It is well known that unconventional gas – shale gas, tight gas, and natural gas associated with shale oil production – has transformed natural gas supply across North America. Currently, about 60 billion cubic feet of unconventional gas is produced daily in the US or about two-thirds of total US production. Going forward this fraction is expected to increase.
With US Gulf Coast LNG exports beginning in 2016, the transformational power of unconventional gas has begun to impact global LNG supply. Global LNG supply could grow by one-third by the early 2020’s and the US will likely be one of the two largest sources of this new LNG. Australia is the other major source of this incremental LNG and it is important to note that unconventional gas – in the form of coal seam methane – has grown to be a major source of Australian LNG exports. Once all US LNG liquefaction construction projects are completed, the US is expected to be the third-largest global supplier of LNG with unconventional gas likely accounting for 75% of the associated natural gas supply.
Unconventional is different
Unconventional gas is very different from conventional gas, both technically and commercially, and this difference creates different risks and opportunities across the entire LNG value chain. To manage these new risks and capture these new opportunities, it is imperative that LNG market participants understand how Unconventional LNG – LNG sourced from unconventional gas is different.
Qatargas trains 1-4 required 66 wells to deliver the approximately 4.5 billion cubic feet per day supply. The Haynesville unconventional play located in East Texas and Northwest Louisiana and a major contributor to US Gulf Coast natural gas supply, including LNG export, is currently producing about 6 BCF/d from over 4500 wells. There are currently about 40 drilling rigs active and over 150 new wells are permitted each quarter in the Haynesville. The truth about all unconventional plays is – drilling never stops!
This non-stop drilling, perhaps counterintuitively, is a strength of unconventional plays because it allows successful operators to achieve significant improvements that are not seen in conventional fields. For example, in the Haynesville play the incremental new gas rate created per active rig, a common measure of productivity, has increased by almost a factor of four since 2009. Improvements like this are the result of “manufacturing learning” and are no accident but the result of different business processes.
The impact to LNG
The vast majority of forecasts of future unconventional gas production do not include the impacts of manufacturing learning and as a result are wrong. Leading LNG participants will, and are, updating their forecasts of future unconventional gas supply taking into account manufacturing learning as they embark on long-term supply decisions. Making long-term decisions without the benefit of forecasts that include manufacturing learning is a risky course to pursue.
Unconventional gas supply driven by manufacturing learning will impact natural gas market price dynamics as well. Understanding these impacts to price dynamics is critical to buyers of LNG that is supplied by unconventional gas. For example, unconventional gas has significantly dampened price volatility and this impact is expected to increase. However, long-term price uncertainty remains. The drivers of this long-term price uncertainty are the same as the drivers of manufacturing learning that underpins unconventional gas production and include both technical and stakeholder issues. Long-term hedges, other than direct equity participation in unconventional gas plays, will remain expensive and of limited efficacy. Finally, the ongoing decoupling of oil and gas prices, driven by unconventional gas production, will continue impacting the portfolio decisions of LNG participants.
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Berkeley Research Group LLC
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