Early Action Needed to Benefit from the Global Unconventional Gas Revolution says Wood Mackenzie

EDINBURGH/SINGAPORE/HOUSTON, 22nd July 2010 – Wood Mackenzie draws together analytical thinking from its Unconventional and Global Gas Markets teams in its new thought piece titled ‘Local Supply with Global Implications: Wood Mackenzie’s view on Unconventional Gas’. The report concludes that producers, buyers and regulators need to monitor the development of global unconventional gas as it has the potential to further reshape global gas dynamics. In particular, the thought piece highlights that the companies that position themselves early will be best placed to benefit from the Unconventional Gas revolution.

Giving some indication of the volumes of gas resources available, Wood Mackenzie currently models 1,400 trillion cubic feet (tcf) of unconventional gas resources in plays across six continents. Dr. Rhodri Thomas, a Principal Analyst from Wood Mackenzie’s Unconventional Gas Service says, “Development of just a small proportion of this resource could dramatically change local gas markets with further implications for global gas dynamics. Specifically, it could reduce import requirements, provide additional export sources and impact global gas pricing.” Thomas expands, “There is huge potential but there are also huge associated challenges and uncertainties.”

The report findings conclude that while the longer term impact of unconventional gas could be profound, the reality is that outside of North America and eastern Australia the economics and logistics of undertaking large scale unconventional gas operations have yet to be proven and some of the key success factors behind the rapid growth in North America are missing. “Therefore, the pace of growth is likely to be slower than that witnessed in North America and substantial volumes on a global scale are unlikely before 2020,” Thomas continues.

“It is too early to say how the future of unconventional gas will play out, but it is clear that stakeholders across the gas value chain – gas suppliers, resource holders, buyers and policy makers - need to understand the possible impact of future developments. Those that do this early and monitor key signposts will be best placed to benefit from the unconventional gas revolution,” Thomas remarks.

Noel Tomnay, Head of Global Gas Service for Wood Mackenzie, and co-author of the report continues, “For potential suppliers specific issues include the need to develop a gas marketing strategy cognisant of lengthy initial ramp up periods, potentially unreliable early production and often illiquid local markets.  Such strategy development will likely include partner screening, particularly for those companies without a suitable gas portfolio and/or local gas marketing capabilities.  For buyers with an existing deep portfolio this presents an opportunity, especially given the attraction of the relatively low risk nature of production from a proven unconventional gas play.”  

Tomnay further discusses the implications from the market side: “In the present over-supplied gas market, strong growth of unconventional gas within Europe, Asia and elsewhere could perpetuate this over-supply, keep regional markets linked, and ensure the influence of US market prices on global gas pricing. It may even remove the need for long-term contracts in some markets.”

“In Europe, successful development of unconventional gas will mean indigenous supply for countries which currently rely on imports. Therefore reduced import dependency could significantly blunt the future pricing power of key gas exporters such as Russia.” Tomnay continues, “In Asia, the potential for indigenous unconventional gas production is higher than in Europe and the relative expectation of import dependency lower, therefore the impact could be greater in Asia than in Europe. It could put a significant dent in, or even negate, incremental gas import requirements in key Asian markets and could also provide an additional competitive threat to future LNG export expansion from high cost projects such as in Australia.”

Wood Mackenzie’s analysis cautions against a simplified view of unconventional gas potential and market dynamics as Tomnay explains, “In countries such as Poland and China which have low gas penetration – four percent and twelve percent respectively compared to an OECD average of 25% - new indigenous gas supply is likely to result in higher demand than currently expected. Historically, large domestic coal reserves and political concerns regarding import over dependency and supply security have tempered the growth of gas in these markets.”

The report outlines the key success factors which countries with unconventional resource will need to address and overcome to bring the gas to production including: geology of the plays; transfer of technology; service sector support and costs; land access; environment and regulatory framework; and infrastructure.