Archive for the ‘Energy Market Articles’ Category

Energy independence – divergent European and American paths meet

July 25, 2012 2 comments

In recent months, many have touted that the United States is on the road to energy independence. Citibank pointed in the early part of the year that the emergence of shale oil and shale gas and increased vehicle efficiency may make USA the new Middle East of Oil, whilst Philip Verleger, a famed American economist argued that the US will be energy independent in that it will export more oil than it imports by 2023. In March 2012, the United States exports of petroleum products exceeded imports for the first time since six decades.

Whilst the Americans satiate their energy appetite with advanced lateral and horizontal drilling for tight oil and gas, the Europeans are pursuing their own energy agenda via a different route.

Divergent paths to energy independence

The use of gas instead of coal in power generation has reduced American carbon emission by 450 mt over the past 5 years. At the same time, lower energy costs have resulted in a renaissance of industry in the States, with thousands of jobs created and the relocation of petrochemical and fertiliser industries back to the States.

In Europe, countries are adopting a renewables approach towards energy independence instead. Germany’s adoption of Energiewende – an energy turnaround or transformation – faces hurdles to meet all its targets. The Irish targets renewables to be 20% of all energy sources by 2020. These targets are made more arduous by European countries phasing out nuclear power, whilst shale gas lumbers with environmental and geological obstacles in the continent.

Divergent paths meet on transportation

Even as renewables growth accelerates over the next 5 years and natural gas increase its share as an energy source, energy independence in both continents hinges on the key transportation sector. The transportation sector unlike the power sector is made up of disparate millions of vehicles which face inertia to fuel type change relative to more concentrated power stations.

Both continents’ success hinges on reducing the use of gasoline (for America) and diesel (for Europe) in vehicles. The Europeans will largely depend on electric vehicles to wean off oil. However a recent IEA report highlighted the muted impact of electric vehicles – only 5 million of vehicles sold in 2020 or 5% of total vehicles production. It may take another 30 years for electric vehicles to make a material impact, during which re-charging stations and the mileage range of electric vehicles are improved.

The greater abundance of natural gas for the Americans may see it adopt natural gas (CNG / LNG) vehicles as an interim solution for energy independence. However, similar issues arise for this type of vehicles – re-fuelling stations and the mileage range. In the case of natural gas though, prices are not likely to remain at present depressed levels. Advancing renewables technologies on the other hand are likely to see a decrease in unit costs of production over time.

A blighted dawn in the Straits of Hormuz?

May 21, 2012 Leave a comment

In early 2012, the US and its allies imposed crude oil export sanctions on Iran for alleged infringement of its nuclear activities. The market reacted in turmoil. The sanctions were met with a flurry of analysis. Possible scenarios were drawn on the blockage of the Straits of Hormuz and if Saudi Arabia has sufficient capacity to make up for the lost crude – in a worst case scenario up to 12mmpbd of crude. Prices were predicted to rise to $200/bbl derailing the world economic recovery.

Since then, European countries including Italy and Greece which import substantial Iranian crude highlighted the crippling effects of the sanctions at a crucial stage of the debt crisis. Several Asian countries including Japan, India and China too commented on the difficulties of replacing light sour Iranian crude in the existing tight market. The sanctions were delayed to July 2012 to allow countries look for replacement crudes.

Three months later in May 2012, the IEA reported that the Iranian production has decreased by 200kb/day and is expected to decrease by 1mmbpd by mid summer. Iran used to export 2.5 mmbpd before sanctions were imposed. Most of the reduction in crude exports (500kbd) is coming from European compliance, whilst Asian countries (including China, India, Sri Lanka) seek waivers. Meanwhile, a 1.5 mmbd pipeline from the UAE oil fields will be completed in mid 2012 to bypass the Straits of Hormuz for export via the Fujairah terminal.

Over the past few decades sanctions have proved to be an ineffective weapon against erring nations. The emergence of a multi-polar world has further weakened the sanctions. Emerging growth economies with a voracious appetite for oil provide alternative markets for exports. It did not help that the developed economies themselves have been preoccupied with restorative measures for their ailing economies. In France and the USA, presidential elections are held this year, which would have made any punitive measure on Iran likely. Early in May, Monsieur Hollande displaced Sarkozy as president. Sarkozy had been known for his hardline stance against the Iranian regime.

These reconciliatory stances appeared to defuse the tension due to the sanctions. This even as the frequent rhetoric of war in the media desensitized public reaction to it. Has a false sense of dawn and peace then set in the Straits of Hormuz? Will the looming sanctions actually impact the bargaining stance of the nations?

The Iranian oil minister recently predicted a rise to $160/ bbl if sanctions take effect – an increase of $70 from today’s $90 prices. At this price, Iranian oil revenues are estimated at $240 million (1.5 mbbls x $160/bbl) whilst pre-sanctions, oil revenues are estimated at $232 million ( 2.5 mbbls x $93/bbl). Depending on the amount of export loss and the resulting gain in crude price, the Iranians may actually ‘profit’ from the sanctions. The table below has export bbls lost on one axis and the export revenue gain on the other axis. Green cells indicate a net revenue inflow whence the gain in price outweighs the loss in crude, while the red cells indicate the opposite. Interestingly, the $70 price gain postulated by the oil minister corresponds to a positive revenue flow for a loss of 1mmbd in throughput.

Table showing effects of oil price change and export loss on revenue

It remains to be seen then if a surprise springs up. Afterall the weather is capricious. Nations are too. What the analysis above shows though, it will not be the sanctions that will provoke a reaction.

Does oil storage increase prior to rainy days?

March 31, 2012 Leave a comment

It is old wisdom that one should save for rainy days. Somehow in the economics sense, this adage was lost, especially in the modern context of optimising between saving for the future, or investment and consumption in the present. With the existing low interest rates environment, there is much less incentive to store and save for the future.

Supply disruptions are rainy days:

In the oil markets, do players store for rainy days? This is especially pertinent with the overhang of geopolitical tensions in the Middle East – what with Iranian sanctions planned for the middle of year and a much debated but never concluded Iranian threats in the Straits of Hormuz. Obviously, the governments do not agree as the US, UK and France contemplate a strategic oil release. Critics write it is politically motivated with the coming Presidential elections in November. The release can be construed for smoothing price increases or for discouraging speculators away. Even more so, the timing and size of its release remain suspense to market players. My game theory lessons on incomplete information equilibrium taught me it is a wise act to prolong its intended deflating effect. Speculators anticipate its release and dare not go long, whilst governments leverage on the information asymmetry to its full effects.

The original intent for oil storage is to buffer against surprise supply shocks so that users (the refiners) can maintain operational effectiveness. This must be seen in the different interests of the commercial players (oil producers and trading houses) and governments that store strategic petroleum reserves (SPR) though. Whilst commercial players seek to maximise profits, governments seek to minimise supply disruptions from inexorable events.

Commercial and strategic storage:

A look at the graph of the crude stocks by the EIA shows negligible storage by the US DOE over the past few years. In fact, spring of 2011 shows a SPR IEA coordinated release in response to the Libya civil war disruptions. An increase occurred in the spring of 2009 to take advantage of depressed prices in the financial crisis. A plateau has since occurred for the last year in 2011. A similar inspection of commercial storage showed the same market behaviour during the financial crisis in the second half of 2008 and spring of 2009, with an increase of inventory by almost 50 million barrels over half a year.

The author hesitates to draw any conclusion during 2011 when Cushing tanks were full. This was a period when WTI started to lose its importance as an international benchmark. Noticeably though since the beginning of the year 2012, commercial storage has increased by 25 million bbls. Was this in anticipation of the Iranian sanctions looming in June?

source: EIA, DOE

Contango and backwardation:

An analysis of oil storage is not complete without examining the forward curve contango and backwardation. Historically, commodities markets are in backwardation norm as producers willing pay a spot premium for their operations.  For the crude oil markets, this will be for the continued operations of refineries. After 2004, the oil markets begin to be ‘financialised’ and ‘globalised’ with more market players, and become more volatile with rising prices. The market structure flipped into contango seen in the graph below. The huge spikes above $10 in the second half of the 2008 and early spring 2009 during the financial crisis were periods mentioned when commercial storage increased greatly.

WTI M4-M1 : source EIA

Post 2004, major investment banks decided to enter into physical storage play alongside existing oil trading houses (like Vitol and Glencore), realising there were profits to be made. For storage to work, these entities long the spot cargo and short the forward curve a few months out to lock in their arbitrage profits with the higher contango. In the process, they lease out storage tanks and pay a leasing fee ranging from $0.15-$0.50/bbl per month.

Oil speculation or storage? A conclusion.

These storage plays account for major profits among so called ‘speculators’ or non commercial players classified by the CFTC1. Back to the original question if oil storage increases prior to rainy days? Oil storage occurred not due to some prudent mind saving up for the rainy days, but for an invisible hand of the market. Investment banks and trading houses invest in storage plays and in the process sold down the forward curves a few months out. Although storage plays increase spot prices, this potentially helped to smooth future price increases. The present contango to June ’12 out is about +$1.5o as of end March –  a result perhaps of the storage plays shorting and depressing the forwards. It would not be conceivable with the upcoming sanctions in June, the market ascribes only such a small premium from that month.

A re-look at the first graph on storage shows that actual oil storage has not changed much beyond the 1990s. In fact, storage was much higher during the 1990s, before the oil markets became ‘financialised’. This needs to be seen in context as oil prices were in the $10s and $20s back then and the opportunity and capital costs for storage were much lower. There was also a higher spare capacity of oil production.


1 – Other strategies are geographical arbitrage plays where physical players ship oil from one region to another to take advantage of regional price differences. An excellent example of geographical occurred during the Hurriance Katrina and Rita, when gasoline shortages in USA were quickly remediated with imports across the Atlantic. Physical blending or the undesirable pure flat price punt are other strategies.

Could shale gas have contributed to the different economic fortunes of Europe and USA?

February 16, 2012 3 comments

In a recent interview of George Soros by CNN, he highlighted that shale gas and shale oil have contributed to the economic recovery of the US. The US ISM manufacturing rose 1% in Jan 2012 over the previous month. Shale gas impacts the economy through:

1.   direct employment and production in gas producing states

2.   lower production costs through power savings and manufacturing feedstock

3.   lower trade deficits and stronger USD; lower inflation

In the main shale gas production states of Texas, Wyoming, Louisiana and North Dakota, towns have been revived and employment is at a country-wide low of 3.3%. It is even reported that McDonald’s in Dickinson provided a sign-on bonus for staff in their outlets. An estimated number is 600,000 people employed in the shale gas industry in a survey done by IHS Insight. In another study by PwC, an estimated 1m more jobs is expected to be created through the middle of the next decade. The PwC study also highlighted several companies like Bayer and Dow Chemical reviving their chemical plants in the shale gas rich regions to appropriate the cheaper feedstock of ethane (in natural gas). Shale gas contributes to almost 40% of daily production 65 bcf of natural gas. This amounts to $29b (at a per mmBtu price of $3) in annual production revenue. Notwithstanding the multiplier effect on the GDP, shale gas impact is much larger than this baseline estimate.

Other unintended consequences of shale gas and oil are a lower trade deficit and a stronger USD. A big story in 2011 is the USA turning to a net exporter of petroleum products. This by far is due to the lower domestic demand and stronger domestic production volumes of oil and gas (shale oil contributed 400kb/d). The dual consequence is to lower core inflation, which directly supports fiscal measures and quantitative easing.

Europe case is different

Comparatively, Europe is still deliberating on the environmental aspects of shale gas drilling. Already France and Bulgaria set a moratorium on shale gas drilling. Further, many of the rosy projections on shale gas in Europe by smaller companies appear too optimistic, and it may take another 5 years for shale gas production in Europe to take off according to Exxon. Among the European countries, Germany and Poland hold the most potential for shale gas reserves and production. See also an article by the author “All not so rosy for shale gas“. Whilst Europe shares US’s concern on energy security, it has traditionally been more environmental conscious than the larger American continent. Not that, energy security is a less pressing issue for Europe with Gazprom having delivered ‘less than enough’ volumes of natural gas to the continent during the cold snap last month.

Would shale gas (and oil) have delivered equal benefits to Europe? Firstly, there are much higher electricity tariffs and diesel/ gasoline taxes in Europe than the States. This is due to the higher taxes (VAT and excise) and feed-in tariffs for renewable generation in OECD Europe. The tables below indicate the household and industry electricity prices in Europe and USA, sourced from the Oil Drum and originally from the IEA quarterly database in 2009. Germany electricity data is not in the figure but in 2011, its residential tariff was $0.178 /kwH on the upper range of the prices. Except for Norway, US has lower electricity tariffs than any European country.

Residential and industrial electricity prices in Europe and USA

A historical comparison between USA and Europe indicates that the USA industrial electricity prices as always below that of Europe. In spite of the increases in fossil fuels (coal and oil) in particular from 2006-2009, industrial electricity prices in USA have remained relatively unchanged in the period.

Comparison of USA and Europe industrial electricity prices

In theory, Europe could have lower electricity prices from cheaper natural gas which contributes about 19% to its power generation. However, it imports almost 35% of its imports from Russia based on take-or-pay long term oil-indexed contracts. This renders it contractually liable to take a minimum amount of gas imports. The imports are mainly on oil-indexed prices which have remained high, although there have been recent pressure to index it on spot gas prices.

This coupled with its higher taxes and feed-in tariffs would have kept its electricity production costs high. Consequentially, it would also not have experienced a similar revival in its chemical industries, based on price parity on the gas feedstock.

The Demand and Supply Cycle of Peak Oil

February 2, 2012 1 comment

Much has been written on peak oil – the theory made famous by Hubbert which now bears its name. In 1972, Hubbert made an analysis that people born after 1965 will see the dissipation of oil use in their lifetimes. Hubbert did not see the emergence of China and its voracious oil appetite in the 2000s. Neither did he see the youthful population growth of the Middle East with its exorbitant oil subsidies. Yet, 40 years later the Peak Oil date has been pushed back time after another.

Peak Oil theory tends to parochially delve into the supply aspect. Hubbert based his theory that oil resources are finite and will eventually be depleted according to a famous bell-shaped curve below.

Hubbert peak oil curve

Peak oil advocates highlight that much of the world oil is supplied by giant oil fields – Ghawar (Saudi Arabia), Kirkuk (Iraq), Cantarell (Mexico) and Burgan Greater (Kuwait), which are rapidly aging. No new major oil fields have been discovered in the past decade. Further, Norway, Mexico and UK join a list of countries which oil production profiles follow the Peak Oil ‘curve’.

The author wrote in May 2011 that the hidden hand of economics is the best answer to peak oil. This can entail a demand and supply cycle of energy resources with an ‘affordable energy concept for all1’ dictated by price as illustrated below:

The hidden hand of economics of Peak Oil

An analysis of trends in the energy sector reveals this hidden cycle at work. There was much public discourse on high oil and gas prices from the mid 2000s that partly arose from high demand in the developing countries. However it is these high prices that have hastened the development of alternative fuels (solar and wind in particular) and the present shale gas revolution. Already, the media has written a lot about about massive shale gas reserves. A massive potential exists too in new technologies eg coal-to-liquids (CTL), gas-to-liquids (GTL) and underground gasification of coal (UGC) that will greatly increase potential fossil fuel reserves.

The CTL and GTL technologies will increase the amount of transportation fuels from the more abundant coal and gas reserves2. These technologies will not be economically feasible without the higher price of oil driving the push for innovation and efficiency. UGC in particular will almost triple the amount of coal reserves, converting underground coal reserves underground to liquid fuels. These new technologies will further push ‘Peak Oil’ later to the future.

Perhaps the greatest impediment to peak oil theory is the use of renewable energy – a potential game changer. According to Bloomberg New Finance in 2011, the total investment in renewables globally reached $260b with cumulative investment of $1t over the past 7 years. It surpassed the investment into fossil fuels for the first time. Most of the investments are into solar and wind energy. It is projected that in 3-5 years, the unit costs of electricity production from PV solar will be able to compete with that from fossil fuels. This is mainly due to the deluge of investment in China into the manufacture of solar panels, which lowers its production costs substantially. Already, the most efficient form of generation of electricity from wind energy is able to compete on a cost basis with electricity from fossil fuels generation.

The increasing oil consumption in the Middle East exporting countries may decrease their available volumes for export over the next decade. Increasing consumption was partly due to subsidies which alone cost $13b in Saudi Arabia in 2010.  This fact has not gone unnoticed in Arabian governments which have embarked on ambitious renewable projects recently. For example, Saudi Arabia is increasing its electricity generation mix of solar to 10% by 2020 to a few GW. Other countries like Oman and Abu Dhabi, and Egypt have embarked on similar solar and wind projects. This spurt of growth is all driven by the rising costs of oil and a need for fiscal balance. Even more interestingly, Qatar has not displayed much enthusiasm in investment in renewable generation – perhaps because of the availability of its own abundant gas reserves.

According to the BP World energy outlook 2035, renewable energy will contribute about 8% of world primary energy consumption. This compares with 1.3% in 2010.

If the trajectory of oil prices continues over the next two decades, expect this ratio to be even higher. Market capitalism will eventually dominate in this efficient allocation of resources.

BP share of world primary energy


1. The chief economist of Bp advocated in the recent statistical review that an affordable energy future for the world population is possible.

2. The reserves to production ratios of gas and coal are approximately 60 and 160 years presently, whilst that of oil is 50 years.

A demand-supply tug of war and $100 – $200 oil prices in 2012?

January 17, 2012 2 comments

In an earlier Sep 2011 article by the author, he wrote that a tug of war ensued between the elasticities of demand and supply to create range bound oil prices. The year 2012 started in earnest with dichotomous forecasts on the oil price. This is due to ongoing market uncertainties – with the Euro crisis damping potential demand and supply disruptions from the ongoing Iranian crisis. The author is convinced though this tug of war is increasingly won by the supply factors and the oil price will hinge on the upside.

Demand destruction and the Euro crisis:

During the financial crisis of 2008, OECD oil demand fell from 47.9 mb/d in 2Q 2008 to 44.2 mb/d in 2Q 2009 (IEA OMR data). Most of the demand loss came from the USA (1.8 mb/d). A look at the main demand figures from Europe during the financial crisis revealed important consumption patterns:

kd/b (product demand)

2008 Jun

2009 Jun





































The consumption demand2 has actually decreased only a marginal 350 kb/d in continental Europe with the major powerhouses France, UK and Germany having minimal impact. A key reason for the relatively low demand destruction is the use of natural gas and other alternative sources of energy in Europe (for eg nuclear in France) as a primary form of energy. The peripheral countries – Italy, Portugal, Greece and Spain in the epicenter of the crisis lost 350 kb/d of demand.

The latest economic data3 indicated that the US and China are likely to weather the contagion from Europe. More importantly central banks have learnt an important past lesson – it was the constriction of bank credit that led to the contagion in 2008 and in this respect, the European central bank (ECB) has offered low interest rate loans to banks to shore up liquidity.

A further base on the prices – $100 was cited by Saudi Oil minister Ali al-Naimi on 16 Jan ’12 as a level to be ‘stabilised’ at. This was the first time a price level was hinted at 3 years after $75 was cited in Nov ’08. It is an acknowledgement of the growing fiscal spending by the Kingdom in social welfare and wages in its public sector to balance the government budget.  A recent IMF report in Oct ’11 indicated that the break-even oil price for the Kingdom has grown by almost $30 since these 3 years.

MENA governments fiscal break even point

Demand never fully restored in US post crisis:

Importantly, the US has seen a dramatic fall in oil demand from 20.24 mb/d in Jun 2008 to 18.7 mb/d in Oct 2011. Most of it is due to higher vehicle fuel  efficiency and the higher average price of gasoline experienced in 2011 (even more than 2008)  slashing gasoline demand by 0.7 mb/d. The USA never fully recovered its oil demand post financial crisis.

USA demand (mb/d)4

2008 Jun


2009 Jun

2011 Oct


Jun08 – Oct11































Supply disruption and geopolitical instability:

A list of existent supply disruptions issues is below. The list is not extensive with other disruptions in Libya and potential unrest in Iraq and Kazakhstan. However, these longstanding issues appear to have been ‘factored’ into market prices. A geopolitical theme permeates through the list with the Straits of Hormuz having the greatest impact.

Region Remarks
Iran (through Straits of Hormuz) Ongoing nuclear crisis could see the blockage of the Straits of Hormuz where 17 mb/d of crude flows. Mitigating factors include the 5mb/d Petroline to Yanbu and a 1.7 mb/d Fujairah pipeline ready from UAE ready only in 2H 2012. Still, up to 11 mb/d immediate supply could be lost in a worst case scenario. Iran itself exports 2.3 mb/d of crude. Comparatively, the OECD has oil stocks of 2630mb (IEA Dec ’11 OMR). An excellent article on the cruciality of the Straits of Hormuz is found here.
Nigeria Removal of fuel subsidies has triggered a strike among oil workers potentially disrupting its 2.4 mb/d of exports. On 16 Jan, the Nigerian president reinstated partial subsidy.
South Sudan Landlocked South Sudan seceded from Sudan but its oil exports of 350kb/d through Port Sudan appeared to have been routed for Sudan domestic consumption.

An observation is a relatively ‘minor’ supply disruption (in South Sudan or Nigeria) is expected to have the same order of impact as demand destruction in Europe. The author therefore postulates the supply elasticity of oil price to win this tug of war against demand, and consequently the oil price to surprise on the upside this year.


1 – Greece, Ireland and Portugal data are import data from EIA and not consumption data, but given that their own production is minimal, import and consumption figures should be similar.

2 – The dates were chosen as covering the period of the Lehman collapse – a defining moment of the crisis and to reflect the summer driving season in the USA.

3 – The labour market in USA is improving whilst the PMI data in China improved to 50.3 in Dec from 49 in Nov 2011.

4 – From IEA oil market reports in Aug 2008, 2009 and Dec 2011.

Not all so rosy for shale gas … …

January 7, 2012 1 comment

A rosy scenario has been painted about the emergence of natural gas as a major fuel source.  This was contributed in part by an increase in unconventional gas supply – in particular coal bed methane, tight gas and shale gas. Coal bed methane production is growing but is expected to be important in countries with large coal reserves – Australia and Canada.

Shale gas boom:

Of this natural gas boom, shale gas share of supply has increased to 40% in 2011 from 10% in 2005 in the United States alone. Dick Cheney in 2005 then Vice-President exempted gas drilling from federal regulations. This led to advances in horizontal drilling and hydraulic fracturing and the subsequent boom in shale gas revolution in the United States. Shale gas is expected to contribute to ~13% of total gas volumes in 2035 worldwide under the Golden Age of Gas Scenario (GAS).

Much of the shale gas drilling techniques were attempted by small independents initially. This has contributed to recent boom in shale gas investments in particular with large foreign entities for ‘technological transfer’:

  1. in Dec 2011, a $2.3b joint venture between Total S.A. (25% stake), and Cheaspeake Energy and EnerVest to develop the Utah Shale in Ohio
  2. in Dec 2011, a $0.9b joint venture between Sinopec and Devon Energy for shale gas development in the United States.
  3. in Jan 2012, Marubeni $1.3b joint venture with Hunt Oil to develop Eagle Ford shale resources

This shale gas revolution has spread worldwide. Below is a figure showing the shale gas reserves estimated by the Energy Information Administration.  Presently countries that are investing heavily include China, Argentina and Poland whilst licensing rounds have started in India and Israel.

Figure 1 : World shale gas reserves estimate by EIA

Environmental considerations for shale gas:

However, not all is rosy in this shale gas scenario – in particular environmental and costs considerations have surfaced. Scientists have speculated the following environmental concerns:

  1. Hydraulic fracking possibly causing two separate earthquakes in Ohio and Blackpool, UK, although the link has not been confirmed.
  2. Fracking chemicals leakage to the water aquifer in Wyoming as detected by the Environmental Protection Agency, (EPA). Again the evidence is not conclusive, but this has led to legislation requiring drilling companies to publicise the content of their proprietary fracking liquids. Many in the industry advocated tighter regulations and casings on the drilling as enough to prevent such leakages.
  3. Huge amount of water resources needed for the fracking process. Total volume pumped into a well is from 7500-20000 cubic metres. (source: IEA GAS report)
  4. From well head to burner, shale gas production is also more emissions intensive relative to conventional drilling – although only marginally at 3.5%1 higher than conventional gas production if modern techniques are used. (source: IEA GAS report)

Already, these environmental concerns have led to bans and moratorium in Europe – in particular France, Germany and Britain. Only Poland has been going ahead in the environmental conscious continent.

Project economics:

There is also a lack of price projection and its effect on project economics. With estimated break even costs for shale gas production at about $4 mmBtu2 and present Henry Hub prices at $3 mmBtu3, present production is at a loss. The shale gas revolution is a victim of its own success in the United States. Supply glut is only expected to clear in 2015. A key reason investments still keep flowing is technology transfer and realising that shale gas could be a future revolution.

Notwithstanding these, production over the past 3-4 years is still shedding light on the reserves profile. Presently, a hyberbolic decay profile is assumed whilst in a study an exponential decay is found more appropriate. Total recovery is reduced by half consequentially. Given the short life of existing wells, costly re-fracking may also be needed later. These have important impacts on project economics. Already, reserves estimation in the large Marcellus shale resources has been reduced in a new USGS survey to 84 tcf from a previous 264 tcf by the Department of Energy.

Implications: Higher costs and lesser abundance

The overall implications of these environmental considerations and project economics are potentially higher costs and lesser abundance. However the cause and effect may not be linear. Potential factors include the fast development of LNG infrastructure to link world markets3, and the de-linkage of gas to oil prices outside of the Americas. Maintaining gas prices linkage to oil indices will de-link its own supply and demand fundamentals to gas prices. The construction of LNG terminals will facilitate the export of the gas to markets in Asia, priced at >$10/mmBtu. See the author’s earlier article on a trading hub in Asia. The consequential development of any protocol post 2015 will have a bearing on the relative emissions advantage of natural gas to its substitutes, fuel oil and coal.

1 – Other study reports highlight shale gas emissions (including the higher GWP of methane) to be much higher. This remains a subject of debate.

2 – This estimate figure varies greatly among different well and reports – $2-$6 per mmBtu.

3 – This is progressing at a fast pace worldwide, but still faces obstacles – for example the recent aborted Hess Fall River project.