INSIGHT: Shale gas welcome but it’s not a panacea

WASHINGTON (ICIS news)--The US natural gas industry hailed a new study this week indicating that the nation has vastly more natgas reserves than previously thought - but the gas-dependent chemicals sector is not sure that a new energy day has dawned.

A study commissioned by a natgas advocacy group, the American Clean Skies Foundation, boldly claimed that fast expanding development of domestic US shale gas reserves can meet all of the country’s natural gas demand growth for the foreseeable future and can even supplement oil and coal use.

Aubrey McClendon, foundation chairman and chief executive of major natgas producer Chesapeake Energy Corporation, said the US is “entering an age of new gas abundance, and we will have enough natural gas to meet all areas of new demand”.

“This is a game-changer, a paradigm shift,” he added, not shy about the potential he sees. “Shale gas makes the US the Saudi Arabia of natural gas.”

For example, McClendon said the now developing Haynesville shale deposit that reaches from East Texas, through Louisiana and into Arkansas “may hold up to eleven or twelve times current US annual natural gas consumption of around 22,000bn cubic feet [bcf]”.

That would represent recoverable gas reserves of about 264,000 bcf.

Natural gas is a major feedstock and energy resource for US chemical producers. Chemical companies and a broad array of other US gas-dependent manufacturing sectors have seen gas prices rise five-fold from the long-time range of $2/m Btu in the 1990s to $12 within the last year. 

Prices have since moderated to the $9 range, but they are still well above historic norms and remain troubling to petrochemical manufacturers and downstream chemical and polymers producers.

McClendon noted that the Haynesville field is only one of a half-dozen major shale gas basins under development and that there are at least a dozen other shale basins scattered across the US.

Shale gas development has become economical in the last 3-5 years due to technical advances in horizontal drilling and hydraulic sediment fracturing and amid the increasing cost of gas, McClendon said.

The study commissioned by the foundation and conducted by Navigant Consulting predicts that annual production from just the seven largest US shale basins could exceed 10,950 bcf and even reach 14,235 bcf within ten years.

Combined with conventional US onshore and offshore gas production, the Navigant study contends that domestic natgas supplies are sufficient for expanding national demand for at least 100 years.

McClendon’s exuberant predictions are not outlandish. The respected investment bank Freedman Billings Ramsey (FBR) said in a recent shale gas analysis that the US is “on the cusp of a significant supply response”.

“We estimate that natural gas supply from these shale plays could increase to about 10bn cubic feet/day [bcf/d] by 2010 and to 16.75 bcf/d by 2012, with a peak of 39 bcf/d around 2027,” FBR said. 

In annual production terms those amounts are 3,650 bcf, 6,113 bcf and 14,235 bcf. And those figures are just for the five largest shale basins (Barnett, Haynesville, Fayetteville, Woodford and Marcellus) considered in the FBR analysis.  There are another 17 shale basins under development.

Bear in mind that current US annual consumption of natgas is just nearing 23,000 bcf, and even FBR’s conservative estimates are impressive.

McClendon urged congressional support for new legislation that would provide tax credits and bonding authority to encourage more production of automobiles powered by natgas and installation of natgas fuel points at US retail gasoline stations.

He said that shale gas reserves are sufficient to meet anticipated US demand growth for home heating, industrial, power and transportation needs, even if US policymakers create climate legislation that would cap greenhouse gas emissions and drive coal-fired utilities to cleaner natural gas.

In short, he wants to see US natgas consumption grow as a transportation fuel and expand further as a power source for electric utilities, thereby, he notes, reducing US reliance on foreign oil and pollutant-rich coal-fired electricity.

McClendon conceded, however, that despite availability of shale gas resources, anticipated US gas demand growth would likely keep gas prices in the range of $9-11/m Btu. The more complex and costly drilling and fracturing techniques required for shale gas development become uneconomical at around $8/m Btu and lower, he said.

Therein lies the problem for US chemicals manufacturers, who fear that as shale gas production increases and its potential looms ever more promising, gas consumption will grow and spread and keep gas prices well above the good old days of $2/m Btu.

While hailing and welcoming the fact and promise of shale gas, the American Chemistry Council (ACC) cautioned that “new demand pressures may keep gas markets tight, even with new production”.

Council spokeswoman Jennifer Scott noted that shale gas is more costly to produce, and growing US demand for gas to supplement wind farms and to power public and private transportation vehicles “will use up lots of new gas”.

In addition, the council worries that “new production from shale will give opponents another reason to keep the OCS [outer continental shelf] off-limits” to energy production. The council and other US manufacturing interests have been pressing Congress for six years and more to lift its moratorium on oil and gas drilling in 85% of the US outer continental shelf regions.

Chesapeake Energy’s McClendon agrees that the newfound wealth of onshore shale gas resources might make the need for more offshore access less critical.

The growing production and even greater promise of shale gas could also put in jeopardy the hard fight under way to site and permit regasification terminals on US coasts for incoming cargoes of liquefied natural gas (LNG). McClendon suggested that the US instead might want to consider building liquefaction facilities to one day export abundant shale gas supplies.

Scott suggested that despite the promise of shale gas, her industry could face a still tighter natgas squeeze. What if shale gas undermines the effort to open the OCS and then runs into political development problems of its own?

“The question is, what kind of local opposition will shale run into in its new frontiers?” she asked. “Producing gas from shale is a messy business and requires lots of water that gets ‘contaminated’ when used to fracture rock. Local opposition may slow down siting and permitting.”

Paul Cicio, president of the Industrial Energy Consumers of America (IECA), also cautions that booming projections for shale gas potential won’t solve the problem.

Without additional access to the OCS, he said, “the power sector growth in natural gas demand and the limited supply response would raise serious questions of whether the US will have enough supply for both the power sector demand and that of the manufacturing sector”. IECA represents chemical companies and other large industrial energy consumers.

Even the broad natural gas industry takes a rather sober view of the exciting shale developments.

“Natural gas from shale holds great potential for future US supply,” said Skip Horvath, president of the Natural Gas Supply Association (NGSA), the principal group of US gas producers and marketers.

“But in June the federal government reported that global energy demand is expected to increase 50% in the next two decades,” he added.

“All natural gas supplies have a role to play because each supply source, traditional or unconventional [shale], onshore or offshore, brings with it a different technology requirement, cost structure, resource life, land and infrastructure requirement,” Horvath said.

In other words, we need it all.