The world’s energy titans are only starting to get a grip on the surge in the unconventional production of shale gas that has postponed for years the United States’ expected emergence as major natural gas importer.

The prediction that the United States would soon become a big buyer of
ship-borne liquefied natural gas was a key theme of the last World Gas
Conference in 2006.

This year’s event was dominated by the grim realization that many
companies were completely wrong-footed by the unconventional gas
revolution and that spot gas prices could remain weak for years.

“The United States is now a virtual liquefied natural gas exporter
because all the LNG that was supposed to be going there is now going
somewhere else,” said Ian Cronshaw of the International Energy Agency.

Big players in the LNG market like Repsol YPF, Total and Qatargas,
which oversees some of Qatar’s huge LNG industry, predicted this week
spot gas prices will remain mired near current low levels until well
into the next decade.

Gas markets have been battered by a plunge in demand due to the world
economic crisis and surging production, that has sent storage levels to
record highs.

U.S. energy companies have been increasingly exploiting reservoirs of
gas trapped in shale rock formations that cannot be produced using
traditional techniques but which are now commercially viable due to new
technologies including horizontal drilling and new rock fracturing
tools.

Unconventional gas production has added nearly 5 billion cubic feet per
day to U.S. supplies in recent years, equivalent to 10 percent increase
in output, according to BP chief executive Tony Hayward.

HALF-PRICE LNG

The massive increase in production from places like the Barnett Shale
has sent gas prices plunging and has forced LNG producers to scale back
production or put cargoes into storage.

Spot cargoes of LNG are trading at half the rate of some long-term
supply contracts, experts said, prompting customers to begin to agitate
for renegotiated pricing.

Analysts cautioned that the full impact of the shale gas revolution has
yet to be felt, especially as the potential outside the United States
has been barely tested.

“It will probably take three or four years to get one’s arms around the scale of it,” said Daniel Yergin, Chairman of IHS CERA.

A recent study by CERA concluded that unconventional gas reserves could
be as much as 16 quadrillion cubic feet, or roughly double current
proved reserves.

Nevertheless, energy executives warned that the current low price
environment could not be sustained and predicted prices would recover
from 2013 onward as the low prices lead to the postponement of new gas
projects and growing demand catches up with supply.

The adoption of new global targets for curbing greenhouse gas emissions
should also boost the prospects for gas as the world will not be able
to make a massive shift to renewables in the short to medium term, BP’s
Hayward argued.

And big gas exporters noted that shale gas comes with its own problems,
including massive water use and other environmental complaints, as well
as the need for constant investment that could limit its impact.

“There’s a lot of myths about shale production,” said Gazprom Deputy Chief Executive Alexander Medvedev.

“We should not forget what the shale gas production profile looks like.
If you stop drilling, production will fall by up to 80 percent in the
next year.”

Source: Reuters

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