Unconventional Gas and the North American Energy Market: Transformational or Wishful Thinking?

The unconventional gas revolution is for real, said Adam Sieminski of Deutsche Bank at the Canada Institute's twelfth energy forum. The forum explored the potential impact of unconventional gas development on the North American energy market. More than 50 senior level Canadian and U.S. officials, energy experts, and representatives from the energy industry attended the event and engaged in a closed door discussion on unconventional gas issues following panelist presentations. This was followed by a keynote luncheon at the Canadian Embassy, featuring a presentation by Mary Barcella of IHS Cambridge Energy Research Associates (CERA). The program was organized in collaboration with Global Public Affairs and sponsored by Chevron Corporation and the Canadian Embassy in Washington, D.C.

An Optimistic View from Industry

Lee Fuller of the Independent Petroleum Association of America briefly outlined the horizontal drilling and fraccing technologies that have allowed unconventional gas to suddenly emerge as a major energy source for North America. If estimates of potential U.S. unconventional gas production are accurate, said Fuller, the United States should have sufficient supply of the resource for the next 100 years. Fuller noted that because horizontal drilling results in fewer wells drilled than conventional vertical gas drilling, the technology carries environmental benefits as well. Fuller pointed out, however, that there remains some uncertainty related to investment and the regulatory issues that could hamper the ability of unconventional gas to make a significant impact on the North American energy market.

From a transmission perspective, Canada and the United States have already constructed a comprehensive and integrated pipeline system that will be a major asset in allowing natural gas to play a more prominent role in the North American energy mix, said Donald Santa, Jr., of the Interstate Natural Gas Association of America. Between 2000 and 2009, FERC approved 15,000 miles of interstate pipeline construction of which 13,000 miles have been constructed. In addition, said Santa, U.S. natural gas storage capacity grew 25 percent in that time period and liquefied natural gas has seen a four-fold increase in its production. The prospect of increased shale gas production only adds to an already dynamic gas supply situation in North America, maintained Santa.

Santa said North America is well positioned for natural gas to play a more significant role in its energy mix thanks to a U.S. legal and regulatory framework that supports interstate natural gas infrastructure and a stable economic environment that provides investors sufficient confidence to spend in the sector. Such a favorable economic and regulatory climate, said Santa, should allow the United States transmission development to keep pace with anticipated increases in U.S. shale gas production.

Stephen Lucas of Natural Resources Canada offered an overview of Canada's known unconventional gas resources. He noted that because conventional gas production has peaked in several North American operations, the future of the gas market will depend increasingly on extracting unconventional gas. On the whole, said Lucas, shale gas development in Canada is a couple of years behind the United States. In fact, the Montney shale field in British Columbia is the only site in Canada that has reached the commercial development phase. Nevertheless, shale gas operations are growing elsewhere in Western Canada and some shale production in Eastern Canada is close to reaching market, said Lucas.

Looming Fresh Water Issues?

The United States has reached "peak fresh water" usage, said Michael Hightower of Sandia National Laboratories. In fact, said Hightower, fresh water supply in the United States is diminishing and has been since the mid 1980s. Population growth in tandem with other environmental stresses, such as climate change, has placed serious strains on the United States' fresh water reserves. Hightower cautioned that most state water managers expect shortages within the next decade. Despite the perception of having vast fresh water resources, some provinces in Canada are also expected to face serious water shortages, including Ontario and British Columbia.

If the development of unconventional gas is extensive, cautioned Hightower, it could exacerbate already scarce fresh water resources in North America. He explained that the process of drilling, completion, and fraccing shale gas wells all require water and can use up to 3 million gallons of water per well. Although industry is able to recycle some of the water it uses, water recovery rates can vary dramatically from 20 to 70 percent. As Hightower pointed out, however, the amount of water needed to extract unconventional gas is far less than coal gasification or coal liquefaction.

Increasing scarcity of fresh water resources, noted Hightower, highlights the importance of developing North American shale resources in an environmentally sustainable manner.

Looking Ahead

Sieminski stressed that while unconventional gas will transform the North American energy market, it is a revolution that is still in its nascent stage. Even those in the shale gas industry, he noted, were not aware of shale's potential to transform the natural gas sector until the end of 2008. Though much has been discussed of shale gas formations in North America, Sieminski pointed out that substantial shale formations can be found around the globe, including Europe and China. Technological breakthroughs have allowed shale gas to be extracted economically, which has led to an increase in drilling sites over the past few years.

Sieminski cited environmental concerns and regulatory issues as two areas that could slow unconventional gas development. Sieminski downplayed environmental concerns over the fraccing process, noting that the chemicals used in fraccing fluid mostly compromise common household items such as bleach and shampoo. According to Sieminski, companies are working to green their production practices. Chesapeake Energy, for instance, stated its intention to use less water and recycle more water per well, and ensure its fraccing fluid is 100 percent green. On the legislative side, Sieminski maintained that natural gas development would still be profitable even with a carbon tax as high as 60 dollars per tonne of CO2.

Mary Barcella of IHS Cambridge Energy Research Associates presented the findings of CERA's recently released report, Fueling North America's Energy Future, during the forum's luncheon. She commented on shale's potential to transform the natural gas sector, noting that shale gas reserves and resources have increased the amount of the resource available in the United States by over 1000 trillion cubic feet. Despite its potential, Barcella cautioned that significant environmental and market-related questions remain in the natural gas sector. In addition to environmental concerns related to water and the shale extraction process, Barcella also noted that several of the major shale gas plays are near large population centers in the United States. This raises concerns as to whether those who live near planned shale gas development sites will tolerate its construction.

Barcella also maintained that the future of natural gas as a "game changer" will depend on the creation of new demand options. She said the power sector is projected to have the greatest increase in demand for natural gas in the next decade, partly because natural gas has a much lower carbon footprint than coal. She also noted that there is increased interest in using natural gas in the transportation sector. Shifting to gas vehicles will take time, said Barcella, as the United States currently does not have the infrastructure needed to support natural gas vehicles.

By Ken Crist, Program Associate, Canada Institute