COLUMN - Welcome to the Gas Century: John Kemp

Fri Jun 24, 2011 6:27pm IST

A view of the petrol depot of the Grandpuits oil refinery, southeast of Paris, October 22, 2010. REUTERS/Benoit Tessier

A view of the petrol depot of the Grandpuits oil refinery, southeast of Paris, October 22, 2010.

Credit: Reuters/Benoit Tessier

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-- John Kemp is a Reuters market analyst. The views expressed are his own --

By John Kemp

LONDON (Reuters) - Coal dominated the energy systems of the 19th century, giving way to petroleum in the first part of the 20th century, but the next few decades could see another huge shift to an era dominated by natural gas.

The International Energy Agency (IEA) recently asked whether the world is entering a "golden age" of gas. Gas has uniquely attractive properties that suggest it will take over from oil as the price-setting form of energy in the next two decades.

ABUNDANT, DISTRIBUTED RESOURCE

Unconventional gas from shale and coal-bed methane has doubled the estimated technically recoverable gas resource in less than a decade, ensuring that gas will remain abundant and relatively low cost.

The IEA now puts technically recoverable resources at 404 trillion cubic metres of conventional gas and another 380 trillion cubic metres from unconventional sources, equivalent to 250 years worth of current production, according to the 2010 World Energy Outlook.

Gas resources, especially shale resources, are much more widely distributed around the world than oil, ensuring the market will be more competitive and suffer less political risk.

In a recent survey, the U.S. Energy Information Administration (EIA) put world shale resources at 6,622 trillion cubic feet (188 trillion cubic metres) distributed across China (20 percent), the United States (13 percent), Argentina (12 percent), Mexico (10 percent), Australia (6 percent) Canada (6 percent) and Europe (10 percent).

The EIA employed a conservative methodology reflecting the uncertainty surrounding estimates and covered only 33 countries, excluding Russia, Central Asia, and large parts of the Middle East and Africa, so the global resource is probably higher (here).

Wide distribution across both energy producing and consuming countries makes it less likely any one producer will wield market power or that gas production will be successfully cartelised. It also minimises risks from political upheaval, regulation and natural disasters.

MOST FLEXIBLE PRIMARY FUEL

Natural gas is by far the most flexible form of primary energy. It can provide energy in any desired form (heat, electric power, transportation fuel) employing proven, mature and low-risk technologies (combined-cycle gas turbines, gas-to-liquids transformation) that use existing infrastructure (pipelines, refineries, power grids, filling stations) and do not require build out of high-risk, expensive and new systems.

Gas has already supplanted oil and coal as the most popular fuel for new power plants across the United States and Europe, and its share in generation is set to grow, on account of its favourable cost and emissions profile. Gas-fired plants are reliable, cheap to fuel, simple to build and have short payback periods.

Gas is also set to challenge oil primacy in transportation. Oil remains the fuel of choice in the transport sector because of the unmatched energy-density liquid fuels such as gasoline and diesel. It is still not clear whether the commercial and personal vehicle fleet will continue to rely on liquid fuel or switchover at least in part to electricity such as electric vehicles (EVs) and plug-in hybrid electric vehicles (PHEVs).

But gas is uniquely placed to serve as the primary fuel however the vehicle fleet evolves in future. It can power the vehicle fleet through any or all of three different pathways.

If the fleet switches over in part to electric power gas will provide a substantial share of the generation mix. Even if the share of wind and solar and other intermittent renewable in the mix is increased, gas will be increasingly important as back-up generation because of the unique responsiveness of gas-fired combined-cycle and single-cycle turbines.

If the fleet remains dependent on liquid fuels, gas will play an increasingly important role -- either through the direct use of compressed natural gas (CNG) and liquefied natural gas (LNG) onboard, or via conversion of gas to diesel, jet kerosene and naphtha through the gas-to-liquids process (GTL).

Whether gas powers the vehicle fleet through liquid fuel or PHEVs it has the advantage of being able to utilise existing infrastructure rather than requiring the roll out of an entirely new production and distribution system.

MATURE LOW-RISK TECHNOLOGY

The potential to extend the petroleum resource base by converting other forms of hydrocarbons into liquid fuels such as gasoline and diesel has been understood since the 1920s.

Most analysts have focused on gasification of coal and other solid fuels by partial combustion at high temperatures, transforming them into synthesis gas (syngas), a mixture of carbon monoxide and hydrogen, which can then be used in integrated gasification and combined-cycle power plants (IGCC) or converted into liquid fuels via the Fischer-Tropsch process.

But it is simpler, cheaper and cleaner to make the synthesis gas from natural gas, which can then be converted into liquids in the normal way.

Germany used the Fischer-Tropsch process to produce almost 4 million barrels of synthetic fuel from coal in 1945, and South Africa's Sasol has produced synfuels from both gas and coal since the 1950s. The focus has been on coal rather than gas for military-strategic reasons (Germany and South Africa were isolated but had abundant reserves of solid fuel).

Synthetic fuel processes are well understood and reliable. The only reason they have not been more widely deployed is that they were not competitive during the era of cheap petroleum that lasted from the 1950s to the 1990s. Interest was rekindled after the oil shocks in 1973-74 and 1979-81 but dwindled once oil prices fell back.

But the process is competitive at oil prices of $50-70 per barrel for gas-to-liquids and $60-100 for coal, according to the IEA.

Shell has been producing up to 14,700 barrels per day of liquids from gas at a plant in Bintulu, Malaysia since 1993. The company has now begun producing much larger volumes from the giant Pearl GTL project at Ras Laffan in Qatar, using gas from Qatar's giant North Field.

Production started this month from the first train. The project is scheduled to reach full production by 2014 when it will be producing 140,000 barrels per day of GTL products and 120,000 barrels of oil equivalent per day of natural gas liquids and ethane.

Shell puts the total cost of the integrated gas and GTL project at a staggering $18-19 billion. But the project was launched in 2006, when oil prices were around $50-70 per barrel, and gas was more expensive, so it must be competitive at oil prices far below current levels.

Now gas reserves are so abundant and widely distributed, gas is set to displace coal and other solid fuels as the most likely feedstock for gasification and conversion to liquids. It opens the potential for a substantial supply of liquid fuels at real prices well under $100 per barrel in the medium term.

CONSTRAINTS ON THE GAS AGE

For now, it seems unlikely oil prices will fall below $50 per barrel on a sustained basis given the increasing technical difficulty and rising cost of recovery. Ironically, the main threat comes from the deployment of fracking technology to the oil sector to win liquids from shale, which could substantially increase the recoverable petroleum resource base.

But gas is likely to remain competitive and attractive even if the oil sector experiences a similar "shale revolution". While analysts focus on the increasing expense of recovering oil from deepwater, bitumen and heavy oils, GTL is likely to be an increasingly important price setter.

Combusting so much gas will increase carbon dioxide emissions and heighten concern about the addition to the greenhouse effect. Converting gas into liquid fuels is likely to be especially controversial because the process produces huge amounts of CO2 as a by-product.

But burning gas produces far fewer emissions than coal or oil and is increasingly embraced by policymakers as a "cleaner" fuel if not a zero-emission one. At the very least it is seen as a "bridging" technology until solar, wind and other more advanced technologies become used later in the century.

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