INSIGHT: A disruption not necessarily welcome or sustainable

27 September 2010 18:08  [Source: ICIS news]

By Nigel Davis

LONDON (ICIS)--No manager worth his or her salt will rush too quickly to accept the norm. The usual rules of business apply day to day.

But when it comes to predicting the future  or at least setting out parameters within which you believe the business will operate  it is at least worth asking some fantastical questions at first sight, such as: will the drive to shale gas ultimately drive natural gas prices higher?

Received wisdom suggests the reverse to be true. New shale gas field development in the US has already helped push natural gas prices lower.

It was not so long ago that dire predictions were being made about an impending tightness in US natural gas supply. That was sufficient to drive prices higher. Chemical companies were keen to crack liquids and develop their liquids' cracking capacities in a higher gas cost world.

For the past two years or so the reverse has been true. Ethylene producers have sought to crack more ethane (the ethane associated with natural gas production). Crackers have been revamped to accept more of the feed.

Shale gas  the natural gas obtained by horizontal drilling and the “fracking” of shale deposits has grabbed the attention, with technology only recently developed boosting its availability.

In the US, it probably put downward pressure on prices in 2009, according to the Energy Information Administration (EIA). Henry Hub prices averaged $4.06/m cubic feet compared with $9.12/m cubic feet in 2008, the agency said in a July 2010 report.

Alongside factors associated with the recession and reduced demand, shale gas played a part in keeping prices low.

“The correlation typically observed between the natural gas rig count, prices and production became less evident, illustrating the impact of the increasing presence of production of natural gas from shale formations, horizontal drilling and hydraulic fracturing,” said the EIA.

“While these production methods are not particularly new, they have become more efficient and more widespread in the last few years.”

They have become more efficient and widespread  and the horizontal drilling tends to produce more natural gas per well and result in higher initial production rates, the EIA added.

But it should be remembered that in 2009 natural gas prices in the US were at their lowest for seven years. Production capabilities have shifted, certainly. And it looks as though significant volumes of shale gas will become available  even driving consultants to predict that the US will be “long” on gas for the next 100 years.

Yet the shift in gas economics could suggest a period of regional disruptions in prices as much as a benign era in the US.

“The 'shale gas revolution'  responsible for a huge increase in unconventional gas production in the US over the last couple of years  is creating huge investor uncertainties for international gas markets and renewables and could result in serious gas shortages in 10 years' time,” according to international affairs think tank Chatham House last week.

Shale gas has accounted for a 20-fold increase in unconventional gas production in the US over the past decade, it said in a report.

“The report casts serious doubt over industry confidence in the 'revolution', questioning whether it can spread beyond the US, or indeed be maintained within it, as environmental concerns, high depletion rates and the fear that US circumstances may be impossible to replicate elsewhere, come to the fore,” it added.

So, if the shale gas revolution extends beyond the US, consumers might expect an era of cheap gas.

“However, if the current hype about shale gas proves an illusion, the world will face serious gas shortages, as investment in future supplies are hit by the current uncertainty,” says Chatham House.

The knock-on impact of the shale gas revolution in the US has already been a reduction in liquefied natural gas (LNG) capacity utilisation and, according to the report, “dramatic reductions in forecasts of LNG capacity”.

Investors in LNG terminals in the US, particularly, have lost out, but there is investor uncertainty along the entire gas value chain.

Lower prices have also driven speculation over whether major gas producers might create their own exporting collective, a so-called Organization of Gas Exporting Countries (OGEC).

The shale gas opportunity is significant, but the uncertainty and disruption it has already caused are not to be welcomed.

The questions remain whether the US is set fair on gas, and its petrochemical producers on an extended period of ethane feedstock cost advantage.

Players elsewhere in the world are plunged into increasing uncertainty, or possibly opportunity, depending on location. It depends on how shale gas development plays out.

In addition, shale gas uncertainties have played through into renewables and the international drive towards a low-carbon economy.

“In a world where there is the serious possibility of cheap, relatively clean gas, who will commit large sums of money to expensive pieces of equipment to lower carbon emissions?” asks Chatham House.

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By: Nigel Davis
+44 20 8652 3214

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