Peak Natural Gas

Off the keyboard of Monsta666


Discuss this article at the Energy Table inside the Diner

Summary

Much of the mainstream media in the US bills shale gas as the next revolution that will push the country towards energy independence but the facts do not support these claims. Furthermore due to the high costs of extracting shale gas it is not economical to produce at current market prices. The effect of these low prices are already being felt from producers as drilling activity has decreased significantly throughout 2012 which has resulted in production levels plateauing.

It is likely that the US will peak in total natural gas production in the coming two years as peak production of conventional gas has already been reached and the high decline rates of shale gas make it very difficult to sustain even existing levels of production for a prolonged period of time due to the high levels of investment required to maintain exponential growth of drilling.

While the European region may have more reserves than the US and ultimately the problems will not be as acute the region is heavily dependent on Russia for its gas and will become increasingly dependent due to increasing consumption and reduced production in the EU region. As a result Europe will need to make some difficult decisions on how it procures its gas either from Russia or the Middle East which is rich in natural gas. Gaining access to the Middle East gas may prove to be difficult however due to the need for large investments in pipelines or LNG terminals. In addition to these financial (and possibly political) barriers there is likely to be strong competition from Asia and most particularly China for these natural gas resources as those economies grow faster than European countries.

Natural Gas

Natural gas can come in various forms and this list should offer you a glance of the grades of natural gas available in the market:

Conventional Gas – Consists primarily of methane but also contains other gases such as ethane, propane, other hydrocarbons, hydrogen sulphide, carbon dioxide and nitrogen.Although natural gas emits less C02 than other fossil fuels when burned it should be noted that methane itself is 72 times more potent than C02 as a greenhouse gas so any natural gas leakages in pipelines/LNG terminals will mean its advertised environmental advantages will be significantly reduced.[21]
Condensate – Gases often found in oil wells and some gas wells. The gas found in these “wet” wells contain heavier hydrocarbons (such as pentane) which are found as a gas upon extraction but then condense to form liquids when reaching room temperature hence the term condensate.
Coal-bed Methane – Natural gas extracted from coal beds. This form of natural gas lacks hydrogen sulphide and is often called “sweet gas” because of this property. Coal-bed methane also contains less ethane and propane and none of the heavier condensate hydrocarbons.
Shale Gas – Natural gas found in shale rock. This form of natural gas has a slightly different composition to standard natural gas which can result in higher processing costs. [8] [9]

Main Article

The importance of a global peak production of natural gas is somewhat less relevant than its peak coal or peak oil counterparts. This is because unlike coal or oil natural gas is not exported in large quantities. This is particularly true for the North American market as the costs of exporting natural gas over the Atlanta and Pacific oceans are excessively high. This makes the market for gas far less open and the closed nature of these markets is reflected in the huge differences in spot prices:

Natural gas prices obtained from BP Statistical Review of World Energy June 2012.[1]

As a result of these closed markets it becomes more relevant to examine the time when natural gas will peak in each region. If we divide the world’s natural gas production into its respective continents we find the top three largest markets are the Europe, America and Asia Pacific.

North America Europe + Russia Asia Pacific Middle East South America
2011 Total Consumption 863.8 billion cubic metres 1101.1 billion cubic metres 590.6 billion cubic metres 403.1 billion cubic metres 154.5 billion cubic metres
2011 Total reserves 10.8 trillion cubic metres 78.7 trillion cubic metres 16.8 trillion cubic metres 80.0 trillion cubic metres 7.6 trillion cubic metres
2011 % of world reserves 5.2% 37.8% 8.0% 38.4% 3.6%
2011 Production 864.2 billion cubic metres 1036.4 billion cubic metres 479.1 billion cubic metres 526.1 billion cubic metres 167.7 billion cubic metres
Depletion rate 8.00% 1.32% 2.85% 0.66% 2.21%
Year reserves are depleted 2023 2086 2046 2163 2056

Data obtained from BP Statistical Review of World Energy June 2012.[1]

USA

PROVEN RESERVES (1P) = Reserves that have a 90% or greater probability of being present, the term is often shortened to 1P.

PROBABLE RESERVES (2P) = Reserves that have a 50% chance of being present. 2P represents proven + probable reserves.

POSSIBLE RESERVES (3P) = Reserves that have only a 10% chance of being present. 3P represents proven + probable + possible reserves.

This figure of an 8% depletion rate equating to a 12.5 year supply is certainly a contentious and alarming point to make. It should be noted that other reputable sources such as the EIA arrive at similar figures claiming the US has a 13.7 year supply if taken on a R/P basis (R/P = Reserves/Production rate).[2] In the case of the EIA it does stress however that discoveries currently exceed production rates. Still, this is quite different to the picture painted out by the media and even Obama who claimed that the US has enough natural gas to meet current needs for 100 years.[3] This discrepancy over how long these reserves will last mainly stem from the fact that Obama included proven, probable, possible, speculative AND coal-bed methane reserves when applying the R/P ratio. It should also be noted that even adding all those reserves the total still only accounts for 95 years (it would appear the papers simply rounded of for the final five years).[4] In the case of BP and EIA the supply time was calculated only using proven reserves.

In any case it is best to breakdown natural gas into its different grades to gain a greater understanding of the overall situation of natural gas production:

Natural Gas Production data obtained from EIA.[5]

Note: Since January 2012 the EIA has only published aggregate totals for natural gas production.

From this graph we see that while natural gas production has risen slowly but steadily peak production of conventional natural gas was reached in December 2006 when 1.56 trillion cubic feet of gas was extracted that month. Since then production of conventional natural gas has declined by 35.5% for the period of December 2006 to December 2011. These declines in conventional gas have been masked by steep increases in shale gas production; in fact these large gains in shale gas have been the main reason why total natural gas extraction has risen in recent years. This large increase in shale gas is reflected in that fact that until 2007 there was negligible amounts of shale gas being produced but as of December 2011 shale gas makes up 33% of total natural gas production.

With conventional gas already reaching a peak it would seem that the US’s future in gas production lies firmly in shale gas production. Unfortunately the cost of producing shale gas is higher than conventional gas as it requires the use of more expensive horizontal drilling not to mention hydraulic fracturing (informally known as fracking) which on average the fracturing operation alone cost $6-7 million per well.[6] This $6-7 million cost may not even cover the entire expenses imposed on society as hydraulic fracturing is a very water intensive activity with each operation requiring the use of 1.2-3.5 million gallons of water.[7] Each well (of which there are currently thousands in operation) requires hydraulic fracturing and in some cases multiple fracturing operations are performed on the same well. Furthermore there is on-going controversy over the fact that the chemicals used in fracturing can result in water contamination on a chemical and even possibly radioactive level. It is also speculated that these drilling activities can result in minor earthquakes.

[vsw id=”j2Nc-kxWfmc” source=”youtube” width=”425″ height=”344″ autoplay=”no”]

(10 minute extended trailer it is recommend you watch the entire movie for more information)

Other issues with shale gas come from its composition as shale gas is slightly different to conventional natural gas as it contains higher concentrations of ethane, propane, hexane and even diluents such as C02 and nitrogen; [8] this view is also supported by Dmitry Orlov.[9] This means that the processing costs as well as drilling costs will be higher than conventional natural gas. To cover such costs it often stated that shale oil has to be priced at least $4 per thousand cubic feet but the figure is more likely to be $6 or even higher.[10][11] Considering current natural gas prices are $3.19 per thousand cubic feet at the time of writing it means the vast majority of shale gas is being produced at a loss. As a result it should be expected that the number of rigs that drill for gas will be declining and upon inspection of drilling rigs that does appear to be the case:

US Active rigs engaged in oil/gas drilling, according to Baker Hughes.[12]

The period between December 29th 2011 and December 28th 2012 saw the rig count for natural gas decline from 809 to 431 rigs a 46.7% decline in just one year! It is this decline in drilling that has resulted in total production for most of 2012 to stagnate.[13] To make matters even worse is the fact that shale gas plays have high decline rates of around 65%-85%.[14][15] As a result of these two factors it seems only a matter of time before shale gas and by extension total natural gas production in the US to decline. Indeed many shale gas producing regions such as the Barnett Shale, Haynesville Shale and Fayetteville have seen production rates plateau while The Eagle Ford and Woodford Shale have already began to experience declines. The only shale gas region that still appears to exhibit exponential growth in rates of production is the Marcellus Shale.[16] However even with strong growth in this region it seems highly likely that production will hit a peak within the next two years due to the fact that annual decline rates for the US now totals 32% or 22 billion cubic feet per day and these decline rates will continue to increase even further as a larger percentage of gas wells are devoted to shale gas production.

Europe + Eurasia

While on the surface the European situation may not seem as acute as that of the US it should be noted that European natural gas production is dominated by Russian production with the country producing 58.6% of the gas in the entire region. Furthermore the United Kingdom; which was the third largest producer in the region as recently as 2008, is now experiencing major declines with the latest decline figures for 2011 being 20.8%. This on-going decline means as time goes on the Western European nations can no longer depend on Britain for exports and will become increasingly dependent on exports from further regions, the most obvious being Russian exports but this will also include other former Soviet countries such as Turkmenistan or Azerbaijan.

Natural gas production data obtained from BP Statistical Review of World Energy June 2012.[1]

These issues of dependence will be further compounded if Germany follows through with its plan to phase out nuclear energy as natural gas will be the favoured fossil fuel to replace nuclear energy due to its lower C02 emissions. Indeed this move towards natural gas is a pattern repeated by many European nations as many strive to meet the EU quotas of reducing 20% of their 1990 C02 emissions by 2020.[17] If we look at the energy mix of Europe we find that the amount of energy obtained from natural gas has consistently been increasing in the last 20 years:

Natural gas production data obtained from BP Statistical Review of World Energy June 2012.[1]

It is this increased demand that means Europe will have to look elsewhere for gas to meet internal demand. Another candidate apart from the former Soviet states is the Middle-East most notably Qatar but also possibly Algeria. Qatar has the third largest reserves in the world and has trebled its exporting capacity since 2006 through the installation of numerous Liquefied Natural Gas (LNG) terminals.[18] However such terminals are expensive and to be economically viable require the use of long-term contracts. Moreover Europe will face strong competition from Asia countries who are not only long-term customers to this exported gas but their economies are expected to grow faster than Europe.

Another avenue being pursued is that of shale gas however it is still early days to make any educated judgement on what will transpire here as most EU nations have opted to take a cautious stance to shale gas and wish to seek a rigorous regulatory framework being formed before pursuing this issue further. However the United Kingdom and Poland have been more aggressive in their pursuit of shale gas with both nations giving the green light to drilling.[19] [20]

Regardless of what happens with shale gas in Europe the situation will not massively change. The simple fact of the matter is if we exclude Russia and other former Soviet nations the main EU block has already peaked in 2004 with a production of 327.5 billion cubic metres and since then production has declined by 15%. Seeing as the current trend is for natural gas consumption to increase then it means Europe must build extra infrastructure to accommodate more natural gas imports from either Russia or the Middle East but each option has its own set of problems. If Europe relies heavily on Russia they will have a monopoly and will gain an increasingly strong foothold on the energy market and the chances of a large scale disruption such as the disputes in 2006 and 2009 in Ukraine is likely to become more common place. This is a particular issue because 80% of all European gas imports from Russia flow via Ukraine pipelines. The probability of such disruptions occurring will only increase if numerous European countries experience recessions and struggle to pay their debt obligations as this was the chief cause for Russia shutting its pipelines to Ukraine.

If on the other hand Europe decides trade with the Middle East then it must invest heavily in either pipelines or LNG terminals to gain access to Middle Eastern gas but even then Europe will likely face the prospect of stiff competition from Asia for this resource and likely higher prices which will harm economic growth.

Global Outlook

As we go forward it seems quite likely that supplies of natural gas will become increasingly strained. This will be particularly true in the west as production in Europe has already passed its peak and the growth of Asian economies will mean most of the excess supply from the Middle East and former Soviet bloc will largely be diverted to them. Moreover it is likely that the Asian economies will be able to tolerate higher prices natural gas prices (as is the case with oil) which will stand them in good stead in the future when it is reasonable to assume natural gas prices will rise (this will happen because of demand rising faster than supply).

The reason the Asian economies will be able to tolerate higher gas prices better is because of a concept known as energy leveraging. That is, when an economy faces high prices it will leverage these high energy costs against cheaper energy sources. In the case of Asia they have cheaper sources such as coal and even cheaper labour (which is less the case in Europe). This means any expensive energy sources can be diverted into economic activities that are more productive for example an Asian country will use this natural gas to provide electricity for a corporation which is a more economically productive use of this energy than if it were used to heat a domestic home in a European country. To learn more about energy leveraging please refer to this article. This dynamic will become even more prominent should there be a shortage of coal as suggested in my previous article.

These issues of constrained natural gas supply will be further compounded if the US reaches its own peak in the near future. While we cannot be certain this will be the case I believe this will peak will occur soon because of the high decline rates of shale gas. These high decline rates mean a high level of investment (which must increase on an exponential basis) needs to be sustained for production to continue rising or even to maintain a plateau. However since current market prices are below production costs these investments cannot be supported and as a result drilling activity will decline (this has already happened).

This sudden reduction in investment by itself would not necessarily result in production peaking even with high decline rates. For example if prices were to rise quickly then investments would return to normal levels fairly quickly. However I do not believe this will be the case. This is because due to the on-going recession in the US and the milder winters demand for natural gas has not kept up with supply. As a result the amount of gas held in storage has increased over the last few years:

As we see from the diagram storage capacity is near five year highs, indeed storage capacity has been close to the point of overcapacity.[22] As a result it will take a considerable length time of time before storage levels get low enough for the price of natural gas to rise sufficiently to induce large scale investments. What is more if prices of natural gas rise above $4 per thousand cubic feet then that will mean it will become more economical to mine coal reducing demand for gas even further.[23]

If this period of low gas prices carries on for a considerable length of time then producers will lose even more money and this is likely to make investors more cautious in reinvesting in the future after the shale gas bubble bursts. In the after mass of such an event it is likely any investors still interested in investing will scrutinise the economics more deeply and according to analysis from Arthur E. Berman and Lynn F. Pittinger (warning their detailed analysis is not for the faint of heart!) the shale gas plays are only marginally profitable even under the best of circumstances. This view is further supported by Richard Heinberg who suggests that the EROEI of shale gas can be as low as 6:1.[24] With a ratio this low it is likely that these plays can only be supported if subsidised with higher EROEI energy sources. Therefore as time goes on and there are less cheap energy resources available it is very possible that shale gas production will largely cease as it would no longer prove economical from a financial and energetic basis to drill.

References:

[1] = BP Statistical Review of World Energy June 2012 (BP as .pdf file)
[2] = U.S. Crude Oil, Natural Gas, and NG Liquids Proved Reserves (EIA)
[3] = The Math Behind the 100-Year, Natural-Gas Supply Debate (CNBC)
[4] = What the Frack? (Slate)
[5] = Natural Gas Gross Withdrawals and Production (EIA)
[6] = Landscape with well (The Economist)
[7] = Unconventional Gas Shales: Development, Technology, and Policy Issues (Congressional Research Service as .pdf file see pg. 11)
[8] = Shale Gas Measurement And Associated Issues (Pipeline & Gas Journal)
[9] = Shale Gas: The View from Russia (ClubOrlov)
[10] = Economics of Shale Gas (energybiz)
[11] = The murky future of U.S. shale gas (smartplanet – Chris Nelder)
[12] = Rotary Rig Count (Baker Hughes)
[13] = U.S. marketed natural gas production levels off in the first half of 2012 (EIA)
[14] = Barnett Report (Pickering Energy Inc. as doc file see pg. 19)
[15] = Chesapeake Energy – Haynesville Shale Decline Curve (Haynesville Shale)
[16] = After The Gold Rush: A Perspective on Future U.S. Natural Gas Supply and Price (The Oil Drum)
[17] = What is the EU doing about climate change? (European Commission)
[18] = The Cold Facts About a Hot Commodity: LNG (The Oil Drum)
[19] = Fracking for shale gas gets green light in UK (the guardian)
[20] = Poland Moves Ahead With Shale Gas Production (Arkansas Business)
[21] = Fourth Assessment Report (IPCC as .pdf file see pg. 212)
[22] = Natural gas storage capacity up 3.3 pct: EIA (REUTERS)
[23] = Headwinds for Rally in Natural Gas (Wall Street Journal)
[24]= Gas Bubble Leaking, About to Burst (Energy Bulletin)

Advertisements

Leave a Reply

Please log in using one of these methods to post your comment:

WordPress.com Logo

You are commenting using your WordPress.com account. Log Out / Change )

Twitter picture

You are commenting using your Twitter account. Log Out / Change )

Facebook photo

You are commenting using your Facebook account. Log Out / Change )

Google+ photo

You are commenting using your Google+ account. Log Out / Change )

Connecting to %s