The new gas economy

I t’s been described as a game changer and a market disrupter – a way to transition the world’s energy economy from fossil fuels to renewables. But can natural gas live up to its billing and challenge oil as the primary driver of the global economy?

That is a question being asked more and more often as the full extent of North America’s natural gas reserves become apparent. While most of the reserves are locked in deep rock formations known as “unconventional” or “tight” gas, the evolution of technology to access the resource means that massive amounts of this valuable resource can now be extracted.

Canada is estimated to have natural gas resources of close to 4,000 trillion cubic feet, of which approximately 80 per cent is “unconventional.” The Canadian Society for Unconventional Resources calls natural gas a strategic resource for Canada that is abundant, safe, reliable and affordable.

Among its other attributes, natural gas is an ideal energy source for both transportation and power generation. While it is not a renewable energy source, natural gas is also considered “clean” – a moniker owing to its position as a lower CO2-emitting energy source compared to other fossil fuels and thus its reputation as a bridge to a lower-carbon economy. Given these factors and its abundance, natural gas is increasingly touted as having a key role to play in meeting Canada’s long-term objectives for energy, the environment and the economy.

Calgary-based Reynold Tetzlaff, Canadian Energy Leader, PwC, says while cheap natural gas is positive for integrated heavy oil producers because it’s a big cost component in processing, oil will remain the world’s dominant energy source for many years to come.

“Coal is another story. It’s been a cheap source of power for electricity generation for a long time, but the low price of natural gas is making it attractive for electricity companies to switch from coal,” says Tetzlaff.

He adds that while he has not seen a full report on the economics of switching to coal, it is generally accepted that when the price of gas falls below $4 per MMBtu (million British Thermal Units), it starts to make sense to switch.

Price is also a factor in the scramble by natural gas-producing nations to secure global markets, particularly in Asia where demand for liquefied natural gas (LNG) is surging, says Tetzlaff.

“There is no question that it’s a bit of a race.” He says natural gas exporters – including Australia, Papua New Guinea and others – already have deals with major Asian buyers. “That’s the key. If you’re going to build an $8-billion LNG export facility, you need to get the long-term pricing contracts,” he says.

Recent moves by the U.S. to enter the LNG export market are a serious competitive threat to Canada, adds Tetzlaff.

“A year ago it seemed that Canada was ahead of the U.S. in the race to export LNG. Now it looks like the U.S. is going to pass Canada. However, deciding how much LNG to export is a very political issue in the U.S. because there are indications that some of the big petrochemical plants that moved offshore to reduce costs are considering returning to the U.S. because of cheap natural gas,” he says.

In a paper published earlier this year, Thomas Helbling, a division chief in the International Monetary Fund’s Research Department, says it is already widely accepted that the availability of shale gas resources has fundamentally changed the outlook for natural gas as a source of energy.

“The main increased usage of gas has occurred in the U.S. power sector, where the share of electricity produced with natural gas has started to rise because many power plants can switch between gas and the now relatively more expensive (and dirtier) coal. But in the longer term, there is potential for other industries to switch to natural gas – even transportation, because natural gas can be used in internal combustion engines, which now rely mainly on refined petroleum products such as gasoline or diesel fuel,” he wrote.

Helbling’s outlook is supported by the “Golden Age of Gas” scenario developed by the International Energy Agency. Based on the scenario’s assumptions, gas use will increase by 50 per cent between 2010 and 2035 and account for over 25 per cent of world energy demand.

Leave a Comment