Insight: The dash for gas

The European Gas Advocacy Forum – a group of gas firms - has suggested that switching from coal to gas power could save European nations 450bn euros ($596bn; £377bn) in the next two decades and cut carbon dioxide (CO2) emissions.
European coal-fired power stations emit 70% more CO2 than modern gas plants; gradually replacing coal power stations with gas could help Europe cut CO2 emissions by 80% by 2050.
Time was that explorers regarded a gas discovery as a pretty much the same as a dry hole, more often than not non-commercial and potentially embarrassing as it might demonstrate that our understanding of the petroleum system was imperfect.
Now we know that gas is plentiful and is the cleanest of the fossil fuels, times have changed. I would say that research notes on gas, especially unconventional gas, form the majority of those sitting on my desk-top. There is truly a ‘dash for gas’.

‘Clean’ coal versus gas – no contest!

Let’s deal with the issue of ‘clean’ coal head on.

First of all, mining coal is inherently dangerous. News from New Zealand in the last few weeks, Chile in the last few months and China on a routine basis reminds us that coal is hewn at a regular cost in men’s lives.
Secondly, forgetting for a moment its carbon content, coal is environmentally unfriendly, emitting various pollutants such as sulphur and mercury, despoiling the countryside either with slag heaps or huge open-cast mines and requiring transport by rail or road.
Thirdly, any carbon tax system will penalise coal because of its high carbon content per unit of energy. Fourthly, and for the same reason, any carbon capture and storage system (CCS) applied to coal will dramatically increase the cost of power generation.

In comparison, gas extraction is relatively safe, has a relatively smaller environmental footprint, and in a world of carbon taxes and/or CCS results in relatively lower power generation costs, to the point where in most cases combined cycle gas turbine generators will undercut their higher cost coal fired competitors.
Thus, there should be extensive substitution of gas fired for coal fired electricity generation.

Is there enough gas?

I have 4 points to make, and a conclusion.

Firstly:
Even under quite conservative assumptions, global gas reserves are considerable, with over 60 years of production left at current consumption rates.
Global gas resources, dominated by all manner of unconventional gas that is yet to be proven commercial, are vastly more. Unconventional gas includes Tight Gas, Coal Bed Methane, Shale Gas and – potentially – Gas Hydrates.
Gas reserves are dominated by the Middle East, Europe & Eurasia (i.e. Russia) and Asia Pacific.
In contrast, gas resources (excluding gas hydrates) are dominated by North America and then the FSU. Shale Gas is the dominant contributor in North America, China, Latin America, the Middle East/North Africa and the Rest-of-the-World (which excludes the former regions and the FSU and Western Europe).

Secondly:
The fundamental idea behind the exploration and exploitation of Shale Gas is that, in some cases, rich oil-prone source rocks buried at the centre of a basin will have passed into the gas generation ‘window’ and that most of the gas, rather than being expelled and subsequently migrating into conventional traps, will be retained trapped in the source rock itself. A deceptively simple idea that requires two things:
a) Extremely insightful geoscience and reservoir engineering by skilled teams to recognise where the ‘sweet spots’ might be, and
b) Extremely intensive horizontal drilling and hydraulic fracturing to release the gas from where it is trapped.

Thirdly:
Massive shale gas resources have been identified in North America, especially in a handful of plays in the USA, to the extent that some would see this offering the country independence from ‘foreign oil’. There are two issues:
a) The very size of the total resource has in the short term depressed gas prices to the extent that commerciality is currently in question for many of the resources.
b) There is considerable environmental ‘push back’ as hydraulic fraccing consumes vast amounts of water – up to half a million gallons for any one well.

Fourthly:
What might this mean for Europe as there may well be rich source rocks such as the Kimmeridge Clay of NW Europe, the Bazhanov Shale of Russia, the Silurian of North Africa that may contain vast amounts of Shale Gas? Two things will hold exploitation back:
a) Europe-wide, the oil field service industry cannot gather together enough rigs and fraccing units to tackle even one play in the normal manner seen in the USA.
b) Environmental ‘push back’ will almost certainly be even stronger in densely populated Europe than in the USA.

My conclusion is that unconventional gas, especially Shale Gas, will have major global significance. We should expect this future to unfold relatively slowly: it will be ‘owned’ by the big companies that can afford to wait for gas prices to rise, that have major resources of cash and people, aided and abetted by the bigger oil field service companies.

It will be a “long game”

What about price?

The availability of huge gas resources in North America seems to have two undesirable, hopefully short term effects, namely a drop in gas prices, resulting in many development projects being uneconomic as things stand, and the introduction of uncertainty into energy planning in general.
It is important to recognize that gas resources, gas reserves and gas supply are not all the same thing. Technical success in identifying shale gas “sweet spots” and producing it by the aggressive application of technology is all very well but is not the same thing as economic production over the long term. For this, prices need to rise and/or costs need to drop.

As T Boone Pickens has argued in the USA – and Matt Ridley has written in The Times – governments need to respond strategically to the fact of this newly abundant resource, driving the replacement of coal fired power generation by gas, replacement of gasoline with gas liquids and so on. This will reduce uncertainty and, as the market for this new resource increases, so gas prices will rise appropriately.

There is another issue too, I believe.

Oil field services companies have successfully escalated their prices on the back of a rising oil price, an upwards curve from which gas prices have now become de-coupled. It follows therefore that the same services prices cannot apply to the ‘gas patch’ as to the ‘oil patch’.

Let’s dash for gas!