As natural gas produced from shale starts to become global, the traditional natural gas industry as represented by many attending Gastech in London, October 8 to 11, finds itself in positions that some have only ever dreamt of - and some have only ever feared.
I’ve been in the downstream sector of natural gas sales in Europe - everything from fish and chips to computer chips for twenty years. But a few years ago, when the conventional narrative in Europe was one of ever rising prices based on eternal oil indices, I opened my eyes to new possibilities. At the time, when the US had just completed several LNG import terminals, any notion they could reverse seemed not merely incredible, but delusional. But back in 2008, just as gas prices worldwide were at their highest ever, news came from an unlikely place.
I’m going to use this blog to highlight issues arising from shale gas’s coming impact outside North America, but first let’s start from the beginning:
Geologists have always known that shale rocks, the most common type of rock worldwide, had natural gas trapped very tightly within them. A combination of technologies and experiments since the early 1970s led to a breakthrough in the early 2000’s in the Barnett Shale in Fort Worth, Texas. The first key advance was the use of high power hydraulic fracturing to create small (<1mm) fissures in the rock to release gas almost molecule by molecule. The second advance was to combine HVHF with horizontal drilling techniques originally developed for offshore. This opened up far more of the gas rocks than ‘conventional’ vertical gas drilling. A final contributor was the impact of increased computing power to combine geo-chemical and geo-physical analysis.
The next stage of the US experience is instructive in that gas resources, second only to Qatar, were located in north-eastern states centered on Pennsylvania. These resources were literally underneath the largest part of the US gas market. That led to some fears from those unfamiliar with the sudden appearance of gas rigs on their doorsteps. Fears over “fracking” have informed, or to be exact, misinformed the debate worldwide. Working now in public acceptance of shale gas in Europe, I used to say that no one had heard of shale gas and those who had, had heard the wrong thing. But technology does not stand still and modern methods to be used worldwide will be both cheaper and far more productive than the original US model of thousands of wells.
For example, horizontal drilling can mean many wells spreading out as far as 10 kilometers from a ‘kick-off’ point up to 3,000 meters underground. We often hear from those who say that shale gas won’t work in Europe that we are too crowded, but the reality is only a half dozen or so rigs at any one time will fan out to create an ultimate combined footprint of 100 hectares in the entire UK for example. That visual footprint would be less than electricity or the old gas holders still present in most towns and would be far less permanent than wind turbines.
North America has many first mover advantages, but it does not hold a monopoly on rocks. It is becoming clear that natural gas is almost ubiquitous and abundant, literally under major markets. This has implications for the long range pipeline sector and LNG industry.
It is becoming increasingly clear that what was once called “unconventional” gas is rapidly becoming just plain natural gas. At lightning speed, in what has often been a conservative industry operating on multi-year investment cycles, suddenly abundant and ubiquitous natural gas, mostly - but not exclusively - from shales, is suddenly changing everything. Change is an opportunity, but also disruptive.
The global natural gas industry has never had to sell itself. We had a product that everyone wanted - and many couldn’t afford. But thanks to the inflection point of shale’s emergence in the past five years, natural gas is turning into a product that actually has to be sold. The fact that this is happening, even as very few actual molecules are yet to be produced outside North America, signifies the looming challenge of abundant natural gas to suppliers who have been able to pick and choose markets. For those suppliers - and often some of their customers - who both built models based on constraint, the next few years may be the last of the happy days.
In the new world, natural gas will have to seek out customers and markets in an innovative fashion. Some are extensions of traditional natural gas marketing techniques but the coming glut of natural gas will also mean true gas-to-gas competition. Until now the supply market has been dominated by International or National Oil Companies. Customers were made to feel grateful for natural gas. Tomorrow they will have to feel needed, and if one company doesn’t make them feel wanted, there will be plenty of others who can. Some of those players will inevitably be what only a few years ago seemed unlikely: Relatively small, but rapidly growing, and above all, flexible producers in almost every corner of the earth.
North America and Western Europe have until now been mature markets, roughly split into thirds of generation, domestic and industrial customers. Each of those markets have challenges but can also be used as a template to move into new markets once thought marginal, but which will become critical to long term survival of some players.
The LNG markets of North East Asia are symptomatic of those changes. Japan, Korea and Taiwan were once considered connected to producers by not only the umbilical cord of what were effectively floating pipelines, but by the willingness of those countries to ensure security of supply at almost any cost. Those days are rapidly drawing to a close. Just as the emergence of shale only recently seemed beyond the bounds of possibility, the idea of breaking the gas/oil pricing linkage seemed entirely improbable. It was an idea hoped for by some customers, but unrealistic in a constrained supply world.
Several events just in 2012 underline that the oil gas link breakage may occur far sooner than many predicted. Already we have seen adjustments to gas contracts on take or pay and price discounts being offered by Gazprom to German generators. This was followed in September by an International Arbitration Court decision in favour of Italian LNG importer Edison’s complaint against Qatar on a multi-year oil linked supply contract.
A few days later Centrica and Gazprom inked a deal for NBP priced imports.
But recent developments at an LNG Producer and Consumer conference in Tokyo showed that customers were giving significant pushback on the idea of oil linked prices.
The idea of Japan as an oil linked price taker instead of informed consumer seemed to take producers unaware. The dreams of huge LNG exports based on shales in both the US and Canada aiming at high priced Asian markets, collided with consumers replacing shortage with choice - multiple choices.
The reality comes back to shale and at that same conference we heard what would be an amazing quote from anyone, but all the more so for its source:
"We are prepared to adjust to revolutionary thoughts. I do think we are hearing this message," Thomas R. Walters, vice-president of Exxon Mobil Corp and head of its gas and power marketing arm, told a conference of LNG producers and consumers this week in Tokyo.
Today’s revolution rapidly becomes tomorrow’s reality. Change is happening so fast no one in the world gas industry can consider themselves immune.
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