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A buoyant outlook

Oilfield Technology,

In the late 1990s, rapid advances in horizontal drilling and hydraulic fracturing technologies unleashed large scale commercial production of shale gas in the US. In what is often coined as the ‘shale gas revolution’, production has increased to account for almost 35% of the country’s output compared with only 2% in 2005. This vast increase in domestic shale gas production will transform the US from one of the largest gas importers to a substantial exporter by as soon as 2016.

The shale gas revolution

The production of shale gas in the US has had a dramatic impact across all of the country’s domestic energy sectors, and is now also a game changer in the global energy markets. In 2008 Henry Hub gas averaged at a rate of US$ 8.86/million BTU. This has now greatly reduced and in 2012 it averaged at a rate of US$ 2.75/million BTU. Shale gas production has been the main driver for this drop in domestic gas price, with gas production in the US increasing from 1.98 trillion ft3 in 2008 to 2.35 trillion ft3 in 2012.

North American LNG paradigm

Activity over the past decade has seen the US national gas strategy turned on its head. Plans to become one of the world’s largest LNG importers were scrapped in light of the shale gas glut. During 2007 the US Department of Energy (DoE) was reviewing 49 separate project applications, which would have accounted for over 300 million tpa of regasification capacity. Of course the majority of these applications were quickly withdrawn in the wake of dwindling demand for imported gas.

However the tipping point was too late for some projects, which had already begun construction. By late 2010, the US had approximately 14 billion ft3/d of import capacity, yet import terminals were barely utilised at 10% of this level. As confidence grew in the domestic shale gas market, project operators began to contemplate an alternative use for their idle import terminals.

Indeed, all existing projects have now filed to add LNG liquefaction capabilities to their import terminals in a bid to make their projects economical once again. As of November 2013, a total of 26 projects had filed to export domestically produced LNG to countries which do not hold a free trade agreement (FTA) with the US.

Shale/LNG market position

LNG is not as fungible a commodity as it appears to be. The increasing globalisation of LNG trade has highlighted the mismatches that can occur between LNG quality and the differing importation specifications that regional natural gas markets have evolved.

LNG produced from US shale gas will be particularly dry, meaning it is primarily comprised of methane, but not much else. This presents a particular issue for key buying markets in Asia Pacific, none more so than the world’s largest importer of LNG, and one of the oldest, Japan.

Impacts on LNG buyers

The main issue exercising the minds of Asia's LNG sellers and buyers is what will happen to their current LNG sale and purchase agreements (SPAs), which are priced based upon the Japan Crude Cocktail (JCC), as cheaper (Henry Hub linked) shale imports start to flow into the region from North America. Buyers will be under pressure to ‘close the gap’. At the same time, sellers are keen to maintain the prices based on which they made the decision to develop their LNG projects.

Wind the clock back several years and Australia was the global hotspot for Asian gas investors looking to take advantage of its proximity to top buyers such as Japan and South Korea. However in today’s environment, Australian projects are some of those particularly susceptible to price increases with the majority of the seven projects currently under construction announcing cost increases. Australia’s cost blowouts have been well publicised in recent times, to the embarrassment of energy operators. Currency, skilled labour shortages and a tough regulatory environment have all been touted as causes for the cost increases, pushing grassroot projects beyond economic viability. Now with the added complication of buyers looking to renegotiate, project developers are starting to feel the squeeze.

A second coming?

Until recently, shale gas development was almost entirely a North American phenomenon. According to the latest US Energy Information Administration (EIA) shale gas study, the US and Canada hold 16% of the technically recoverable shale gas reserves. Despite this relatively small amount, at the end of 2012 it is estimated that 110 000 shale gas wells were drilled in the US compared to 200 in the rest of the world. This equated to a shale production (oil and gas) of around 6.2 million bbls of oil equivalent/d, accounting for 99.9% of global shale production.

Although other countries are now looking to develop their own domestic shale resources, it is going to be difficult to repeat the North American success.

Both China and India are set to lead the growth in Asian energy demand through to 2030. This is likely to be met in part by shale gas either through domestic production or through LNG imports from the US. China and India are expected to be the biggest sources of additional LNG demand over the coming years, supporting the bulk of the 78.1 million tpa demand growth seen in the Asia Pacific region by 2020.

The outlook for LNG is buoyant as shale gas production grows globally. Record shale gas production in the US will dominate, with exports expected to begin in 2016, followed closely by Canada. Exports will continue to be rapidly snapped up by developing countries, particularly in Asia Pacific, to meet rising domestic demand. In the long term, the development of domestic shale reserves in China could potentially reduce its imports of LNG, any may add another twist to the tale, but gas demand is forecast to soar globally and it is expected that US shale gas will continue to fuel global and domestic economic growth for many years to come.

The full article can be found in the February issue of Hydrocarbon Engineering.

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