Unconventional Gas Could Change Geopolitics of Energy

Since hydraulic fracturing techniques and horizontal drilling have opened up the U.S.’s vast shale gas reserves to development, the impact on the global gas market has been profound. But as unconventional development ramps up in other countries, the future of major gas players becomes even harder to predict.

While the amount of accessible gas elsewhere in the world is still unknown, the International Energy agency has estimated it to be 921 trillion cubic meters—five times the volume of proven conventional reserves.

As the price of oil has risen, many countries have made it more difficult for foreign companies to develop it, leaving only the most inaccessible and costly resources open to foreign development. This has forced oil’s major players to take a second look at gas.

While it was smaller developers who pioneered shale gas extraction in the U.S., the explosion in supply combined with the global recession have resulted in a marketplace where drillers are in need of cash—making them ideal targets for acquisition. In December of 2009, Exxon Mobil purchased shale gas player XTO; BP, Total and Statoil are testing the waters with joint ventures.

There are other changes underway. LNG projects launched when prices were high and the American market seemed hungry are no longer the sure thing they once seemed to be. And the Asian markets that may be a temporary stopgap for excess supply are themselves expressing interest in domestic gas development. In November, the U.S. and China announced a shale gas “initiative” that would share American extraction technology in exchange for opportunities to invest in China.

Meanwhile, exploration is already underway in Europe. Edward Christie, an economist at the Vienna Institute for International Economic Studies, told The Economist that the EU could be importing a third less natural gas in 2030 than was forecast in 2005.

The prospect of decreased demand for imports in places like China or across Europe casts a shadow over the long term plans of would-be exporters. Russia’s Gazprom would be particularly hard-hit, since many of its gas fields are in remote places that are costly to develop. Now, in addition to the counted-on U.S. market going soft, it appears that China may have quietly equipped itself to receive gas instead from Central Asia and the south.

But even exporters in places like Qatar and Australia, whose costs are lower, are looking at a global gas market that is dramatically changed from what it was a few years ago.

It is, in short, a buyers’ market. This year, almost 50 percent more LNG will be produced than in 2008. And yet in 2009 global gas consumption fell by 3 percent.

From here, where the market will go is subject to debate. Some predict prices could stagnate for years. Others see in pending climate change legislation the push for adoption of natural gas for both power generation and transportation—which would send demand roaring back. Additionally, low prices have curtailed new exploration, which in a couple of years should tighten supply back up again.

Last but not least, the environmental report card for hydrofracking has yet to be issued—though the EPA and other organizations are investigating it.

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