Top 5 states that are most active are Texas, Louisiana, Wyoming, Oklahoma, and Colorado – together accounting for over 50% of the total natural gas production in the US

Definition / Scope

• Shale gas is a form of natural gas that is usually found trapped in shale – fine-grained, sedimentary rock formations – hence the term ‘Shale Gas’.
• Besides crude oil, coal/peat and natural gas hold a significant share of the energy market, nonetheless, newly discovered shale gas reserves around the globe are likely to further promote consumption of gas as both an energy source and an affordable feed stock for a wide variety of chemicals and materials.

Market Overview

• The shale revolution is the result of technological breakthroughs in horizontal drilling and hydraulic fracturing that have made vast dormant gas and oil resources economically exploitable. The technology was originally developed in the US in the 1940s, but application was quite limited until it was revolutionary improved about the turn of the century. Nonetheless, there has been considerable debate over the level of technically recoverable shale gas resources together with significant revisions to some estimates of those resources.
• While Shale Gas is abundant, cheap and burns cleaner than fossil fuels; Shale gas is set to remain a largely regional resource over the next one to three years with an uncertain global impact due to the increased technical challenges and higher development costs of the resource
• Growth of shale gas in the US has been rapid – In 2000 shale gas had a share of approx 1% of the U.S. natural gas production; by 2010 it was over 20% and the U.S. government’s Energy Information Administration predicts that by 2035, 46% of the United States’ natural gas supply will come from shale gas.
• Exploitation of shales is characterized by high output in the first year, followed by sharp declines. Production in the second year is typically down by 40% from the first year with further reductions in the following years. New wells have to be drilled continuously to maintain production, and output reacts speedily to price changes. Investments are characterized by short payback periods.

Market Risks

• Because shales ordinarily have insufficient permeability to allow significant fluid flow to a well bore, most shales are not commercial sources of natural gas. Shale gas is one of a number of unconventional sources of natural gas; others include coalbed methane, tight sandstones, and methane hydrates. Shale gas areas are often known as resource plays (as opposed to exploration plays). The geological risk of not finding gas is low in resource plays, but the potential profits per successful well are usually also lower
• If and when natural gas prices will rise in North America is the big unknown – currently supply outstrips demand.
• How shale gas development will impact investment in renewable energy sources and how much environmental regulation shale gas-related activities will attract are also uncertain.
• With price uncertainty, managing costs and financing risks are top priorities for the industry.
• The level of future shale gas development will hinge on the industry’s ability to control reputational risk and manage public opinion by minimizing environmental and community impact.
• As shale gas transforms supply and demand of the world’s energy mix, geopolitical factors will continue to create risk.

Top Market Opportunities

The country is estimated to hold the largest reserves of shale gas in the world.

• In the Annual Energy Outlook 2011, the U.S. Energy Information Administration (EIA) states that the U.S. has 2,552 Tcf of potential natural gas resources, the highest level since 1971. Of these resources, 827 Tcf represent natural gas from shale, 474 Tcf above its 2009 projection.
• In the last 4 years production from unconventional resources has increased significantly in most of the shale basins in the US. The dry gas production increased from 0.3% in 2000 to 9.6% in 2012, contributing 40% of the total natural gas production in the US.
• The contribution of shale gas in the total US gas production supply is likely to increase from 22.8% in 2010 to 46% in 2035.

Top States in the US for Shale Gas

• Top 5 states that are most active are Texas, Louisiana, Wyoming, Oklahoma, and Colorado – together accounting for over 50% of the total natural gas production in the US in 2012.[[[citation needed]]] Besides these 5 states, shale development activity has been increasing in Pennsylvania

Top Application Opportunities in the US

• Power Generation: It has been estimated almost 38% of the energy consumed in the US is by power generation sector making it the largest consumer of natural gas. With an abundance of shale reserves, EIA expects 62% of all generation capacity that is planned to be added in the US till 2035 will be natural gas fired.
• Industrial Sector: The US industrial sector has enormous potential to replace energy demand with natural gas. Lower prices and lower emissions compared to other sources are key contributors for natural gas consumption growth. Further, increases in consumption are driven by stringent emission regulations in the US. With the recent fall in natural gas prices and expected stability in the supply will likely drive competition of the US industry particularly, in petrochemicals, and fertilizer industry where natural gas is used as a feedstock.
• This is evident from the fact that the usage of natural gas in the industrial sector increased from 18.70 in 2010 to 19.50 billion cubic feet in 2012. Further, the industrial sector is projected to increase the consumption to 20.18 billion cubic feet in 2014. Estimated to generate approximately 1.2 million direct and indirect jobs along the supply chain. Approximately $26.20 billion in federal and state tax revenues are expected due to increase in economic growth. Predicted to increase capital investment in major industries including paper, chemical, plastic, rubber, glass, and iron to $72.00 billion.
• Chemical Feedstock Source: Abundant NG resources coupled with extraction technologies (which improve recoverable amounts) drive down costs, making NG increasingly attractive as a chemical feedstock source. With demand for NG increasing, products exclusively sourced from crude oil, such as aromatics, may be impacted, creating opportunities for alternatives such as bio-based sources. Olefins, methanol, ammonia, and aromatics are primary petrochemicals used to manufacture a variety of products from plastics and fertilisers to performance materials and pharmaceuticals. While the impact on the supply of aromatics is likely to be small, it may promote the development of bio-based sources, such as cellulose in the short term (5 to 10 years), provided processing techniques can match the petrochemicals in purity and performance.
• Gas to Liquids: Shale gas production has promoted GTL activity. Typically, the GTL process converts NG to long-chain hydrocarbon fuels such as diesel and naphtha (used to produce the chemical feedstocks) and in addition, liquefied natural gas (LNG) and gasoline can also be produced. GTL has traditionally been considered expensive and only economical in NG-rich regions such as the Middle East. However, with the world’s abundant shale gas reserves, oil and gas giants are tapping into this market. GTL conversion technology allows synthetic transportation fuels to be produced at a cost that is comparable to traditional crude oil fuels. Activity in this area is likely to influence the global transportation fuel mix in two ways. On the one hand, compressed natural gas LNG fuels are likely to become mainstream, provided adequate infrastructural requirements are met and in addition, dependence on traditional fuels (long-chain hydrocarbon) is likely to remain entrenched but with a higher contribution from NG rather than crude oil.
• Major participants in the GTL market include: Sasol, Shell, BP, ExxonMobil, Rentech, Petrobas, Syntroleum, Compact GTL, Mitsubishi Chemical, Statoil, Kogas, and PetroChina. Transportation Fuel Mix: The transportation fuel market is huge and dominated by crude oil (approximately 96 per cent), with NG and renewable fuels accounting for only around 2 per cent each. This makes it an attractive and largely untapped market for NG. Innovations in technology are facilitating easy and more widespread adoption of NG in transportation, as well as promoting NG conversion to traditional transportation fuels. (EIA)

Competitive Play for Opportunities

• Large chemical companies are shifting investment patterns to exploit the rich shale gas reserves in the United States, at the expense of the Middle East and other NG-rich regions.
• Key Companies with plans to build crackers and olefin production capability and/or expand existing facilities in the United States are: Dow; Shell; BASF; ExxonMobil; Bayer; SABIC; Chevron; Braskem; Huntsman; Formosa Plastics; and Occidental Petroleum.
• North American NG prices are the lowest globally, and chemical companies are fuelling a revival of the US manufacturing sector by capitalising on this cheap supply.
• Producers of chemicals used in shale gas exploration and production have capitalised on the rise in demand in the North American region.
• Opportunities exist for wastewater treatment companies due to the high volumes of water consumed in shale gas production. Traditional water treatment methods are proving inadequate in light of increased regulations, which impose stricter limits on permitted levels of toxicity and disposal of wastewater in natural waterways (e.g., streams, rivers, etc.) or underground. In addition, improving recycling methods reduces shale gas extraction costs and overall GHG emissions (e.g., those associated with the transportation of water to the site).

Market Drivers

• A half decade ago, demand for fuel in the US was largely met by imports. With the advent of fracking technology and horizontal drilling, the US is now unlocking domestic supply to meet its gas demands. The country’s gas imports reduced significantly from 4,607.6 Bcf in 2007 to 3,153.3 Bcf in 2012.
• In 2012, estimates citation needed show that global exploration and production spending may increase by over 10%. Of this projected increase in investments, over 50% will likely take place in the US. Such a strong investment climate was mainly attributed to the development in shale gas production. The drilling activity in the US shale basins will likely grow throughout the foreseeable future.
• States including Texas and North Dakota are witnessing the economic development due to the strong investments in shale oil and gas sector.
• With shale gas production, increased domestic supply will likely decrease the fuel prices resulting in new job opportunities, lower energy bills, and increased competition from the US industries.
• Risks remain since shale gas development has met with environmental concerns over the hydraulic fracturing, or “fracking”, process. Some specific concerns being:
  • Contamination: fracking chemicals used in the process can potentially leak into underground rivers and reservoirs and ultimately into drinking water supplies. The health effects of long-term exposure to chemicals commonly used in fracking need to be evaluated and regulated
  • Gasification: the pressure build-up due to gasification may lead to tremors or explosions, though these claims need to be investigated further
  • Surface Water and Soil Risks: Risks may also arise from the volume of chemicals that need to be stored at the drilling site and from the liquid and solid waste produced during drilling and fracking.
  • Life Cycle Risks: Combustion of natural gas produces lower GHG emissions compared to other fossil fuels. However, shale gas production suffers from fugitive/unwanted emissions throughout the entire life cycle.

Market Outlook

• NG production in the United States and Canada is expected to diversify to other unconventional resources. These could include coal bed methane (CBM), tight gas sands, and in the long term (greater than 20 years) solids, such as methane clathrates (methane trapped in ice crystals).
• Abundant reserves of shale gas are likely to promote consumption of gas at the expense of other energy sources, such as coal, nuclear, and renewables. Particularly in the United States, power generation from renewables (e.g., solar and wind) will be significantly affected because NG requires less initial investment.
• Innovation in extraction technologies improve the amount of recoverable gas, while addressing environmental concerns. Such advances can be replicated in other global regions where shale gas development is likely to materialize (e.g., Poland and China).
• Cheap NG (for use in energy and as a feed-stock) is likely to revive the North American manufacturing sector, making the United States more competitive against Europe, particularly in the high-performance materials industries. However, low-end (cheap) materials from major producing nations, such as China, will remain competitive due to other factors (e.g., favourable labour laws in China).
• With many oil and gas and chemical companies setting up and/or expanding production facilities in the United States, exports in basic materials (e.g., polymers) are likely to increase.

Competitive Landscape

• The competitive landscape is dominated by multinational oil and gas participants, energy service firms, and chemical companies due to demand for hydro-fracking chemicals.
• Water-treatment firms are increasingly active in this space due to the complex and expensive wastewater disposal challenges associated with shale gas production.
• Some backward market integration has taken place (and continues to do so), with both energy service firms and oil and gas companies producing their own chemicals and materials.
• The shale gas production value chain is dominated by major oil and gas participants and energy service companies. However, chemical and water treatment companies have tapped into the growing markets for hydro-fracturing chemicals and wastewater treatment chemicals.

Competitive Factors

• Shale gas plays must be big enough to warrant the tremendous investment in time and money required to extract and fully exploit it. The play should be sufficiently close to markets to facilitate distribution.
• Natural gas prices are currently depressed in some regions, and the wealth of newly viable shale gas plays could drop prices even farther. But as oil and gas production from conventional sources continues to decline, the local price of natural gas relative to other energy sources will dictate whether the long-term investments required to develop and exploit a play will produce sufficient returns.
• Shale gas production and distribution requires more than wells. Production sites must be adequately serviced by roads and pipelines, for example, and special processing and transportation facilities are required to liquefy natural gas for marine transport.
• A well-developed, stable regulatory regime, predictable access to permits and licenses, and government subsidies for exploration and development are crucial.
• While the environmental safety of shale gas production is still under study, many shale gas developers are meeting strong opposition from environmental groups on the basis of health and safety concerns related to hydraulic fracturing technology and water usage.

References

1. Aguilera, R.F., Ripple, R.D., and Aguilera, R., “Link between rocks, hydraulic fracturing, economics, environment, and the global gas portfolio,” SPE Canadian Unconventional Resources Conference, CURC 2, 2013, pp. 1,044-68.
2. IEA, “World energy outlook,” International Energy Agency, Paris, 2009.
3. Energy Information Administration
4. American Chemistry Council
5. Beneath the Surface: A Survey of Environmental Risks from Shale Gas Development

Appendix

NATURAL GAS CONSUMPTION BY SECTOR IN THE REFERENCE CASE, 1990-2040 (TRILLION CUBIC FEET)

NATURAL GAS-FIRED GENERATION IN THE ELECTRIC POWER SECTOR BY NERC REGION IN THE REFERENCE CASE, 2005-40 (BILLION KILOWATTHOURS)

Note: Florida Reliability Coordinating Council (FRCC); Midwest Reliability Organization (MRO); Northeast Power Coordinating Council (NPCC); ReliabilityFirst Corporation (RFC); SERC Reliability Corporation (SERC); Southwest Power Pool, RE (SPP); Texas Reliability Entity (TRE); Western Electricity Coordinating Council (WECC)

TOTAL NATURAL GAS PRODUCTION, CONSUMPTION, AND IMPORTS IN THE REFERENCE CASE, 1990-2040 (TRILLION CUBIC FEET)

U.S. EXPORTS OF LIQUEFIED NATURAL GAS IN FIVE CASES, 2005-40 (TRILLION CUBIC FEET)