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Bursting the Bubble: Shale Gas Impact on Natural Gas Exports in GCC

Since the shale boom in North America, the impact on the oil and gas market in the Middle East, mainly GCC countries, has become a hot energy topic in the region. 
 
Experts, decision-makers and high level authorities have had conflicting positions on whether or not shale gas presents a threat to GCC’s natural gas market; with some ignoring it and others warning of its upcoming results. But what should we expect?
 
According to EIA, in 2012, shale gas constituted 39% of the share of total dry natural gas production in the United States and 15% in Canada.[1] In 2008, the US shale gas production was of 57 billion cubic meters (bcm), rising to 226 bcm in 2012 and forecasted to reach 396 bcm in 2030.[2]
 
BP has projected that the United States will be energy self- sufficient by 2035. According to the oil company, the most direct reason for that is the 24% rise in the US energy production faced by only 3% rise in energy consumption. It also assumes that energy production as a share of consumption will increase to 101% in 2035.[3]
 
Figure 1: GCC Exports
 
Seizing the opportunity, by March 2014, US companies had submitted 37 applications to the US Energy Department to export LNG produced from the Lower-48 States.[4]
 
The situation might seem threatening for the GCC countries. However, USA has its own issues: with shale play come major challenges to overcome. To name a few, the high environmental and economic cost of flaring; as per Earthworks’ report released last August, $854 million in natural gas has been burned as waste in the Bakken shale play since 2010.[5] Plus, according to the United States Geological Survey, the process “can cause earthquakes that are large enough to be felt and may cause damage.[6] Moreover, fracturing of wells requires large amounts of water; yet, an Ernst and Young study reported that 76% of USA corporate representatives believe water is the top resource at risk.[7] 
 
Besides, shale gas production in North America alone would have negligible impact on GCC countries, for the latter already started implementing some mitigation measures like diverting gas exports from US to Asia. In 1990, USA, Europe and Japan were buying 45% of all GCC exports and Asia (excluding Japan) only 15%, yet, as of 2013, Asia is buying 43%.[8]
 
This trend will continue, but is bound to face a new challenge: Australian LNG exports. 
 
It is forecasted that by 2018-2020, Australia will become the World’s leading LNG exporter with 85 million tonnes, and Qatar, the current leader in LNG exports, will come second at 79 million tonnes.[9] However, Australia is also fighting its own battles: domestic challenges and cost inflation on one side, and decreasing natural gas prices, Russian competition and re-negotiating long-term contracts on another. 
 
Meanwhile, Qatar is lowering gas prices to secure long-term Asian buyers. This would mean a decline in Qatar’s profit margin, especially since prices are estimated to drop to around 12$ per million British thermal unit (MMBtu) by 2016 but the country is also working on securing its profits; the state energy company’s foreign investment unit has been purchasing stakes in several gas and oil fields across the World.
 
It’s important to mention that the shale gas technology advancements in North America would translate into advancements in other parts of the world, mainly China- the only nation outside of North America that has registered commercially viable production of shale gas-, which would pose a greater threat to GCC natural gas exports, however, this is unlikely to happen by 2020.
 
Starting with a shale gas goal of 60- 80 bcm by 2020, China halved its target earlier in August, and decided on a new 30 bcm target.[10] In the latest energy news, experts stated that China’s natural gas production from shale will be used domestically. An expert added: “The economic viability of Chinese shale gas is questionable, however.”[11]
 
Thus, for the near future, the North American shale gas direct implication might be the decline in natural gas prices, simplified by the supply-demand curve below: (assuming that supply is increasing, yet demand is constant)
 
 
Figure 2: Supply Demand Curve
 
For the medium term, GCC countries’ natural gas exports would still be secure; nevertheless, proper mitigation measures and new strategies will be needed on the long-run when the shale gas will become an actual game-changer!

References:

  1. http://www.eia.gov/todayinenergy/detail.cfm?id=13491
  2. http://www.atkearney.com/latest-article/-/asset_publisher/lON5IOfbQl6C/content/shale-gas-threat-or-opportunity-for-the-gcc-/10192
  3. http://www.bp.com/en/global/corporate/about-bp/energy-economics/energy-outlook/country-and-regional-insights/us-insights.html?utm_source=google&utm_medium=CPC&utm_term=energy%20outlook%202035&utm_campaign=Energy+Outlook+Non+Branded&gclid=CIGI1aLaxbwCFRRo7Aodzl4Afg
  4. http://energy.gov/sites/prod/files/2014/03/f13/Summary%20of%20LNG%20Export%20Applications.pdf
  5. http://www.earthworksaction.org/media/detail/up_in_flames_pr#.VBC_MPmSxqU
  6. http://www.eia.gov/energy_in_brief/article/about_shale_gas.cfm
  7. http://www.businessinsider.com/us-drought-water-scarcity-2013-5#ixzz3Cwtbc92s
  8. http://www.asiyainvestments.com/en/assets/reports/economic-reports/economic-report/quarterly/economic-reports-economic-report-q3-2013-3383.pdf
  9. http://www.bloomberg.com/news/2014-09-09/australian-lng-contracts-under-pressure-from-u-s-russia-supply.html
  10. http://www.reuters.com/article/2014/08/07/us-china-shale-target-idUSKBN0G71FX20140807
  11. http://www.worldbulletin.net/news/143998/china-shale-gas-not-to-enter-foreign-markets
Jessica Obeid's picture

Thank Jessica for the Post!

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