Should Alaska Export More LNG to Asia?

The Governor of Alaska reportedly met this week with officials from the South Korean national gas company to discuss exports of liquefied natural gas (LNG). Ever since crude oil production on Alaska's North Slope ramped up in the 1980s, industry observers have speculated about the ultimate disposition of the significant associated natural gas reserves found with the oil. In a letter filed with the state of Alaska, BP, ConocoPhillips and ExxonMobil, the three main North Slope producers, together with pipeline company Transcanada, recently confirmed their plans for a potential liquefied natural gas (LNG) project, instead of the long-mooted pipeline to deliver the gas to America's lower-48 states. The contemplated megaproject would validate both the scale of Asia's future LNG market and the long-term nature of the US shale gas revolution.

Alaska's North Slope has already yielded 15 billion barrels of oil. Production peaked at over 2 million barrels per day in 1988 and subsequently declined to less than 600,000 barrels per day last year. With around 6 billion barrels of remaining reserves, it's still a very significant field but well past its prime. While the public has focused on its oil output, the producers and the state have long had their eyes on how best to harvest the value of the 35 trillion cubic feet (TCF) of gas dissolved in the oil. In fact, the North Slope complex has produced several TCF per year of gas for years, ranking it among the largest gas fields in the world, but almost all of that gas has been reinjected into the formation to aid oil recovery--and for lack of a market in an isolated and sparsely-populated state.

For decades the default assumption was that a pipeline would eventually be built across Alaska and Canada to link this gas to the existing network feeding the contiguous US. That idea gained traction when US marketed gas production stalled around 2000 and then began to decline. The economics of an Alaskan gas pipeline compared poorly with gas produced along the Gulf Coast, but competing with rising LNG imports looked much more feasible. Then along came unconventional gas, starting with coal-bed methane and culminating with the surge of shale production since 2005. The US gas market now has enough domestic supply to shrink coal's contribution to US power generation by 7% since 2008 and revive gas-intensive industries.

If shale gas were only a short-term phenomenon, as some have suggested, it would be of little relevance to the plans of the North Slope producers. All they'd need to do would be to delay their pipeline for a few more years, and the market would come to them. However, estimates put US shale gas resources at between 482 and 686 TCF--a 60-90 year supply at current shale production rates. And the fact that all three of the main North Slope producers have invested in significant acreage positions and production in US shale basins surely gives them insights into the longevity of those resources.
Nor is time on the side of the Alaskan producers. As oil production declines the economics of the North Slope operation will deteriorate, while keeping the Trans Alaska Pipeline full becomes more problematic. Finding an attractive outlet for the North Slope "gas cap" wouldn't just provide a new revenue source; it could keep oil production going for additional decades.

The LNG option offers several advantages, despite its estimated $45-65 billion price tag and technical complexity. For starters, it cuts roughly 1,000 miles of difficult terrain off the distance that the gas must be pipelined, in this case to a site on the southern Alaskan coast. That location is much closer to Asia, the world's largest LNG market, than export projects intended to ship LNG from the US Gulf Coast. The Asian market is also growing, thanks in part to Japan's post-Fukushima reassessment of nuclear power. The Japanese government has backed away, at least for now, from plans for a firm nuclear phase-out, but it seeks to diversify its energy sources. Among other steps taken in the aftermath of the Sendai quake and nuclear disaster, it has instituted the world's most attractive solar power incentives. Yet Japan's solar resources provide just a few hours of peak output per day, on average, requiring substantial fossil fuel generation to fill in the gaps. Power plants burning LNG are well-suited to that task.

China presents a more complex picture, with its own significant shale gas potential and an energy market expected to add as much natural gas demand by 2035 as all the world's developed countries put together. Considering the scale of eventual demand and the infrastructure necessary to bring China's shale gas to market, it seems likely that the growth of the market in the interim must depend heavily on LNG imports.

Assuming that the state of Alaska presents no obstacles and that US export permits would be forthcoming, because Alaskan LNG exports wouldn't impact US natural gas prices, the main questions that will determine the future of this project can't be answered definitively today. Among these are whether the numerous competing LNG projects being planned and built around the Pacific Rim and elsewhere will saturate the global market in the meantime, and whether the market will provide an attractive price for Alaskan LNG, influenced more by crude oil prices than by US shale gas. The North Slope producers are already immersed in these issues via their other activities, including ConocoPhillips' small LNG plant in Kenai, Alaska, which has been shipping LNG to Asia for more than 40 years. The project timeline provided to the state includes at least three go/no-go decisions along the way as the answers to these questions unfold.

A slightly different version of this posting was previously published on the website of Pacific Energy Development Corporation.

Shale Gas Likely to Alter China's Energy Mix

Two recent news stories highlight the significant shifts underway in China's energy sector, along with the global impact that is already apparent from these changes. Last week the Chinese government announced a new estimate for the country's potential resources of shale gas that is nearly double the Department of Energy's latest estimate for US shale gas. However, having the resource and developing both it and the infrastructure and market to take advantage of it are distinctly different things, as I pointed out in a brief interview on the subject on public radio's Marketplace program. The key to that may be found in a front-page story in today's Wall St. Journal describing the recent pace of Chinese investment in the North American energy sector.

When we think about energy in China, we tend to focus on the vast scale of its coal use, which affects local, regional and, at times, trans-Pacific air quality, to say nothing of its huge greenhouse gas impact. Coal made up 70% of China's total energy mix in 2010. Or we might think of the explosive pace of renewable energy deployment, although China's solar industry, and to a lesser extent its wind power industry, are still mainly export-oriented. Non-hydropower renewables, which were identified as a strategic industry within the 12th Five-Year Plan, account for just 0.5% of China's energy, but the government has recently indicated it would rein in the "blind expansion" of such sources. Together with hydro and nuclear, low-emission energy sources account for just 8% of the total, less than half the 18% share of oil, which is likely to continue expanding as the transport sector grows and encompasses more personal cars. That leaves natural gas with just 4% and a much lower profile than in the US, where it supplies roughly one-fourth of total energy.

If the resource figures that were just released are any indication, the potential growth of gas in China may exceed that of all other energy sources over the next several decades. Nor is that growth dependent on shale gas development, which is in its infancy there, with only a few wells having been drilled. China has some conventional gas production and a small but growing coal-bed methane industry, and it is already one of the world's largest purchasers of liquefied natural gas (LNG). Although the shale gas figures might seem like bad news for companies planning LNG exports from the US, or for the enormous new LNG projects in Australia and elsewhere in the region, they could prove complementary in two ways.

First, the current availability of large and growing quantities of LNG in Asia-Pacific provides the basis for developing both the enormous potential gas market in China's coastal industrial centers and the infrastructure for serving it, including the crucial "reticulation system"--what other industries call the last mile. You simply don't build this unless you have a large, reliable supply on hand, and you also don't develop huge new domestic supplies unless they have an assured market. LNG could thus be the key to avoiding a classic chicken-and-egg dilemma that might otherwise retard the growth of gas in China for years.

At the same time, the recently identified shale gas resources solve a major problem for LNG vendors, by reassuring Chinese buyers that they will have access to ample gas to satisfy industrial, commercial and residential demand long after the 20-year or longer LNG contracts expire and the reservoirs feeding the region's LNG plants are depleted. But that's only true if China acquires the expertise for developing its own gas, and that's where its North American energy deals come into play.

The Journal article provides a good overview of how Chinese companies changed their approach to North American oil & gas mergers and acquisitions in the aftermath of CNOOC's failed bid for Unocal in 2005. Chinese investors have learned not to raise the hackles that that deal did, and they have focused on minority shares in oil & gas companies or in specific field developments, mainly in unconventional plays such as the Eagle Ford shale in Texas with Chesapeake Energy. Even if no intellectual capital flows back to the investing companies, the mindset required for selecting and managing such projects surely will, and that will have a direct bearing on China's enormous new shale resources, which if proved up would equate to 230 years of current consumption.

No one can know at this point how durable last week's estimate of 25.1 trillion cubic meters (886 trillion cubic feet--TCF) of undiscovered, technically recoverable shale gas will be. The Energy Information Agency recently cut its previous US shale gas estimate of 827 TCF by 42%, based on updated information on per-well recovery rates and other factors, particularly in the Marcellus formation underlying New York, Pennsylvania and other northeastern states. (Despite being widely publicized by critics of shale development, this adjustment won't have any bearing on actual shale gas output for many years, during which the resource estimate is likely to be further refined many times.) China will gain similar experience as it develops its shale resource and should have a much better handle on its probable size within a few years. As with nearly everything else related to the country's economic development, the number is still likely to be very big.

Three Studies Confirm Shale Gas Is Not Worse Than Coal

For most of this year the enormous potential of shale gas has been clouded by controversy over its alleged climate impact. This began with the draft and later the leaked pre-publication version of a paper from a Cornell professor suggesting that the greenhouse gas emissions from gas were no better than those from coal and might even be worse. When I examined Dr. Howarth's analysis in two postings last December and this April I found that his methodology and assumptions were sufficiently flawed to undermine his conclusions. However, I also recognized the informal nature of my assessment and suggested the need for further scrutiny of this issue by organizations with more resources. That has now taken place, though I claim no credit for it. Within the last month three separate teams have issued reports bearing on this question, and not one of them validates Dr. Howarth's findings against shale gas.

The first of these studies comes from IHS Cambridge Energy Research Associates, addressing not just Dr. Howarth's paper, but also the EPA's estimates of methane leakage that were a key input for its calculations of greenhouse gas emissions from shale gas. Although a skeptic might find reasons to dismiss a study from a consultancy with a large energy industry clientele, the other two studies have connections to groups with unimpeachable environmental/sustainability credentials. One is a collaboration between Worldwatch Institute and Deutsche Bank, while the other paper, published in Environmental Research Letters, is from a team at Carnegie Mellon University with financial support from the Sierra Club. I encourage you to read them, but here are the highlights:

The Carnegie Mellon team focused on shale gas from the vast Marcellus formation underlying several eastern states. (See Friday's posting for some perspective of the scale of this resource.) They found that while the current techniques for developing and completing a Marcellus shale gas well do result in higher methane emissions than from conventional gas wells, the extra methane only increases lifecycle emissions from well to burner tip by 3% on average. This is the case because, "The life cycle emissions are dominated by combustion that accounts for 74% of the total emissions." As a result, when burned in a combined cycle power plant to generate electricity, shale gas results in emissions per kilowatt-hour (kWh) that are 20-50% lower than those from coal, depending on equipment and sources. This is the crucial comparison that Howarth's paper gave short shrift. They also compared shale gas emissions to those from LNG, which we'd now be importing in large quantities had shale gas development not ramped up as it did a few years ago. The Mellon team found shale gas and LNG roughly comparable, with both emitting around a quarter less CO2 equivalent per BTU than diesel fuel. That suggests that shale gas isn't just a lower-emitting fuel for power generation, but also for transportation. Finally, they looked at the possibility of shale gas wells being fractured multiple times, rather than just once during their production life, and found that it would take more than 25 fracturing events to negate gas's advantage over coal.

The Worldwatch/Deutsche Bank study considered both top-down and bottom-up views of shale gas emissions, including that of Howarth. They looked at the average US natural gas supply including current proportions of shale gas and found that the emissions from gas-fired power plants beat coal-fired plants by an average of 47%, even with the EPA's higher figures for methane venting during gas production. They also found that among bottom-up assessments of shale gas emissions, including the one from Carnegie Mellon and another from the DOE's National Energy Technology Laboratory, Howarth's results appear to be an outlier, and that shale gas is materially lower than coal in lifecycle emissions for power generation. And while their analysis was performed using the standard 100-year global warming potential for methane of 25 times CO2, they considered sensitivities ranging up to a GWP of 105:1, at which extreme gas still performed better than coal.

It's probably too much to hope that these independent studies will alleviate all of the concerns that have been raised about the greenhouse gas emissions from shale gas, which will only improve as technology and standards progress. (The studies also highlighted both the need and potential to reduce methane emissions from shale gas development, in order to minimize the extra greenhouse gas contribution, irrespective of any comparison to other fuels.) I also get that with the current mood in much of this country, claims for the game-changing energy potential of shale gas must sound too good to be true, without some fatal flaw. Yet everything I see indicates that the problems associated with shale gas development are all manageable, and that while it isn't a panacea, it does represent an extraordinary opportunity for the US from an economic, energy security and environmental perspective. It's time to recognize this as the tremendous gift that it is.

The Golden Age of Natural Gas

A regular reader of this blog kindly sent me a link to the International Energy Agency's new study on global natural gas, to which he contributed. The report, entitled, "Are We Entering A Golden Age for Gas?" was launched with a press conference yesterday in London. It presents a scenario in which gas use grows rapidly due to faster demand growth, particularly in the developing world, increased supply from unconventional sources such as shale gas, and a slower expansion of nuclear power in the aftermath of the Fukushima Daichi accident. Its key findings envision gas providing 25% of world energy by 2035, up from 21% today, and eclipsing the share of coal before 2030, with corresponding benefits for global greenhouse gas emissions.

The IEA's presenters were careful to point out that they are not proposing this view as the likeliest scenario, but as an offshoot of their primary World Energy Outlook scenario published last fall, which incorporated the commitments at the Copenhagen climate conference. The new gas scenario depends on a number of uncertainties, including the resolution of some of the concerns about the environmental impacts of unconventional gas production, along with the realization of carbon-intensity and gas-development targets in places like China. However, it doesn't depend on new technology or dramatic changes such as a massive move to natural gas for vehicle use. (The latter is presented as a "High Impact Low Probability" sensitivity.) Its big shifts occur in the big existing gas market segments, for power generation globally and for industry and buildings in the developing world.

I was struck by several elements of the scenario. First, although much of the focus on unconventional gas has been on North America, where many of the techniques were pioneered, this is very much a global story. The IEA shows estimated unconventional gas resources from shale, "tight gas" and coal-bed methane that exceed conventional gas resources in Asia and Africa and rival them even in Eastern Europe/Eurasia. On the strength of its unconventional resources China could become the world's third-largest gas producer by 2035, behind Russia and the US. So even if the US plaintiffs bar attempts to turn "fracking" into the next tobacco or asbestos, unconventional gas exploitation will likely progress elsewhere. At the same time, increases in conventional gas production are expected to exceed those from unconventional sources, by 60/40 over the period studied. That requires big increases in LNG production in Australia and a substantial increase in pipeline capacity linking Russian and Central Asian gas to markets in Europe and Asia. It's also worth noting that despite the shale gas bonanza, the IEA doesn't envision the US becoming a net gas exporter.

As one of my mentors frequently reminded me, natural gas doesn't get developed without a market, and in this scenario the biggest source of new demand is in power generation, where the combination of lower gas prices and the 60% thermal efficiency of combined cycle gas turbines makes gas highly competitive, even with coal. It's less clear whether gas is taking market share from new nuclear based on price, or mainly filling the gap that the response to Fukushima is leaving in some markets. From what I heard on a power industry webinar yesterday, the former is a significant factor, at least in the US. The strong connection between gas and power is another reason why so much of the growth in gas demand--80% by the IEA's estimate--is expected to occur in developing countries including China and India, where electricity demand is expanding at rates that the US and Europe haven't experienced for years or decades. Perhaps the most startling forecast in the report is that China's gas demand could grow from roughly matching Germany's today to about the level of the entire EU in 25 years. That would be supported as much by additional imports as from domestic unconventional gas output.

As I'd have expected, the IEA provided a sober assessment of the environmental implications of their scenario. Increasing the share of gas in global energy demand reduces global GHG emissions by 160 million tons of CO2 equivalent by 2035--less than 1% of total emissions--by substituting for coal and some oil. That's a lot less than if the extra gas didn't also contribute to higher energy demand by keeping electricity prices lower, while outcompeting some lower-emission renewables and nuclear projects. The IEA states plainly that relying on more gas is not a silver bullet for climate change, although it is a positive step.

In addition to pointing out the need for safe handling of the fluids involved in hydraulic fracturing, the report also specifically addresses the critique of Howarth and others concerning the direct emissions from shale gas production. The IEA found that CO2-equivalent emissions for shale gas from well to burner exceed those for conventional gas by 3.5%-12%, depending on whether the methane liberated during well completion is captured, flared or vented to the atmosphere. Even at the high end, that does not negate gas's emissions advantage over other fossil fuels, especially when power generation efficiencies are factored in. The report's authors apparently see most of the excess emissions compared to conventional gas production as representing an opportunity that can be captured with current technology and best practices.

The IEA put a price tag on this shift to gas: a cumulative $8 trillion through 2035 , nearly $1 trillion higher than the gas infrastructure investment in their global energy scenario of last fall. Those figures aren't as hard to fathom in the context of developed-country budget deficits and debt as they might seem, because they mainly reflect unsubsidized, economically attractive investments by publicly-traded and state-owned energy companies that are making healthy profits and have substantial cash flow on which to draw. Surprisingly, the IEA sees most of the incremental investment in gas coming at the expense of oil. Although they deliberately framed the title of their scenario as a question that hinges on a number of variables, the report comes across as a plausible and credible glimpse of our possible energy future.