Natural Gas- Fuel for the 21st Century

by Vaclav Smil

  In 1974, Cesare Marchetti, an Italian physicist and nuclear scientist, began to work at the International Institute of Applied Systems Analysis (IIASA), and during the late 1970s, as energy supply became a great public and scientific concern, he looked for a quantitative model that would describe energy substitutions, in both global and national terms, and he analyzed the market shares of successive uses of fuels and primary forms of electricity by using the Fisher–Pry model that was developed to study the market penetration of new techniques (Fisher and Pry, 1971). The model’s fundamental assumptions are that technical advances can be seen as competitive substitutions and that the rate of fractional substitution is proportional to the remainder that is yet to be substituted. Because the adoption rates tend to follow a logistic curve, it is easy to calculate the market fraction (f) of a new technique (or a new energy source) and express it as f/1−f—and when that quotient is plotted on a semilogarithmic graph, it appears as a straight line.

  The method was originally applied to many simple two-variable substitutions (including synthetic vs. natural fibers, plastics vs. leather, electric arc furnaces vs. open hearth steelmaking, etc.), but Marchetti used it for historical energy substitutions that begins with just two sources (as coal is taking market share from traditional biofuels) but now, at the global level, includes six primary sources (biofuels, coal, oil, natural gas, hydroelectricity, and nuclear electricity). The first publication of these substitutions included a much-reprinted graph of the world’s rising and falling primary energy sources between 1850 and 2100, and Marchetti (1977, 348), without any reservations, claimed that

  the whole destiny of an energy source seems to be completely predetermined in the first childhood … these trends … go unscathed through wars, wild oscillations in energy prices and depression. Final total availability of the primary reserves also seems to have no effect on the rate of substitution.

  In a subsequent, and more detailed, publication, he stressed that, despite such major perturbations as wars and economic crises and booms during the first three-quarters of the twentieth century, the penetration rates remained remarkably constant, as if “the system had a schedule, a will, and a clock” and hence is able to reabsorb all perturbations “elastically without influencing the trend” (Marchetti and Nakićenović, 1979, 15). This unbounded determinism seemed to offer an unexpectedly reliable means of long-range forecasting of global and national energy developments. But there were two problems with this simplistic trust: Marchetti’s analysis contained several obvious errors, and almost as soon as it was published, new realities caused major deviations from expected substitution patterns.

  The original analysis left out hydroelectricity, the most important source of primary electricity ever since the 1880s, and it used inexplicably low estimates of historical global fuelwood consumption that pointed to wood accounting for less than 1% of the total primary energy supply before 1995, while traditional biofuels still supply at least 10% of the world’s primary energy use. And the simplistic belief in a built-in clock entirely missed the post-1970 deviations from supposedly set trends of falling coal shares, peaking and falling oil shares, and strongly rising gas shares. Marchetti’s clocklike substitution mechanism was to deliver these global shares by 2010s—less than 5% for coal, about 25% for oil, and just over 60% for natural gas—while the actual shares were, respectively, 29, 34, and 24% (Figure 8.1). Some clock!

  Figure 8.1 Marchetti’s fuel transitions and reality.

  And, an important point when trying to discern the future of natural gas, the model’s greatest error was in highly overestimating its future rise. At roughly 60% of global primary energy use, the gas would have delivered about 300 EJ of primary energy in 2010—while in reality, it provided no more than 120 EJ. Clearly, the system does not behave in a predetermined fashion, and natural gas consumption has shown the greatest deviation from the expected trend. The only correct feature of Marchetti’s model is that it captures the gradual nature of energy transitions, with primary resource substitutions taking many decades before claiming significant shares of the overall market.

  As already explained (in Chapter 7), the worldwide transition to natural gas has proceeded slower than the two preceding shifts. Natural gas reached 5% of the global primary energy supply by about 1930, rose to 10% by 1950, and to 20% only by 1995, and, using British Petroleum (BP) data series, it has yet to reach 25% (it was short of 24% in 2013). Consequently, it will have taken natural gas more than 80 years to go from 5 to 25%, while coal took 35 years and crude oil 40 years to span those shares. Of course, this slower rate of penetration is a function of scale: as the modern global primary energy supply expanded (in 2013, it was, excluding traditional biofuels, about 535 EJ; in 1950, it was about 80 EJ; in 1900, it was only 22 EJ), it is more difficult to claim additional share of the market. Adding 1% in 1950 required 730 PJ (equivalent of about 17 Mt of oil), and in 2013, it demanded 5.3 EJ or 127 Mt of oil equivalent. Clearly, high shares dictated by a dubious clock are not going to materialize: there is absolutely no chance that natural gas could supply 60% of the world’s primary energy even by 2050 and a very low probability that it could make it as high as a third of the total by 2040.

  While I will not offer any new forecasts, I think I should note at least five recent projections, three done by the world’s largest oil and gas companies and the other two by leading energy bureaucracies. ExxonMobil (2013) looks as far as 2040 when it sees global energy supply at 743 EJ, which is about 35% above the 2010 level, with natural gas supplying 27% compared to 22% in 2010, or in absolute terms going from about 121 to 199 EJ, a 65% gain. The study also estimates sectoral consumption shares and sees no change for natural gas for residential and commercial use (supplying 22% in both 2010 and 2040), slight gains in industry (from 23 to 27%), and electricity generation (from 25 to 29%)—and still virtually no role in transportation: ExxonMobil does not foresee any large-scale CNG- or LNG-fueled road and maritime traffic or any massive GTL industry to supply the transportation sector.

  BP, Exxon’s smaller rival, chose 2035 as the last year of its forecast, and it has rightly stressed that fuel shares evolve slowly, and as oil continues to decline and gas continues to rise:

  by 2035 all the fossil fuel shares are clustering around 27%, and for the first time since the Industrial Revolution there is no single dominant fuel. Taken together, fossil fuels lose share but they are still the dominant form of energy in 2035 with a share of 81%, compared to 86% in 2012. (BP (British Petroleum), 2014a, 17)

  The BP sees transport as the sector with the fastest growth of natural gas consumption (7.3%/year) but, of course, from a small base; in absolute terms, it sees most of the demand growth coming from industry and electricity generation (both rising by nearly 2%/year).

  The BP expects shale gas to provide nearly half of the extraction growth in global gas, with the US shale gas (now more than 99% of the global total) still accounting for 70% in 2025, followed by 13% from China. Another forecast in accord with general expectations is that natural gas trade expansion will be dominated by Asia-Pacific region whose imports should overtake Europe by 2026 and could more than triple by 2035 to account for half of all net interregional imports, while the growth of shale gas changes North America from a net importer to a net exporter of gas as early as 2017. Imported gas should supply 34% of all consumption in 2035, slightly above the 2012 share of 31%; pipelines will remain the dominant means of delivery even as the share of LNG trade rises significantly, from 32% in 2012 to 46% of all exported gas by 2035.

  And Royal Dutch Shell (2013) goes as far 2060 in its latest duo of scenarios called Mountains and Oceans. These two scenarios represent continuation of status quo, moderate economic growth and vigorous development of new gas resources on the one hand and a more constrained expansion of gas on the other. In the first case, global primary energy use rises to 992 EJ by 2060, with gas delivering 24%, slightly behind coal (25%) but nearly twice as much as oil (13%);
in the second case, the global total is slightly higher at 1056 EJ, but gas supplies only 17% of the total, with oil and coal roughly even at 19%. For comparison, Shell’s 2040 primary energy total is 822–856 EJ, at least 10% higher than 743 EJ estimated by ExxonMobil.

  As for the two leading energy bureaucracies, the International Energy Agency issued a lengthy natural gas report in 2012 concluding the fuel “is poised to enter a golden age, but will do so only if a significant proportion of the world’s vast resources of unconventional gas … can be developed profitably and in an environmentally acceptable manner” (IEA, 2012, 9). The promise can be achieved only if the social and environmental concerns associated with gas extraction are fully addressed by advancing production techniques that improve performance and assure public confidence in the new extraction processes.

  These qualifications echoed the conclusion published a year earlier by the US National Petroleum Council:

  realizing the benefits of natural gas and oil depends on environmentally responsible development. In order to realize the benefits of these larger natural gas and oil resources, safe, responsible, and environmentally acceptable production and delivery must be ensured in all circumstances. (NPC, 2011, 8)

  The IEA called specifically for stronger regulation of fracking, including improved disclosure of chemical composition of fracking fluids, better monitoring of water discharges and wastewater disposal, and further research on environmental impacts.

  If these golden rules regarding “full transparency, measuring and monitoring of environmental impacts and engagement with local communities are critical to addressing public concerns” are followed, the IEA estimates that they would raise the cost of a typical shale gas well by 7%, but higher fuel availability would have a strongly moderating impact on gas prices, and the global demand for natural gas would rise by more than 50% between 2010 and 2035, and by that year, gas would supply 25% of the worldwide primary energy demand to become the second most important source after crude oil.

  Finally, in its reference forecast, the USEIA puts the share of natural gas at 24% of the global primary energy use in 2030 (only marginally above the 2010 share) and at 22% by 2040, while for North America, it forecast the rise from 25% in 2010 to 28% by 2030 and 29% by 2040 (USEIA (US Energy Information Administration), 2014i). During the shared forecasting time span (up to 2030 or 2040), all of these five forecasts suggest very similar, and generally linear, growth of global natural gas consumption that would roughly double the 2010 volume by 2030 and raise the fuel’s share in total primary energy consumption to just short of 30%. Highly conservative nature of all of these forecasts may be a surprise only to those uncritical observers who believe (contrary to rich historical evidence) that fuel totals and fuel shares can shift rapidly at the global level.

  And perhaps the most comprehensive study of US natural gas prospects concluded that, based on reserves of 60 Tm3, most of the increased extraction will go for electricity generation, and that if energy prices were to reflect specific carbon burdens natural gas would almost completely displace combustion of US coal by the year 2035, but its production would start declining by 2045 as the global energy system moves toward no-carbon alternatives (MIT (Massachusetts Institute of Technology), 2011). More specifically:

  under the mean resource estimate, U.S. gas production rises by around 40% between 2005 and 2050, and by a slightly higher 45% under the High estimate. It is only under the Low resource outcome that resource availability substantially limits growth in domestic production and use. In that case, gas production and use plateau around 2030 and are in decline by 2050. (MIT, 2011, 56)

  Figure 8.2 sums up these long-range forecasts, but it is entirely plausible that by the 2030s or 2040s, absolute volumes and the market shares of natural gas might be somewhat below recent expectations, both globally and for the United States. On the other hand, I do not see any justification for going as far in the other direction as McNutt (2013): she suggested that the United States could deplete domestic gas rapidly and that the country could become dependent for its energy needs on China, the country with the largest technically recoverable shale gas resources. Whatever the future specifics, the two main uncertainties in decades ahead are the speed and extent of shale gas extraction in the United States and in half a dozen countries with major shale gas resources and the growth of LNG trade.

  Figure 8.2 Long-range global gas production forecasts.

  8.2 SHALE GAS PROSPECTS

  Several critical matters that will decide the long-term future of shale gas have been either largely ignored or commonly glossed over, not only by media reporting but even by some of those shale gas enthusiasts whose professional understanding of oil and gas development should have made them to be more critical. Part of the problem is the fast progress of shale gas expansion. The shift toward horizontal drilling and hydraulic fracturing has been so rapid that it made even appraisals in leading energy publications instantly obsolete. Just one example to illustrate the point: on a paper in Energy Policy published in 2011, a group of experts concluded that LNG will become “the largest source of net U.S. imports by 2020” (Kumar et al., 2011, 4104)—while just two years later other experts were charting the US dominance of global LNG export market.

  This surprising speed of American shale gas development resulted in no small expectations: dreams of potential benefits are, as befits a gaseous substance, properly inflated, and a common conclusion seems to be that shale gas will turn out to be a truly exceptional resource. Although nobody is repeating the infamous claim about nuclear energy in the 1950s (that it would be too cheap to meter), natural gas is predicted to remain inexpensive even as its domestic consumption rises and as intercontinental exports help to reverse America’s balance of payments, to undercut the dominance of Russian exports to the European Union, to provide Asia with a cheaper alternative, and to assure America’s strategic supremacy for decades to come. And domestically, the cheap fuel will attract not only petrochemical industries but also energize America’s manufacturing renaissance and create large numbers of jobs (Dow Chemical, 2012).

  Price Waterhouse Cooper concluded that shale gas is reshaping the US chemical industry (PWC, 2012). By 2013, the plans were for up to $100 billion of new petrochemical capacities, with investment by major US companies (Dow Chemical, ExxonMobil, Chevron) but nearly half of the total by foreign companies including South African Sasol, Saudi Arabian SABIC, and Taiwan’s Formosa Plastics (Kaskey, 2013). American Chemistry Council estimated that between 2010 and 2020 new chemical capacities worth $71.7 billion will directly create 485,000 jobs and also lead to an additional $122 billion of indirect output and bring the total investment of $193 billion and 1.2 million new jobs (ACC, 2013). Inexpensive supply of methane and ethane would continue to attract new investment, but while building a typical modern petrochemical plant requires hundreds, or even thousands, of workers, operating plants will employ relatively few people. Consequently, future long-term job opportunities should not be exaggerated.

  In any case, here is just a small sample of approbatory sentiments regarding expanding shale gas extraction by leading institutions and media sources (note all those superlative nouns and adjectives). As already noted, in June 2012, the International Energy Agency issued a report entitled Golden Rules for a Golden Age of Gas (IEA, 2012). In July 2012, The Economist reviewed the unconventional “bonanza” and saw this new source of gas “transforming the world’s energy markets” (Wright, 2012). In February 2013, Der Spiegel, Germany’s largest weekly newsmagazine, concluded that the US fracking has “the potential to shift the geopolitical balance in its favor” (Spiegel, 2013). In a few opening paragraphs of short news item in March 2013, CNBC, the leading US business TV channel, labeled the US energy developments as a power shift, an amazing turnaround, a renaissance, a miracle, a boom, and a bounty that “could shake up global order” (CNBC, 2013a, 1). Two weeks later, it raised a possibility of oil prices falling as low as $70/barrel as a result of these deve
lopments (CNBC, 2013a).

  In October 2013, before a single new LNG export shipments of the US gas took place, The American Oil & Gas Reporter saw the US natural gas industry “positioned for dominant role in global LNG markets” (Weissman, 2013). And in the same month, Jaffe and Morse (2013) offered a much more expansive argument, claiming that

  by providing ready alternatives to politicized energy supplies, the United States can use its influence to democratize global energy markets, much the way smartphone and social media technologies have ended the lock on information and communications by repressive governments and large multinational or state-run corporations,

  and that this development will mean nothing less than “The end of OPEC.” And as the conflict between Ukraine and Russia intensified during the spring of 2014, Financial Times was just one of many opinion makers suggesting a rethink of the US policy: “booming US oil and gas production has been portrayed as a bounty that will boost America’s energy independence, but the crisis in Ukraine has cast it in a different light: as a strategic weapon to help allies overseas” (Jopson, 2014, 1).

  All of these arguments, claims, conclusions, and suggestions should be challenged because most of them represent overenthusiastic reactions to what are undoubtedly important changes and because some of these deductions are plain cases of counterproductive wishful thinking. Most notably, I do not see either a swift demise of OPEC or the Ukrainian economy energized by massive US oil and gas exports. More importantly, except for Western Canada’s shale gas extraction, no other country has embarked on exploration and extraction activities that would be even remotely resembling (even after adjusted for country size or economic level) the scale and intensity of the US shale fracking: clearly, that revolutionary example has not, so far, traveled well.