The price of natural gas (NG) in the U.S. fell sharply in the
first three quarters of 2009, and U.S. reserves
estimates increased
by 35% from 2006 to 2009. However,
gas currently supplies only 20% of our energy, and the cheap
gas (onshore conventional)
will account for only 25% of domestic gas production by 2015.
Most shale gas will continue be expensive in spite of
continued progress in the technology. By Feb 2012, gas is projected
to be about twice its recent record-low price of
under $2.70/mmbtu. A steady upward cost trend beyond that is
expected, as more customers
switch from oil and nuclear to gas.
The price of LNG plummeted briefly in mid 2009 to as
low as $5.50/GJ (under one-third
of previous highs) in some spot markets, but by 7/2010,
it was back above $12.00/GJ in most ports. It will likely be
30% higher by the end of 2011 and three times higher by 2018
– driven partly by the slow-down in expansion of nuclear
power since the Fukushima disaster, but mostly by high oil prices.
Utilization of the stranded
natural gas (NG) reserves in the Persian Gulf, East Caspian,
Australia, Northern Africa,
South Pacific, and
elsewhere will grow rapidly over the next 15 years to help fill
the gaps created by declining conventional oil production.
This utilization will take two basic forms – gas to liquids
(mostly methanol and diesel) and liquefaction. The price of LNG
has historically often been based on a formula that gives relatively
little weight to the price of oil – typically only about
16% of the equivalent energy cost in oil has been added to the
baseline cost of LNG. Such a pricing structure cannot persist
in a carbon-constrained, flexible-fuel world. 
The global LNG market
has been doubling every five years, and the major gas producing
nations have recently begun
to organize the gas-equivalent
of the oil
cartel. In spite of the fact that LNG can
be produced, liquefied, shipped, re-e-vaporized, and piped to the customer
at a total cost of about $7/GJ, its market price will soon
be more determined
by the price of heating oil and propane (the mean of which was about $23/GJ
in 4/2011) than by LNG production costs. Propane will
see rapid price increases over the next decade as it begins
to replace naphtha as the primary feedstock for production of light olefins.
(Recall
that the international unit GJ is 5% smaller than the American
unit MMBTU. We hope international trends will finally force
the last bastion of
archaic units, the US energy market, to begin using SI units within a decade.
This should help engineering productivity in the US.)
Much of the current
trade is controlled by multi-year international contracts, many
of which are supposed to hold
their prices of LNG below $7/GJ
for the next 2-15 years. However, the spot and short-term market grew from
12% of global LNG trade in 2004 to almost 25% in 2008 or 2009
(there are conflicting reports), and this trend is continuing.
Within six
years, the LNG spot prices, except in the US, should be
close
per
unit
energy
to that of crude
oil – partly
because of LNG’s higher energy content per unit carbon, and partly
because it does not require refining.
Global LNG
demand reached 172 MT (million metric tonnes) in 2007, or 8%
of global natural
gas usage. This was only an 8% increase over 2006, partly because
2007 saw
a
mild
winter
in
the US. Growth was near zero in 2008 due to the severe recession,
and only a few percent in 2009. Demand growth of
about 50% (cumulative) is projected over the next 6 years.
Supply
capacity increased by ~16% in 2008 because of five
exceptionally
large projects coming on-stream (in Qatar, Nigeria, Australia, and Indonesia),
and about 15% in 2009. Iran (which has the world’s second largest
gas reserves) might add 76 MT of LNG production by 2016. If so,
this would add ~7%
annually to the global supply; but there
are serious doubts, as a recent project with Shell was cancelledand many
others are on hold. Australia is expected to add about 30 MT/yr of LNG
production capacity over the coming decade and become one of the world’s
largest LNG exporters.
There will be no shortage of demand growth from the developing
economies – especially China, where total NG demand is
expected to grow at least 20% annually for at least the next
5 years. China’s LNG imports in 2009 totaled only 3.5 MT,
but (as of 3/2010) they are projecting 6 MT of LNG imports in
2010. Similar year-over-year demand growth is expected as long
as the price of LNG stays much below that of heating oil.
The severe global recession of 2008-2009, along with the strong
investment in LNG liquefaction facilities over the previous
five years, has led to
a glut in supply that will take two more years to work through. The mainstream
pundits seem blind to the fact that the global oil market (nearly
4 GT/yr) is 15 times the size of the LNG market on an energy
basis, and it is easy to substitute LNG for petroleum products
in many large applications. When crude oil and propane
are back to $20/GJ ($120/bbl and $1.85/gal respectively)
in mid 2011, the spot-market price for LNG could be similar in many
ports, and the spot market will comprise 30% of the total LNG
market
Peak
Gas.
With low
NG prices and reports of large finds of unconventional
gas
(shale gas, tight reservoirs, coal bed methane...) in the U.S.
that will be competitive because of new technology, the subject
of Peak natural Gas has largely faded from the front page. However,
the U.S. still has only about 4% of the world’s gas reserves.
The recent MIT study (MITEI,
2010) indicates there may be enough gas in the US if all probable
and possible reserves can be utilized (and this includes all
shale gas and coal-bed methane) to meet our current usage rate
(providing 20% of our energy) for 92 years. Of course, there
is motivation from a climate change perspective to increase the
fraction of energy supplied by gas, and economic growth is also
expected. Moreover, Europe is running out of gas, and China projects
their gas usage will increase by 20%/yr for at least the next
5 years. With that kind of rising global demand, it probably
won’t be long before the U.S. will be exporting LNG.
The MITEI study puts the global gas economical resource, including
likely undiscovered shale gas, at 600 trillion m3 – three
times the recent IEA global reserves estimates. Current global
usage is 3.2 trillion m3. If coal is replaced with gas at the
rate of 2%/yr and economic growth adds an additional 1.5%/yr,
global gas usage would double in 22 years. If growth continued
thereafter at the rate of 1.5%/yr, the world would completely
run out of gas in 2080. This suggests peak gas would likely be
around 2050. If the economically recoverable gas is closer to
the IEA reserves figure, peak gas could be as soon as 2030.
There are reasons to believe the projections
for shale-gas production have been optimistic – because
of both cost and environmental issues (especially ground water
contamination) associated with
fracing. Moreover, a recent study concludes that, without new
regulations or incentives, the GHG footprint benefit of shale
gas compared to coal is marginal – because of all the
released methane associated with production of shale gas. It
is also still not widely appreciated that most shale gas contains
10-30% CO2, which is just being vented at the well head.
The gas-well blow-out in Pennsylvania
on June 3, 2010, didn’t
get a lot of attention because it was small compared to what
was happening in the Gulf of Mexico, but it wasn’t the
first and it won’t be the last. Production from shale gas
usually declines by 50% in the first year after fracing, so re-drilling
and re-fracing is a continual process with shale gas. Also, it
is important to keep in mind that shale-gas production thus far
has mostly been from the easier sites, and it has been partially
supported by subsidies that will soon be ending.
On Dec 23, 2008, Putin announced the formation of the beginnings
of a gas cartel,
and said "the era of cheap energy resources, of cheap gas, is of course
coming to an end". Russian Energy Minister Sergei Shmatko said “A
new organization has been born today.” Russia, Iran, Qatar, Saudi Arabia,
Abu Dhabi, Nigeria, and Venezuela together hold 70% of the world’s gas
reserves. The first three of these alone hold 57%.
The Future.
WindFuels will
begin to limit the rise in the price of both oil and gas in 8
to 15 years (depending on the rate at
which it is funded), and eventually carbon-neutral WindFuels will
supply most of our oil and gas. WindFuels methane will
not be more expensive than what we could see for LNG within
a few years ; but WindFuels will first go exclusively
into liquid transportation fuels, as they will be much more profitable.
It may be 3 decades before WindFuels comprise a majority
of our liquid transportation fuels, and it will be another
decade before it is supplying a substantial portion of our “natural” gas.
In the meantime, all energy prices – oil, gas, nuclear,
hydro, and coal – will get very ugly.
References:
China also will probably see strong increase
in shale-gas production, and this could structurally alter LNG
markets:
http://www.petroleum-economist.com/default.asp?Page=14&PUB=46&SID=727805&ISS=25741&LS=EMS489600
Methane releases associated with shale gas production:
https://motherjones.com/files/04-11shale_gas_footprint_fulltextpdf.pdf
MITEI, The Future of Natural Gas, MIT, 2010
http://web.mit.edu/mitei/research/studies/report-natural-gas.pdf
Recent natural gas price projections:
http://www.hellenicshippingnews.com/new/2010/12/13/natural-gas-prices-may-advance-in-2011-on-lower-production-energy-markets/
LNG in Qatar
http://www.hellenicshippingnews.com/new/2010/11/19/qatar-to-enjoy-dominant-lng-market-position-finds-study/
Increasing availability of Natural Gas Liquids
http://www.scribd.com/doc/36293316/Raymond-James-NGL-Update-August-23-2010
Offshore LNG market:
http://www.offshore-mag.com/index/article-display/6278806807/articles/offshore/regional-reports/north-sea-northwest-europe/2010/10/new-report_assesses.html
Natural gas resources estimates,
July 2009:
http://apps1.eere.energy.gov/news/news_detail.cfm/news_id=12634
http://www.eia.doe.gov/oiaf/ieo/world.html
LNG market in Japan:
http://www.mongabay.com/images/commodities/charts/chart-lng.html
The Petroleum Economist
http://www.petroleum-economist.com/default.asp?Page=14&PUB=46&ISS=25406&SID=720365
http://www.eia.doe.gov/pub/oil_gas/natural_gas/presentations/2008/ngstorlng2008/ngstorlng2008.ppt
http://en.wikipedia.org/wiki/LNG
Peak gas:
http://www.peakoil.net/headline-news/shell-vice-president-peak-gas-could-come-earlier-than-we-think
http://www.oilcrisis.com/laherrere/NAm-NG2007.pdf
Gas cartel:
http://news.bbc.co.uk/2/hi/europe/7796806.stm
Other NG references:
http://money.cnn.com/news/newsfeeds/articles/reuters/MTFH20892_2010-03-01_22-03-06_SGE6200GT.htm
http://www.marketwire.com/press-release/Sinking-Soaring-Shifting-Outlook-2010-North-American-Oil-Gas-Project-Spending-Navigating-1117106.htm
http://www.reuters.com/article/idUKSGE6200GT20100301
http://www.osclimited.com/releases/LNGto2020.pdf
http://tonto.eia.doe.gov/dnav/ng/ng_pub_publist.asp
http://www.eia.doe.gov/oiaf/ieo/pdf/nat_gas.pdf
http://www.eia.doe.gov/oil_gas/natural_gas/data_publications/eia914/eia914.html
http://tonto.eia.doe.gov/energy_in_brief/natural_gas_production.cfm
