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Tight regulation must accompany shale gas boom - IEA

30th May 2012

A boom in shale gas will only be practical if measures are taken to ensure these reserves are extracted in a socially and environmentally satisfactory way, said the IEA this week

Natural gas boom will help US and other countries lessen its dependence on the Middle East

A boom in unconventional resources, such as shale gas, over the next 20 years could see the US and others benefit from cheaper energy but must be accompanied by appropriate regulation, the International Energy Agency (IEA) said on Tuesday.

Growth in shale in the US and China could match gains made in conventional gas in Russia, the Middle East and North Africa combined, IEA Chief Economist Fatih Birol told Reuters.

"Unconventional gas will fracture the status quo, and will be a complete game changer with major geopolitical implications," Birol said.

High natural gas prices have helped spur investment in previously unavailable, unconventional gas reserves that include tight-gas, shale gas, and coalbed methane resources.

Yet the boom can only run if measures are taken to ensure these reserves are extracted in a socially and environmentally satisfactory way, the IEA said in a report.

"Greenpeace opposes the exploitation of unconventional gas reserves because the impacts have not been fully investigated, understood, addressed and regulated," the environmental group said. "The IEA report essentially affirms that these concerns are real but falls short of actually addressing them."

The IEA admits that unconventional gas production will pump 12 per cent more greenhouse gases into the atmosphere, compared with conventional extraction methods, but says the figure could drop below 3.5 per cent if producers follow its recommendations and stop venting gas and minimize flaring.

Speaking at the report's launch in London on Tuesday, the IEA's Executive Director Maria van der Hoeven said the most important thing is for gas to substitute more polluting fossil fuels such as coal in electricity generation.

Falling prices driven by an unconventional gas glut would help displace coal, Hoeven said, potentially slashing emissions further.

But gas must be accompanied by renewables and the roll out of carbon capture and storage (CCS) technology, an as yet unproven technology designed to trap exhausts from coal-fired power stations, in order to limit a long-term global rise in temperatures to 2 degrees Celsius above pre-industrialized levels.

"Renewables are indispensable to this goal and that means government measures for supporting renewable energy must be there for years to come...because otherwise lower gas prices will make renewables uncompetitive," Hoeven said.

The IEA report underscored the economic gains offered by the rapid growth in unconventional gas, with "countries that were net importers of gas in 2010, including the United States, gaining the wider economic benefits associated with improved energy trade balances and lower energy prices."

Australia, India, Canada and Indonesia are also set for big increases in unconventional gas production, it said.

"The share of Russia and countries in the Middle East in international gas trade declines from around 45 per cent in 2010 to 35 per cent in 2035," the report said.

For Europe, where shale is expected to play a smaller role than elsewhere, Birol said that growth could still be enough to offset a decline in conventional gas output.

"The main benefit for Europe will that there will be lower gas import prices, putting pressure on oil-indexation of traditional gas supply contracts," Birol said.
Europe's main gas suppliers, Russia and Norway, sell their gas under long-term contracts that are linked to the oil market.

Because oil prices have remained firm on strong demand from emerging economies while European gas prices have fallen on weak domestic demand, European gas suppliers are forced to sell imported gas to their customers at a loss, and utilities lose money when generating electricity from imported gas.

The IEA said this price structure could change as a result of a global unconventional gas glut.

The report said that natural gas could become the world's second most important energy source after oil within the next two decades, should the right rules be introduced to ensure safe and environmentally sustainable use of unconventional gas resources.

Global gas demand could rise by over 50 per cent between 2010 and 2035 and reach 25 percent of the world's energy mix, overtaking coal to become the second largest primary energy source after oil, the IEA said.

Growth in the gas sector would equal the combined growth in the coal, oil and nuclear sectors and outstrip expansion in the renewable energy sector, the IEA said.

"Production of unconventional gas, primarily shale gas, more than triples to 1.6 trillion cubic feet in 2035," the IEA said.

"The share of unconventional gas in total gas output rises from 14 percent today to 32 percent in 2035."

It noted the majority of the gas production increases would come after 2020 as producers needed time to develop a commercial unconventional gas sector.

Expanding unconventional gas production at such rapid rates will require a total of 1 million unconventional wells to be produced by 2035 globally, the IEA said. That's compared to the 500,000 such wells drilled in the past 20 years.

Of that 1 million, the US will require 300,000 and China 200,000, with the remainder shared with the rest of the world.

The US, the world's biggest shale gas producer, currently has just 100,000 unconventional wells in operation.

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