The outlook for natural gas supply is undergoing rapid transformation. As BP’s Chief Executive, Tony Hayward, commented at the recent World Gas Conference, ‘A quiet revolution has occurred in the gas fields of North America. New techniques such as hydraulic fracturing and horizontal drilling are accessing deposits of unconventional tight and shale gas and coalbed methane.’ This surge in US natural gas production is having a significant effect on supply both within the US and beyond. Security of gas supply and how the US will compete with energy hungry countries such as China and India are no longer the hot topics they once were. Almost overnight US reserves are estimated to be over 57 trillion m3 of unconventional gas.
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This translates into over 100 years of domestic supply. By comparison, Russia, which possesses the world’s largest reserves of conventional natural gas and has long enjoyed the strategic influence these reserves have afforded it, holds a mere 43 trillion m3. With Europe hoping to join the ‘shale gas party’, which is by no means a forgone conclusion (see the keynote article by Brian Horsfield and Hans-Martin Schulz of the German Research Centre for Geosciences, on page 14 of this issue), Russia has naturally been quick to point out major environmental concerns over the impact of shale gas drilling and production.
Shale gas is undoubtedly a game changer. You only have to look at ExxonMobil’s US$ 41 billion purchase of XTO at the end of 2009 to see that this is an area of the industry that the majors believe has significant potential. That shale gas initially came in under the radar for many of the larger oil and gas companies is ironic. In this instance, smaller independents stole a march on their larger competitors who were off investing in oilsands and looking for the next big find in ever more hostile, remote and therefore costly locations, ignoring the emergence of shale gas in their own backyards. Eager not to make the same mistake again, Shell, BP, ConocoPhillips and Statoil amongst many others are very much at the forefront of shale gas development in Europe.
For Russia, shale gas clearly represents a threat to its natural gas hegemony in Europe and indeed its designs on the Asian market. With the US now boasting self sufficiency, it is no longer looking to the Middle East and West Africa for LNG imports. These cargos are and will largely be re-routed to Europe, reducing Russia’s market share and its ability to negotiate premium export prices. Factor in the recent downturn in the economy and its knock on effect on manufacturing and it is no surprise that Gazprom is feeling the pinch. As a result, it has already been forced to delay the development of its huge Bovanenkovo and Shtokman gas fields. Unfortunately, this is short-termism on Russia’s part. Natural gas remains the preferred fuel for electricity generation. It is relatively clean in comparison to coal, producing approximately half of the CO2, and gas-fired power plants are quick and easy to build and essentially cost effective when compared to nuclear and renewables. Most significantly of all, China, which currently relies on coal for 81% of its electricity generation needs and only 1% on gas, is keen to redress this balance amidst efforts to improve its environmental performance. Whilst China may be successful in developing a shale gas sector of its own, Russian supply will certainly play an important role.
The future of gas is therefore assured. Whether derived from conventional or unconventional sources, natural gas is a key ingredient in the global energy mix and ongoing investment is crucial in maintaining security of supply at affordable prices for many years to come. For Russia, shale gas may be a fly in the ointment but for everyone else, it has given the natural gas sector a much needed shot in the arm.