LNG Trumped

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The burst of enthusiasm for shale gas could put LNG on the sidelines of global gas trade

This article appears in the October 2010 issue of Oilweek

By Peter McKenzie-Brown

If you want to understand the performance of global natural gas markets in the next few years, think hockey. On one side the team captain is liquefied natural gas (LNG); on the other natural gas from shale reservoirs (“shale gas”).

The matches are serious, but they are also friendly. Each side is a team of rivals. The squads frequently swap players in and out, but they can play nail-biting games.

Robin Mann’s description of an annual CBM conference in Asia calls the game during two days of play. The first day of the Singapore conference, the president of AJM Petroleum Consultants says, the dominant theme was that “if there is a lot of shale gas development in India, Europe and China, there will be no need for much LNG project development.”

Shale Gas one; LNG zip.

On the second day, however, “the speakers suggested that new LNG projects will be needed no matter how much shale gas is developed in those countries. LNG development might not be as dynamic as people had thought it would be, but the projects now built or on the books to be built will remain viable.”

Game tied.

He cautions, though, that “In the end price will be the deciding factor.” Of course, everything from geopolitics to economics can influence price. This is the recurring theme in the competition between LNG and shale gas.
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Three Sources of Gas
From the perspective of North American producers, the future of three gas sources (not two) is of interest. The first is the wild success of shale gas production in the US and Canada. The shale gas revolution, as it is called, is largely the result of rapid innovation in such down-hole technologies as horizontal drilling, better bit design, coil tubing, down-hole motors, geo-steering, microseismic, measurement-while-drilling tools and more powerful fraccing systems. It has truly been a revolutionary development.

The second is the evolution of a global market for liquefied natural gas. This development has been decades in the making, and it has eliminated the need for pipelines to tie stranded gas into the world’s industrial markets. To cite the extreme example, Qatar is developing liquefaction facilities for an offshore reservoir with more than a quadrillion cubic feet of proved reserves, and it will be able to deliver that gas around the world for a century or more.
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The gas industry’s third area of interest lies in the huge conventional gas reserves in Alaska and the Northwest Territories. While companies are proposing expensive pipeline systems to deliver those resources to southern markets, Mann doubts that those proposals will go ahead in the foreseeable future. “Because of the development of shale gas formations like the Montney and Horn River and other with great potential right next to infrastructure and right next to pipelines, and with our existing conventional gas and our exports to the United States going down daily, we have more than enough (gas) for our own (use) so why is it important to build these pipelines? Why are we worrying about anything north of Alberta and BC?” asks Mann.

“Their costs keep going up and up and up, and economics will trump any national sovereignty argument for the Canadian pipeline. Maybe the best way is to develop LNG facilities in the north, but what will the economics of that kind of project be? Will the price of LNG justify building facilities up there? Certainly at the Singapore conference there was no strong feeling that there would be much in the way of LNG exports from North America, apart from a few small projects” like the proposed LNG terminal in Kitimat, BC. The only really positive argument for developing LNG facilities is that the many existing receiver terminals in the world offer a lot of flexibility. Given a Northwest Passage free of ice, you could take Arctic LNG anywhere – if the price were right.
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Arctic Gas Pipelines: benched.
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International sketches
While Robin Mann acknowledges the large potential for shale gas development in Asia, especially in China and India, he is sceptical that this will happen in the near term. “North America’s shale gas sector is advanced, it’s more of a mature industry” he says, sketching out the situation around the world. “Europe is in its infancy. In Asia it isn’t even that far – it’s in its beginning stages. People have barely gone beyond looking at resource potential. The idea of unconventional gas in Australia, China, India and Indonesia is still CBM” (coal bed methane) – a resource the North American industry is not heavily investing in anymore. “Europe is more interested in shale gas because they don’t have much CBM.”

One problem those countries face in developing a shale gas industry is “getting the hardware needed to properly develop the resource – getting the right equipment to the right spot and (having) the expertise and manpower to get things developed. That’s why CBM is still on the books in those regions. To manage in the CBM world you don’t need (heavy-duty) frac equipment or (specialized) manpower.”

Here is the kind of problem he is talking about. Huge fraccing jobs for shale gas development in north-eastern B.C. require a great deal of logistical support. Each horizontal hole can require 2,000 to 3,000 tonnes of fine-grained sand as a propping agent. To take on one such project may require a 40-member crew and 20 or more hydraulic compression systems mounted on huge fraccing trucks. This equipment isn’t widely available outside North America, and there are gas-bearing shales around the world that are remote from the kind of sand quarries needed.

Moreover, a great deal of water is required. While the water commonly comes from deep formations, a typical shale gas fraccing job requires a large water storage pit in addition to a string of high-volume steel tanks. According to Dave Russum, an AJM vice president who also attended the Singapore conference, “in India and Australia they are drilling their first holes into shale just to gather information. They aren’t even into pilot projects yet.” Given those realities, Mann concludes that shale gas will not have a large impact on LNG development – at least not initially
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Geopolitics and the local community
As a domestic source of supply, shale gas is an attractive alternative to imports. For the United States, which has huge trade deficits, it slows down the haemorrhage of US dollars. For Europe it offers a geopolitically smart alternative to Russian supply. Also, governments want this kind of development because it contributes to security of supply
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In recent years Russia has turned off the taps a couple of times because of disputes with Ukraine over payment. As collateral damage, countries in the European Union were temporarily cut off, too. It is therefore ironic that the best shale gas prospects in the European Union are in the north – especially Poland, Ukraine’s neighbour. In northern Europe, according to Mann, “you can get access to enough land to make a viable shale gas project.” In more developed and densely populated southern parts of the union, this is much harder.

As Europe develops shale gas, geopolitics is again likely to enter the fray compliments of the Russian bear. “Are the Russians just going to sit by and let Poland and northern Europe develop natural gas so they can turn off the taps from Russia?” asks Mann. “I don’t think so. They could retaliate with price, and make shale gas uneconomic.”

So could LNG producers. In fact, rather than shale gas driving LNG out of global markets, the exact opposite could take place, with LNG putting the screws to shale gas development irrespective of its geopolitical and trade balance advantages. Qatar, you will recall, has huge reserves that it can liquefy and deliver cheaply, causing international gas prices to crater and rendering some shale gas projects uneconomic.

Yemen and other exporters could do the same. According to Dave Russum, “It wouldn’t take much of a gas surplus on the oceans to really drop the price of gas in many markets. Although (shale gas) reservoirs can be prolific, gas from shale is not cheap, and whether production is sustainable over time is a real question.”

In addition to the prospect of price competition, shale gas development is likely to face environmental and population density issues in Europe and Asia. Environmental concern is likely to be most intense in Europe, and to echo concerns already being expressed in a number of places in the US. Will fraccing contaminate groundwater reservoirs? Are the chemicals used in development safe? Will shale gas production lead to unintended consequences of the undesirable kind?

The matter of population density ranges from critical in India and coastal China to highly significant in much of the southern states in the European Union, where the industry can’t get access to enough land to develop a viable shale gas project. Shale gas development requires drilling many wells. Multilateral horizontal drilling and fraccing from a single pad can take weeks and even months to complete. These drilling pads are large and operations can be dirty and noisy. Moreover, in densely populated countries good drilling prospects can be covered over with villages, small farming operations, markets and industrial operations. This inconvenient truth is hard to ignore

Game plans
Mann’s assessment of the situation involves pretty raw political analysis of the situation. “In China the communist government would just do it,” he speculates. The country has almost the same landmass as Canada, yet the population is mostly located along a relatively thin band along the east coast. There are many prospective sedimentary basins within the country, which is geologically more like the United States than Canada. “The ones that are now being looked at for shale gas are out in a desert in the western China, where there is virtually a zero population problem and access is not a problem either. None of these projects are commercial yet, they are just at the stages of looking at resource potential, doing some tests, seeing whether they are viable and then going down the road” to development.

Having said that, he recalls an argument from Singapore that “Even if China developed shale gas at the same rate and volume as North America did over the past ten years they would still require LNG because (in ten years) shale gas would meet only around 15% of their total requirements.” That’s a compelling argument against the notion that shale gas will displace global LNG
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Shale gas development is going to be difficult in most places except northern Europe, potentially China and eventually India. “In India, you do have British law covering land ownership so you do have land issues but you wouldn’t have the same environmental issues as you have in Europe. (Gas producers) could get (to viable projects) if they worked with the local population, most of whom have very low incomes. In much of Europe, where the amount people make on average is much higher and people have a much higher standard of living, it would likely be more difficult to work with local populations.”

Shale gas and LNG can coexist, but as team captains for the gas industry’s two big new hockey clubs there are many ways they can affect price and therefore development. Too much LNG on world markets could hinder development of shale gas in certain parts of the world. A great deal of shale gas development could hinder LNG development in others. But, says Mann, “Either thing could happen. It’s going to depend on geography, on what resources you have, on governments’ want to develop security of supply – a whole bunch of political things can get rolled up into that.”

“North America is a great example,” he concludes. “A few years ago we wanted to have LNG receiver terminals dotting the east coast, the southern coast and the west coast of North America. People didn’t want them. Then all of a sudden by some miracle we ended up with the shale gas revolution and we suddenly found we didn’t need them. So LNG – go away.”

For North America, at least, shale gas was the game changer. Shale Gas five; LNG one.

Canadian gifts help mobilize the disabled

Crippled when she fell from a building 15 years ago, Ratchapon Deesala receives a gel cushion and a much-needed replacement wheelchair. Ratchapon lives with family in the community.

By Bernie McKenzie-Brown

For most of us, it is a simple matter to get out of bed and get ready to take on the day. Spare a thought, though, for those who can’t get out of bed because they are quadriplegic. Spare another for those who can’t get out because they need help dressing and getting into their wheelchairs. Then there are the men and women who need colostomy bags changed or urinary catheters replaced before their days can begin. This is reality for many disabled adults. For a fortunate few, life has begun to improve.

Last week physically handicapped patients and staff at McKean Hospital couldn’t hide their excitement and pure joy as medical equipment and other items started to arrive. The day’s delivery included two modified beds – one for a quadriplegic and one for a paraplegic – as well as a dozen new wheelchairs and 15 gel cushions.

This Canadian-funded initiative is helping transform life for young and severely disabled adults who live at Chiang Mai’s McKean Rehabilitation Centre. The 720,000-baht project has begun to provide help for 13 extended-stay rehabilitation patients and for outpatient clients who live in their community. Their ages range from about 16 to 42. Some have suffered since birth; others are often victims of motorcycle and industrial accidents.

Those who live at McKean share accommodation in tiny one-bedroom bungalows. All suffer from debilitating handicaps. They desperately need equipment and such aides for daily living as wheelchairs, braces, and prosthetics to make their lives more comfortable. Unfortunately, this equipment is too expensive for their families to afford. The hospital delivers good care in a caring environment, but it, too, is constrained by budgets.

An initiative of the Rotary Club of Chiang Mai West, the McKean Disabled Project’s main aim is to make it easier for the disabled to move about. In addition to purchasing high-quality wheelchairs, the Canadian project has provided funds for the purchase of motorcycles, which will be modified for use by wheelchair-bound patients. The project has also modified regular bicycles into tricycles propelled by hand.

The project has other aims, one of which is to help patients deal with painful bed sores. This terrible condition develops in those confined to beds or even wheelchairs. To manage this condition, the project has funded the purchase of gel cushions.

McKean’s residents show off new equipment and supplies, from hand-driven bicycles to gel cushions.

Funding began with a grant from the Rotary Club of Calgary Centennial. Several Canadians also made personal cash gifts. These sums were then matched by The Wild Rose Foundation, a funding agency sponsored by the government of Alberta (a Canadian province). This agency, which promotes charitable, philanthropic, humanitarian, and public spirited acts, thus provided the single largest contribution to the project. These sums were topped up by The Rotary Foundation, taking total contributions to the budgeted amount of 720,000 baht. The involvement of several branches of the global Rotary organization is tribute to the far-reaching philanthropy of the world’s largest service organization.

McKean Hospital has been serving the people of Northern Thailand for a century. It was established by a humanitarian missionary surgeon, James McKean, in response to the plight of those with leprosy in Chiang Mai. Still the centre for leprosy treatment in northern Thailand, today McKean also operates a program of extended general rehabilitation programs to treat the disabled. McKean Hospital’s disabled patients include those who live at the facility full-time; those receiving short-term treatment; and outpatients.

For some people, the simple act of getting out of bed in the morning is no simple matter. For some who live with this simple truth, simple generosity is bringing hope and the gift of greater mobility.