The Story Of The Year: The Unconventional Gas Revolution

The story of shale gas is the story of a revolution. Some analysts are even talking about a 'paradigm shift' which has so far impacted the US gas market by reducing gas prices and import volumes from Canada and LNG.

Less than 10 years ago, the US decided to build numerous LNG import terminals to counter the decline of its indigenous source of conventional gas. Today, its LNG terminals are vastly under-utilized and the US is self-sufficient in gas supply thanks to crucial technological developments that allow the country to unlock vast unconventional sources of gas. Shale gas which has grown to over 10% of US gas production has increased 8-fold over the last decade.

The phenomenon of shale gas is set to continue its exponential growth, in the US and abroad -- notably in Europe, China and Latin America. The race between energy companies to find sweet spots of unconventional gas is only starting.

However as the impact of shale gas is increasingly felt on global gas market, the expansion of shale gas could become more constrained due to environmental concerns. A few questions remain to be answered to understand better the scale of this revolution:

1) What is the impact of shale gas on global gas market and LNG

How will the competition between shale gas and LNG unfold in the next five years? In a nutshell, the story is who is pushing who out of the game.

2) Can shale gas be developed in an environmental safe way?

The US is currently focusing on a big controversy about potential risk of water contamination in New York watershed if the Marcellus shale gas play is extracted in some NY counties' watershed. The breakthrough technology used to produce shale gas is a combination of horizontal drilling and hydraulic fracking. There are worries that introduction of chemicals in the watershed during hydraulic fracturing as well as water spill could pollute drinking waters.

These environmental concerns could expand to international markets where shale gas will be developed as technology transfer happens.

3) How and where this new source of supply can be used? What are the markets and outlets for this shale gas?

- Displacement of coal in power plants. But retirement of old coal plants takes time.

- Electric sector

- Transportation. As natural gas vehicles are unlikely to extend beyond the fleet of heavy duty trucks, buses and taxi, gas could be used to produce electricity for electric cars.

- Exports of LNG from the US is a long-term perspective, not yet on the agenda.

4) Can we expect a competition between coal and gas?

In the absence of a price on carbon or cap and trade regulation, and until carbon capture and sequestration (CCS) is available, gas investment will be favored.

Drill Baby Drill But Pay Taxes !

President Barack Obama in his State of the Union's speech tonight announced a sensitive energy measure: opening new areas to oil and gas development. This is an indicator of new support for domestic oil and gas production. The Bush administration and Congress allowed long-standing moratoria that prevented drilling off the US Atlantic and Pacific coasts to expire last year. The eastern Gulf of Mexico which is currently under a moratorium until 2022, is estimated to contain at least 3.9 billion barrels of recoverable oil and 21.5 trillion cubic feet of gas.

However, in return of this spine in the President's green agenda, the oil and gas industry will have to pay. Mentioning the record high national deficit, the President indicated that energy companies will pay higher taxes.

Could Total have anticipated better geopolitical risks in Yemen?

The Total-led 6.7 million tons Yemen LNG (YLNG) liquefaction project has started commercial operations at a wrong timing. Media and policy makers have shed a new light on Yemen decades-long security problems following the claimed involvement of Yemen-based Al-Qaeda in an alleged attempt to blow up a US airliner on Dec. 25. Terrorist activities, tribal rivalry and piracy in the Gulf of Eden are nothing new for Yemen, but they are posing an extreme geopolitical risk to the $4.8 billion YLNG scheme, the country's biggest-ever industrial investment.
Early January, the Mayor of Boston announced that he would block imports of YLNG cargoes into GDF Suez's Everett regasification terminal located in the Boston harbor. He considers that residential areas are too close from the port and LNG tankers constitute a major threat.
YLNG sent its first cargo to Korea in November. Since then most of the deliveries due to come to Europe or the US have been diverted to Asia, notably South Korea and China where the market offers better prices but with a global glut of LNG capacities the US market may be needed to absorb all the Yemeni volumes once a second train starts up later this year.Could Total have anticipated better this geopolitical risk?
While plans for a liquefaction plant were first mooted in the 1990s, it took more than a decade for Total to convince investors, lenders, and long-term buyers that Yemen was a safe environment for investment. The French oil and gas giant surely thought it was worth the risk, while Exxon Mobil withdraw from the project in the late 1990s, partly because of lack of progress and partly because Yemen was not central to its Mideast strategy - but maybe the company also believed it was a too risky investment given the unknown political risks.Could Yemen LNG become a Nigeria?
As in Nigeria -- where LNG production has been routinely shut down -- YLNG may find itself having to declare force majeure if its liquefaction plant or LNG vessels become the target of attacks by domestic insurgents or pirates.
YLNG has long-term contracts to sell 2.55 million tons/yr to GDF Suez and 2 million tons/yr each to Korea Gas (Kogas) and Total itself.