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Unconventional Gas Riles and Refigures the World Energy Market: The Oil Market (Part III)

Author’s note: No, I have not been in a cave for the past two weeks.  The impacts of unconventional gas on energy markets will be measured in months and years, not in days and weeks.  There is essentially nothing that current unconventional gas production can do to moderate crisis-driven escalation of oil prices and oil-linked LNG prices in the next few weeks.

In Part I and Part II of this series, the impacts of unconventional gas discoveries in the U.S., Australia, Canada and elsewhere were explored.  Gas-to-gas competition was seen as a powerful force for price moderation.

U.S. shale gas discoveries and production from coal bed methane (CBM) have already provided great benefits for energy consumers in the Atlantic Basin.  Gas-to-gas competition – shale v. LNG – has led to interesting market outcomes and investments.  Gone are the panic days of encouraging any and all LNG regasification plants in the US in the fear that the US might “lose out” to others on the LNG bonanza.

Now, the U.S. is quickly moving toward overall sufficiency in gas supplies with investments in two-way (regasification and liquefaction) LNG plants now firmly on track in Texas and Louisiana.

Other markers of the sea change in gas markets include proposals for another two-way LNG plant in Canada and investments in gas-to-liquids production in British Columbia.

In the U.S., shale gas production has led to investment in new gas separation facilities and a revival of moribund petrochemical firms.

Australia’s exploitation of its CBM resources has created investments in more than 14 million tonnes/y (mtpa) for export to Asian markets.

In China, India, Poland and elsewhere, drilling is firming up new supplies of shale gas and CBM.

Even the U.S. government has entered the fray, with its Global Shale Gas Initiative.  The program aims to assist countries in identifying shale gas resources and the technology to produce it.

Where will it end?

Will the Gas-to-Gas Party Be So Much Fun That Oil Joins In?

The short answer is no, or at least not yet.  However, detailed investigations of the impacts of unconventional gas on energy markets in the US, Indonesia and elsewhere indicate that eventually the unconventional gas bonanza will “leak” into markets where gas can act as a near substitute for refined oil products.

What is necessary is not promise,[i] but production.  The Atlantic Market was not roiled until the US decreased its imports of LNG.  The oil and gas markets will react to what is or what will almost certainly come soon, not to what might be.

In the U.S., for example, natural gas production in the various shale basins is leading to additional gas pipeline reticulation, displacing #2 oil.  Some transport fleets in the U.S., especially local delivery vehicles, continue to convert to compressed natural gas (CNG) fuels.  In Australia long distance trucks in that country’s West rely increasingly on gas engines using LNG for fuel.[ii]

In Part II we noted that it was premature to declare gas-to-gas victory in the Pacific market.  To do so unconventional gas development production would need to develop so that:

  • Production of Asian unconventional gas outside Australia and Canada exceeds the “lost” Indonesian LNG exports (~15 mtpa);
  • Unconventional gas output in Indonesia can swing to LNG feed;
  • China and India challenge oil-linked LNG prices based on domestic unconventional gas output; and
  • Central Asian gas exporters (Turkmenistan, Kazakhstan) accept gas-to-gas pricing basis.

However, recent discoveries of shale gas in India and China, as well as likely near term CBM development in Indonesia may generate gas-to-gas competition in the Pacific by 2014 or 2015.

The first shoe to drop is likely to be LNG oil parity pricing.  This is likely to occur once Australian and Canadian LNG exports to the region start in large volumes.  At that point neither India nor China, each with its own unconventional production, will wish to pay oil-linked prices for their LNG imports.

The next step is likely to be large-scale oil product substitution in Indonesia.  Recent studies of CBM potential and transport indicate that replacement of 500,000 b/d of oil products or more is likely by 2020.  Indonesia’s CBM resources are huge, estimated at more than 400 tcf.

Is Unconventional Gas Doing Any More Than Nibbling Around the Edges of the Oil Market?

If unconventional gas is to truly impact oil markets, as it should (someday) given its abundance, then the market for transportation fuels must be breached by natural gas or gas-derived fuels.

Already, there are some indications, as noted above:  CNG in the US and India, LNG in Australia.  But so far, nothing has challenged the dominance of gasoline for personal vehicles.  LNG is too complex for small vehicles and CNG lacks the fuel density that most drivers want, especially to be able to carry groceries and children instead of fuel.

A second front is synthetic fuels – gas-to-liquids.  In the past GTL technology has been heavily dependent on very low gas prices.  The technology used is still essentially the same as the synthetic fuel technology used by Germany in World War II, South Africa in the 1970s and 1980s and promoted by the US in the 1970s.  For natural gas, of whatever source, this means conversion to synthesis gas, reaction with CO and Hydrogen and catalytic conversion to gasoline and diesel.

In other words, take champagne, covert it to beer and then transform the beer into cognac (or something like that).  Under special circumstances such approaches can work.  SASOL, the South African synthetic fuels company, is looking at just such a special situation on the West Coast of North America.  With fuel quality specifications tightening and additional oil production or refining in California unlikely until the geothermal energy source rock freezes over, that state will be a prime market for synthetic fuels manufactured from shale gas in Canada.

At this point GTL technology cannot compete with conventional oil refining.  However, direct conversion of gas to liquids, the holy grail of synthetic fuel technology, is not yet commercial.  Until such technology becomes less costly gas can only restrain the uglier excesses of the oil market; it cannot yet replace the mass market for transportation fuels, especially in China and Southeast Asia.

As noted in Part I unconventional gas resources are often found in the same or nearby vertical strata relative to one another.  Government’s can assist mostly by getting out of the way – permitting pipeline and network construction – a key element in the US success with unconventional gas; avoiding price guarantees – unconventional gas is perfectly able to stand on its own against oil and LNG; and permitting investment by companies that can do the job.

With fuel quality specifications tightening and additional oil production or refining in California unlikely until the geothermal energy source rock freezes over, that state will be a prime market for synthetic fuels manufactured from shale gas in Canada.[i]


[i] As in “Nobody ever said Willie Mays had promise.  He had bypassed promise and potential.”

[ii] For long distance trucks the density of CNG is not sufficient for the desired range, hence the use of LNG.

[iii] California has at least two shale gas basins.  I invite MR’s readers to form a pool about whether and when the California authorities will ever permit them to be exploited.

6 comments

1 Alex { 02.24.11 at 7:21 am }

India has drilled its first shale-gas well. The results at the moment indicate that India has a potential of an equivalent of 200 years’ supply of gas extractable by current technology.
http://www.nohotair.co.uk/index.php?option=com_content&view=article&id=1767:indias-story-gets-bigger&catid=120:lng

2 Bill Batt { 02.24.11 at 11:02 am }

CNG for short range; LNG for long range. Neat.
Electric cars for short range; gasoline (and hybrid) cars for long range.
Electric trains for short range; Diesel-electric for long range.
How short is short? How long is long? It depends.

3 Cladd { 02.24.11 at 8:16 pm }

Natural Gas for Europe http://www.naturalgasforeurope.com and Natural Gas for Asia http://www.naturalgasforasia.com are two sites that provide an overview of unconventional gas (and oil) activities and the drivers of the unconventional movement in those respective continents and the (i.e. consumption, energy security, etc.)

4 JavalinaTex { 02.24.11 at 11:13 pm }

Interesting article… I think that one of the things that is utterly amazing as the massive size of the shale resources… we have almost become numbed as to their magnitude… even if – as some critics contend – they are over stated, due, say to an excessively long tail, the numbers are staggering…

I just researched on a project, that the Hugoton production to date is about 35 TCF… it virtually launched the interstate pipeline business… I can think of about 5 or 6 companies that had their genesis in that field… And we have long talked about Prudhoe Bay having 48 TCF… dwarfed and made irrelevant by the shale resources.

It will be great to see what India and China can come up with… I note 100 years of supply for India isn’t that month at 1 tcf/y production… but 100 TCF is a lot of gas, none the less… and these resouces are imminently scaleable…

I don’t see LNG and CNG working at any sort of real scale (still drive by the seemingly unused Enron built facilities (20 yrs old) every morning…

I just do not see the GTL… the scale and investment is so huge, that I think there are many far less expensive ways to directly substitute Natural Gas for light distillates (like New England space heating for one… – Oh Yeah, they are going to run everything on wind ;-)…

Rob, I know you and many on this board are rightly (I mean the only thing with a worse record is cellulosic ethanol) skeptical of the electric vehicle initatives (OK, I will use subsidies)… But overall, they would appear to be a far more effective and long run efficient way to get Natural Gas (as well as Coal, Nuke, Wind, etc.) into the motor vehicle pool… the overall busbar to wheel pathway is exceedingly efficient… throw in NGCC heat rates and IF we can get the battery costs way down (like 75% – 50% at a very minimum) the economics will be very compelling (but they will still be niche vehicles)…

What will be interesting will be all the permutations on LNG… if Prudhoe Bay gets connected to Anchorage, will Kenai be restarted for export… with out the connect, will Kenai be converted to an import facility? If Sabine Pass and others get built, where will the LNG go? Throw in Mainland’s very early results on the Mississippi Haynesville….

I find the whole Hydraulic Fracturing “debate” amusing… we may need to export our horizontal rigs and know how to nations that appreciate what having low cost resouces mean…

5 Donald Hertzmark { 02.25.11 at 9:56 am }

Thanks for the comments.

As regards GTL I agree with Javelina that the current Fischer-Tropsch technology is not ready to replace crude oil. The example that proves the case is the proposed BC SASOL plant, which is intended to take advantage of California’s self-inflicted wounds with respect to energy supply.

LNG heavy trucks are not likely in the US for quite a while, but local fleets can make some headway with CNG.

It is entirely possible that unconventional gas development will be curtailed significantly in the US by continued disinformation regarding fracking. Another point is that the abundant supply of gas makes arguments for subsidized renewables look silly – really, how can wind pass the giggle test vis-a-vis $4-5/mmbtu natural gas.

As to the two-way LNG plants in the US it may be useful to think of them as physical hedges in both the domestic gas market and the spot LNG market. Customers for Sabine et al are likely to be small buyers in the Caribbean.

Finally, with both India and China now net importers of coal (cif prices > $/mmbtu) the all-in cost of high efficiency coal plants is not likely to compare favorably with the costs of domestic unconventional gas in CCGTs augmented by a competitive LNG supply.

6 Jon Boone { 02.25.11 at 10:57 am }

“Another point is that the abundant supply of gas makes arguments for subsidized renewables look silly – really, how can wind pass the giggle test vis-a-vis $4-5/mmbtu natural gas.”

Giggle test? Laugh at loud is what should actually ensue, Don. If there was a choice between wind and natural gas. But, from the politics, we’ll likely get both, since the natural gas industry has been (literally) advertising itself as the best enabler of wind–while the companies that control natural gas are themselves now heavily investing in wind.

The only tandem sillier than wind and natural gas is wind and nuclear, which Areva has been touting for some years while picking up on wind’s tax sheltering bonanza. And for those who think wind paired with hydro is such a good idea, do read this article in today’s paper of record:http://tinyurl.com/4eedflj.

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