Shale Gas: Threat or Opportunity for the GCC? – Chemicals Featured Article – A.T. Kearney

Shale gas has upended the North American natural gas and chemical markets, and its effects are propagating. Profiting from the new opportunities will require flexibility and swift action.

North America’s development of shale gas has triggered a revolution in the gas market that could have a major impact on other energy sources and on the petrochemical footprint. The effects are spreading to the rest of the world and are even affecting the hydrocarbon-rich countries in the Gulf Cooperation Council (GCC).1 A full appreciation of the potential threats and opportunities that shale gas brings to the GCC’s oil and gas and petrochemical industries requires an understanding of the impact of shale gas in North America and other international markets.

We look at the impact of shale gas from two angles. First, we focus on gas markets, and then we examine the impact on the global chemical and petrochemical markets.

Impact of Shale Gas on Natural Gas Markets

The natural gas market comprises regional markets, connected through liquefied natural gas (LNG). Regional natural gas markets have traditionally been rather stable and predictable; shale gas has caused a fundamental shock to the North American natural gas market. We first provide an overview of the shale gas revolution in North America. Then we analyze its potential to propagate to other regional natural gas markets and impact the global LNG market. Finally, we explore the implications for the GCC’s oil and gas industry.

The shale gas revolution in North America

High gas prices in the 2000s prompted the development of shale gas, which is now emerging as a main source of natural gas in North America. Shale gas is bringing the United States close to self-sufficiency and could turn the country into a net exporter of gas in the near future. U.S. production of shale gas grew from two trillion cubic feet (Tcf) in 2008 to more than eight Tcf in 2012, accounting for more than a third of total domestic natural gas production. Shale gas is projected to grow to 14 Tcf by 2030, representing almost half of U.S. natural gas production.

Shale gas has triggered a sharp drop in natural gas prices and decoupling from oil prices. Shale gas has upended the natural gas market. In 2012, natural gas prices dropped to between $1.82 and $3.77 per million British thermal units (MMBtu), down from between $5.82 and $13.31 per MMBtu in 2008, and natural gas and oil prices decoupled, having traditionally been strongly correlated (see figure 1).2 In the past, significant global demand shocks and natural disasters have caused temporary divergence from the oil and gas energy equivalent ratio, but this time it looks as if the split is here to stay.

There is consensus on the upward trajectory of North America’s natural gas prices, which will be required to make dry shale gas developments economically viable. A.T. Kearney’s scenarios predict equilibrium in the range of $4 to $8 per MMBtu by 2020, with the reference case in the $6 to $7 per MMBtu range.3 However, there are no signs that natural gas prices will go back to the pre-shale correlation with oil prices.

Shale gas has the potential to turn the United States into an LNG exporter in the near future. Abundant domestic resources and low prices are displacing natural gas imports to the United States and creating the potential for the country to become a net exporter of natural gas by 2020 and a net exporter of LNG by 2016. LNG import terminals in the United States, built on the expectation of substantial future LNG demand, are all suffering from low capacity utilization and are looking for export opportunities.

At the same time, LNG importers are trying to secure supplies of North American shale gas linked to the Henry Hub price. Japan, the largest LNG importer, has already signed agreements with the United States and is working to secure shale gas from Canada. By 2020, North American shale gas could represent 30 percent of Japan’s demand, with 17 million tons per annum (MTPA) coming from the United States and nine MTPA from Canada. GAIL (India) recently signed a 20-year contract with the U.S. Sabine Pass terminal linked to the Henry Hub price.

Shale gas is turning North America into an important LPG exporter. The exploitation of wet shale gas plays, which give producers higher returns, is not only fueling the renaissance of the North American chemical industry but also lifting liquefied petroleum gas (LPG) production for domestic and export markets. The increasing production of LPG has already turned the United States into a net exporter with the potential to capture a growing share of the market currently dominated by the GCC.

Shale gas impact on international markets

North American shale gas has created uncertainties in natural gas markets. Despite the fact that shale gas production is still confined to North America, its impact is being felt around the world. Shale gas has created more uncertainties in natural gas markets and has added a new dimension to the already complex and fluctuating global flows of natural gas, making it even more difficult to forecast the evolution of the natural gas markets, the supply-and-demand balance for each regional market (domestic conventional and unconventional resources versus pipeline gas versus LNG), and the international flows of natural gas. This amplified uncertainty is at the heart of the mounting pressure on natural gas producers to move away from long-term contracts and gas prices indexed to crude oil.

The price of natural gas in Europe and Asia remains substantially higher than in the United States, but some signs of decoupling are emerging in the European market (see figure 2).

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