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Conventional Economics

mugshot of John DonnellyRobust forecasts for natural gas growth from conventional and unconventional sources continue to see a smooth shift to a world in which gas is the dominant fuel of choice by industry and consumers. But market forces may have a say on how quickly the world gets there.

A new report examining the top 10 growth markets in energy, air, and water puts shale gas development at the head of the list. The McIlvaine consultancy sees a continuing increase in investment in US shale gas projects, as well as in other promising areas such as China, Argentina, and Europe. Shale is followed on the list of growth industries by vessel air and water treatment, water reuse, NOx control, aquaculture, power plant efficiency improvements, soil and groundwater remediation, fine particulate reduction technology, solid waste management, and renewable energy.

But questions are being raised about the rapid rise of gas in Europe, where gas prices are tied closely tied to oil prices. With the price of Brent comfortably above USD 100/bbl, at least for now, and a good USD 20/bbl higher than the US West Texas intermediate oil price benchmark, power generators and industries are becoming increasingly cautious about the finances of increased gas usage.

The US International Energy Agency speaks of a “golden age of gas,” in which European electricity generation alone will increase 40% by 2015. And many market forecasts have predicted huge capital outlays in gas infrastructure across Europe in the near future. The Netherlands, for instance, has plans for a network of pipelines and liquefied natural gas (LNG) terminals that would allow it to become of the region’s gas hubs.

But recent demand has been softer than expected because gas, at current price levels, is less economic than coal. That, in turn, has raised questions about the need for huge outlays for infrastructure if there is uncertainty about the long-term attractiveness of gas, including new pipelines or terminals to import LNG from producers in Qatar and Nigeria. European government initiatives to promote energy efficiency also could have an effect.

In the US, it is low gas prices that are taking a toll. Producers with strong ties to US gas production are “losing their shirts,” ExxonMobil Chief Executive Officer Rex Tillerson said in releasing his company’s second-quarter earnings. ExxonMobil has yet to see the benefit of buying US gas producer XTO 2 years ago. Chesapeake, Noble, Encana, Anadarko, and others all have suffered because of sustained low gas prices in the US caused, in part, by the success of shale plays. Shale gas has quickly become a place not to sink additional capital, and many producers have shifted their attention toward liquids production instead.

What would help is a sooner-rather-than-later ramping up of new LNG export facilities in the US, which would allow producers to take advantage of more attractive markets such as Asia and which would eventually firm prices in the US. Until that happens, US gas prices at Henry Hub will remain under pressure because US gas is not tradable on the open market. Whether the public and politicians can agree to exporting US energy resources after seeing the country finally lessening its dependence on foreign sources is another question.