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The Miracle of Shale Gas

Changing the Global Petrochemical Landscape

Oct. 02, 2013
Fig. 4: World shale gas resources assessment
Fig. 4: World shale gas resources assessment more
Fig. 4: World shale gas resources assessment Vir Lakshman, head of chemicals and pharmaceuticals, Germany, KPMG Paul Harnick, global COO, chemicals and performance technologies, KPMG Fig. 1 Fig. 2 Fig. 3 Fig. 5 The discovery of abundant reserves of shale gas in the U.S. has driven down the natural gas price ... 

Cheap, Clean And Controversial - Shale gas has the potential to turn the world's energy industry on its head. It's abundant. It's cheap. It burns cleaner than other fossil fuels. And it's being found almost everywhere. But for shale gas to become a game-changer, the industry has to surmount tremendous organizational, reputational and regulatory hurdles.

Clean-Burning Benefits

Once captured and processed, natural gas is one of the cleanest burning and lowest carbon content fossil fuels. For companies subject to greenhouse-gas emission-reduction targets, natural gas usage may offer more "tick-the-box" benefits than traditional fossil fuel sources. At the consumer level, regions that rely on oil-based heating, such as parts of the United States, could bring their emissions down by encouraging homeowners to convert to natural gas heating. Additional incentives could be granted to promote the development and sale of vehicles powered by natural gas.

Pushing Prices Down

The discovery of abundant reserves of shale gas in the U.S. has driven down the natural gas price and has created a massive competitive advantage for U.S. companies. Generally a ratio of 6-1 between crude oil and gas prices is enough to make the U.S. chemical environment favorable. At today's prices, the disparity is more like 9-1, creating lasting advantages for U.S. producers. Cheap shale gas is also providing a boost to the wider U.S. manufacturing base - providing competitively priced energy such that "made in America" is becoming a cost competitive option again, leading some multinationals to rebase their production in the U.S.

Continued discoveries in unconventional oil reserves, coupled with growing production, efficiency improvements and a relatively slow recovery in North American demand, have all contributed to depressed gas prices.

This has led to a significant decline in dry gas shale development over the past 18 months.

After growing from around 750 billion m3 in 2005 to more than 7,845 bcm in 2011, U.S. natural gas production is forecasted to remain effectively flat until 2015, according to the U.S. Energy Information Administration's Annual Energy Outlook.

Maximizing Shale's Potential

Certain regions of the U.S. lack pipelines, terminals and storage to hold and transport shale gas and oil to the customer base. In order to fully exploit the potential of shale gas, it is estimated that, between 2011 and 2035, the sector needs $2 trillion in upstream investments for wet gas production and $1.7 trillion for dry gas. An additional $205 billion capital spending would be required for gas infrastructure development, according to a report from private equity firm KKR & Co., with mainline gas transmission expanded by about 35,600 miles and an additional 589 billion cubic feet (bcf) of working gas storage. Although the required infrastructure will take decades to build, and gas prices may not recover for several years, there is no questioning shale's overall potential. In 2007, shale accounted for less than one-tenth of total gas production; by 2035, the U.S. Energy Information Administration forecasts it to reach half of total gas production.

Regulatory Debate On Fracking

The chemicals in the fracking process may contaminate local drinking water or the environment, which has led to a regulatory debate about shale gas. Despite its cost benefits, it must be noted that shale gas extraction remains a contentious and divisive issue for many politicians, communities and even the chemical industry. Nearly a dozen major energy companies, including Chevron and Shell, recently released a set of shared standards for fracking in the Appalachian region. While the regulatory debate about shale gas is still ongoing, the commercialization of shale gas has already heralded in a new era of growth and prosperity for the U.S. oil and gas industries.

Advantage: United States

Recent announcements from Dow, Shell, Sasol, Chevron Phillips and others suggest that we will likely see more than 10 million tons of new ethylene capacity come in stream by 2017. Investments in the extraction coupled with the sheer abundance of proven shale reserves (200 years based on current U.S. demand outlook) have made the U.S. industry the second most feedstock-advantaged region after the Middle East. As Middle East countries, however, continue to use more gas for domestic energy and fuel for water desalination plants, gas allocation to the petrochemical industry has become extremely limited, such that the U.S. is expected to become the most advantaged location for petrochemical production worldwide.

Until the development of European and Asian shale, which is not likely before 2017, the U.S. will continue to enjoy this competitive advantage. However, the U.S. market remains a mature economy, which will not be able to absorb all the planned chemical capacity. Therefore significant investment in supply chains is required along with a focus in establishing a broader growth market presence.

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Keywords : chemical industry Chevron Phillips crude oil Dow emission reduction energy industry fossil fuel fracking global petrochemical trade greenhouse gas KPMG Paul Harnick Paul Harnick KPMG petrochemicals Sasol shale gas Shell U.S. Energy Information Administration U.S. Energy Information Administration’s Annual Energy Outlook Vir Lakshman Vir Lakshman KPMG

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