Shale Gas Boom Likely To Benefit United States And China With Development Of Unconventional Gases

According To IEA, U.S. Could Become World's Top Gas Producer

* Unconventional gas glut to mainly benefit U.S., China -IEA

* Strict regulation needed to develop shale gas sector

* U.S. to become world's top gas producer -IEA

* Gas share in global energy mix could reach 25 pct -IEA

* New regulations would raise shale cost by 7 pct (Updates throughout)

By Henning Gloystein and Oleg Vukmanovic

LONDON/OSLO, May 29 (Reuters) - A boom in unconventional natural gas over the next 20 years could see the United States and others benefit from cheaper energy while the importance of the Middle East declines, the International Energy Agency (IEA) said on Tuesday.

Growth in shale in the United States and China could match gains made in conventional gas in Russia, the Middle East and North Africa combined, IEA Chief Economist Fatih Birol told Reuters.

"Unconventional gas will fracture the status quo, and will be a complete game changer with major geopolitical implications," Birol said.

High natural gas prices have helped spur investment in previously unavailable, unconventional gas reserves that include tight-gas, shale gas, and coalbed methane resources.

Yet the boom can only run if measures are taken to ensure these reserves are extracted in a socially and environmentally satisfactory way, the IEA said in a report.

"Greenpeace opposes the exploitation of unconventional gas reserves because the impacts have not been fully investigated, understood, addressed and regulated," the environmental group said. "The IEA report essentially affirms that these concerns are real but falls short of actually addressing them."

The IEA admits that unconventional gas production will pump 12 percent more greenhouse gases into the atmosphere, compared with conventional extraction methods, but says the figure could drop below 3.5 percent if producers follow its recommendations and stop venting gas and minimise flaring.

Speaking at the report's launch in London on Tuesday, the IEA's Exectuive Director Maria van der Hoeven said the most important thing is for gas to substiute more polluting fossil fuels such as coal in electricity generation.

Falling prices driven by an unconventional gas glut would help displace coal, Hoeven said, potentially slashing emmissions further.

But gas must be accompanied by renewables and the roll out of carbon capture and storage (CCS) technology, an as yet unproven technology designed to trap exhausts from coal-fired power stations, in order to limit a long-term global rise in temperatures to 2 degrees Celsius above pre-industrialised levels.

"Renewables are indispensable to this goal and that means government measures for supporting renewable energy must be there for years to come...because otherwise lower gas prices will make renewables uncompetitive," Hoeven said.

The IEA report underscored the economic gains offered by the rapid growth in unconventional gas, with "countries that were net importers of gas in 2010, including the United States, gaining the wider economic benefits associated with improved energy trade balances and lower energy prices."

Australia, India, Canada and Indonesia are also set for big increases in unconventional gas production, it said.

"The share of Russia and countries in the Middle East in international gas trade declines from around 45 percent in 2010 to 35 percent in 2035," the report said.

For Europe, where shale is expected to play a smaller role than elsewhere, Birol said that growth could still be enough to offset a decline in conventional gas output.

"The main benefit for Europe will that there will be lower gas import prices, putting pressure on oil-indexation of traditional gas supply contracts," Birol said.

Europe's main gas suppliers, Russia and Norway, sell their gas under long-term contracts that are linked to the oil market.

Because oil prices have remained firm on strong demand from emerging economies while European gas prices have fallen on weak domestic demand, European gas suppliers are forced to sell imported gas to their customers at a loss, and utilities lose money when generating electricity from imported gas.

The IEA said this price structure could change as a result of a global unconventional gas glut.

The report said that natural gas could become the world's second most important energy source after oil within the next two decades, should the right rules be introduced to ensure safe and environmentally sustainable use of unconventional gas resources.

Global gas demand could rise by over 50 percent between 2010 and 2035 and reach 25 percent of the world's energy mix, overtaking coal to become the second largest primary energy source after oil, the IEA said.

Growth in the gas sector would equal the combined growth in the coal, oil and nuclear sectors and outstrip expansion in the renewable energy sector, the IEA said.

"Production of unconventional gas, primarily shale gas, more than triples to 1.6 trillion cubic feet in 2035," the IEA said.

"The share of unconventional gas in total gas output rises from 14 percent today to 32 percent in 2035."

It noted the majority of the gas production increases would come after 2020 as producers needed time to develop a commercial unconventional gas sector.

Expanding unconventional gas production at such rapid rates will require a total of 1 million unconventional wells to be produced by 2035 globally, the IEA said. That's compared to the 500,000 such wells drilled in the past 20 years.

Of that 1 million, the U.S. will require 300,000 and China 200,000, with the remainder shared with the rest of the world.

The U.S., the world's biggest shale gas producer, currently has just 100,000 unconventional wells in operation.


The IEA said the rules needed to ensure unconventional gas production is both environmentally and socially acceptable would raise production costs.

"I hope that the industry will recognise that it will be tested against the worst practices in the sector," Birol said.

The report said such measures "could increase the overall financial cost of developing a typical shale gas well by an estimated 7 percent."

Yet should the industry fail to implement strict enough rules, the IEA said a lack of public acceptance would likely mean that only a small share of unconventional gas resources would become available for development.

As a result, unconventional gas production rises only slightly above current levels by 2035, sending worldwide gas import bills 60 percent higher than in the scenario of an unconventional gas glut.

Yet Birol said he was "cautiously optimistic" that industry and governments would introduce the needed measures to enable a global gas boom.

Shale gas is extracted using a technology called hydraulic fracturing or fracking, which involves pumping large amounts of water and chemicals underground.

The technology has been blamed for causing slight earthquakes and been banned in several countries, but it has also transformed the U.S. energy sector and caused domestic energy prices to plummet in recent years.


The IEA said that a gas glut fueled by unconventional extraction methods would lead to a boom in U.S. exports of liquefied natural gas (LNG) and impact global gas prices.

The advent of North American LNG exports by 2020 will more than double U.S. gas prices from current historic lows but bring down prices in the world's biggest LNG market, Japan, the IEA said.

The U.S. could be exporting 35 billion cubic metres by 2020, around 20 percent of Russia's current export levels, according to the report.

The IEA said this would lift U.S. domestic gas prices from $2 currently to $5.4 per million British thermal units (mmBtu), which is still cheap by Asian standards of around $18 per mmBtu.

That influx of cheap U.S. gas would drive competition on global gas markets and cut gas prices in Japan to $12.4/mmBtu by 2020. (Editing by Jason Neely and William Hardy)

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