"Unconventional Gas: Lessons Learned from Around the World"
Author: Holly Morrow, Former Fellow, The Geopolitics of Energy Project
Belfer Center Programs or Projects: Geopolitics of Energy Project
The shale gas revolution has changed the landscape of American energy – transforming the US from a country that was building billion-dollar terminals along its coasts to import liquefied natural gas (LNG) from countries like Qatar, to one that is reconfiguring those facilities to export American natural gas as LNG around the world. Production of gas from shale has soared 1,200% over the past decade. In 2000, it accounted for only 1% of US natural gas production; by 2012, it was 39%2. Many people in the American oil and gas industry will tell you that the unconventional boom is the most dramatic energy story they have witnessed in their careers. It has not only transformed the US energy picture, it has also encouraged a different perspective about the global supply picture. Global energy supply forecasts used to take the world’s resource endowment as more or less fixed – there was a certain amount of oil and gas in the ground, and the question was how rapidly mankind depleted it (this was the basic premise behind the theory of “peak oil”). There is now a greater appreciation for the “unknown unknowns” with regard to energy, and the idea that, while not infinite, there is in fact a sliding scale of resource availability, with high prices and technological innovation pushing out the frontier of what is available for human consumption. For those who see greater global supply as positive, this is a source of optimism; for those who wish to see the world pivot away from fossil fuels, it’s discouraging. However, amid all the excitement about American shale gas, it is often overlooked that the US is not the only country to have experimented with unconventional energy sources. China has been looking to unlock its coal bed methane (CBM) resources for many years with less success than it would like, while Australia’s CBM industry has experienced such robust growth that CBM-based LNG projects are slated to make up nearly 30% of Australia’s LNG exports by 2020, even amid strong growth in conventional gas exports. Indonesia, a historic energy powerhouse, looks at declining conventional reserves and sees CBM as a potential savior. Given the intense interest in unconventional energy around the world, the purpose of this paper is to examine what lessons can be drawn from these different approaches to unconventional hydrocarbon development and see whether there are success factors that can be viewed as critical.
I will examine four very different stories. The US case is one of almost accidental abundance – many different companies working on a small scale ultimately created a phenomenon that, when it caught on, became huge in scale and flooded the US market. The Australian story was slightly different – several companies that were developing CBM for specific local power generation projects came to understand the size of the resource that was available, and realized that to develop a resource of that magnitude, access to international markets was required, thus initiating the world’s first LNG projects based on CBM. Both of these were bottom-up approaches. In China, the government is trying to create an unconventional boom through the mechanisms of state planning – government targets and state-owned companies. And in Indonesia, the government is looking to CBM (and shale) to ameliorate a projected imminent gas shortage caused by surging domestic demand and sluggish domestic production.
In reviewing the four cases, it becomes clear that the US history need not be unique. While there are factors that explain why the US was the first to have success with unconventionals, and will probably continue to have the largest and cheapest production, there are several generalizable principles that can facilitate unconventional energy anywhere in the world. If the geology is right, the prize is big enough, and the playing field is open, companies will figure out how to make it work.
This paper will largely bracket two issues. One is the geologic quality of the unconventional resource in these different areas; geology is obviously important to the success or failure of unconventionals in a country, but it is not determinative in these cases, and the related technical details are beyond the scope of this paper. Second is the large debate over the environmental impacts of unconventionals (and in particular shale gas and fracking). The purpose of this paper is to examine why unconventional energy succeeds or fails, and to identify conditions relevant to its success in jurisdictions that choose to pursue it. Whether some countries or localities should pursue unconventionals is a separate discussion.
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