LONDON/OSLO (Reuters) - A boom in unconventional natural gas over the next 20 years could see the United States and others benefit from cheaper energy while the importance of the Middle East declines, the International Energy Agency (IEA) said on Tuesday.
Growth in shale and other newly available forms of natural gas in the United States and China could match gains made in conventional gas in Russia, the Middle East and North Africa combined, IEA Chief Economist Fatih Birol told Reuters in an interview.
“Unconventional gas will fracture the status quo, and will be a complete game changer with major geopolitical implications,” Birol said.
High natural gas prices over the past years have helped spur investment in previously unavailable, unconventional gas reserves that include so-called tight-gas, shale gas, and coalbed methane resources.
Yet a boom in these resources can only happen if measures are taken to ensure these reserves are extracted in a socially and environmentally satisfactory way, the IEA said.
An IEA report presented in London on Tuesday underscored the economic gains offered by the rapid growth in unconventional gas, with “countries that were net importers of gas in 2010, including the United States, gaining the wider economic benefits associated with improved energy trade balances and lower energy prices.”
Australia, India, Canada and Indonesia are also set for big increases in unconventional gas production, it said.
“The share of Russia and countries in the Middle East in international gas trade declines from around 45 percent in 2010 to 35 percent in 2035,” the report said.
For Europe, where shale gas production is expected to play a smaller role than elsewhere, Birol said that unconventional gas growth could still be enough to offset an ongoing decline in conventional gas output.
“The main benefit for Europe will that there will be lower gas import prices, putting pressure on oil-indexation of traditional gas supply contracts,” Birol said.
Europe’s main gas suppliers, Russia and Norway, sell their gas under long-term contracts that are linked to the oil market.
Because oil prices have remained firm on strong demand from emerging economies while European gas prices have fallen on weak domestic demand, European gas suppliers are forced to sell imported gas to their customers at a loss, and utilities lose money when generating electricity from imported gas.
The IEA said this price structure could change as a result of a global unconventional gas glut.
The report said that natural gas could become the world’s second most important energy source after oil within the next two decades, should the right rules be introduced to ensure safe and environmentally sustainable use of unconventional gas resources.
Global gas demand could rise by over 50 percent between 2010 and 2035 and reach 25 percent of the world’s energy mix, overtaking coal to become the second largest primary energy source after oil, the IEA said.
Growth in the gas sector would equal the combined growth in the coal, oil and nuclear sectors and outstrip expansion in the renewable energy sector, the IEA said.
“Production of unconventional gas, primarily shale gas, more than triples to 1.6 trillion cubic feet in 2035,” the IEA said.
“The share of unconventional gas in total gas output rises from 14 percent today to 32 percent in 2035.”
It noted the majority of the gas production increases would come after 2020 as producers needed time to develop a commercial unconventional gas sector.
The IEA said the rules needed to ensure unconventional gas production is both environmentally and socially acceptable would raise production costs.
“I hope that the industry will recognise that it will be tested against the worst practices in the sector,” Birol said.
The report said such measures “could increase the overall financial cost of developing a typical shale gas well by an estimated 7 percent.”
Yet should the industry fail to implement strict enough rules, the IEA said a lack of public acceptance would likely mean that only a small share of unconventional gas resources would become available for development.
“As a result, unconventional gas production rises only slightly above current levels by 2035, from 21 percent in 2010 to 22 percent in 2035, remaining well behind coal.”
Yet Birol said he was “cautiously optimistic” that industry and governments would introduce the needed measures to enable a global gas boom.
Shale gas is extracted using a technology called hydraulic fracturing or fracking, which involves pumping large amounts of water and chemicals underground.
The technology has been blamed for causing slight earthquakes and been banned in several countries, but it has also transformed the U.S. energy sector and caused domestic energy prices to plummet in recent years.
The IEA said that a gas glut fuefuelledled by unconventional extraction methods would lead to a boom in U.S. exports of liquefied natural gas (LNG) and impact global gas prices.
The advent of North American LNG exports by 2020 will more than double U.S. gas prices from current historic lows but bring down prices in the world’s biggest LNG market, Japan, the IEA said.
The U.S. could be exporting 35 billion cubic metres by 2020, around 20 percent of Russia’s current export levels, according to the report.
The IEA said this would lift U.S. domestic gas prices from $2 currently to $5.4 per million British thermal units (mmBtu), which is still cheap by Asian standards of around $18 per mmBtu.
That influx of cheap U.S. gas would drive competition on global gas markets and cut gas prices in Japan to $12.4/mmBtu by 2020.
Editing by Jason Neely