GIS Dossier: The shale gas revolution

Picture of an LNG bunker ship, currently the world’s largest with the cargo capacity of 7,500 cubic meters of gas
Hamburg Feb. 7, 2019: The world’s largest LNG bunker ship hauls liquefied natural gas for naval vessels and onshore gas consumers in the Baltic region (source: dpa)

GIS Dossiers aim to give our subscribers a quick overview of key topics, regions or conflicts based on a selection of our experts’ reports since 2011. This survey reviews the consequences of a “game-changing” hydrocarbons extraction technology that continues to rock the energy business around the globe. GIS experts have monitored this development closely from the service’s start.

Natural gas is the lightest hydrocarbon resource, wrote GIS energy expert Dr. Carole Nakhle. Per unit of volume, it contains only 1/1000th the heat energy of oil. Early on, when oil companies came across natural gas during exploration, it was seen as a disappointment: such gas wells were called “dry holes” in those times. Gas recovered while extracting oil could not be profitably sold and was burned off at the well site. Today, such “flaring” is illegal in most places and natural gas is considered a strategic source of energy.

Its importance in the global energy mix has been increasing gradually since the oil crisis of the 1970s. This process is driven by the need, firstly, to achieve greater security of supply by diversifying the sources of energy, and, more recently, to meet the climate change agenda. Natural gas is by far the cleanest fossil fuel.

Natural gas

  • Natural gas consists primarily of methane. It is often found “associated” with other hydrocarbon fuel, typically in coal beds or oil fields; or “nonassociated” in isolated natural gas fields
  • It is important both as a fuel source and in fertilizer production

Then, early in the 21st century, the world had to learn a new technical energy term: shale gas.

Shale gas is natural gas trapped in sedimentary rock – or shale – formations. The extraction technology is hardly new. Horizontal drilling began in the 1930s and a well was first fracked (a technique of fracturing rock with pressurized liquid) in 1947. However, the large-scale development of “unconventional gas” in the United States began in earnest only in this century.

Initially, much cynicism surrounded shale technology, which was dismissed as overhyped, expensive and short-lived. But doubters have been proven wrong. Since 2009, when shale-derived energy began to reach the market in large quantities, U.S. oil and gas production staged a remarkable recovery, reversing decades of decline and reducing the country’s reliance on imports. As a result, shale gas not only revolutionized the energy sector in the U.S. but also became the tipping point for fundamental change in global gas markets. There have been winners and some losers, too.

GIS’s coverage of the phenomenon began in 2011. In the first of several reports on shale gas, GIS expert Dr. Frank Umbach quoted leading U.S. energy scholar Daniel Yergin:

“This revolution arrived with no fanfare, no grand opening ceremony, no ribbon cutting. It just crept up.”

Born in the U.S.A.

Rapidly expanding production of shale gas transformed the U.S. from the world’s largest import market of liquefied natural gas (LNG) to a self-sustaining gas producer and a net gas exporter.

A chart showing the U.S. production of natural gas from 1970 until 2017
The shale revolution reversed decades of decline in U.S. gas production. Through 2025, the U.S. is expected to account for 40 percent of the total growth in gas output (source: macpixxel for GIS)

A combination of three factors – falling demand linked to the global recession, an increase in U.S. shale gas production and the arrival of new LNG delivery capacity – created a rapid shift, the expert explained. These factors led to a sudden LNG overcapacity that made it cheaper than pipeline gas, based on long-term contracts. It also contributed to the de-linkage of gas prices from oil prices, benefiting gas consumers.

“This has global dimensions and may extend the present worldwide gas glut to at least 2017- 2020, longer than previously anticipated,” Dr. Umbach correctly predicted. Later in the report, he focused on Europe’s potential for developing its own unconventional gas.

In her June 2012 report, Dr. Nakhle described the impact of shale gas development on LNG exporters like Qatar. LNG producers were taken by surprise by the global market change, she wrote. Qatar, however, successfully reallocated its cargoes and secured long-term contracts with other clients, like China and India. Such contracts have reduced Qatar’s exposure to volatility in spot LNG prices.

In the same month, GIS expert Dr. Stefan Lippert described the early impact of the shale gas/LNG shift on Asian countries, particularly Japan, whose thirst for gas energy followed the decision to shut down its nuclear power stations after the Fukushima nuclear accident in March 2011. Japan paid a steep price for the imported gas: $17-18 per million British Thermal Units (BTU). That was more than seven times the U.S. price.

Beginning in August 2012, GIS ran a six-part series of reports by Dr. Umbach on the key facets of the shale gas revolution. In Part 1, the author described the challenge posed by environmental concerns over the fracking technology and possible ways to handle the perceived and real threats. Part 2 was devoted to listing the impressive economic benefits and strategic gains that shale gas was affording the U.S.

Great gains of the U.S.

  • In 2007, the U.S. imported a record-high of 130 bcm of LNG, accounting for 20% of its total gas demand
  • In 2011, it imported just 20 bcm of LNG, becoming almost self-sufficient in the gas

Gas price differences in 2012

  • North America: around $2.5 per million British Thermal Units (BTU)
  • Europe: $11 per milion BTU
  • Asia: $17-18 per milion BTU

The possible beneficial impact of shale gas on Europe’s energy security was discussed in depth in Part 3 of the series. Dr. Umbach concentrated on the factors in Europe which made replicating the U.S. success unlikely, including the legal framework. “Minerals in European countries belong – in most cases – to the state, so there is little incentive for landowners to start exploration projects for gas,” he pointed out.

In his next report, the expert reviewed the attitudes of Europe’s political and bureaucratic elites, sharply divided in their opinion on shale gas. In several countries, environmental groups had persuaded the government to hold off the exploration for unconventional gas. Part 5 of the series was devoted to the emergence of unconventional gas in Australia and Southeast Asia, and the final Part 6 to the big demand for it in China.

No study recommended a ban on shale gas exploration

Also in September 2012, Dr. Nakhle reviewed how China’s new energy strategy reflected the U.S. shale gas’ success and how it would affect the Asian giant’s energy mix in the coming decades. China’s shale gas resources, she wrote, laid at a greater depth than those in the U.S. and more challenging, mountainous terrains with inadequate water reserves. Even more importantly, the U.S. industry had been driven by the private sector and competition – which remained underdeveloped in China.

Facts and fears

In October of the same year, Dr. Umbach returned to the issue of fracking’s risks by reviewing the findings of four studies, two published by the European Commission and two by German federal ministries. He noted:

All four studies concluded that there were higher potential environmental risks associated with shale gas production than for conventional gas extraction, but no study recommended a ban on shale gas exploration.

The studies, Dr. Umbach wrote, recommend a series of robust regulatory regimes and specific risk management measures to mitigate the risks and improve overall public confidence.

Potential environmental hazards of fracking

  • Contamination of ground and drinking water
  • Undisclosed chemicals used at drilling sites
  • Undermining water resources for agriculture
  • Unresolved wastewater problems
  • Tremors and earthquakes
  • Carbon footprint and methane escape into the atmosphere

In March 2013, Dr. Umbach highlighted the risks for the European Union of missing out on the shale gas revolution.

“LNG is now less expensive in Europe than pipeline gas for long-term contracts,” he noted. In the U.S., cheap gas had prompted a revival of energy-intensive industries and manufacturing. Meanwhile, in Europe, the Association of the German Industry (BDI) warned that U.S. gas price of $21 per megawatt hour (MWh) was three times lower than Germany’s equivalent ($63 per MWh), putting Europe’s manufacturing powerhouse at a serious competitive disadvantage.

Cheap gas reserves also called into question the renewable energy policies of the EU, Mr. Umbach suggested, particularly those of Germany, where renewables had been heavily subsidized to make them commercially viable.

In a follow-up report, the expert reviewed the state of the shale debate in several European countries, from the United Kingdom (which lifted its shale gas exploration ban in December 2012) to Germany, France, Poland, Spain, Romania and Lithuania, and also in Turkey and Ukraine. His conclusion:

The rewards of shale gas are starting to outweigh the potential risks of getting the energy source out of the ground for some European countries. Reserves of the gas are now thought to be much larger in some states than previously estimated. In others, there is a growing concern over the dominance in the market of the United States. Some are also keen to break their dependence on Russian conventional gas.

Estimated European shale gas reserves

United Kingdom: Up to 1,700 trillion cubic feet (tcf) of total unconventional gas resources. Original estimates of recoverable shale gas reserves (with current fracking methods) put them at 5.3 trillion cubic meters (tcm)

Germany: 6.8-22.6 tcm; with technically recoverable reserves of 0.7-2.3 tcm (10% of total shale gas reserves). Exploitable reserves: 827 billion cubic meters (bcm). In comparison, conventional gas reserves: 150 bcm

Bulgaria, Romania and Hungary:
538 bcm of technically recoverable shale gas reserves

Ukraine:
1.2 tcm of shale gas reserves and a total of 2.8 tcm of all unconventional gas reserves, which include coal-bed methane and tight gas.

Lithuania:
480 bcm

Poland:
187 tcf (technically recoverable shale gas reserves)

Meanwhile, in Russia…

In May 2013, GIS expert Prof. Stefan Hedlund’s described the effect of the U.S. shale gas expansion on the Russian gas giant Gazprom. The company was complacent as it had locked the European market into profitable, oil price-pegged long-term contracts. It ignored both LNG and shale gas.

As large amounts of LNG destined for the U.S. market were rerouted to Europe, at substantially lower prices than Russian pipeline gas, Gazprom chairman Aleksei Miller argued that American shale gas was a “soap bubble” that could not substitute for Russia’s ample supply of conventional gas.

“But behind the façade, one can detect serious concern that the very core of the company’s business model is under serious threat,” observed Prof. Hedlund in the report. European customers began to call for amendments to Gazprom contracts by seeking arbitration over conflicts on clauses of gas price revisions, he wrote. The combined outcome for the Russian giant has been a loss of market share and a downward pressure on prices. On top of that, the EU began to put muscle behind its demand for “unbundling” (intended to make Gazprom give up its interest in pipelines) while probes were launched into alleged anticompetitive activities by Gazprom in several EU member countries.

Secrets of success

Two GIS reports in August 2013 again highlighted the impact of unconventional energy, including shale gas, on the U.S. and global economies. GIS guest expert Nick Loris wrote in the first of them:

One of the critical elements to efficient and environmentally responsible shale oil and gas development in the United States has been that state governments have effectively regulated production while the federal government has not interfered - at least for now.

As a result, the expert continued, significant employment benefits occurred in states where the shale reserves are located, such as Texas, North Dakota, Pennsylvania and Arkansas, and also in states supporting the industry: California, Georgia, Florida and Missouri. Overall growth in U.S. gross domestic product (GDP) related to the new industry was estimated at more than $231 billion by 2035, and employment expansion – at 2.4 million jobs.

Gas markets are segmented into three main regions: North America, Asia and Europe

Wellhead prices of natural gas dropped from nearly $8 per 1,000 cubic feet just before the shale gas revolution in 2008 to just $2.66 for the same amount of gas, Mr. Loris wrote. This shift led to a 10 percent decrease in electricity prices, leading to projected savings of nearly $1,000 for the typical American household between 2012-2015. “And this is just the beginning,” Mr. Loris concluded.

Fragmented market

Dr. Carole Nakhle concentrated in the other report on what the U.S. shale revolution means to global gas prices and potential new gas producers. Gas, she wrote, had a unique feature that distinguished it from oil – namely, the absence of a well-integrated global market. The expert pointed out in the summer of 2013:

Low gas prices in the U.S. have not reached other markets yet. However, the shale revolution has accelerated trends in various gas markets, which are likely to look structurally different in the coming years.

Gas markets are segmented into three main regions: North America, Asia and Europe, Dr. Nakhle explained. Different pricing mechanisms exist for gas across these regions. The Northern American and British gas markets are the most liberalized, she wrote, with prices and volumes determined by demand and supply.

Asia is reliant mostly on LNG imports, the expert wrote, typically traded under long-term oil-price-indexed contracts. Europe is more diverse; it consumes both LNG and pipeline gas, delivered mostly under long-term contracts but also, to an increasing degree, traded under short-term contracts based on spot prices. Prices in Europe tend to fall between the U.S. and Asian rates.

In early fall of 2013, Dr. Nakhle reported in detail on the intensifying debate on shale gas resources in the UK. Her conclusion:

A limited onshore domestic service industry, geological complexities, no private ownership of mineral rights, high population densities, strict environmental regulations and local opposition, all add to the costs and time of exploiting the resource. …There are doubts that the UK will be as successful as the U.S. in developing its shale gas.

In April 2014, GIS expert Mr. Loris correctly forecast that shale gas could help ease Europe’s dependence on Russian energy if the U.S. removed its “antiquated and unnecessary restrictions” on exporting fuels, including LNG.

The restrictions have remained, but more export licenses have been issued. By February 2017, Dr. Umbach analyzed a new situation in the global gas market: a glut of LNG was growing as exports from the U.S. increased and demand from Asia waned. These factors fueled competition in regional gas markets, especially in hotly contested Europe. A price war became a possibility, the author wrote:

Most experts expected the majority of U.S. LNG exports would be shipped to Asia rather than Europe since gas prices in Asia were much higher. However, by the spring of 2015, Asia’s gas prices had already decreased 65 percent from around $15.60 per million BTU, their peak in 2014, to near European levels. This has given American companies a powerful financial incentive to export to Europe and meshes with U.S. geopolitical interests to support the EU’s efforts to diversify its gas sources.

In Europe, U.S. exports compete with other LNG supplies and with gas coming through Gazprom’s pipelines, priced around $4-6 per million BTU. Increased U.S. gas exports present a threat to Gazprom’s market share of more than 30 percent, its pricing and contract models, as well as Moscow’s political influence in Europe.

Renewables vs. shale

The impact of new extraction technologies for fossil fuels, specifically those developed for shale oil and shale gas, has been larger than that of renewables, observed Dr. Carole Nakhle in her Feb. 23, 2017 report. Shale technology, she wrote, “has been by far the more powerful force, fundamentally altering the global energy markets and challenging the existing order, with serious spillover effects on the global economy and geopolitics.”

The U.S. has decreased greenhouse gas emissions more than any other country

The contribution of renewable energy (solar, wind and biofuels) to the world's primary energy mix is approximately 3 percent, helped by the political favor it enjoys in many countries. Shale oil and gas, by comparison, make up more than 5 percent of the world’s total primary energy mix, despite being frowned upon as a fossil fuel, essentially confined to one country, and tightly regulated. “This is truly remarkable,” wrote the GIS expert. “Shale technology’s potential may, therefore, be much bigger than what the world has seen so far; its full impact is yet to be experienced.”

Latest assessments

In his January 2018 “Global Outlook” report, Dr. Frank Umbach wrote that shale gas “hastened the transition” in U.S. power generation from coal to gas and transformed energy markets around the world. In the process, the expert pointed out, the U.S. has decreased greenhouse gas emissions more than any other country. “These unprecedented changes may even speed up in the coming years, with digitization, automation, electric mobility, robotics and artificial intelligence transforming the entire energy sector,” Mr. Umbach predicted.

A chart showing the world’s 10 largest producers of natural gas in 2017 and their output in billions of cubic meters
Since 2009, the U.S. has been the largest gas producer in the world, edging out Russia and leaving Iran, Canada and Qatar well behind (source: macpixxel for GIS)

On April 18, 2019, Dr. Nakhle summarized the current situation in the global natural gas market:

Today, LNG markets are undergoing a structural change. Supply has been growing rapidly and the industry is shifting from a traditional point-to-point delivery business model (e.g., from Australia to Japan) toward a flexible, integrated global market. U.S. LNG, which is sold under flexible terms (spot pricing and short-term contracts), has been fueled by a rapid buildup in shale gas production. The rise of U.S. LNG has challenged established exporters, such as Russia and Qatar, and the old pricing order, while tilting the bargaining power in favor of consumers.

Europe remains a key market for natural gas, Dr. Nakhle wrote, both in terms of its overall consumption and as a center for competition among different sources of supply. According to BP, the region accounted for 13 percent of global gas consumption in 2017. Declining domestic production also means that Europe’s reliance on imports will increase, she noted. The diversification of energy supplies is highly politicized in the European Union, particularly regarding natural gas.

Decisive factor: Asia

Asia is expected to be the growth center for oil and gas in the coming decades, with China leading that growth, the expert projected. For natural gas, the potential was massive, she asserted. The share of natural gas in China’s primary energy mix in 2018 remained a modest 7 percent, as compared with a world average of 24 percent. China’s economic growth and a policy effort to improve air quality are turning the country into one of the world’s largest natural gas consumers and importers, despite growing domestic production, Dr. Nakhle concluded.

The changing global gas market

  • Unlike oil, which is a fungible commodity traded in a global market, the natural gas trade remains a mostly regional affair; around 70% of the gas produced globally is consumed locally
  • The EU member countries’ import dependency is 75%
  • The U.S. is forecast to have the third-largest LNG export capacity in the world by the end of 2019, after Australia and Qatar
  • Global LNG capacity is on track to grow 20% between 2018 and 2020, with the U.S. providing around half of this growth. Australia and Russia will provide most of the rest (IEA)
  • In Asia, Japan is the largest market. China overtook South Korea for second place in 2017

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