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The shale revolution and the world’s gas producers and consumers

London, August 2013

The shale revolution is transforming oil and gas markets. While extracting shale resources is today concentrated in the United States, such a development has wide-reaching implications, affecting oil and gas producers and consumers around the world.

Gas has special features which distinguish it from oil.

Because of its versatile nature, natural gas competes with other fuels in most of its applications. For industrial use, it competes with coal and heavy fuel oil, as a boiler fuel; for residential and commercial use, it mostly competes with heating oil; and in power generation, it competes with coal, nuclear, hydro and, again, oil.

In contrast to oil, gas has no globally integrated market. While 64 per cent of oil production is traded globally, only 31 per cent of the gas produced is traded (of which 68 per cent by pipeline and 32 per cent by Liquefied Natural Gas - LNG). The rest is consumed locally. Because it competes heavily with other fuels, especially coal, the impact of growing shale gas production will have an effect not only on producers but also on local consumption patterns.

In the US, shale gas production increased by 440 per cent between 2007 and 2012 – constituting today around 40 per cent of total US natural gas production. That share is expected to increase to more than 50 per cent by 2040.

This rapid increase in supply has had major implications mainly domestically but also globally. The direct effect was a decrease in gas prices in the US, where the American (spot) price for gas fell from its peak of US$ 8.85 per Million British Thermal Unit (/MBTU) in 2008, to US$2.76/MBTU (even reaching a low point of US$1.83/MBTU in April 2012) – an overall fall of 221 per cent within five years.

The decrease in the price of natural gas has had two main effects.

First, on the demand side, it has increased the attractiveness of natural gas which has increasingly displaced coal in power generation. According to BP's Statistical Review in 2012, gas fired power generation increased by 21 per cent – the largest increment of any fuel in US power generation for at least 40 years. Coal fired power generation, on the contrary, fell to its lowest level since 1987.

The switch from coal to gas has contributed to a rapid decline in US carbon emissions.

Meanwhile, many industries enjoyed lower production costs, in addition to cheaper energy. Some European energy intensive industries, like German chemical giant BASF, have started to discuss the possibility of relocating production to the US as a result.

Second, on the supply side, the effects have been mixed.

Originally shale gas supplies increased rapidly but the fall in gas prices has acted as a disincentive for producers. Producers shifted their interest to the higher valued oil (including tight oil), and tended to focus more on associated gas which is found with oil.

The US is also planning to export some of its gas in the form of LNG to more lucrative markets.

Because the infrastructure for exports overseas does not exist, lower prices in North America have not been experienced elsewhere. As a result, significant price differentials have emerged. While the US enjoyed prices below US$3/MBTU, Japan was buying LNG for almost US$17/MBTU as demand increased to replace nuclear power. It is these differentials that are bound to accelerate emerging trends and changing trading and consumption patterns around the world.

Many countries are now keen on replicating the US experience. The UK government, has announced its intention to offer generous tax terms to companies investing in shale gas. Countries like Algeria, Argentina, China, Poland, and Russia are also considering ways to exploit their substantial shale resources.

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