Could global shale gas production displace LNG demand?
Emulating American Success
The shale revolution has had wide reaching effects on global gas markets. Within the space of a decade, access to huge unconventional gas resources in the Permian Basin, Marcellus Shale, Eagle Ford and elsewhere has seen America move from a net importer of natural gas to the world’s largest producer. The domestic gas industry’s challenges have shifted from how to secure additional supplies, to how to bring a massive surplus to consumers in other markets. It is a good problem to have.
Growth in US liquefied natural gas exports – unimaginable at the turn of the century – has been the inevitable consequence. This new chapter in the American energy story is just getting started. Industry analysts IHS Markit anticipate a rise in US shale gas production of 60% over the next 20 years. The Potential Gas Committee, tasked with estimating reserves of recoverable natural gas in the US, believes that the country may be in possession of another 100 years of supply.
The United States will certainly overtake Qatar and Australia to become the world’s largest LNG exporter in the foreseeable future. What remains to be seen is how quickly that can happen. 7 billion cubic feet per day of additional liquefaction capacity is currently under construction on the Eastern seaboard, with a new wave of pre-FID LNG developments expected to take shape before 2020 as oversupply fears abate. The IEA‘s prediction is that the US will become the largest exporter midway through the next decade .
US involvement in the LNG market has already had an outsized impact, given the volumes involved. A hefty dose of American liberalism has shaken up the contracting environment: driving the retreat of unwieldy oil-linked supply contracts, increasing the prevalence of flexible spot LNG contracts, and positioning Henry Hub as probably the global LNG market’s most important pricing benchmark. The result has been a different type of market – more liquid, weighted towards buyers rather than sellers.
But the extent of the shale revolution’s impact begs the question: what could happen if and when the rest of the world follows suit? Extensive and as yet largely undeveloped unconventional resources in places like China, Argentina, Australia, Canada, the Middle East and Europe imply that the impacts of a rise in shale gas production outside the US could be considerable. But much depends on how able these regions are to meet the challenges involved, be they geological, technological or regulatory. Emulating American success won’t be easy, and the timelines are far from clear.
To get a sense of some of the possible outcomes, we reached out to three leading experts in LNG and natural gas: Susan Sakmar, University of Houston professor and author of Energy for the 21st Century: Opportunities and Challenges for Liquefied Natural Gas, Vivek Chandra, CEO of Texas LNG and author of The Fundamentals of Natural Gas: An International Perspective, and Karen Sund, founder and partner at Sund Energy. Read on to find out what they had to say.
In which regions do you see the next wave of shale gas development taking place (Saudi Arabia, Argentina, China, Europe, etc), and what are the probable timelines?
Susan Sakmar:
For the foreseeable future (the next 10 years or so), the US will remain the leader in shale gas and oil production. Canada also has shale gas production and, similar to the US, will use shale gas to support at least one major LNG export project in the next decade, although many more have been proposed. Similarly, Australia will continue to produce its unconventional resources, which are mostly coalbed methane or coal seam gas (CSG).
Beyond that, China actually has the world’s largest unconventional gas reserves and could be a major producer of shale gas by 2040. But replicating the US success story in shale gas is not easy. China’s shale formations are more challenging and costly to develop, so it will take some time before we see significant production from China. That said, China certainly has the passion to do it and has been increasing production in recent years, so it is definitely the region to watch in the future.
Argentina also has promising shale gas reserves, especially in the Vaca Muerta play, and there’s reason to be optimistic that these resources will be produced so long as the regulatory and investment framework remains favourable.
Vivek Chandra:
Shale gas development takes more than commercial and geologic factors to be successful. The most critical factor is the regulatory environment. The fiscal terms have to be encouraging, the permitting process has to be simple and transparent, and the operator companies have to have the ability to change their work plans in the field without having to go back to the government regulator or the National Oil Company. Finally, land access rights have to be beneficial for both the operator and the private surface owner.
I do not think that any country that limits the activities of small nimble operators (such as Saudi Arabia or China) or that has difficult land rights (Europe and China) can truly create a world class shale gas sector. Thus, from your list, only Argentina has most of the required elements.
However, success in Argentina, though encouraging, is not guaranteed. The government has to continue to encourage the development of shale gas, and allow private companies to make commercial decisions as required.
Karen Sund:
There are so many countries with large deposits, so both shale and other unconventional gas could grow significantly. Drivers differ by country (in terms of demand and the price of imports) – and the list could include Algeria, India, South Africa and more. Time and scale are difficult to estimate, but China has huge resources and has already started.
What would LNG flows in a world with more widespread shale gas production potentially look like? Could greater shale production make China more self-sufficient in the mid-term?
Susan Sakmar:
It depends on where the shale gas production occurs. Canada has long had aspirations to use its massive shale gas resources to support many LNG export projects. Canadian LNG has taken a back seat to US LNG, but there is renewed hope that at least Canada LNG will take FID this year. In the years to come, perhaps one or two other Canadian LNG projects take hold and this LNG would be well placed to serve the Asian market.
The big wild card is China. If China develops a significant amount of its shale gas resources, most of this gas would serve the domestic market which in turn could displace imported LNG. Depending on the scale of development, this could be a major disruption in LNG trade in the future. But we still seem to be a long way off before this happens. At the moment, the global LNG world is looking to China to ramp up imports to meet growing gas demand. It seems unlikely that Chinese shale gas development will disrupt this anytime soon. A more immediate question for the LNG world is how will the start-up of the Power of Siberia pipeline with Russia impact LNG demand?
Vivek Chandra:
I do not see how shale gas production in any region (outside US/ Canada) will have an impact on global LNG flows.
China has been hyping its shale gas potential for many years. There are many reasons why their goals cannot be achieved - the three large state oil companies are not nimble enough to efficiently produce shale gas, land rights are difficult, and LNG demand is along the coast while shale gas potential is in the interior. I do not see any significant impact on seaborne LNG trade - though there could be a minor impact on mini- and small-scale LNG production and the transport sector.
Karen Sund:
We will see much more small-scale LNG for domestic supplies, which is already happening in China. Global flows will naturally depend on import needs and prices - demand could grow with more domestic gas production. Increasing shale production could potentially make China more self-sufficient, but demand could grow even more. LNG and pipeline gas would still be imported for many years.
Should the LNG industry see the globalisation of shale gas production as a challenge or an opportunity?
Susan Sakmar:
It’s both! Increased shale gas production in some countries, such as Canada, will make natural gas available for LNG export projects. At the same time, if China’s shale gas production really ramps up, it could displace LNG imports, much like it did in the United States. It’s difficult to predict since there are so many other pieces to the puzzle such as the role of coal and renewables. On balance, I would say that increased natural gas production – including both shale gas and conventional gas – depresses prices which makes natural gas a more attractive energy source for more countries, which will drive growth in the overall gas industry.
Vivek Chandra:
Growth in all gas production is a positive factor for global LNG. It will encourage more pipelines, more infrastructure, and more transparent market pricing.
Karen Sund:
There will be more opportunities for small scale LNG, which could also increase demand from shipping, heavy haulage and other sectors that prefer the gas to be liquid. When overall demand grows with more domestic resource, imports could also grow.
