Growth in shale in the US and China could see a decline in the Middle East’s importance to gas production.
An International Energy Agency (IEA) report has forecast that a boom in unconventional natural gas over the next 20 years could see the United States and others benefit from cheaper energy, while the Middle East’s importance to gas production will decline.
In an interview with Reuters last week, IEA chief economist Fatih Birol said that growth in shale in the US and China could match gains made in conventional gas plays in regions such as Russia, the Middle East, and North Africa combined.
“Unconventional gas will fracture the status quo, and will be a complete game changer with major geopolitical implications,” said Birol.
The report underlines that historically high natural gas prices have helped spur investment in previously unattainable and unconventional gas plays including tight gas, shale gas, and coal bed methane resources. Between 2005 and 2010 the US shale gas industry grew by 45 percent a year; as a proportion of the country’s overall gas production shale gas has increased from just 4 percent in 2005 to 24 percent today.
A positive future
Speaking at the report’s launch last week, IEA Executive Director Maria van der Hoeven underlined that the future of unconventional natural gas is positive and that the most important focus should be to substitute gas for more polluting fossil fuels, such as coal for power generation.
The report adds that the majority of production increases would occur after 2020 as producers need time to develop a commercial unconventional gas sector. Expanding unconventional production will require a total of 1 million unconventional wells to be produced globally by 2035 in comparison to the 500,000 such wells drilled over the past 20 years.
The agency forecasts that the natural price structure could also change as a result of a global supply glut and that unconventional gas could in fact become the world’s second most important energy source after oil. It estimates that demand could rise by over 50 percent between 2010 and 2035 and make up 25 percent of the world’s energy mix, overtaking coal to become the second-largest primary energy source after oil.
Some have questioned the timing of advancing the sector with prices having fallen to historic lows. Last month prices dipped below $2 per million British thermal units, less than a sixth of the pre-boom price and a level too low for many producers to break even. However, with Asian and European countries currently paying between four and six times this price for their supplies, many are now looking west to secure supply. Peter Voser, CEO of Royal Dutch Shell (NYSE:RDS.A), a company with large shale gas investments, has stated that he believes natural gas prices will double by 2015.
Economic and trading patterns shifting
The shock waves of unconventional reserves are not only being felt within North America, but are also having a fundamental effect on the entire natural gas trading landscape. The development of Russia’s vast Shtokman gas field in the Barents Sea, a $40 billion project once earmarked to supply the US, has stalled, while Qatari gas, once aimed almost entirely at the US, is now finding its way to energy-starved Japan.
The IEA report also underlines the economic gains offered by the rapid growth in unconventional gas, with “countries that were net importers of gas in 2010, including the United States, gaining the wider economic benefits associated with improved energy trade balances and lower energy prices.” It adds that Canada, Australia, and Indonesia are set for large-scale increases in unconventional gas production and that “the share of Russia and countries in the Middle East in international gas trade declines from around 45 percent in 2010 to 35 percent in 2035.”
Canadian gas potential
Meanwhile, the potential of this game changer has not gone unnoticed in Canada. For example, British Columbia is sitting on one of the world’s largest unconventional gas plays, with estimates varying anywhere between the official 78 trillion cubic feet (tcf) to 355 tcf in reserves. However, with the country only currently exporting to one partner – the US – Rich Coleman, BC minister of energy and mines, has underlined the need to diversify BC’s trading portfolio.
“We recognized a long time ago we were a long ways from market and so we have been aggressive in pursuing the LNG [liquefied natural gas] opportunity,” Coleman said. “There are other jurisdictions, such as Alberta and Saskatchewan for natural gas, and we can’t be tied to one market, which is North America. The more we can diversify the better it is.”
Junior company news
Yangarra Resources (TSXV:YGR) has announced its financial and operating results for the three months ended March 31, 2012. Highlights during the quarter included production at 2,139 barrels of oil equivalent per day (boe/d), which is a 24 percent increase from the fourth quarter of 2011. The company is currently in spring breakup and drilling operations are expected to resume in late June or early July.
Thunderbird Energy (TSXV:TBD) announced the completion of the evaluation of its Gordon Creek, Utah natural gas reserves. According to a press release, highlights included proved reserves increasing 50 percent over the previous year to 11,171 Mmcf. Probable reserves increased 49 percent over the previous year to 27,589 Mmcf and the discounted cash flow valuation of the company’s proved plus probable reserves increased 84 percent to $69.9 million.
Manitok Energy (TSXV:MEI) announced its financial and operating results for the first quarter of 2012. A company release confirmed an 891 percent increase in the average production for the quarter relative to the average production of the comparable period in 2011. Average first quarter 2012 production was 2,209 boe/d. Cash flow for the quarter was $1.97 million, up from a $95,336 loss in the comparable period in 2011. The increase was due to the success of the Stolberg discovery well in 2011 and the asset acquisition made in the fourth quarter of last year.
Securities Disclosure: I, Adam Currie, hold no direct investment interest in any company mentioned in this article.