Worldwide production of unconventional natural gas continues to grow and that has major implications for markets and prices. The trend will play out for many years to come, according to a newly released World Energy Council report, “Unconventional Gas, A Global Phenomenon.”

The study looked at where and how the unconventional gas revolution is taking place and determined growing gas output by the U.S. and Australia will have the biggest impact on the overall gas business.

Gas ranks as the third most-popular fuel in the global energy mix currently, according to the council. The role of the comparatively clean-burning hydrocarbon in a different energy future—one that emphasizes renewable fuels—has spurred lively debate in recent years as part of discussions about possible global warming.

A 2012 council survey predicted that shale gas development would have a “significant impact on the dynamics and prices” of future natural gas markets. This study, developed with project partner Accenture Strategy, on the implications of unconventional gas argues that, despite the currently uncertain price environment, unconventional gas already has become a global phenomenon.

Growing supplies of unconventional gas, led by U.S. production, are entering regional markets and those supplies have the potential to reflect a significant share of future global supply additions. The implications of this phenomenon on markets are an important consideration for energy professionals seeking to understand the future of the industry, the report said.

“The bearing of unconventional gas on changing market dynamics should not be under-estimated,” the report added. “Now that Australian coal bed methane (CBM) and U.S. shale gas are emerging on the global market as liquefied natural gas (LNG), the impact will no longer be contained to regional markets.” It added three important trends have emerged as the most meaningful:

  • Interconnected markets—“With excess supplies in the market, there has been price normalization and other structural shifts towards a more global and transparent market across the three main regional hubs: Asia, Europe, and North America.”
  • International growth—Upstream producers in China and Argentina have made progress in growing unconventional gas supplies of their own.
  • Shifting portfolio allocations—“In this time of uncertainty, U.S. unconventional gas emerged as a cost-competitive asset type that continues to shift industry capital towards flexible, shorter-cycle investments in North America shale assets,” it added. “The key uncertainty, outside of North America, is whether gas can be made available at prices affordable to consumers while offering suppliers incentives for continued infrastructure investments. Unconventional gas reduces concerns about security of supply by providing a new cast of gas suppliers who will bring competition, liquidity, consumer bargaining power and a clear price signal to the market.”

With the start-up of a major LNG export business likely in this quarter, U.S. shale gas-produced LNG faces “a challenging period and it has disrupted the global supply structure with economics that are competitive with many conventional assets,” the report determined. Small-scale LNG exports from Alaska’s Cook Inlet gas fields to Japan began in 1969 but have been intermittent since 2011.

“Technology innovation drove productivity, efficiency, and operational flexibility in E&P and a new set of investors enabled the fast tracking of LNG export projects. As the market slack is absorbed through 2020 and prices move closer to the cost of supply, the U.S. is well positioned to respond quickly and emerge as a marginal LNG supplier,” according to the study.

The report projected that North America will eventually become the world’s No. 4 LNG supplier, behind the Asia-Pacific region, the Middle East and Africa. “The U.S. alone will account for almost one-fifth of global liquefaction capacity and will become the third-largest LNG export capacity holder in the world, after Qatar (77.0 mtpa [million tonnes per annum]) and Australia (86.5 mtpa).” It quoted U.S. federal government estimates that five U.S. LNG plants with a combined capacity of 62.7 mtpa will be online by the end of 2019.

The increase in supply will give LNG customers increased leverage, the report said.

“In Asia, the arrival of U.S. LNG could create the necessary liquidity and competition to establish regional natural gas pricing hubs,” it added. “China, Japan, and Singapore are all taking steps to launch benchmarks against which both spot and long-term contracts can be priced. Singapore is expected to launch its first futures and swaps contracts in early 2016 that will be priced against a new benchmark, the Singapore SLInG (after the city’s famous cocktail).”

The report reviewed the status of the other major unconventional gas producer—Australia—and its new role as a major LNG supplier.

While coal-sourced gas has not caught on among shale-focused North American gas producers, “shale gas development takes a back seat to Australia's world leading CBM projects,” the council study said, noting Queensland accomplished a first at the end of 2014 by using CBM feedstock to produce LNG. “CBM development represents about 40% of eastern Australian domestic gas production.”

By yearend 2015, three more CBM-to-LNG liquefaction projects came on stream, giving Australia 21.4 mtpa of export capacity, which is projected to increase another 3.9 mtpa by the end of this year.

The report said the council interviewed numerous industry leaders worldwide, who as a “group converged on their view that natural gas has the potential to play a critical role in the grand transition to an affordable and environmentally sustainable energy future.” Based on those conversations, the study concluded certain things must happen to assure full use of the growing supply of unconventional gas:

  • Industry—There must be greater focus to portfolio allocation, risk management and efficiency as industry continues to seek new and innovative investment partnerships to build new LNG projects.
  • Policymakers—Governments must “establish policies that promote a liquid market and competition needed for security of supply and the formation of clear price signals.”
  • Consumers—The public will need to evaluate the economic and environmental benefits of diversified energy options with gas used in “power, industry, transportation, and chemicals and consider innovative investment partnerships to secure supplies.”

“In shifting the supply structure of the global market, unconventional gas may compliment the actions of key actors by increasing transparency, competition, and reshaping the economics of natural gas,” the study added. “This will enable the confidence for investors to develop the infrastructure required for the reliable and safe use of natural gas as a fuel source for the long-run.”

Paul Hart can be reached at pdhart@hartenergy.com.