America, according to Mr Cronshaw. However, he adds, it is worth noting that significant investments in both production and pipelines over quite a long period were required to bring the US to this position.

So while other countries scramble to explore their own potential ‘unconventional’ resources, which will take time, money and come with no guarantee of success, gas prices elsewhere are set to rise, he explains.

Increasingly gas will be sourced from more distant deposits, offshore, in deep water, or the Arctic, or have difficult technical characteristics.

“New LNG plants suck up significant funds,” he observes. For instance, the Gorgon gas project in Western Australia – which aims to produce 20 bcm a year from 2014 – is stated to cost USD40 billion, which will in turn have an impact on the consumer.”

Mr Cronshaw concludes: “The vast investments needed for ‘unconventional’ gas production and new LNG plants, which are taking place in order to meet the predicted growing demand, mean that the relatively low prices being enjoyed in the current supply environment are unlikely to last. It may not only be that the age of cheap oil is over; the same may now be the case for gas as well – at least in some markets.”

World Energy Outlook 2011
On 6 June, a special excerpt of the World Energy Outlook 2011 will be released, which will look at just how bright – and how likely – a ‘golden age of gas’ might be.

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