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Natural Gas Rising

Issue 10 and Volume 114.

By David Wagman, Chief Editor

Daniel Yergin, chairman of Cambridge Energy Research Associates (CERA), told the World Energy Congress last month in Montreal that we are witnessing a “shale gale,” the fruit of 20 years’ worth of technology development that is starting to pay off. Previously unavailable natural gas resources are tapped in tight sand and shale formations through a process known as hydraulic fracturing, or fracking. Yergin said he considers the emergence of shale gas as the biggest innovation in fossil fuel resource development since the start of the 21st century.

Fatih Birol, chief economist with the International Energy Agency, said it is no longer a question of whether a gas supply glut is coming but how long the glut will last and how it will affect competing fuels and generation resources. Renewable resources may be affected if they face sustained price competition from low-cost and relatively sustainable supplies of natural gas. Liquefied natural gas exporters, too, may be affected if North American gas supply growth affects world markets.

Peter Voser, CEO of Royal Dutch Shell, said fracking technology means “there’s now enough technically recoverable gas in the ground for 250 years at current production rates.” Shell has some skin in the game: the company acquired East Resources, which has a major position in the Marcellus shale gas play in the Appalachians. Farther west, Shell produces natural gas from the Groundbirch area in northeast British Columbia.

A report issued by Ernst & Young at the Montreal conference said long-term shale gas production growth is expected to play an important role in shaping North American, European and Asian natural gas demand.

“The unconventional natural gas business may have already changed the overall supply and demand balance in North America and perhaps globally,” said Barry Munro, who leads the firm’s Canadian oil and gas practice. “It’s possible we could be onto something big, but there are many underlying uncertainties.” He counted environmental concerns, technology challenges, water availability and land issues as chief among those uncertainties.

The study concluded that while unconventional gas resources have the potential to fundamentally affect global supply and demand balances, the resource’s long-term viability is still maturing. On the demand side, the report said uncertainties exist around the state of economic recovery and expanded long-term uses for new natural gas production.

One question, according to Ernst & Young, is “whether the world’s appetite for natural gas will keep pace with supplies.”

With just that idea in mind, Voser told the World Energy Congress that an overall utilization rate of about 40 percent for existing gas-powered electrical plants on both sides of the Atlantic means “we can push more gas into the power system and reduce emissions essentially by making better use of what we already have.”

Voser pointed to a report by the Congressional Research Service that considered the notion of displacing a portion of U.S. coal-fired generation with natural gas. Voser said that if the U.S. were to double the utilization rate of its existing natural gas turbines to around 80 percent, nearly one-fifth of CO2 emissions from coal-fired power plants would be displaced.

Sounds good, but what the Shell CEO did not mention is that the CRS report highlighted several problems with the displacement idea, including transmission, system dispatch and natural gas transportation and storage.

To illustrate one transmission problem, the CRS report considered a hypothetical 1,000 MW of surplus combined cycle capacity in the northern part of the Electric Reliability Council of Texas. Although available, that capacity may still not displace Oklahoma-based coal-fired capacity due to transmission interconnect issues. “Although the regions are adjacent, from the standpoint of the power grid they are electrically isolated from each other,” the CRS report said.

The CRS report also looked at natural gas and coal-fired power plants that geographically are close enough to one another to be substitutes. Deeper analysis showed that displaceable coal generation and related emissions amount to “only a fraction” of total U.S. coal generation and carbon dioxide emissions. The hypothetical amount of displaced coal generation equaled 5 percent to 9 percent of total U.S. coal generation. For the associated CO2 emissions, the percentages dropped to 3 percent to 5 percent of the U.S. total from coal generation.

Natural gas is a fossil fuel with a carbon footprint, albeit smaller than coal’s. In the words of Fatih Birol, “if gas replaces coal in the U.S. this is good news from a CO2 point of view.” However, to reach global greenhouse gas emission targets by the middle of the century (a goal which few in Montreal disputed), Birol said zero-emission technologies are required. On that score, natural gas is “not very innocent.” Like coal-fired generation, natural gas, too, will require carbon capture and sequestration technology, Birol said.

The shale gale may be blowing at the door. Its long-term effects, however, are still unknown.

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