Global Surge of Activity Follows Successful Production of Unconventional Gas in US

The recent successful production of ‘unconventional’ gas in the US has sparked a flurry of interest throughout the world, with dozens of countries having launched ambitious programmes to examine whether or not they can also benefit from this relatively unexplored resource.

Australia is leading the charge, but China, India and Indonesia are also seriously investigating their own ‘unconventional’ gas sources. There is a growing interest within Europe from both major companies and small players, but most are still at the pre-drilling stage. A few countries in other regions, such as Argentina, Ukraine and South Africa, are also investigating their potential.

“Production of ‘unconventional’ gas in the US has rocketed in the past few years, going beyond even the most optimistic forecasts,” says Anne-Sophie Corbeau, a Senior Gas Analyst at the International Energy Agency (IEA). “It is no wonder that its success has sparked such international interest.”

Game-changer

The three main types of ‘unconventional’ gas are: shale gas (found in shale deposits); coal bed methane, or CBM (extracted from coal beds) and tight gas (which is trapped underground in impermeable rock formations).

Before news of the US success emerged, production of these ‘unconventional’ sources of gas was limited because of the significant cost and complicated technology required.

“A thorough knowledge of its geographical resources and recent improvements in technology allowed the US to pioneer and benefit from exploration in this area,” Ms Corbeau argues. “Another factor which contributed to the United States’ success was the high global gas prices from 2006 to 2008, which prompted it to closely investigate drilling more unexplored types of gas in larger volumes.”

The decision clearly paid off, as recent ‘unconventional’ gas production in the US, mainly of shale gas, increased dramatically leading to an estimated 10% increase of total production between 2007 and 2010. Because of this impressive rise, around 12% of global gas output is now produced from ‘unconventional’ resources, and most of this takes place in North America.

Recipe for success

For this success story to be replicated effectively, Ms Corbeau believes that there are four core factors which countries must address:

* Geology: In order to identify potentially good areas to drill, it is essential to have access to high quality geological data.

* Companies: Companies involved in the operations must have first-rate engineers, a sufficient number of available rigs, and significant experience of drilling.

* Costs: Operations depend highly on the quality of the gas field, leading to a wide range of costs within the United States. There are still many uncertainties on how expensive such production would be outside of North America.

* Country: Before undertaking such an exercise, a country must assess whether: a) there is an internal and external market for the gas; b) landowners and local communities will accept drilling; c) all environmental risks have been taken into account and addressed; d) the appropriate fiscal and regulatory frameworks are in place; e) there is any way to link the project to pipeline infrastructure that already exists.

If any of these four factors are not fully addressed, Ms Corbeau warns that a country is quite unlikely to enjoy the success seen in the US.

“That said, despite the many uncertainties associated with production, countries are still prepared to take risks and invest time and money in exploration and production, because of the potential long-term benefits,” she explains.

“Based on current rates of consumption, it is estimated that recoverable conventional gas resources will last around 130 years. This length of time could be doubled with ‘unconventional’ gas, so it is little wonder that the current scramble for these previously untapped resources is now firmly underway.”

Q & A with Senior Gas Analyst, Anne-Sophie Corbeau

How is unconventional gas produced?

‘Unconventional’ sources of gas are trapped deep underground by impermeable rocks, such as coal, sandstone and shale. While different techniques are applied, depending on the type of gas being extracted, one common method is known as hydraulic fracturing: large volumes of water (mixed with some sand and chemicals) are injected underground to create cracks in the rock. This frees the trapped gas which can then flow into the well bore created by the drill and be collected. Another key technology is horizontal drilling which enables the exposure of significantly more surface to the well.

For how long has ‘unconventional’ gas been produced?

In the US, tight gas and coal bed methane have been produced for over two decades, but production was limited due to high costs and technological limitations. Production of shale gas in the US started much more recently, and it is this which led to the recent success.

If ‘unconventional’ gas has been known about for so long, why all the sudden attention?

Although these sources were known about, large-scale production was put off because of the high price tag, as well as the daunting complexities of the operations. However, recent technological improvements, excellent geological data, and soaring prices for conventional forms of gas prompted the US to pursue production of unconventional gas types more vigorously. The impressive US output in the last few years has prompted other countries to explore whether or not they could enjoy similar results. Countries are keen to explore this, because if they are able to recover significant volumes of ‘unconventional’ gas they would have greater energy security and more energy independence – reducing a country’s reliance on costly energy imports.

What impact has the US success had on the global market?

It was once thought – and not that long ago – that the US would become a big importer of liquefied natural gas (LNG), but its soaring ‘unconventional’ gas production has led to a sharp drop in its need to import gas. This slump in demand from the US, especially for LNG, had a significant impact on the global gas markets. Recently, there was a general dip in global gas demand, caused by the economic crisis. The US suddenly had no need to buy LNG at a time when ample LNG supplies, mostly from Qatar, were arriving to the market. This led to a ‘gas glut’ – where there was more gas on the markets than was needed – and gas spot prices in the United States and in Europe consequently went down.

Have countries other than the US made much progress in their exploration efforts?

Although years behind the US, some countries have made notable strides forward in exploring their own ‘unconventional’ gas sources. Australia has shown good potential for coal bed methane, which is already being produced in small quantities. But Australia’s future success most likely lies in projects which focus on creating LNG from coal bed methane, which it can then export. Already one such project has been approved, and several others are not far behind. China, India and Indonesia have also produced small amounts of ‘unconventional’ gas and are aggressively looking at ways to increase their respective volumes. Despite strong interest throughout Europe there are areas of concern – such as high population densities and issues surrounding the potentially damaging environmental impact – which are hampering progress.

Is ‘unconventional’ gas production bad for the environment?

There are concerns about the environmental impact of shale gas production, as vast amounts of water, as well as some chemical products, are required. The US Environmental Protection Agency (EPA) is currently conducting an investigation, the results of which are expected in 2012. The findings of the EPA will enable a much more accurate assessment of environmental issues.

How much is the production of ‘unconventional’ gas set to grow in the next few decades?

The IEA expects the production of ‘unconventional’ gas to jump from 12% to 19% of the global output of gas between 2008 and 2035. Just how much recoverable ‘unconventional’ gas is there? Estimates suggest there are 385 trillion cubic meters. This would last around 130 years, based on current rates of gas consumption.

Does the IEA work in the area of ‘unconventional’ gas?

We closely follow gas markets, developments and trends all over the world and provide advice to our member countries on the current situation and possible future scenarios. We look at ‘unconventional’ gas when it comes to production forecasts, which are then included in the World Energy Outlook (WEO), the IEA’s flagship publication.

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Source: International Energy Agency, January 20, 2011;