Surplus and Deficit in the Golden Age of Gas (part 1—US)

On April 13th, 2012, Peter Kiernan, the Energy Analyst of the Economist Intelligence Unit, put on a webinar on the current state of supply and demand with respect to oil and gas in North America, Europe, and China.   The following are my notes of the webinar; I’m splitting the post into three parts, covering the three areas covered by the webinar as mentioned above.   I do not have a separate post for the Q&A session after the webinar as I had with previous EIU seminars, because I did not have a recording of that session available.   

Here are some trends with regard to natural gas in the United States, and its effect on other fossil fuels (oil, coal) and renewable energy sources.

1.  Shale gas boom

Shale gas is different than shale oil in that the natural gas is usually on top of a reservoir of shale oil, which usually means that it is more accessible than shale oil.

In the United States, natural gas production was on the decline before 2006, and was expected to become a major importer of LNG (liquefied natural gas), particularly from Canada.

However, since then proven shale gas reserves have increased and gas production itself has increased, to the point where shale gas now comprises 25% of total US gas production.   The supply has increased to the point where US is now expecting LNG.   Several LNG supply deals have concluded and LNG export terminals are under construction.

The shale gas boom and the relatively weak demand have led to lower prices for shale gas, and consequently a cut on production.

2.  Effect on shale oil

The shale oil that is more accessible is that found in tight or densely packed shale formations called light, tight oil or LTO.   Often this LTO is found in conjunction with natural gas which tends to rise to the top of the formation.   The gas production mentioned in paragraph 1 has therefore had a spillover effect on the increased production of LTO.   High oil prices make it profitable at this time to go after this type of oil.

Both shale gas and shale oil are considered unconventional supplies because they rely on methods such as fracking (or fracturing) of the shale in order to release the oil and gas contained therein.   High oil prices make the additional costs of these unconventional methods more economically viable.

3.  Effect on coal

As the US oil and gas production increase, the US dependence on coal production to meet its energy demands decreases.

4.  Effect on renewable energy

The lower prices on the production side (note we are not talking about lower gas prices that you are paying for at the gasoline pump) mean that renewable energy sources do have a role, but economic forces do not give incentive towards their development in the absence of government subsidies.

5.  Environmental scrutiny

One of the issues affecting oil and gas production in the US is the increasing environmental scrutiny attached to the fracking process, with the main short-term environmental hazards being the potential contamination of groundwater and increased earthquakes in production areas adjacent to fault lines, not to mention the long-term environmental hazards having to do with increased carbon dioxide in the atmosphere and its effect on climate patterns.

This increasing environmental scrutiny may pressure the US government to factor in some of these environmental impacts into decisions regarding the implementation of further shale development projects.     However, absent this political pressure, economic forces now favor an increased shift in the US from coal and oil production towards the production of natural gas, which is a relatively cleaner-burning fossil fuel.

Tomorrow I will post on the effect of shale gas and oil production in the EU.


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