by Robert Bryce
Wrong, wrong, wrong, wrong.
In 2008, U.S. natural gas production hit 56.2 billion cubic feet per day, its highest level of production since 1974.28 And given the abundance of new shale gas resources, some optimistic analysts are projecting that U.S. gas production could increase by 50 percent or more over the next two decades.
Of course, no one knows how much gas will be produced over the coming years. But the U.S. gas business has repeatedly shown that when it’s not hampered by excessive governmental regulations, it can provide as much gas as the market needs. But to provide that gas, the U.S. gas industry, and more particularly, politicians and regulators, must once and for all overcome the notion that gas is scarce.
In less than five years, the global natural gas business has gone from shortage to surfeit. The industry has gone from concerns about having adequate available resources to a situation where a near-term glut—meaning the next two to five years, or perhaps even longer—is likely. That glut is due to several factors, including the global economic downturn, a surge in new natural gas liquefaction capacity, and, perhaps most important, the refinement of technologies that can unlock vast quantities of gas from shale deposits. Indeed, the shale gas revolution is what long-time gas analyst H. deForest Ralph has called the “black swan” in the gas business.29
The well-drilling and well-completion techniques that were perfected in the Barnett Shale in Texas proved that, when properly fractured under high pressure, shale—a rock source that has very low permeability—could yield enormous quantities of gas. But shale is only part of the story. Similar technological advances have resulted in increased gas production from other geologic formations with low permeability, such as coal beds and tight sands. These low-permeability reservoirs produce what the industry calls “unconventional” gas. And the potential volumes of unconventional gas resources are staggering.
In April 2009, Cambridge Energy Research Associates produced a study that estimated recoverable shale-gas resources outside of North America at between 5,000 and 16,000 trillion cubic feet.30 Seven months later, the IEA estimated recoverable global gas resources—which includes both conventional and unconventional gas—at some 30,000 trillion cubic feet. That’s the energy equivalent of about 5.4 trillion barrels of oil.31
Estimates of U.S. gas resources have escalated alongside those global estimates. Over the past two years, several reports have put potential U.S. gas resources on par with the gas reserves of Iran, Russia, and Qatar. In July 2008, Navigant Consulting put potential U.S. natural gas resources at 2,247 trillion cubic feet .32 A few months later, another consulting firm, ICF International, estimated U.S. gas resources at 1,830 trillion cubic feet.33
Although those studies are important, a mid-2009 estimate by the Potential Gas Committee, a U.S. nonprofit organization, is the most credible. The Gas Committee, made up of experts from academia, the energy sector, and government, issues a report every two years. On June 18, 2009, it issued a report that estimated U.S. gas resources at 2,074 trillion cubic feet—the highest resource evaluation in the committee’s forty-four-year history.34 That quantity of gas is the energy equivalent of more than 350 billion barrels of crude oil, or about three times as much as the proved oil reserves of Iraq.35 The 2009 estimate by the Gas Committee was a 35 percent increase over the estimate published in 2007, and like the reports from Navigant and ICF, it pointed to the boom in shale gas as a key reason for the big hike in the resource estimate.
The lead author of the report, John Curtis, a professor in geology and geological engineering at the Colorado School of Mines, cited the reasons for the big increase in resource estimates: “New and advanced exploration, well drilling and completion technologies are allowing us increasingly better access to domestic gas resources—especially ‘unconventional’ gas—which, not all that long ago, were considered impractical or uneconomical to pursue.”36
Now, to be clear, resources are not reserves. In oil-field parlance, a “resource” is something that’s probably out there. “Reserves” only applies to in-the-ground hydrocarbons that have been surveyed by drilling and other agreed-upon techniques. In 2009, BP estimated proved global gas reserves at about 6,534 trillion cubic feet, or less than a quarter of the IEA’s 2009 estimate of global gas resources.37 The same distinctions apply to the United States. BP puts proved U.S. gas reserves at about 238 trillion cubic feet, or about one-tenth of the Potential Gas Committee’s 2009 estimate of U.S. gas resources.38
FIGURE 31 From Scarcity to Super-Abundance: U.S. Gas Resources Compared to Proved Gas Reserves of Iran, Russia, and Other Countries
Sources: BP Statistical Review of World Energy 2009, http://www.bp.com/liveassets/bp_internet/globalbp/globalbp_uk_english/reports_and_publications/statistical_energy_review_2008/STAGING/local_assets/2009_downloads/renewables_section_2009.pdf; ICF International, Table 7, “Availability, Economics, and Production Potential of North American Unconventional Natural Gas Supplies,” November 2008, http://www.ingaa.org/cms/31/7306/7628/7833.aspx, 51; Navigant Consulting, “North American Natural Gas Supply Assessment,” July 4, 2008, http://www.cleanskies.org/upload/MediaFiles/Files/Downloads2/finalncippt2.pdf, 14; Potential Gas Committee, “Potential Gas Committee Reports Unprecedented Increase in Magnitude of US Natural Gas Resource Base,” June 18, 2009, http://www.mines.edu/Potential-Gas-Committee-reports-unprecedented-increase-in-magnitude-of-US-natural-gas-resource-base.
While the resources-versus-reserves caveat applies, the enormous gas estimates being put forward are part of a new gas paradigm that is based on abundant supplies of methane in a marketplace that is increasingly global. The growing globalization of gas can be seen by looking at the surge in trade of liquefied natural gas. Between 2000 and 2007, global trade in LNG increased by 67 percent.39 And more LNG trade is on the way. By 2013 or so, the IEA expects global LNG production capacity to increase by about 50 percent.40 And yet more gas liquefaction capacity is being planned.
In October 2009, the British-Dutch energy giant, Shell, announced plans to build a floating natural gas liquefaction facility that, when completed, will be deployed off the northwestern coast of Australia. The vessel, expected to cost about $5 billion, will be nearly 500 meters long and will be designed to monetize what the industry calls “stranded” gas, that is, gas that is in fields that are either too small or too far from commercial centers to justify the construction of pipelines or conventional gas liquefaction facilities. Australia alone has some 140 trillion cubic feet of stranded gas, and Shell may build as many as ten floating LNG production vessels, which could allow Australia and other countries to turn their stranded gas into cash. In addition to Shell, Japan’s Inpex Holdings and Australia’s Santos are also considering floating LNG projects.41
In November, Petrobras, the Brazilian energy giant, announced that it, too, is planning to build floating natural gas liquefaction facilities in order to bring ashore the massive amounts of gas that it has discovered in the Santos Basin, one of Brazil’s huge offshore hydrocarbon reservoirs. The company said the floating platforms will operate about 190 miles offshore and will allow the offshore gas reserves “to be monetized, ensuring flexibility to supply the internal market and the possibility of exporting the product in the spot market.”42
The new LNG production capacity is coming onstream at the same time that, thanks to the boom in shale gas production, America’s need for LNG imports has largely disappeared. That point was made succinctly by Ian Cronshaw, a gas analyst at the IEA, who said that the United States was “now a virtual liquefied natural gas exporter because all the LNG that was supposed to be going there is now going somewhere else.”43
The increasing globalization of the LNG market is occurring at the same time that the technologies for producing gas from shale are going global. In Canada, drillers have begun tapping two massive shale formations, Horn River and Montney.44 Those resources are so big that there is even talk of building a gas liquefaction terminal in British Columbia that would use Canadian shale ga
s as a feedstock. The company proposing the idea, Calgary-based Kitimat LNG, claims that it already has potential buyers for the LNG in Asia.45
European countries see the shale gas revolution as an opportunity to reduce their dependence on the Kremlin-based kleptocrats who control the Russian gas business. The Europeans are justifiably worried about Russia. Gazprom, the Russian gas giant, has repeatedly shown its willingness to shut off gas flows to its neighbors. Those concerns have led European energy companies to invest in some of America’s best shale-gas producers. In late 2008, Norwegian energy giant StatoilHydro paid Oklahoma City–based Chesapeake Energy nearly $3.4 billion to gain a stake in the massive Marcellus Shale play in Appalachia.46 And in mid-2009, StatoilHydro and Chesapeake announced that they are assessing shale formations in China, India, Australia, and other countries.47
A host of companies have begun seeking permits to tap shale gas prospects in France.48 In mid-2009, Exxon Mobil started preliminary exploration drilling in Germany, while ConocoPhillips started prospecting on a 1-million-acre section of Poland. Meanwhile, the Italian energy giant, Eni, paid $280 million to gain a stake in a Texas gas field operated by Fort Worth–based Quicksilver Resources so that Eni can learn some of Quicksilver’s unconventional-gas production techniques.49
The surge in shale gas production is occurring at the same time that increasing numbers of countries are producing significant quantities of gas. Back in 1970, only about ten countries were producing more than 1 billion cubic feet of gas per day.50 By 2008, there were forty-one countries producing at least 1 billion cubic feet of gas per day.51
One other important development in the megatrend toward increased use and availability of gaseous fuels is that new gas reserves are being found at a faster rate than new oil reserves are. Between 1988 and 2008, global proved natural gas reserves (remember, the numbers for reserves are always smaller than those for resources) jumped by more than 68 percent, reaching 6,534 trillion cubic feet.52 During that same time period, global oil reserves increased by just 26 percent, to some 1.26 trillion barrels.53 By any measure, that is a tremendous amount of petroleum. But the world’s gas reserves are likely to last substantially longer than its oil reserves. In 2009, the reserves-to-production ratio for global proved oil reserves was 42.54 That means that at current rates of extraction, the world’s known oil reserves will be exhausted in 42 years. For comparison, the reserves-to-production ratio for natural gas is 60.4, meaning that at current extraction rates—and assuming no more gas is discovered—the world has more than 60 years of proved natural gas reserves left in the ground.55 And those numbers will undoubtedly grow in the years ahead as more gas resources get moved into the reserves category.
The megatrend of increasing natural gas consumption and natural gas availability could scarcely be occurring at a better time. Over the past few years, worries about peak oil, and another possible peak—peak coal—have emerged as serious concerns. And that leads us to our next megatrend.
Peak oil is one of the most emotional and hotly debated issues in the energy business. There is widespread disagreement about when the world will hit peak production. For instance, former Princeton University geology professor Kenneth Deffeyes claims the peak was hit on Thanksgiving Day, 2005.56 Veteran Houston-based energy analyst Henry Groppe says it occurred in 2006, and that the increases in production since then are due to production of natural gas liquids, not of crude.57 Houston stock analyst Marshall Adkins, of the brokerage firm Raymond James, contends the peak was hit in 2008.58 Other energy watchers claim that the global economic downturn has delayed any discussion about peak oil for the time being, perhaps until 2020 or so.59
What will reaching peak oil mean? Well, it will almost certainly mean higher prices. But how much higher? Groppe, the dean of the Houston energy analysts, with more than five decades of experience in the sector, provides a succinct prediction: “The price of oil will have to be whatever is required to cause total consumption to decline.”60 Put another way, oil prices will rise to whatever level is needed in order to make alternative energy sources more economic and thereby cut demand for oil products. As the old saying goes, the cure for high oil prices is high oil prices.
Of course, it’s not known how much pain the economies of the United States and other countries will feel when the relatively high oil prices caused by a peak in production begin to kick in. Nor is it clear what will happen with oil demand. In fact, a peak in oil demand may be just as important as a peak in oil production.
The peaking of oil demand in the United States would be driven by a number of factors, including the economy, the age of the population, and the efficiency of the automotive fleet. The stagnating demand at present, due to the economic downturn, the aging of the population, and the increasing efficiency of the automotive fleet, can be seen in the numbers. In 2008, U.S. oil consumption fell to 19.5 million barrels per day, a level that’s just 3.5 percent higher than it was back in 1978.61
In June 2009, Cambridge Energy Research Associates issued a report projecting that U.S. demand for automotive fuel would peak in 2014. That outlook agrees with that of the world’s biggest publicly traded energy company, Exxon Mobil, which expects U.S. demand for transportation fuel to plateau by 2015 and then fall by about 10 percent by 2030.62 Oil giant BP believes that U.S. demand has already peaked. In November 2009, the company’s chief executive, Tony Hayward, declared “We will never sell more gasoline in the US than we sold in 2007.”63
Meanwhile, some analysts are now predicting a similar peak in global oil demand. In October 2009, analysts at Deutsche Bank predicted that world petroleum consumption would peak in about 2015 at around 90 million barrels per day.64 If those projections prove to be correct, then the United States, and much of the rest of the world, may soon have too much oil-refining capacity, and maybe too much oil-production capacity.
In fact, the United States already has too much refining capacity. In November 2009, Valero Energy, the biggest independent refiner in the country, announced that it was permanently shutting down its 210,000-barrel-per-day refinery in Delaware because of slack motor-fuel demand. The refinery had been losing $1 million per day. Three months earlier, Valero announced that it was halting production at a 235,000-barrel-perday refinery in Aruba indefinitely. Valero had tried to sell the refineries but couldn’t find buyers.65
Though we cannot predict the future, we can look backward and see that the beginning of the latest economic recession—like many recessions before it—coincided with a major spike in oil prices. History shows that sharp increases in oil prices are often followed by recessions. Those oil price spikes also lead to sharp decreases in oil demand. For instance, in 1978, U.S. oil consumption peaked at 18.8 million barrels per day. But the high prices that came with the 1979 oil shock, the second big price spike in six years, sent U.S. consumption tumbling. In fact, it took two decades for U.S. oil demand to recover after the price shocks of the 1970s.
It wasn’t until 1998, when U.S. consumption hit 18.9 million barrels per day, that the 1978 level of consumption was surpassed.66 And it took two decades for oil demand to recover, even though oil prices were remarkably low. From the mid-1980s through the early 2000s, prices largely stayed under $20 per barrel, and they even fell as low as $9.39 per barrel in December 1998.67
As we look forward, we can be sure that any peak in production, or spike in oil prices—regardless of the causes—will make consumers more judicious in their oil use. Groppe has pointed out that oil consumption in the OECD countries peaked way back in 1979 and has been flat or declining ever since. Future increases in oil prices will continue wringing less-efficient uses of oil—such as burning petroleum to make electricity—out of the system.
While peak oil discussions dominate the headlines, peak coal may be even more significant. Over the past two or three years, several analysts have been taking a close look at global reserves and production trends, and they are concluding that the peak in global coal output could come sooner than
most people think.68 Among the first to reach this conclusion was David Rutledge, an electrical engineering professor at the California Institute of Technology.69 Although Rutledge spends much of his time working on radio and microwave circuits, he was intrigued by questions about peak oil and became interested in global coal resources. Rutledge looked at coal production histories and the reserves estimates in the United Kingdom, the United States, and other countries. His conclusion: Global coal production will peak at levels far lower than what many reports have projected. 70 Although Rutledge is somewhat reluctant to put an exact date on when he thinks global coal output will peak, during an interview in August 2009 he told me that it’s reasonable to assume that coal production would peak within the next decade. Rutledge is particularly dubious about China’s ability to continue increasing its coal use. “If something can’t go on forever, it won’t,” he told me.71
Other researchers are doing work that parallels Rutledge’s. Tad Patzek, the head of the petroleum engineering department at the University of Texas at Austin, and Gregory Croft, a doctoral candidate in engineering at the University of California at Berkeley, have come to similar conclusions. Patzek and Croft have concluded that world coal production will peak in 2011. Furthermore, in a report that they completed in 2009, they projected that global coal production “will fall by 50% in the next 40 years” and that carbon dioxide emissions from coal combustion will fall by the same percentage.72 For Patzek and Croft, the implications of the looming peak in coal production makes it apparent that the world must focus increasing effort on energy efficiency and that “new nuclear power stations should also be designed and put online fast, not because of the GHG [greenhouse gas] emissions issues, but because of the insufficient supply of coal.”73