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S P E C I A L R E P O R T
NAT U RAL GA S
July 14th 2012
AN
UNCONVENTIONAL
BONANZA
POLAND
Energizing Europe
Poland is the only European economy which
has grown year-on-year for the last 20 years.
With a growing economy, stable fi nancial
markets and strong investment in the energy
sector, we are the leader in the region.
Poland is expected to be the leading
power in shale gas in Europe
113 licences
for exploration and
prospecting to
30 companies
including
30 licences
for
three Polish
companies
co-owned by the State
71 exploration drillings
by the end of 2012
estimated resources will meet Polish
demand for shale gas for the next
35-65 years
73% of Poles
support exploration
of shale gas
With the new LNG terminal, it will
be possible to diversify the sources
of natural gas supplies
fi rst project of this kind
in Central
and Eastern Europe and Baltic region
dispatch capacity
up to 5 bn m
per year
3
2 tanks storing
LNG with capacity
of 160,000 m
each
3
cost of investment -
EUR 700 m
completion date -
2014
access to the global market
of liquid LNG
www.msp.gov.pl/en
SPECIAL REPORT
NATURAL GAS
An unconventional bonanza
New sources of gas could transform the world’s energy markets,
says Simon Wrightbut it won’t be quick or easy
COLOURLESS, ODOURLESS, LIGHTER than air. Natural gas may not
have much impact on the senses, but as a source of heat and power it is
transforming energy markets. Around 100AD Plutarch, a Graeco-Roman
poet, noted the eternal res in what is now Iraq. They were probably
methane gas seeping out of the ground, ignited by lightning. Those eter-
nal res are now proliferating. An unexpected boom in shale gas that has
taken o in America may well
spread elsewhere and will add
massively to global gas supplies.
Shale gasan unconven-
tional source of methane, like
coal-bed gas (in coal seams) and
tight gas (trapped in rock forma-
tions)has rapidly transformed
America’s energy outlook. At the
same time discoveries of vast re-
serves of conventional gas from
traditional wells have pushed up
known reserves around the
world. Gas is the only fossil fuel
set to increase its share of energy
demand in the years to come.
For a long time it was regard-
ed as oil’s poor relation. In the
late 18th century William Mur-
doch, a Scottish engineer, used it
to light his house, but it did not
catch on until some decades later
when it became popular for illu-
minating homes and streets, re-
placing ickering candles. Com-
mercial exploitation of gas and
oil began around the same time,
yet gas remained a niche product
for lighting. And despite its rapid
rise in recent years, it will still lag oil as a source of energy by 2035, accord-
ing to the International Energy Agency (IEA), a rich-world energy club
and overtake coal by then only if the new gas reserves are fully exploited.
The trouble with gas is that it is dicult and expensive to transport.
That used to be true of oil too, but since the development of supertankers
in the 1960s it can be shifted relatively cheaply to nd a customer in the
world market. Gas needs a ready buyer and a way of delivering it.
CONTENTS
3 America’s bounty
Gas works
6 Fracking
Landscape with well
6 European worries
Sorting frack from ction
8 Global reserves
A world of plenty
9 Gas pricing in Europe
Careful what you wish for
11 LNG
A liquid market
13 Energy policy
A better mix
ACKNOWLEDGMENTS
The author is grateful to the many
people who helped in the prep-
aration of this report. Particular
thanks go to Simon Blakey, Nathan
Calvert, Anne-Sophie Corbeau,
Richard Forrest, David Giles, Kurt
Glaubitz, Gregory Hild, Jan Willem
van Hoogstraten, Martin Houston,
Amy Myers Jae, George Kirkland,
Alex Krueger, Scott Nyquist, Marvin
Odum, Ed Osterwald, Kurt Oswald,
Gordon Pickering, Howard Rogers,
Philippe Sauquet, George Smith and
Wim Vandenberghe
A priceless commodity
Because of those hefty transport costs, gas does not behave like a
commodity. Only one-third of all gas is traded across borders, compared
with two-thirds of oil. Other commodities fetch roughly the same price
the world over, but gas has no global price. In America, as well as in Brit-
ain and Australia, it is traded freely and prices are set through competi-
tion. In continental Europe traded gas markets are gaining a foothold, but
most gas is delivered through pipelines and sold on long-term contracts
linked to the price of oil, for which it used to be seen as a substitute. Gas-
poor Asia relies heavily on imports of liqueed natural gas (LNG).
Stranded gas, too far from its markets to go down a pipe, can be turned
into a liquid by cooling it to -162°C, shipped in specialist tankers and
A list of sources is at
Economist.com/specialreports
An audio interview with
the author is at
Economist.com/audiovideo/
specialreports
1
The Economist
July 14th 2012
1
SPECIAL REPORT
RUSSIA
NATURAL GAS
NORWAY
4
35
10
5
IRAN
18
4
106
Remaining recoverable
natural-gas resources
End 2011
CANADA
37
4
ALGERIA
CHINA
Top 15 countries
Trn cubic metres
37
37
7
8
48
4
1
Unconventional
Conventional
INDONESIA
UNI
T
ED STATES
35
3
World total
752
99
27
SAUDI
ARABIA
20
9
Q
ATAR
11
7
7
MEXICO
VENEZUELA
NIGERIA
AUSTRALIA
By region
Trn cubic metres
2
7
ARGENTINA
23
22
Share of world primary energy, %
174
Oil
Coal
Gas
Hydro
Nuclear
Renewables
50
40
30
20
10
0
137
132
FORECAST
122
74
71
45
East Europe/
Eurasia
Middle
East
Asia/
Pacific
OECD
Americas
Africa
Latin
America
OECD
Europe
1970
1990
2010
2030
Sources: International Energy Agency; BP
2
turned back into gas at its destination. But the huge plants need-
ed to do the job at both ends are very costly.
Since gas prices in dierent parts of the world are set by
quite dierent mechanisms, they vary wildly across the globe. In
America, where shale gas is whooshing out of the ground, they
recently fell to a ten-year low. In Asia they can be ten times the
American level.
America’s shale beds, but advances in drilling in very deep wa-
ter have dramatically changed exploration in the sea. Australia
will emerge as a gas superpower as it begins to deliver large
quantities of LNG from oshore elds. And better technology
and global warming is unlocking the Arctic’s natural bounty.
But there are reservations. Last year the IEA published a re-
port entitled, Are We Entering a Golden Age of Gas? The ques-
tion mark reects the constraints that public disquiet about shale
gas might put on its development. That is one reason why Fatih
Birol, the IEA’s chief economist, is far from
certain that America’s shale boom can be
replicated elsewhere.
In the most promising scenario, if
shale development goes full steam ahead,
the IEA reckons that the share of gas in the
global energy mix will rise from 21% today
to 25% in 2035. That may not sound much
of an increase, but over that period total
global consumption will grow spectacu-
larly. If the obstacles can be overcome,
more gas and lower prices will mean a rise
of 50% in global demand for gas between
2010 and 2035, according to the IEA.
Gas all over
Global reserves have been steadily increasing for at least 30
years. According to a report from the Massachusetts Institute of
Technology (MIT), published last year, world production has
grown signicantly too, rising by two-fths between 1990 and
2009, twice as fast as that of oil. Only half a decade ago it looked
as though the world might have only 50 or 60 years-worth of gas.
Now shale and other unconventional as well as new conven-
tional gas nds have increased that period to 200 years or more,
by some estimates.
The unconventional-gas bonanza has roughly doubled the
gas resource base, a measure of the total gas in the ground rather
than what might be economically recoverable. In 2009 the IEA
estimated the long-term global recoverable gas resource base
at 850 trillion cubic metres (tcm), against 400tcm only a year ear-
lier. The main reason for the rethink was
shale gas and other unconventionals. Not
just America but parts of Europe, China,
Argentina, Brazil, Mexico, Canada and
several African countries, among others,
sit atop as yet unknown quantities of gas
that could transform their energy outlook.
Better technology has helped, and so
has the high oil price. The spiralling price of crude has caused oil
companies to search even harder for it. But before a test well has
been drilled, it is near-impossible to be sure whether the geologi-
cal idiosyncrasies that excite oilmen will yield either oil or gas (or
sometimes both, and often nothing). Of late, big oil companies
have found plenty of gas.
Not only have breakthroughs in technology opened up
Not just America but parts of Europe, China, Argentina,
Brazil, Mexico, Canada and several African countries sit
atop as yet unknown quantities of gas
What has made gas so exciting is not just the steep rise in
supply but also the wide range of uses for it. It is a exible fuel, ca-
pable of heating homes, fuelling industrial boilers and providing
feedstock for the petrochemicals industry, where it is turned into
plastics, fertiliser and other useful stu. It is also making small
but signicant progress as a fuel for lorries and buses.
But the biggest advances have been in power generation. A
1
2
The Economist
July 14th 2012
SPECIAL REPORT
NATURAL GAS
2
technological breakthrough, the combined-cycle gas turbine, a
spin-o from the aviation industy, has transformed the econom-
ics of the industry. Not only has it made it cheaper to generate
electricity from gas, but the process releases up to 50% less car-
bon dioxide than does coal. As governments strive to cut green-
house-gas emissions, replacing coal with gas will bring fairly
swift results. Already the share of gas in the overall energy mix,
which had remained at 16% from the late 1960s to the 1990s, has
risen to 21%.
Gas power stations are a low-regret option, according to
Michael Stoppard of IHS CERA, a research rm. They are relative-
ly cheap to build, beating nuclear power hands down in terms of
capital costs, and in most cases they are also less expensive than
renewables. The EU hopes that by 2050 some 97% of power gen-
eration will come from renewables, but gas power stations are
likely to be needed for decades yet to provide exibility and se-
curity. And if gas is cheap enough and techniques such as carbon
capture and storage can be developed to make commercial
sense, gas could thrive for much longer even in a world that had
radically cut carbon emissions.
Except in America, though, gas is currently expensive, and
shifting it is likely to remain costly. Gas markets are regional. The
stu is mainly delivered down pipelines that stretch across
countries and even continents, but not between them. Pipelines
cost million of dollars a kilometre to build. The business model
of developing a gaseld has been to nd buyers and lock them
into long-term contracts to ensure that the costs of developing
and delivering the gas will be paid back. The alternative is to ship
the gas in liquid form, as LNG. But projects to liquefy gas also re-
quire huge investments, and often nding long-term buyers too.
Gas producers are naturally happy with the high prices re-
sulting from oil indexation, arguing that without them the eco-
nomics of big gas projects would never work. But Rick Smead of
Navigant, a consultancy, thinks there are good reasons for all
concerned to want competitive gas prices. He points out that
they would reduce regional price volatility and provide gas pro-
ducers with a broad and exible market instead of having to rely
on a single consumer at the end of a pipeline. That should oer
an incentive to make the huge investments required.
If the shale gale blowing through America can be repli-
cated worldwide, the huge surpluses it would bring could hasten
the advent of a global market. Just as the 20th century was the
age of oil, the 21st could prove to be the century of gas.
7
America’s bounty
Gas works
Shale gas is giving a big boost to America’s economy
PENNSYLVANIA, THE SITE of America’s rst oil wells back
in the 1850s, is now home to the world’s second-largest gas
eld after South Pars, on the border between Qatar and Iran. At
the turn of the millennium America’s conventional gaselds
were in decline. The country was preparing to become a signif-
icant importer: around $100 billion was invested in LNG import
terminals that may now be redundant. Shale gas was known to
geologists but had never been worth extracting. As recently as
2000 hardly any of it was coming out of the ground.
Now shale contributes a third of America’s gas supplies. By
2035 the country’s share of total supplies (which may by then
have risen to 820 billion cubic metres a year) could be nearly half.
The rise has been helped along by a variety of factors, such as the
liberalisation of access to existing pipelines by third parties that
started in the 1970s, a deep and liquid gas market that allowed
the risks of drilling to be hedged, ready access to capital, Ameri-
ca’s home-grown oil industry and the entrepreneurial zip that
provided the men and equipment. But the biggest dierence was
down to the eorts of one man: George Mitchell, the boss of an
Well oiled
Historical factors have led to another anomaly: much of the
gas traded across borders is sold at prices linked to those of crude
oil. When gas was rst brought to market as a commercial fuel in
the 1960s, as an alternative to home heating oil, it made sense to
price it against a substitute. But there was also a more subtle rea-
son. Oil was used as an independent price arbiter for Dutch gas
in the 1960s and then for Algerian and Norwegian gas in the
1970s because neither side could inuence the supply and de-
mand for it. The system persisted as Russian gas came to Europe
in the late 1970s. But the economics have changed, and valuing
one commodity in terms of another now seems bizarre.
Britain has had competition based on supply and demand
since the deregulation of the energy industry in the 1990s. The
fuel is traded at the National Balancing Point, a virtual hub. Simi-
lar arrangements are now spreading across north-western Eu-
rope as the European Union is switching to hub-based gas trad-
ing at the virtual Title Transfer Facility (TTF), as well as at
Zeebrugge in Belgium and NetConnect Germany (NCG) and
Gaspool in Germany. The model is America’s Henry Hub in Lou-
isiana, where nine interstate gas pipelines meet and from where
the gas is distributed to buyers, setting a benchmark for prices
across America.
A more competitive market the world over would doubt-
less make gas cheaper by breaking the link with oil, but that will
be dicult to bring about. Gazprom, Russia’s huge state-run gas
producer and supplier of 25% of Europe’s gas, is strongly op-
posed to dropping oil indexation. A tussle is under way between
it and the continent’s big buyers. Some pundits say that gas must
eventually become a global fungible product like oil, with re-
gional price dierences closing as more gas is shifted in the form
of LNG, draining gluts and making up shortfalls in regional pro-
duction in North America, Europe and Asia. But others reckon it
will never happen.
1
America’s hotspots
2011
Shale-gas production
Basins
Bakken
Marcellus
Utica
Barnett
Haynesville
Sources: Energy Information Administration;
International Energy Agency
The Economist
July 14th 2012
3
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