International Consultants LtdAndrew Leung

Shale Revolution in the Golden Age of Gas

Andrew K P Leung, SBS, FRSA

A presentation to the Low Carbon Earth Summit 2013

Qujiang International Conference Centre, Xi’an, China

27 September, 2013

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Are we entering a Golden Age of Gas?• Natural gas 45% less CO2 emission @ btu < coal; 30% < oil; US gas use – 35% industry, 30%

power, 20% residential. 15% commercial, transportation etc.• Natural gas use to rise by 50% to 25% of global energy demand by 2035.• Global conventional gas resources equal to 120 years of current energy consumption• Unconventional at least as large (shale, tight gas (in sandstones and rocks of low permeability),

coal-bed methane (CBM), artic, and gas hydrates - crystallized solids with methane molecules in permafrost and deep seabeds (still uncertain but potential > all other carbon fuels combined). Now 60% of total U.S. gas production (deregulated 1978). CBM growing in Australia. China, India and Indonesia to follow.

• Best practice mitigates environmental cost of hydraulic fracking – excessive water use, contamination and disposal.

• Total resources plus unconventional – 250 years consumption; but discovery to production could take decades; all major regions recoverable – at least 75 years consumption

• By 2035, global primary gas demand to reach 5.1 tcm, increasing proportion in energy mix from 21% to 25%, overtaking coal; 80% due to non-OECD. China’s demand = Germany 2010 to equate entire EU; ME to double =China; India x4. Mainly power generation also industry, transport and buildings

• Overall global gas demand = 3x Russia current production. 40% to be met by unconventional • Strongest producing regions - North America (NA), Russia, ME, Caspian, China and Africa• Natural gas markets, despite isolation (notably NA), to show greater convergence. Global trade

evenly split between pipeline and LNG ; Cumulative investment in gas infrastructure $8 trillion; need for more LNG capacity in some regions

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• China, India and ME = 60% of increase in global OIL demand by one-third to 2035. Increase from China, India and MENA > OECD reductions. To reach 99.7 mb/d by 2035 > 87.4 mb/d in 2011. Transport ½ global oil consumption (40% due to trucks (lower fuel efficiency standards). Crude import price to rise to $215 nominal terms by 2035 ($125/b, 2011 prices)

• After 2020, OPEC output to rise from 42% of world to 50% by 2035, rest of global production driven entirely by UNCONVENTIONAL OIL (light tight oil + natural gas liquids). By 2020, US to be largest oil producer overtaking Saudi Arabia until mid-2020s; to become net oil exporter by 2030.

• IRAQ to exceed 6 mb/day in 2020 rising to 8 mb/day in 2035 > Russia; to become 2ND LARGEST OIL PRODUCER BY 2035, selling to Asia mainly China (gaining 5 trillion revenue or $200 billion p.a.).

• US GAS TO OVERTAKE OIL IN ENERGY MIX BY 2030. Now >1/2 of world’s drilling fleet. Natural gas production growth robust in China, India and MENA. CHINA TO EXPAND GAS USE from 130 bcm/d in 2011 to 545 bcm/d in LARGER THAN CURRENT EU BY 2035.

• Lower-priced gas (1/5 of import prices in Europe and 1/8 of Japan’s) frees up US COAL FOR EXPORT TO EUROPE, displacing Europe’s higher-priced gas imports and hastening retreat from nuclear power

• UNCONVENTIONAL GAS ½ of GLOBAL GAS PRODUCTION TO 2035. Still formative years. Non-OPEC unconventional oil production (light tight oil in US, oil sands Canada, natural gas liquids, Brazil deep-water) to a plateau > 53 mb/d in 2015 from 49 mb/d 9n 2011, falling back to 50 mb/d in 2035.

• Last decade, COAL ½ of global energy demand rise. China electricity demand growth to exceed US + Japan combined by 2033. Coal-fired output nearly = all renewables combined. China to peak in 2020 to 2035. India to overtake US as second largest coal consumer by 2025. FOSSIL FUELS remain dominant globally, supported by 6X more subsidies v renewables (+30% since 2010, mainly in MENA countries)

• Worldwide ENERGY EFFICIENCY drives – China 16% cut in energy intensity by 2015; EU 20% cut in 2020 energy demand; US higher fuel economy standards, Japan 10% cut in electricity consumption by 2030; but > 4/5 potential for energy efficiency in buildings and > 50% in industry remain untapped. Full non-technological potential to halve global 2030 energy demand.

• RENEWABLES to become 2nd largest source of energy by 2015 (half of coal) and 1/3 of global electricity output by 2035. Continued subsidies, falling technology costs, rising energy prices and carbon policies. Solar leading. Biomass, increasing 4X. Subject to good management, global bioenergy resources more than sufficient so as not to compete with food.

• No more than 1/3 proven fossil fuel reserves (2/3 coal, 22% oil and 15% gas) can be consumed to achieve TWO_DEGREE TARGET BY 2050, barring wide CCS deployment. Goal of 2 degree difficult as 4/5 emissions allowable by 2035 already locked in existing power plants and buildings etc. Status quo long-term average global temperature by 3.6 d. C. Oil demand and CO2 emissions to peak by 2020 , 13 mb/d lower by 2035 (= production of Russia + Norway). Consistent with long-term temperature increase of THREE DEGREES.

• 1.3 BILLION PEOPLE IN 10 COUNTRIES no electricity and 2.6 billion people no clean cooking fuel (4 in Asia and 6 in Sub-Sahara Africa) • More water-intensive power-generation and biofuels TO INCREASE WATER CONSUMPTION by 85% to 2035. 2X the rate of energy demand increase.

IEA World Energy Outlook 2012

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New oil dynamics (IEA, Supply shock from North American oil rippling through global markets, 14. May, 2013)• North America to increase oil production by 3.9 mb/d 2012-18 (=2/3 of non-OECD growth); US oil production (e.g. N Dakota) >

Saudi Arabia by 2017, to become net oil exporter by 2030• PWC – oil prices set to drop 40% to stabilize at lower longer-term levels. • Production cost threshold = $70 @barrel at present (Harvard Kennedy School) • World oil refining capacity to surge by 9.5 mb/d, led by China and ME• South China Sea alone has reserve of 200 billion barrels• Shale contributes to 30% of US oil and 40% gas production • US shale oil + Canadian tar sands to increase global capacity to 8.5 mb/d by 2018

> demand growth of 6.9 mb/dBUT –• Serious depletion of light-sweet crude (with little sulphur) and limited refining capacity for processing heavy sour grades into

heavy crude such as diesel and fuel. • Mature OPEC fields now declining at 5 to 6 % p.a. Non-OPEC fields declining 8 to 9 % p.a.• Each marginal barrel more expensive to extract• Growth in U.S. tight oil from fracking (1 m barrels @day) offsets declining non-OPEC oil supplies• Society of Petroleum Engineers (SPE) - more wells to be drilled in next decade > last 100 years.• 10.5 billion barrels of oil estimated beneath coastal tundra of NE Alaska (Arctic National Wildlife Refuge (ANWR)) but U.S. uses

7.3 b barrels of oil a year (= < 1 ½ yr supply).• Since 2007, US has cut foreign crude import by 40% , or 5 mb/d. Preparing to export natural gas. China now imports 57% of oil,

up from 48% 5 years ago. 22% natural gas imported 10x > 2007. 4

World Gas Reserves

•Conventional recoverable = 120 yrs of current consumption•Total recoverable = 250 yrs•All major regions at least 75 yrs•Share of natural gas in global energy mix to increase from 21% to 25% overtaking coal by 2035, with non-OECD use = 80% of total increase•US gas price plunged from $13@1,000 cu.ft to $2 (2012) or $4 (2013) 5

Technically recoverable shale resources2/3 of assessed, technically recoverable shale gas resource concentrated in six countries - U.S., China, Argentina, Algeria, Canada and Mexico.

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Fracking technology

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Shale gas challenges • FRACKING involves injecting large volumes of gelly fluids mixed with chemicals (e.g. biocides) and solid particles

(ceramic beads – “proppants” to hold open fractures). Drilling rig (well site) typically occupies 100 sq meters. Steel and cement casing prevents leakage and seepage.

Environmental –• Massive water usage - 1 – 5 million gallons@; surface or aquiver water depletion; ecological/ bio-diversity impact; water

transport needs hundreds of truckloads – congestion and carbon footprints (e.g. in China Xinjiang rich in shale but water scarce– Sichuan Basin superior). Water substitutes e.g. foam, propane etc have other pollution trade-offs. (Coalbed methane needs de-watering in extraction, highly salty and sodic. In US 2008, 180 million c. meters pumped out of coal seams 45% discharged with little or no treatment (US EPA 2010)

• Toxic fracking fluid (known as “múd”) - 750 secret ingredients, such as methanol. • Methane leakage during production and transportation • Fluid leakage and seepage to aquifers, though shale layer 2-3,000 meters down v aquifers at 350 meters • Treatment of waste water return rate (20 -50%, saline and sometimes slightly radioactive)• Noise and fume• Abandoned walls• Liable to cause earthquakes• Highly energy- intensive, net energy- loser, and can be worse than coal in terms of lifecycle carbon footprintEconomics –• Technology has lowered gas price by 75% to $3.25 in Jan, 2013. Huge debate on how much to export.• Exponential depletion rate –output declines 50% - 70% 1st year; maximum production a few years• Need to drill more and more wells. Roughly 7,200 new shale gas wells to be drilled each year at @$42 billion simply to

maintain current levels of production. As most productive locations are drilled, drilling rates and costs will only increase as time goes on

• William Engdahl, an award-winning geopolitical analyst and strategic risk consultant, - costs and economics of shale gas and tar sands negative

• China has 50% more shale gas reserve, though in more difficult terrain. Shale can be buried near surface to several thousand meters. Thickness, quality and presence of gas liquids dictate economics.

• US to share technology with China, likely biggest customer for US shale gas. http://www.youtube.com/watch?v=dEB_Wwe-uBM

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Policy implications

Scenario 2 - Business as usual with higher estimates of U.S. shale resources.

Without carbon policy, shale abundance likely to foster greater energy consumption and discourage increase use of renewables resulting higher CO2 emissions overall - Resources for the Future/National Energy Policy Institute Study, April 2010

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Golden Rules • Golden Age of Gas will come about only if vast unconventional resources developed profitably

and in environmentally-acceptable manner• Bright future of unconventional gas far from being assured as numerous social and environmental

hurdles to be overcome • Golden Rules – Measure, Disclose and Engage; Watch where you drill; Isolate wells and prevent

leaks; Reduce and Treat water responsibly; Eliminate venting, minimize flaring and other emissions, Think big in coordinated environmental impact containment especially water use and disposal, land use, air quality, traffic and noise; Ensure high quality performance including regulation, innovation, evaluation, verification, emergency response. Supporting infrastructure and market development including creation of economy of scale such as water pipelines and treatment facilities .

• Golden Rules no magic- Needs access (e.g. in China, only 20% shale and 40% coal-bed methane accessible), regulation, technology, infrastructure, water, markets + pricing. Output in Golden Rules Case requires > 1 million new unconventional gas wells worldwide between now and 2035, 2X U.S. operating gas wells. Only 40% invested of $ 6.9 trillion required globally.

• Drivers are China and the U.S. By 2035, US (820 bcm) to overtake Russia (785 bcm) as largest gas producer. China to become largest importer and 2nd largest producer of unconventional gas, though environmental cost and water scarcity likely to hamper expansion.

• Lack of public acceptance would support a Low Unconventional Case where aggregate rise only slightly above current levels even by 2035, well behind coal. This would generate 1.3 % higher CO2 emissions than the Golden Rules Case

• Gas alone cannot achieve limit of 2-degree C above pre-industrial levels without vigorous wide-ranging policy framework – energy efficiency, clean energy sources and technologies such as CCS.

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China’s energy profile

Source: BP Statistical Review of World Energy, June 2012

China’s total primary energy mix (2011) Evolution of China’s energy consumption (1990-2011)

Consumption and production of natural gas in China (1990-2011)

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China’s unconventional gas plans• China plans coalbed methane production > 30 bcm and shale gas - 6.5

bcm by 2015 and 60 to100 bcm by 2020.

• Goal to add 1 tcm of coalbed methane and 600 bcm of shale gas to proven reserves of unconventional gas by 2015.

• Major international oil companies already into partnership with state-controlled companies. Shale gas and coalbed methane classified as “mineral resource” outside CNPC/Sinopec exclusivity. Foreign projects. majority stake allowed in coalbed methane projects.

• Environmental compliance more stringent and water scarcity a major hurdle

• Domestic coalbed methane industry price subsidies between RMB 0.2/m3 ($0.03) and RMB 0.25/m3 ($0.04). Shale gas might receive a similar or higher subsidy.

• In the Golden Rules Case, by 2035, China’s unconventional gas to attain 83% of total gas production, predominately from shale gas (56%), coalbed methane (38%), and tight gas (6%).

• By 2035, in the Golden Rules Case, China’s unconventional gas imports amount to nearly 120 bcm, ~ 20% of total gas demand. In the Low Unconventional Case, at 260 bcm or ~60% of demand.

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Energy GeopoliticsRussian pipelines to Europe• EU relies on Russia for 34% of natural gas imports. Central and

Eastern Europe, 69%. Nabacco pipeline project abandoned (July, 2013) strengthens Russia’s South Stream project.

• US shale revolution and looming US-EU FTA threatens to scuttle Russia’s energy stranglehold over Europe.

• Apart from close ties through the Shanghai Cooperation Organization (SCO), President Xi chose Russia as first port of call. Two sides have agreed energy deals including a tripling of oil exports to China by Rosneft to 45-50 million tonnes, possibly by 2018.

• Unconventional gas provides China with energy security cushion in addition to developing vast Central Asia pipelines overland bypassing vulnerable sea-lanes.

• Shale gas revolution seen as shot in arm for U.S. revival. Some even talk of another “American Century” (v China) as U.S. becomes largest gas producer.

• Largest customer for U.S. shale gas export likely to be China -massive energy demand, time lag in developing own nonconventional gas including shale, and water and environmental concerns.

• Sale of U.S. shale gas to China mitigates China’s pollution costs for cleaner energy, ironically turning the table on pollution outsourcing (e.g. manufacturing).

China’s energy security

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Andrew Leung International Consultants Ltd

Thank you

Andrew K P Leung, SBS, FRSA

www.andrewleunginternationalconsultants.com

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