Can Shale Gas transform UK energy policy?

2007: Natural gas production is considered a declining, insecure and expensive energy source.

2009: Natural gas has been transformed by new extraction technologies, successfully demonstrated every day in North America. Technology transfer promises to expand the success throughout Europe and the world. Geologists agree that natural gas is now abundant and widespread on a planetary scale. Prices are predicted to stabilise downwards in both price and volatility. Natural gas has the potential to transform energy and not only achieve carbon targets, but to do so far earlier and far cheaper than envisioned.

The problem for natural gas has changed from supply to demand.

UK Energy Policy needs to be updated to reflect the very recent and far- reaching developments in natural gas extraction technologies. The new methods of accessing natural gas offer potential for transformative changes that disrupt almost every aspect of present UK energy policy.

Background:

Shale gas is a generic term for natural gas production until recently was known as “unconventional” gas. The existence of the gas was widely known historically, but with no technology to remove it from shale rocks available, conventional natural gas was easier to extract even in deep water locations. Shale gas production remained a specialist technique providing marginal impact on reserve accessibility.
High natural gas prices met computing power to provide technological advances in extraction which changed the game for natural gas in general and energy policy in particular, within a very short time scale. Highlights include:
•    A transformation in the energy fortunes of North America, from shortage to surplus in less than three years.
•    Several world leading petroleum geologists have publicly stated the technology is transferable to almost any part of the world.
•    Companies including BG, BP, Shell, ENI and Statoil-Hydro have made investments in the US to access the new extraction technologies
•    Independent US oil and gas companies have been active throughout Europe, Australia and China.
•    The new technologies can both extend the life of existing fields and access many new provinces previously considered uneconomic.
•    Using actual North American experience, a conservative estimate would be for a tripling of accessible gas reserves worldwide. Geologists holding impeccable academic and industry credentials have made estimates of up to a nine-fold increase in reserves.
This briefing aims to highlight how rapid and very recent changes in natural gas extraction technologies must lead to an update of UK energy thinking. The only uncertainty lies in how up-to-date UK policy will be. While the overall impact will be positive, it must be emphasised that there will be a period of disruption. Widely, strongly and long held opinions over key issues will be found to be no longer applicable in a world where accessible natural gas reserves have grown so rapidly.
The US Potential Gas Committee reported in June 2009 that the advances in extraction technology meant that they could increase their estimate of US gas reserves as being 35% higher than in 2007.
Dr John Curtis was the lead on the report and said at the time:
Our knowledge of the geological endowment of technically recoverable gas continues to improve with each assessment. Furthermore, new and advanced exploration, well drilling and completion technologies are allowing us increasingly better access to domestic gas resources— especially ‘unconventional’ gas—which, not all that long ago, were considered impractical or uneconomical to pursue.
Dr Curtis has told the author that there are no geologic constraints on shale gas technology being applied worldwide, including some specific European locations.
Stephen Holditch, Department, Head of Petroleum Geology at Texas A&M University said at the Groningen (Netherlands) Gas Conference in June 2009 that transferring the technology currently used in the United States would increase worldwide available gas reserves 9 times.
Based on the US experience and other studies, he estimated total world shale reserves as being over 16000 TCF (trillion cubic feet). The distribution included 509 in Western Europe, 627 in the FSU, 2547 in the Middle East and 3526 in China. Total OECD annual gas use is 50TCF, of which the UK has 2.5 TCF.
Dr Holditch made specific references to the Southern Permian Basin, which includes both on shore and offshore UK areas stretching eastwards from Central England, under the North Sea and extending to Poland in the East.

It’s worth noting that during the conference, anonymous voting revealed that in the specific case of the Southern Permian, 56% of the audience agreed with Dr Holditch’s assessment of a nine fold increase in reserve availability.

What’s the catch?

A natural reaction is to be highly cautious when presented with potentially disruptive information. However, careful study of current US shale experience has meant that up to now, assessment of potential gas reserves have tended to err on the side of caution.
Nassim Nicholas Taleb wrote in a 2007 book about low likelihood, high impact, highly improbable events that he named Black Swans.
Almost by definition, Black Swans have negative connotations as being events such as tsunamis, terrorist attacks, financial crises etc. But statistically speaking, chance can also throw up positive events. Shale gas has the possibility of being a millionaire ticket to be shared among everyone.
Three key questions must be asked.
• • •

Are the reserves economical?

Are they accessible?

Are there any environmental constraints?

Economic background

Shale gas exploration in the US arose during a period of high prices, and initial exploration was predicated on prices of $6MMBTU (1MMBTU= 10 therm) continuing.
However, the surge in production has seen prices fall to $2.50 and producers can still make money at those levels. Some US producers have said they can make money at $1MMBTU or below, especially considering how close new supplies are to population centres.
North American shale gas already has a significant indirect effect on UK, European and World Gas Prices. Even in the unlikely event that there are no UK shale plays, the UK, due to exposure to international market forces, will be in the position of benefiting from an acquired immunity which will provide low prices for natural gas for many years to come. Some observers believe that volatility will also ebb and that prices will be both low and stable.
The US, Europe and North East Asia are the main consuming areas in world gas flows. The development of a world LNG market has caused convergence in prices as all gas can flow to a variety of markets without previous physical constraints preventing development of a varied mix of supply alternatives.

A core assumption underpinning development of an international LNG market was the US, via both domestic demand and excess storage capacity, providing a market of last resort and a floor price. However, domestic US over production caused by the shale revolution caused LNG exported to the Gulf of Mexico to seek other markets. For example a number of LNG cargoes from Trinidad have been diverted to the UK and Europe during 2009. Similarly, cargoes destined for the US from Algeria and Norway also were diverted to European destinations. European gas markets, already well supplied from Norway, the Netherlands and Russia have also seen prices fall due to new Qatari LNG supplies and falling demand from both domestic and industrial sectors.

As of September 2009, the US is facing the unprecedented possibility that storage capacity, already equivalent to the rest of the world combined, will reach physical limits sometime during October 2009. This will lead to production cuts once capacity limits have been breached. We have also seen an extraordinary switch from coal to natural gas for generation already developing in the South Eastern US. This is particularly noteworthy given the lack of a US carbon market.

In another exceptional development, ConocoPhilips recently applied to the US Department of Energy for permission to export LNG from the same terminals which had been constructed to import LNG on the back of dire predictions of US energy shortages.

Are shale reserves accessible?

Are there environmental considerations?

Geologically speaking, shale is the most common of sedimentary rocks, which themselves form +/-70% of the earth’s surface.

Shale gas deposits have been found both in known hydrocarbon areas such as Texas and Pennsylvania, and in completely new areas, such as New Brunswick, Quebec, Michigan and California.   Given the prevalence of shale plays in North America, No Hot Air felt it was impossible for the rest of the planet not to have similar reserves. We have confirmation of this in principle from a number of US geologists who cannot speak on the record.

There is a natural discretion on the part of European shale gas prospectors, but recently some of the biggest players are admitting the potential for shale exists world wide. For example,  Exxon Mobil has extended the estimated life of the largest European on-shore gas field in the Netherlands by 35 years through techniques first used in US shale plays.

Other possible areas include existing coal rich areas such as Poland and Eastern France, as well as areas previously barren of any hydrocarbons such as Sweden and Switzerland.

The Middle East and FSU are anticipated to have shale gas reserves far in excess of those found in the EU.

Shale gas is also under development in the Northern Territory of Australia and in the Patagonia region of Argentina.

While South Korea has an active program to find shale reserves, the true prize is naturally considered to be China, and the Chinese government has mentioned shale gas technology transfer during visits by both the US Secretary of State and the US Energy Secretary.

Possible plays in the UK that have been mentioned include Surrey, Kent, Hampshire, Cheshire and Nottinghamshire.

Shale technology is underpinned by three breakthroughs:
1. 3D Seismic Imaging makes prospecting for hydrocarbons much more reliable. Two thirds of oil and gas wells drilled achieve commercial potential compared to one third as little as 20 years ago. Some US shale wells have a 100% success rate.
2. Horizontal Drilling. One gas well can work in a much wider area than a single vertical well. This has enabled the first giant US shale play, the Barnett Shale to successfully drill for gas with minimum disruption in the large urban environment of Dallas/Fort Worth.
3. Hydro-fracturing has been the key technique in shale’s success. While there have been some environmental objections it should be pointed out:
•    The initial shale play, the Barnett, is arid compared with the UK, and this has caused no constraints.
•    There have been full US EPA investigations of shale’s impact on water supply.
•    Objections on environmental grounds have not increased markedly even as shale production has expanded to states and provinces such as Pennsylvania, New York State, British Columbia and Quebec with higher green sensitivity.

Many US environmental organisations have not only a positive view of shale gas, but also actively lobby the US Congress to increase use of gas over coal to reduce emissions. These include the Sierra Club, the oldest and most conservative of US environmental organisations.

What are the challenges to UK Energy Policy?

It is vital that UK policy makers realise that even if not a single kilowatt hour of shale gas is produced in the UK, there will be significant positive impacts accruing via shale gas extraction worldwide.

Only one example would be the impact of shale gas development in China, where many players are active and the Chinese government is actively engaging with both small and large oil producers. Any effective withdrawal of Chinese gas demand from world markets would remove another leg of the three legged stool of European, US and Asian LNG demand.

All current assumptions on UK energy policy need to be revisited and updated according to new realities, not past dogma. But transformational change can be disruptive to some individuals and groups.

For example several assumptions underlying the 2007 Energy White Paper are no longer valid. This is not a criticism, simply an observation that the study was predicated on a natural gas shortage that no longer exists. This may lead to a “denial” phase following the initial “disbelief” stage, where entrenched energy actors fight a rearguard action to preserve influence built up in a world that (correctly at the time) considered natural gas to be a finite and constrained resource.

Most energy experts, and the general public have been told for many years that UK natural gas is in terminal decline, prices will inevitably rise and that “security of supply” will be a continuing issue.
•    UK natural gas production levels will be increasingly irrelevant in an over-supplied globalised market.
•    Over supply will lead to lower prices. Lower prices may make carbon taxes to tackle carbon production and use a more palatable alternative.
•    Security of supply is no longer an issue when either the UK itself or nearby producers find themselves undergoing the paradigm shift of a glut of low cost, low environmental impact natural gas with reserves equal to many lifetimes usage.

•    Such rapid changes in thinking may anger some members of the public and lead to negative impacts on institutions including government, regulators, utilities and environmental organisations.

Natural gas is not a low carbon alternative. But the public will be aware that it is a least carbon intense and more economical alternative to oil and coal. Who will make the case? None of the political parties and few energy or environment professionals appear to have the knowledge about the new gas paradigm and an up-to-date view. The potential is for natural gas to be a bridge to a no carbon future, even as it provides a substantial reduction in carbon use in the short to medium term. This is a positive good news message that all should welcome. Any energy actors who act in an overly skeptical or obstructive manner will simply be swept away by events.

No Hot Air has consistently pointed to the French and Japanese experience with nuclear power as being key to economic success. We have no objection on principle to nuclear generation. But nuclear success was built on the fundamental assumption of insecure alternatives. We hope that this document, and the links within it, will go some way towards disproving that case. We don’t make any value judgments, no one is right or wrong. We just ask that people live in the real world where when facts change, opinions change.

Cheap, plentiful, secure and lower carbon natural gas will have a significant impact on both nuclear and renewable energy. We sketch out only a few scenarios that can transform UK energy policy:

1. Apart from political constraints, it will be physically possible, economically attractive and environmentally sound to switch most, and possibly all UK coal fired generation to natural gas. Natural gas produces half the emissions of coal. This would mean that 2020 reduction targets would be exceeded and achieved earlier and more economically.

2. The possibility of lights going out in 2016 or at any other time appears to be increasingly unlikely.

3. Any requirement of increased UK gas storage would be either negligible or non-existent. Massive quantities of gas will be coming out of the ground. Returning volumes significantly over current storage levels is likely to be uneconomic.

4. Nuclear power may be unable to compete on economic terms without higher direct or indirect subsidies.

5. Natural gas can provide a reliable, resilient and economical back up to wind or any other renewable source. This could lead to significantly greater wind generation at lower overall cost.

6. As wholesale prices continue to fall, suppliers, and regulators, with outmoded hedging models will struggle to explain to the public why retail prices have not moved in tandem.

7. Natural gas could have an increased role in distributed generation and small scale CHP, further removing waste, carbon and cost from electricity transmission networks.

8. Low cost and reliable natural gas, combined with existing proposals for mileage efficiency, can provide a further boost to the electric vehicle market. At the same time there may be uses of natural gas either directly or in GTL (Gas to Liquid) form to reduce oil and carbon use in transportation.

9. Coal Carbon Capture and Storage models would need to be revisited.

10.There may be negatives impacts as current “conventional” North Sea natural gas extraction technologies may be supplanted by on shore supplies from international or domestic locations.

11.Geopolitical alliances based on a perceived need to ensure security of energy supply may need to be revisited.

Further reading:

There is a substantial body of links to Shale Gas stories at the Shale Gas category of www.nohotair.co.uk, dating back to July 2008. Some are cited here:

http://online.wsj.com/article/SB123378467642449289.html
The conventional wisdom said that the U.S. would soon become a big importer of natural gas. The conventional wisdom blew it.
http://www.nytimes.com/2009/06/18/business/energy- environment/18gas.html
The report by the Potential Gas Committee, the authority on gas supplies, shows the United States holds far larger reserves than previously thought. The jump is the largest increase in the 44-year history of reports from the committee.
http://online.wsj.com/article/SB124813163539766707.html

Energy companies operating in Europe are turning to more unorthodox sources of natural gas to get around maturing gas fields and the European Union’s worries about its dependence on Russian fuel.

http://www.cera.com/aspx/cda/public1/news/pressReleases/pressReleaseDet ails.aspx?CID=10179
CAMBRIDGE, Mass., March 23, 2009 - North American natural gas is entering a new era in which supply is no longer constrained, according to a new Cambridge Energy Research Associates (CERA) multi client study, Rising to the Challenge: A Study of North American Gas Supply to 2018. A revolution in technology has unlocked “unconventional” gas resources, dramatically changing the prospects for the market. Demand, rather than supply, will be the challenge for the market going forward, accentuated currently by the economic crisis.
http://www.nytimes.com/gwire/2009/04/22/22greenwire-no-need-to-build- new-us-coal-or-nuclear-plants-10630.html?ref=energy-environment

No new nuclear or coal plants may ever be needed in the United States, the chairman of the Federal Energy Regulatory Commission said today.” We may not need any, ever,” Jon Wellinghoff told reporters at a U.S. Energy Association forum.

http://www.calgaryherald.com/business/Shale+supply+half+North+America/ 1484658/story.html
Despite a far-reaching industry downturn, a new report says unconventional natural gas from shale is expected to account for more than half of North America’s gas supply by 2020.
According to Calgary-based Ziff Energy Group, unconventional gas production from shale, coal beds and “tight” sandstones will more than double to 46 billion cubic feet (bcf) per day from 21 bcf per day in 2000.
About 16 bcf per day—more than Alberta’s current gas output from all sources—will come from shales in Canada and the United States, where prolific deposits such as the Horn River in northeastern British Columbia are thought to contain trillions of cubic feet of potential resources
http://www.eia.doe.gov/oiaf/ieo/nat_gas.html
Much of the increase in U.S. natural gas reserves results from expanded knowledge and exploration of shale resources. Outside the United States there has been almost no exploration of shale resources, and correspondingly little is known about the resource potential in other countries. Technologies that have greatly improved the economics of U.S. shale plays, including horizontal drilling and hydraulic fracturing, probably can be adapted to resource plays in other parts of the world. These technologies may, for instance, be applied in Europe before too long. A few North American energy companies have begun to explore potential shale plays in Central and Western Europe. At the same time, a few European energy companies have invested in North American shale plays. As the technologies are applied in other regions, economically recoverable natural gas reserves in the rest of the world are likely to increase, as they have in the United States.
http://www.oxfordenergy.org/geny.php#
Can Shale Gas be a Game-Changer for European Gas Markets?

The purpose of this analysis is to assess whether unconventional gas resources in Europe can be developed and produced in Europe on a scale that would affect future gas market fundamentals, as has been the case in North America, and what conditions would be required. The focus will be on shale gas. This topic is currently gaining a lot of attention within the industry. Research on European unconventional gas, albeit progressing, remains limited. In this context, the main contribution of this study will be to produce a new and concrete evaluation of shale gas potential in Europe, emphasising in particular investment and policy aspects, and place the conclusions within the bigger gas supply picture.

No Hot Air is a blog aimed at UK Business Energy users. The publisher, Nick Grealy, has had 15 years of experience in the UK gas sector. The opinions expressed both here and on-line are his alone.
We have been surprised how many highly placed UK energy experts have expressed little if any understanding of shale’s impact on world gas fundamentals and we seek to both inform and engage them. It seems to us that the very recent and sudden developments in what has been considered a mundane and unexciting energy area up until now have a capacity to make almost any other area of UK energy policy irrelevant within a short time-scale.