* Unconventional gas glut to mainly benefit U.S., China -IEA
* Strict regulation needed to develop shale gas sector
* U.S. to become world's top gas producer -IEA
* Gas share in global energy mix could reach 25 pct -IEA
* New regulations would raise shale cost by 7 pct
By Henning Gloystein and Oleg Vukmanovic
LONDON/OSLO, May 29 A boom in unconventional
natural gas over the next 20 years could see the United States
and others benefit from cheaper energy while the importance of
the Middle East declines, the International Energy Agency (IEA)
said on Tuesday.
Growth in shale in the United States and China could match
gains made in conventional gas in Russia, the Middle East and
North Africa combined, IEA Chief Economist Fatih Birol told
"Unconventional gas will fracture the status quo, and will
be a complete game changer with major geopolitical
implications," Birol said.
High natural gas prices have helped spur investment in
previously unavailable, unconventional gas reserves that include
tight-gas, shale gas, and coalbed methane resources.
Yet the boom can only run if measures are taken to ensure
these reserves are extracted in a socially and environmentally
satisfactory way, the IEA said in a report.
"Greenpeace opposes the exploitation of unconventional gas
reserves because the impacts have not been fully investigated,
understood, addressed and regulated," the environmental group
said. "The IEA report essentially affirms that these concerns
are real but falls short of actually addressing them."
The IEA admits that unconventional gas production will pump
12 percent more greenhouse gases into the atmosphere, compared
with conventional extraction methods, but says the figure could
drop below 3.5 percent if producers follow its recommendations
and stop venting gas and minimise flaring.
Speaking at the report's launch in London on Tuesday, the
IEA's Exectuive Director Maria van der Hoeven said the most
important thing is for gas to substiute more polluting fossil
fuels such as coal in electricity generation.
Falling prices driven by an unconventional gas glut would
help displace coal, Hoeven said, potentially slashing emmissions
But gas must be accompanied by renewables and the roll out
of carbon capture and storage (CCS) technology, an as yet
unproven technology designed to trap exhausts from coal-fired
power stations, in order to limit a long-term global rise in
temperatures to 2 degrees Celsius above pre-industrialised
"Renewables are indispensable to this goal and that means
government measures for supporting renewable energy must be
there for years to come...because otherwise lower gas prices
will make renewables uncompetitive," Hoeven said.
The IEA report underscored the economic gains offered by the
rapid growth in unconventional gas, with "countries that were
net importers of gas in 2010, including the United States,
gaining the wider economic benefits associated with improved
energy trade balances and lower energy prices."
Australia, India, Canada and Indonesia are also set for big
increases in unconventional gas production, it said.
"The share of Russia and countries in the Middle East in
international gas trade declines from around 45 percent in 2010
to 35 percent in 2035," the report said.
For Europe, where shale is expected to play a smaller role
than elsewhere, Birol said that growth could still be enough to
offset a decline in conventional gas output.
"The main benefit for Europe will that there will be lower
gas import prices, putting pressure on oil-indexation of
traditional gas supply contracts," Birol said.
Europe's main gas suppliers, Russia and Norway, sell their
gas under long-term contracts that are linked to the oil market.
Because oil prices have remained firm on strong demand from
emerging economies while European gas prices have fallen on weak
domestic demand, European gas suppliers are forced to sell
imported gas to their customers at a loss, and utilities lose
money when generating electricity from imported gas.
The IEA said this price structure could change as a result
of a global unconventional gas glut.
The report said that natural gas could become the world's
second most important energy source after oil within the next
two decades, should the right rules be introduced to ensure safe
and environmentally sustainable use of unconventional gas
Global gas demand could rise by over 50 percent between 2010
and 2035 and reach 25 percent of the world's energy mix,
overtaking coal to become the second largest primary energy
source after oil, the IEA said.
Growth in the gas sector would equal the combined growth in
the coal, oil and nuclear sectors and outstrip expansion in the
renewable energy sector, the IEA said.
"Production of unconventional gas, primarily shale gas, more
than triples to 1.6 trillion cubic feet in 2035," the IEA said.
"The share of unconventional gas in total gas output rises
from 14 percent today to 32 percent in 2035."
It noted the majority of the gas production increases would
come after 2020 as producers needed time to develop a commercial
unconventional gas sector.
Expanding unconventional gas production at such rapid rates
will require a total of 1 million unconventional wells to be
produced by 2035 globally, the IEA said. That's compared to the
500,000 such wells drilled in the past 20 years.
Of that 1 million, the U.S. will require 300,000 and China
200,000, with the remainder shared with the rest of the world.
The U.S., the world's biggest shale gas producer, currently
has just 100,000 unconventional wells in operation.
COSTLY REGULATION NEEDED
The IEA said the rules needed to ensure unconventional gas
production is both environmentally and socially acceptable would
raise production costs.
"I hope that the industry will recognise that it will be
tested against the worst practices in the sector," Birol said.
The report said such measures "could increase the overall
financial cost of developing a typical shale gas well by an
estimated 7 percent."
Yet should the industry fail to implement strict enough
rules, the IEA said a lack of public acceptance would likely
mean that only a small share of unconventional gas resources
would become available for development.
As a result, unconventional gas production rises only
slightly above current levels by 2035, sending worldwide gas
import bills 60 percent higher than in the scenario of an
unconventional gas glut.
Yet Birol said he was "cautiously optimistic" that industry
and governments would introduce the needed measures to enable a
global gas boom.
Shale gas is extracted using a technology called hydraulic
fracturing or fracking, which involves pumping large amounts of
water and chemicals underground.
The technology has been blamed for causing slight
earthquakes and been banned in several countries, but it has
also transformed the U.S. energy sector and caused domestic
energy prices to plummet in recent years.
GLOBAL GAS MARKET
The IEA said that a gas glut fueled by unconventional
extraction methods would lead to a boom in U.S. exports of
liquefied natural gas (LNG) and impact global gas prices.
The advent of North American LNG exports by 2020 will more
than double U.S. gas prices from current historic lows but bring
down prices in the world's biggest LNG market, Japan, the IEA
The U.S. could be exporting 35 billion cubic metres by 2020,
around 20 percent of Russia's current export levels, according
to the report.
The IEA said this would lift U.S. domestic gas prices from
$2 currently to $5.4 per million British thermal units (mmBtu),
which is still cheap by Asian standards of around $18 per mmBtu.
That influx of cheap U.S. gas would drive competition on
global gas markets and cut gas prices in Japan to $12.4/mmBtu by
(Editing by Jason Neely and William Hardy)