Unconventional natural gas development and geopolitical implications for energy security

¶ … Future Supply and Demand of Natural Gas

The technology developed in the United States has become available for application in other countries mainly through efforts of major service companies. Until the mid 1990s, Canada's gas production was predominantly from conventional gas formations. This conventional gas filled the available pipeline capacity and unconventional gas resources, which are more difficult to produce, were largely ignored. However, as pipeline capacity was expended and conventional gas production began approaching a peak, market conditions in Canada began to favor development of unconventional gas (Harry, pp88-96) In the recent past, the natural gas markets were fairly predictable; they are now undergoing profound and uncertain changes. Independently, each regional market had developed gradually deposits from the nearest pipeline networks and limiting exchanges between areas. The current trend is marked by greater competition between the available sources and greater flexibility in systems gas. (Tad, pp14-15)

It is apparent that technological innovations and improvements have played an important role in increasing unconventional natural gas development in North America. This technology, advanced over the past three to four decades, promises to become a worldwide commodity through efforts of many service companies. China, with its sizable unconventional natural gas potential, has every prospect of success to repeat the experience of the U.S. And Canada in adopting new technologies. The issue of energy security and vulnerability is currently of more concern to global economies than it has ever been before. As demand grows, energy resources become strategic commodities susceptible to being used for geopolitical leverage. The growing influence of geopolitical factors on the global energy market has profound implications for the interests, strategies, and policy-making of nations as well as for the ways that oil and natural gas companies conduct their business. (Wengenmayr and Thomas, pp42-43)

Background

The main producing countries in 2006 were the Russian Federation and the United States with 21.3% respectively and 18.5% of world production. Note that North America and the former Soviet Union produced 53.6% of total production in 2006. Other states also show a significant production. This is the case, for example, Canada (6.5%), Iran (3.7%), Norway (3%), Algeria (2.9%), UK (2.8%), Indonesia (2.6%), Saudi Arabia (2.6%) and Netherlands (2.2%) *. These ten countries accounted for two thirds of world production of natural gas in 2006. (Tad, pp14-15)

Total world production in 2006 was 2.865 trillion cubic meters, an increase of 3% over the previous year. An increased production of natural gas worldwide is expected due to exploration projects and expansion planned in anticipation of future demand upward.

The main consumer of natural gas in 2006 was the United States with 22% of total consumption and the Russian Federation, with 15.1%. North America and the former Soviet Union together consumed about 49% of natural gas. (Douglas and Marek, pp117-28)

The share of Europe (EU 25) in the total consumption of natural gas was 16.3%. These three areas accounted alone for nearly two-thirds of total consumption in 2006. The consumption growth was 2.5% between 2005 and 2006, with rates highest in Asia / Pacific (6.5%) and Africa (5.5%). The main energy agencies worldwide provide a significant increase in demand around the world over the next twenty years; growth should mainly take place in developing countries. (Tad, pp14-15)

Demand and supply

The total energy demand for end use slows from 1.4% per year between 1990 and 2008 to 1.3% per year over the study period. Despite the modest slowdown in global growth in demand, a further review of the results indicates a decline in many key determinants of energy demand. Among them, there is a slowdown in population growth, higher prices of energy, lower economic growth in past years and enhanced programs in energy efficiency and energy saving. (David, pp19-46) Compared to historical growth rates, growth in energy demand in the commercial and transport slows dramatically. In regard to the commercial sector, the average annual growth rate of its historic fall from 2.0% to 1.0% during the period analyzed, while the transport sector flexes from 1.9% to 1.4%. (Douglas and Marek, pp117-28)

Moreover, under the leadership of federal and provincial programs, there is a significant breakthrough biodiesel and ethanol in the sector. The growth in demand in the residential sector fell by 0.7% per year it was from 1990 to 2008 to 0.6% from 2010 to 2035. The industrial sector, which accounted for nearly half of energy demand in 2010, stands apart, since it was up. (Robert, pp1-3) The sustained growth of many industries neutralizes the decrease in energy intensity that knows this area during the study period. Energy demand in the industrial sector increased at an annual rate of 1.6% during the study period, compared to 1.2% during the reference period, from 1990 to 2008. (Ammann, pp16-38)

Emerging trends related to supply and energy demand will have a significant impact on trade and energy needs of new infrastructure. Growth of oil production from the oil sands and a modest growth in demand for petroleum products will be effectively triple the net supply of crude oil available for export by 2035. Meanwhile, it is expected that the increased demand for Global population natural gas will gradually reduce the net supply of clean natural gas available for export until 2020. Thereafter, the supply remains stable until the end of the period. In terms of the net supply of electricity available for export, it doubles during the study period. (Viscusi et al. pp102-06)

The electricity prices are set in regional markets. The consumer price takes particular account of production costs, transport and distribution. They are generally lower in the countries that produce hydroelectricity, where there are a significant proportion of low-cost cultural assets, including hydroelectric plants, which consist of; often have several decades and whose construction costs are largely amortized. (Ammann, pp16-38)

In most jurisdictions, prices are based on the actual cost of providing services to consumers and include a regulated rate of return for generation assets, transmission and distribution. This model is recommended by all countries and territories. Electricity prices are set by the conditions of competitive wholesale markets. (Kemp, pp4-9)

No doubt while the geopolitical equation would change! Technical developments and prices were the determining factors in setting exploitation of unconventional gas. Economically, it is noteworthy that the number drilling has declined along with the wholesale price (between 8 and 15 € / MWh), while in same time the level of production remained stable. The marginal costs of production therefore appear to be declining. Companies do not advertise their breakeven which nevertheless seem to be around 11 € / MWh (or even 5 € / MWh) by the fields. The exploitation of unconventional gas is certainly more expensive and more polluting but new techniques have already divided the cost by two. The extraction requires quantities significant energy, water, or chemicals, degrading the balance sheet Environmental unconventional gas compared to conventional gas. (Douglas and Marek, pp117-28)

Microeconomics of supply and demand

In 2009, the dynamics of supply due to lower prices when demand has declined. Reduced imports of U.S. LNG have had an impact on other markets with the provision of gas quantities diverted to Europe and Asia. The excess gas has challenged some LNG projects not only in North America but throughout the world. Oversupply has arisen because the United States were no longer applicants and many LNG terminals have been commissioned at the same time. Some countries question now on their continued investment in LNG will be subject to spot prices to their lowest level since 2002, and whose markets are uncertain in terms of demand. Price differences between the three main application areas show the surplus U.S.: Asian and European buyers pay the gas near parity energy with oil while in the United States; it is trading at about a third of cost equivalent oil. (Ammann, pp16-38)

In Europe, contracts have a clause indexing of gas prices on the oil. Yet the gas spot prices decreased at the same time as oil rose. In early 2010, spot prices were twice lower than long-term contracts term. Some European consumers have taken the minimum share provided in their contract; the rest of their need was purchased on the spot markets. Without going into debate on long-term contracts in Europe, several gas companies claim an overhaul contract with an escalator on the spot price of natural gas. (Douglas and Marek, pp117-28) The Forum of Gas Exporting Countries is now able to change the trend. Established in 2001, the Forum brings together the leading countries in production natural gas that have agreed to exchange information. (Wengenmayr and Thomas, pp42-43)

No consensus exists for the introduction of production quotas: the members favor their income exports and do not wish to reduce their production volume. The "revolution expected" LNG has not taken place contrary to the "silent revolution" of unconventional gas. (Evans, pp1-6) Discoveries in the United States, first gas consumers natural, have questioned the organization of markets. The gas bubble is born from the oversupply resulting in lower gas prices. The success of unconventional gas limits the development of LNG (except Asia) and its expected consequences. (Viscusi et al. pp102-06)

It entails a new configuration with fewer interactions between regional markets. Growth Asian demand and market development in South America with the findings Brazil are still to be considered. (Evans, pp1-6) The map is redrawn with the gas new discoveries but also with a set of dynamic businesses. The traditional natural gas companies are forced to rethink their strategy with market developments. Stable and predictable markets for natural gas have become an image of the past; they are now uncertain and complex. (Douglas and Marek, pp117-28)

The projections for electricity supply are related to the application. Technological advances, the adoption of new policies and changing perspectives in relation to supply and fuel prices may dictate the choice of forms of production and the energy portfolio in the coming years. In some cases, accepting the social and local electrical infrastructure projects is also an important factor. (Kemp, pp4-9)

Analysis

The relative profitability of new power projects is driven by fuel prices and all capital costs. These components vary with the type of technology considered. It is generally assumed that the cost of fuel in the case of renewable energy is zero and the production of electricity from fossil fuels generally includes a fuel cost above that of nuclear power plants. The uncertainty regarding the cost of fuels used to generate electricity affects the type of technologies and projects that are selected and, by extension, on the composition of future electricity supply. (Ammann, pp16-38)

Currently, the costs of non-hydro renewable, like wind and solar are higher than conventional sources. However, in some markets, it encourages their deployment through financial incentives such as feed-in tariffs guaranteed. Reliability is also an issue, the questions concerning the amount of electricity generated by various forms of renewable energy that can be integrated to the grid. The reduction or elimination of incentives without reducing costs through improvements in technology or questions concerning joining the network may limit the growth of these energy sources. (Douglas and Marek, pp117-28)

Regulation and government policy is impacting on investment and the activities of plants are constantly changing. Projections of supply and energy demand to 2035 provide a look at supply and demand for energy in Global until 2035. (Viscusi et al. pp102-06) Based on information, trends, policies and technologies currently available, the projections show a preview of what will be the Global population energy system over the next 25 years. During this period, new information becomes available, trends and policies will change and technology will be perfected, disproving certain assumptions in the paper. (Marriot, pp33-48)

Double oil production by 2035 and oil sands provide most of this increase. The downward trend in increased exploitation of natural gas is reversed from 2016, driven by the extraction of tight gas and shale gas production grows to record levels at the end of the period analyzed. Electricity production is slowly increasing, and renewable such as wind, hydropower and biomass are needed among the various energy sources. (Ammann, pp16-38) The slowdown in population and economic growth, higher prices of energy and implementation of best efficiency programs and energy conservation are factors that contribute to slowing demand in the residential and commercial and transport sector. (Viscusi et al. pp102-06) In the industrial sector, the sustained production of oil and gas, combined with strong economic growth in many energy-intensive industries, resulting in an increase in demand that exceeds the pace of past years. The offer record and slowing growth cause a surplus of energy available for export. The amount of oil and electricity available for export increases dramatically, while the net availability of natural gas gradually decreases to stabilize at around 2020. (Douglas and Marek, pp117-28)

In addition to the reference scenario, this report contains four sensitivity scenarios designated "low price," "high price," "rapid growth" and "slow growth." These scenarios provide a broader view and consider the uncertainty associated with energy prices and economic growth. Scenarios of low price and high price point to Global's role as a major producer and major consumer of energy. Scenarios of rapid growth and slow growth are examples of how the economy and energy demand are closely linked. (Evans, pp1-6)

Finally, according to projections world population can expect that the energy markets continue to function well. The supply of oil, natural gas and electricity remains above the needs of world population in the foreseeable future. (Bill, pp15)

Conclusion

The future price of natural gas is an element of uncertainty of the first importance in the production projections. The baseline and the four sensitivity scenarios explore a wide range of gas prices for natural gas to evaluate the possible instability of prices in the coming years. Since 2000, annual average prices of gas in North America have fluctuated dramatically, doubling from 2003 to 2005, and then dropped by more than half in 2008 and 2009. These wide variations strongly affect the industry, both in producer incomes in the capital reinvested in the sector. As was mentioned in the chapter on crude oil, possible shortages of labor could affect the pace of expansion of oil and gas sector. (Chris, pp4-6)

Strong growth and rapid production of shale gas in the U.S. offsetting the decline recorded in other sources. Since 2009, the overall increase in U.S. production has helped curb the increase in natural gas prices in North America. Future growth in production of shale gas south of the border and its impact on gas prices on the continent will affect Canadian production, producers' incomes and demand for Canadian gas in the United States. If the U.S. had to export significant quantities of LNG produced there, it would mean a reduction in excess supply. (Wengenmayr and Thomas, pp42-43)

Demand for natural gas in the international market could vary beyond the parameters used in this analysis. The increased volume of gas used to generate electricity could be stronger than envisaged, or to replace aging coal plants or to compensate for the production of nuclear power plants that would have given up building. Domestic demand for natural gas could also vary due to fluctuations in production or technological changes associated with the fuel needs of oil sands. (Andrei, pp44-46) The price of natural gas could also be affected by any changes in the demand for Canadian natural gas or American. (Marriot, pp33-48)

The industry and many provincial and territorial governments are currently working on issues affecting the multi-stage hydraulic fracturing. Among these issues, we note the amount of water used in the process, maintaining the separation between fracturing fluids and surface water and the chemical composition and the safe disposal of fracturing fluids. The turn taken by this reflection could dictate the pace and level of production. (Evans, pp1-6)

Other potential uncertainties, there is the development of new natural gas sources such as shale gas in different parts of the world. The exploitation of gas hydrates is another possibility in the longer term. The initial production rates may be higher or lower than those considered in this analysis.

This report and the underlying analysis start with a simplifying assumption that the infrastructure will be sufficient to deliver global gas to domestic and export markets. Any shortfall in relation to infrastructure or market demand for global gas would reduce the projected future production.