SHALE GAS WILL CAUSE A SECULAR SHIFT FROM OIL TO GAS
April 10, 2011 § 1 Comment
High oil/gas price ratios will transform the petroleum derivatives industry
The recent unrest in the Middle East has caused a spike in the price of oil, with immediate impact on gasoline price, while the price of natural gas has remained stable. This underlines the principal difference in these two essential fuels. Oil is a world commodity while gas is regional. They also serve largely different segments of end use. Consequently, the fact that today’s gas is one-fourth the price of oil in terms of energy content has little relevance in the main. However, if the energy industry believes that this differential will hold for a long time, technology enabled switching will occur. In this blog post, we will predict a shale gas enabled future of gas at low to moderate price for a long time. At the same time, we subscribe to the view of an upcoming plateau in oil production, which will drive oil prices higher. These two trends taken together assure a high oil/gas price ratio. This will cause systematic switching where possible. We discuss two essential areas where this is likely: transport fuels and propylene, the latter being the precursor to many important industrial goods, principally polypropylene.
Why natural gas price will stay low to moderate: Shale gas has unique economic characteristics when compared with conventional gas. It is located on land and at relatively shallow depths. The exploitation of the resource does have environmental hurdles, but with the proper combination of technology, transparency and regulatory oversight, these can be traversed.
If allowed to be accessed, shale gas offers the promise of cheap gas for decades. If demand drives up price, this resource can be accessed within 90 days of the decision to do so, provided access and delivery infrastructure are available. This single fact will keep a lid on the price and discourage speculators. To give a frame of reference, conventional offshore gas has a lead time of at least four years. That is the sort of lead time this industry is accustomed to. So a fast response lid on prices is a new phenomenon, driven by this unusual new resource.
Natural gas prices can be expected to stay in a tight band between $4 and $6.50 per million BTU, with excursions to $8. The floor will be driven by demand and the ceiling by the aforementioned fast response to new production. At least two oil companies operating in the Marcellus in Pennsylvania have stated that at $4, they have strong profits. Newer technologies and further experience will continue to drive down production costs. One example is refracturing of existing wells after initial production tails off. A unique feature of this type of reservoir is that a properly designed refrac will deliver new gas approaching initial production numbers. This would be at a fraction of the original cost because the well already exists. This and other technological advances will, in most instances, more than offset the costs of better environmentally driven practices.
Impact of predictably low gas prices: High oil/gas price ratios will drive oil substitution. Here we will discuss just two areas of impact. The obvious high volume one is a replacement of the oil derivatives for transport. Technology exists today to convert natural gas to gasoline, diesel or jet fuel. Predictably low cost natural gas will spur further improvements regarding the economics of these processes. Also, Liquefied Natural Gas (LNG) for long haul transport and Compressed Natural Gas (CNG) for buses, taxis and even cars will be strongly enabled.
An interesting analysis is the impact on petrochemicals such as propylene. One of the derivatives, polypropylene, is ubiquitous in our lives: roofing, carpets, bottles and bendable plastics, to name a few. For years when oil and gas pricing was in greater parity, propylene was a bi-product of ethylene production in oil refineries. It is also produced by tweaking the catalytic cracking process, at the cost of a smaller gasoline fraction. A refinery can change the mix essentially at will, presumably based on the relative profit potential.
But with a worsening oil/gas price ratio, ethylene production increasingly switched to a gas feed stock. Unfortunately, this process produces very little propylene as a bi-product. So, as reported recently in the Economist, in the last two years propylene price has gone up 150%.
A predictably low price for gas will allow for plants dedicated to propylene production from gas. At least three companies, Lurgi, Total and UOP, have the technology at an advanced state. This would make the greatest sense for gas that is otherwise stranded – Prudhoe Bay gas comes to mind. The gas pipeline from Alaska is no longer viable if shale gas production in the US and Canada continues apace. Produced gas continues to be reinjected. The real price for this gas is well below the price in the Lower 48. The economics of conversion to transport fuel or plastics feed stock is compelling.
Sustained high oil/gas price ratios are predicted. This will drive a secular shift from oil to gas.