"A floor and ceiling on natural gas prices could lead to a renaissance in U.S. natural gas production." Charles River Associates' Christopher Ross discussed the issues that will need to be overcome to make natural gas extraction from shale a viable contributor to the U.S. energy landscape."It's hard to think about leaping to a future that seems to be financially risky, but oil production will plateau, and sustaining that plateau is needed to provide some valuable opportunities in other areas," said Ross. "There are 2 billion people in China, India and other countries, and many of them want to be more mobile. So there are a lot of ways for everyone to join in the growth that will go along with developing shale gas. Technological advances have massively increased the natural gas resources that can be developed at reasonable costs. This should open up demand growth in power markets and possibly in the transportation sector. For the moment, alternatives have faltered, but will reemerge in the long term."
To give shale gas development the long-term support and stability it needs, Ross said government can provide crucial help. "Regulators and policymakers have a big effect on how natural gas markets have developed and on how prices are set," he explained. "There is shale all over the world. Users drill through it and then hope the gas will seep down, or take they gas out from above if it's in regular deposits."
Ross added that a low-price scenario for extracting shale gas is possible if producers have full access to the resources, reasonable environmental rules, favorable royalty rates and other factors. However, objections and regulatory constraints begin to crop up and multiply as drill rigs get closer to more densely populated areas. "People like the added revenue for their communities from shale gas development, but they don't like having large industrial operations nearby," said Ross. "When you're drilling 5,000 or 12,000 feet down, drilling horizontally and then fracturing the well with high-pressure liquids, it can cause a lot of noise."
Ross added that if the shale gas industry is allowed to develop, numerous other business opportunities will emerge. These include:
- Drilling, completion and reservoir stimulation technologies
- Water management systems around hydraulic fracturing
- Pipeline and storage infrastructure development
- New pricing and contracting schemes for "security of demand"
- Combined-cycle enhancements and construction
- Coal-fired power plants and mines decommissioning and clean-up
- New industrial growth gained from North America's improved comparative advantage in energy costs, affecting petrochemicals, iron and steel and heavy equipment manufacturing
- Technologies to enable penetration of natural gas in the transport sector, including CNG and LNG in heavy-duty fleet use and even high-speed rail.
Consequently, the dilemma with shale gas is that it has the potential to answer many prayers for inexpensive energy, but obstacles to developing it, including extraction problems, which are exacerbated by deregulated and, hence, volatile prices that can lurch upward to the point that imports become competitive—and so stifle potential investment.
"People don't want to invest in natural gas plants because they don't know if prices will remain stable enough to make their investments worthwhile. It's hard to invest in a natural gas project with a 40-year life cycle with all the spot-market volatility," explained Ross. "What we need is a floor and ceiling on the price of natural gas to limit some of this volatility. We could have a renaissance in natural gas in the United States, and that would help level the playing field with countries like China and other competitors."
