Market News

 June 10, 2013
Natural gas finds turn 'world of energy on its head'

 The emergence of shale gas on the energy stage is setting off a worldwide energy revolution.

Around the world, energy developers have found vast deposits of natural gas trapped in tiny bubblelike pockets within layers of "tight" sedimentary rocks, particularly in abundant shale.

"The so-called shale gale ... has turned the world of energy on its head," Thomas F. Farrell II, chairman, president and CEO of Dominion Resources Inc., said in a speech to the U.S. Chamber of Commerce in April.

"Over the past few years, domestic gas production levels have surged to historic highs and imports have dropped to their lowest level in more than two decades," Farrell said. "Production from shale gas formations --- about one-quarter of today's total U.S. reserves --- is expected to double by 2035."

Those changes have seized the Richmond-based giant energy corporation's attention.

Dominion Resources, parent company of Dominion Virginia Power, is building a 1,300-megawatt natural gas-fired power station in Warren County and has applied to build a similar one in Brunswick County. The company also is seeking federal approval to build a $3.4 billion-$3.8 billion natural gas liquefaction plant at Cove Point, Md., to export low-cost U.S. gas to Asia.

"Cove Point is symptomatic of a big shift," said geologist and program director Eric C. Potter with the Bureau of Economic Geology at the University of Texas at Austin.

"Oilmen always knew there was plenty of oil and gas in these tight formations, and drilled right through them," Potter said. "What's changed is the combination of long horizontal drilling and hydraulic fracturing. That's ... caused a renaissance in U.S. supplies of natural gas and oil."

In a stunning turnaround in the energy situation from just a few years ago, the United States is now on track to become a net exporter of natural gas within the next decade, according to analysts Scott McKee and David Rosner with the Bipartisan Policy Center in Washington.

"You often hear about things being a 'game changer' or a 'disruptive technology,' " said Robert Ineson, senior director with the IHS CERA consulting firm, where he leads North American natural gas and global LNG research activities.

"Those terms are tossed about far too easily," he said, "but this is really what it looks like."

The energy industry has traditionally thought the world's natural gas supply would last 60 years, but now recoverable reserves of unconventional gas --- including shale and coal-bed methane --- are conservatively estimated at 250 years at present rates of consumption, according to an IHS CERA report last year.

Many countries are lining up to emulate the North American success with "unconventional gas resources" from shale, coal bed methane and "tight sands," the Paris-based International Energy Agency says.

New, easily tapped conventional gas reserves continue to be discovered, for instance recently in east Africa and the eastern Mediterranean Sea, IHS CERA said. Exploration outside North America targeting harder-to-recover unconventional gas resources has revealed the potential for even more dramatic increases in total recoverable gas reserves globally.

The impact of hydraulic fracturing and horizontal drilling started to show up in the numbers in 2007, Ineson said, though the techniques go back to the 1970s. Since 2007, U.S. natural gas production has grown by 20 percent, adding more than 10 billion cubic feet per day, IHS CERA reported.

"We've gone into a situation where we have a market surplus," Ineson said. "We've seen natural gas displace a lot of coal generation in the power industry, which is not a normal thing."

Emerging shale and tight sands gas plays in the U.S. Lower 48 and Canada contain more than 1,800 trillion cubic feet of recoverable gas, according to an IHS CERA study. Together with conventional gas resources, North American is sitting on more than 3,300 trillion cubic feet of recoverable gas, or more than 100 years' supply at current rates of consumption.

IHS CERA estimated that half of that gas could be produced for $4 per thousand cubic feet or less, in 2010 dollars. That implies, the consulting firm said, that "large increments of demand can be added to the market without requiring a large price increase."

In fact, Ineson said, "The price has fallen to the point where in some of the leading shale plays, it's not economic to drill." The U.S. price is right at $4 a thousand cubic feet now. Last year it fell below $2.

On the order of 50,000 shale gas and oil wells have been completed using long horizontal drilling and "fracking," said Potter with Texas' Bureau of Economic Geology.

In hydraulic fracturing, drillers inject water, sand and chemicals under high pressure to open fractures in underground formations that allow oil and natural gas from shale formations to be captured for use.

"The Marcellus shale is now the big dog on the block and has grown with astonishing rapidity," Ineson said. "It's very well placed, but it is also the biggest" of the shale plays.

As a bonus, the Appalachian basin's Marcellus shale produces natural gas liquids --- such as ethane and propane --- which can be sold separately from the "dry" natural gas.

Though the Marcellus underlies part of western Virginia, the state's Appalachian region is unlikely to be a good candidate for shale gas plays, Potter said. For successful shale exploitation, the rock structure has to be relatively simple: not like Virginia's complex ridges and valleys.

Natural gas has about half the carbon content of coal, the traditional fuel of the U.S. electric power industry. As a result, burning natural gas produces about half the greenhouse gas emissions of coal-based energy generation.

Shale gas extraction can have less favorable environmental impacts, according to the U.S. Environmental Protection Agency, including using large amounts of water, contaminating water sources and releasing air pollutants.

A U.S. Government Accountability Office study found little evidence of significant environmental problems from shale gas production, but the EPA is undertaking a national study of the potential impacts of hydraulic fracturing on drinking water resources. The EPA expects to release the report in 2014.

The International Energy Agency forecasts that natural gas could eventually displace oil as the largest single fuel in the U.S. energy mix by 2030.

Natural gas from unconventional sources is expected to produce significant job creation, economic growth and revenue for federal, state and local treasuries in the U.S., in both gas producing and non-producing states alike, according to IHS Global Insight.

Unconventional gas activity supported more than 1 million jobs in 2010, and it should grow to support nearly 1.5 million by 2015, IHS said.

"A superpower does not punch below its weight class and stay a superpower forever," Farrell said.

"We owe it to the American public --- and to future Americans --- to act like the global leader we are and seize the energy opportunities before us."