For three decades, US domestic gas production dragged its feet. Now, new technology has made shale gas economically viable, giving the US more energy security, lower gas prices, and enabling it to overtake Russia as the world’s largest producer. In five years US gas output has risen 30%, with shale gas now comprising 20% of total production. Daily output is now 1.7 billion cubic metres, an annual increase of 120 million cubic metres per day, despite daily production in the Gulf of Mexico declining by 28 million cubic metres this year. Shale gas production is set to accelerate, but US gas prices have already fallen by 50%.
“The US is sitting on vast unconventional gas reserves in the form of shale and tight sands. US natural gas prices have continued to decline as production surged to new record highs, but producers keep on drilling despite the low price environment. Drilling costs have fallen precipitously, and the process is quicker, more efficient and more productive than they ever thought it would be,” says Sabine Schels, gas analyst at Bank of America-Merrill Lynch.
Follow the leader
Domestic production in the UK – Europe’s largest gas market (see table 1) and second largest importer of liquefied natural gas (LNG) – is declining sharply. Output has fallen 24% in 2011, increasing dependence on expensive imports indexed to oil prices, and intensifying competition with Asia for LNG shipments.
However, shale gas exploration company Cuadrilla Resources estimates that there are 5700 billion cubic metres of shale gas 3000 metres underneath the north-western county of Lancashire. If estimates are accurate, this is comparable to the large US shale reserves and would cover UK gas consumption for more than 60 years.
The UK government is understandably keen to push ahead with exploration, but there are important caveats. “In the UK, if there is evidence that shale gas can be produced at a low cost, then it might eventually happen. But for now cost issues and geological factors mean that there will not be much production in the next five years,” says Ms Schels.
Mountains to climb
Conditions differ between the US and the UK. First, the UK’s far greater population density means the large number of wells in the affected area would have a more obvious impact on local communities. Cuadrilla is considering 400 production wells on 40 sites, each covering many acres and requiring a containment pond for the large volumes of water used in the extraction process, known as fracking.
Second, US landowners’ share in mineral rights is an incentive to allow drilling. In the UK, the state owns those rights.
The government has recently released a study [which says] that exploring for gas is safe and will not lead to contamination of public water sources. That said, one company drilling for shale was recently forced to close after setting off two minor earthquakes
Third, the cost case is very different. “The UK has a fair amount of unconventional gas, but the reserves are much deeper, more porous and harder to drill. They are much closer to population centres and the mineral rights laws mean that progress in the UK will be a lot slower than in the US,” says Ms Schels.
Finally, there are environmental concerns, mainly about water pollution, though these concerns have been assuaged to come extent by UK MPs, who gave fracking the all-clear in May.
A safe solution?
“The government has recently released a study [which says] that exploring for gas is safe and will not lead to contamination of public water sources. That said, one company drilling for shale was recently forced to close after setting off two minor earthquakes,” says Kerri Maddock, commodities analyst at Barclays Capital.
There remains no definitive proof of fracking’s environmental impact, but a study by the US Environmental Protection Agency will report preliminary results next year. “This is an issue for debate. Even in the US, people don’t see conclusively that shale gas wells pollute water with methane, but the issue does make shale gas more difficult to develop,” says Michael Hsueh, lead gas analyst at Deutsche Bank.
“There is, so far, no conclusive study of any kind that proves fracking is harmful to the environment. Nevertheless, the state of New York has put a moratorium on any fracking procedures. Having said that, without that ban, the US oversupply might even be worse. Meanwhile, France has outright banned fracking with no evidence, even though it has a lot of unconventional gas, such as tight sands and shale,” says Ms Schels.
Some reservations
There is considerable momentum behind exploration efforts, despite uncertainty about the estimates of recoverable volumes. The British Geological Survey believes that they UK has only 150 billion cubic metres of shale gas reserves, much smaller than Cuadrilla's estimates. Meanwhile, across the Atlantic, the US Geological Survey’s estimate of undiscovered technically recoverable gas in the country's Marcellus shale deposits is 80% less than the Energy Information Administration’s figure.
“Estimates of UK shale gas reserves vary widely. There are claims that commercial production could be possible by 2013, but it is too early to say. But it is true that conditions in the UK and Europe could be less favourable than in the US. I would be hesitant to say that the UK can mirror the US exactly,” says Mr Hsueh.
