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China’s ambitious new gas development policy, troubles in the nuclear sector, the need to reduce carbon emissions and the discovery of vast new unconventional gas resources are all combining to lead us into a “golden age of natural gas”, says the International Energy Agency (IEA). But, the IEA adds, a global dash for gas will not change the industrial world’s dependency on oil imports and it will not reduce the need to take drastic climate measures. ‘There is no doubt that energy is going to be more expensive’, says IEA division head László Varró.

No doubt some nice bottles of wine were uncorked in a number of gas companies’ board rooms last June when the IEA released its special report on the future of gas. The title of the report – “Are We Entering a Golden Age for Gas?” – was cast in the form of a question, but it seemed very much a rhetorical one. The answer provided by the IEA was a resounding Yes!

The Golden Age of Gas report is essentially an update of the IEA’s base case scenario (or “New Policies Scenario”) from its annual World Energy Outlook (WEO) report. The WEO is the IEA’s flagship publication, which each year sets out in great detail where the world’s energy markets are headed for in the next decades, under certainly policy assumptions. The Paris-based energy think tank of the OECD felt it necessary this year to come up with an intermediate “excerpt” from the WEO focusing specifically on natural gas. In this new report, the IEA concludes that the ‘outlook’ for natural gas is even ‘more positive’ than before.

There are several reasons why the IEA was prompted to proclaim the coming of a Golden Age for gas: first of all, the implementation by China of an ambitious new policy for gas use (in the new Five-Year Plan adopted in March 2011 by the National People’s Congress); secondly, a lower expected growth of nuclear power (in the wake of Fukushima), leading to a higher demand for gas; and thirdly, the increasing use of natural gas in road transport. These trends come on top of two major developments that are highly favourable to natural gas and that were already identified in the World Energy Outlook: the need to reduce carbon emissions and the discovery of vast new “unconventional” gas resources.

In its new Golden Age for Gas (GAS) Scenario, the IEA sees the share of natural gas in the global energy mix rise from 21% to 25% in 2035, compared to just 22% in the previous New Policies Scenario. Global demand will rise to 5.1 trillion cubic metres (tcm) in 2035 – 1.8 tcm more than today and nearly 0.6 tcm more than in the New Policies Scenario. China’s gas demand will rise from about the level of Germany in 2010 to match that of the entire EU in 2035. But China is not the only growth country. The IEA forecasts demand in the Middle East to double, reaching a level similar to China’s in 2035. Demand in India is expected to quadruple.

Obviously, such huge growth will require an equally large growth in production. Indeed, the increase in production necessary to meet the growth in gas demand up to 2035 will be equivalent to three times the current production of Russia! However, according to the IEA, ‘global natural gas resources can comfortably supply this demand’ – well beyond 2035, in fact. Thanks to the revolution in shale gas, tight gas and coalbed methane, all regions in the world have the potential to increase their gas production significantly ‘and enhance overall energy security’, notes the IEA, By 2035, unconventional gas will meet over 40% of demand and China will be one of the world’s largest gas producers. Europe is the only region in the world for which the gas outlook is less promising (see the box below). Better still, the production of this new gas will not cost much more than it does now and its environmental impacts are limited if well-managed.

All this sounds very upbeat of course, yet the report also contains some not so good news for gas advocates. First of all, oil will still be the world’s most important energy source in 2035, so the dash for gas is not going to take us into a radical new Energy Age, free of OPEC and Middle East concerns. Perhaps even more importantly – and surprisingly – in the Golden Age of Gas (GAS)-scenario global CO2 emissions will only be slightly lower than in the IEA’s New Policies Scenario. The Gas Age will, in fact, do little to diminish global warming, warns the IEA. This is because the increased use of natural gas will not only displace a lot of coal in power generation (thus lowering emissions), but also nuclear power (thus pushing up emissions). In addition, there is a risk that with cheap, abundant gas available, governments’ resolve to support renewable energy will waiver, which would be even worse news for the climate. Hence, natural gas advocates can hardly claim that a Golden Age of Gas will be a Golden Age of Climate as well.

European Energy Review’s editor Karel Beckman spoke to László Varró, Head of Division of the Gas, Coal and Power Markets Division of the IEA about some of the implications of the IEA’s Golden Age of Gas report.

EER: There has been a lot of talk in recent years about the unconventional gas revolution, but what may surprise some is that, as your report shows, even the world’s conventional gas reserves are huge.

Varró: Yes, conventional gas resources are indeed very large. In fact, in the past 30 years, the reserves replacement ratio has been consistently well over 100% globally. This means that despite the consumption of large amounts of gas, global gas reserves have been increasing continously for at least 30 years, maybe more! Even without the unconventional gas revolution, the picture of the resource base is very comfortable. And imagine that billions and billions of cubic metres of gas are still being flared in Russia, Nigeria, Iraq and elsewhere. The amount of gas flared in oil production is roughly equal to the gas consumption of a large European country. So the resource base is very large.

EER: What will be the impact of the unconventional gas development?

Varró: The unconventional gas revolution has roughly doubled the gas resource base. Not only that, unconventional gas has a different and wider distribution than conventional resources. At this moment, Russia, Iran and Qatar control half the world’s conventional resources. This is a bigger concentration than in oil. Clearly there are geopolitical issues with Iran. Qatar, although a stable country, is located in the Gulf, which has a bit of history. And there have been issues with Russian gas as well. With shale gas, however, we have very large resources in countries with massive domestic energy demand, such as the US and in China. If there is one country that is brightening the future of gas, it’s China. Today, gas is not playing a major role in the Chinese energy mix, but that is going to change rapidly. If you want to be big in gas, you will need to be big in China.

EER: Can we say the same about global oil resources?

Varró: There are large oil resources as well, but the resource availability is much better for gas. No doubt about that. And we do have unconventional oil, like tar sands and shale oil, but not on the scale of unconventional gas.

EER: To what extent does the Golden Age of Gas report reflect new insights within the IEA?

Varró: We did not come to this realisation in the last few months or so. It has been a gradual process over the last couple of years. But the speed of the shale gas revolution took us by surprise, as it did everyone. Remarkably, on the same day in June 2005 on which the CEO of ExxonMobil declared that US gas production had entered an irreversible decline, shale gas production started in the Barnett basin.

EER: There is still a lot of scepticism about the possibilities of shale gas and other types of unconventional gas. Some critics argue that the decline rates in the North American shale gas plays are very high, so the resources might well be overestimated.

Varró: We don’t agree. In our estimate the major US shale gas plays are comparable in terms of recoverable resources to the supergiant conventional fields. Decline rates are indeed high which leads to intensive drilling, but there have been genuine technological developments in costs and operations. We have very little doubt that the further growth of US production of shale gas is sustainable. And also the resource base outside the US is very large. Having said that, replicating the US success elsewhere is easier said than done. The US has a very favourable combination of good geologic conditions, highly developed gas markets, good infrastructure, an adequate regulatory framework, and a well-developed oil and gas services industry that can ramp up its activities at short notice. That combination of geological, policy and corporate factors is not easy to replicate. Nevertheless, we do expect commercial shale gas production to take off outside the US.

Full interview