Commentary, 1/2 2010

Published Feb 12, 2010
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Cover 1/2 2010

Who Needs Gas?

Gas has long been touted at the “New Oil”, and as we enter a new decade, we see that the dynamic for gas is undergoing great changes.

In recent months, the buzz around unconventional gas has been increasing, especially in light of the scope of the gas shale deposits around the globe. And the Marcellus gas formation in the United States – part of a huge swath from New York to Kentucky – has been a focal point for this interest.

Long considered a marginal source for gas, technological advancements and innovation have made shale gas a viable resource, and rapid development in North America has lead to increased interest in gas shale possibilities in Europe, Asia and Australia. Over 2 trillion cubic feet of shale gas were produced in the US in 2008, which represented an increase of more than 70 percent above the production level of 2007.

The US is hopeful that such seemingly boundless supplies will put a dent in the nation’s dependence on imported energy sources. Last November, the Office of the White House Press Secretary released a statement emphasising the potential of this resource: “The development of shale gas is expected to significantly increase US energy security and help reduce greenhouse gas pollution.”

Shale gas entered the news in Scandinavia in late 2008 when Statoil announced that it would be joining forces with US company Chesapeake Energy to explore unconventional natural gas opportunities, focusing primarily on prospects in the Marcellus formation.

And last fall, Gazprom is reported to have stated that in order to increase its own expertise – with an aim at taking advantage of Russian unconventional gas deposits – it would be interested in acquiring a US shale-gas producer.

But, closer to home, the North American shale gas bonanza may have serious consequences for development of the Shtokman project in the Barents Sea. As we go to press, the directors at Shtokman Development are planning to meet to discuss where to market the gas the field will eventually produce. We can bet that the increasing supplies from unconventional sources as well as the recent trend toward lower gas prices will be the focus of the meeting.

Development of the Shtokman field has already been delayed, with possible production beginning in 2015. Some expect the outcome of the directors’ meeting to be additional delays.

And it’s not only the competition from shale gas that the Shtokman planners need to consider.

In its World Energy Outlook for 2009, the International Energy Agency foresees that wind-generated energy will overtake gas-generated energy during the coming decade. In the last decade, we saw Great Britain moving further away form coal power generation in favour of gas. And now we see a the UK in the early stages of developing significant wind power generation facilities offshore. And this is only one example. Across Europe, energy produced from wind is on the rise.

As gas supplies increase and wind power production matures, the pricing dynamic makes big investments like those required for Shtokman even less attractive, possibly leading to even longer delays as the partnership sizes up how the market will turn.

To be sure, as the North American market is seemingly closing its doors to Barents Sea gas, the hunt for new market opportunities will intensify.

So the question, “Who needs gas?” is important, not only for the Shtokman Development alliance of Gazprom, Total and Statoil, but for the residents of the far north – on both sides of the Norwegian-Russian frontier – who have placed much hope in participating the development of this Barents Sea behemoth.

Welcome to the second decade of the 21st century. It’ll be interesting to see what happens next.

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