It’s no wonder European renewable industry is nervous about shale gas given it’s impact on generation technologies. First we saw the Coal Carbon Capture and Storage industry killed off three to four years ago when shale first poked its head up on the European utility radar. Then we saw shale kill off conventional coal in the US quickly followed by nuclear as the next victim.
But now we have something even more interesting, an emerging development I had mentioned as remote possibility three years ago: Shale gas displacing oil.
A recent report by Citi, Global Oil Demand Growth – The End Is Nigh, sorry no link available, moves on from two key trends already familiar, the increase of US shale oil supply and the decrease of US oil demand via energy efficiency in transport equalling North American energy independence.
After decades of robust growth in oil demand, the broad consensus in the oil industry and the analytic community is that oil demand will continue its inexorable rise through to 2030.This consensus in turn underpins the belief that oil prices will have to stay high versus historical norms to bring forth enough supply to meet this ever-rising demand. The only matters seemingly up for debate are how fast oil demand will grow and how high prices will need to be to sustain supply growth. Several developments in fact give reason to question the consensus and raise the possibility that the tipping point for oil demand may come much sooner than the markets are expecting.
Disruption, shale gas and tipping points. What’s not to love in reports like this? Peak Oil, even in its' death throes, has significant emotional pull in the energy debate. It works because it’s so simple a child could follow it - and many often do. But life is more complicated for grown ups who see that life is not the Malthusian fairy tale.
Peak oil theory speaks to several other closely held myths, chief among them that the energy industry is some sort of immutable, unchanging force. Cold Wars may end, Internets may rise but the international oil industry is forever. We’ll always have oil. We’ll always have an industry based on rising demand. We’ll always have a world where the Middle East is important. For the conventional /Russian gas industry, we’ll always have a world where the price of gas is linked to oil.
Some say natural gas is the most important energy innovation since electric power, others that the move to natural gas is as important as the switch from coal to oil. I think future generations will go further back and see shale gas as having an impact up there with the light bulb.
The same authors of the Citi report, which includes the redoubtable Ed Morse, now move on to the international scale on efficiency and production while proposing another another key trend, the displacement of oil by natural gas. The displacement of oil in trucking has been a favourite trend of mine, but the new Citi analysis highlights not only the coming impact of natural gas transportation worldwide but also includes marine shipping and two further drivers, end of oil based generation and the substitution of ethane for naptha (gas for oil) in the chemical industry.
One of the many unforeseen ripple effects of the US shale revolution is a push to substitute natural gas for oil. This is set to accelerate with LNG already challenging diesel’s 13 mb/d heavy duty truck use globally but especially in China, bunker’s 3.7 mb/d seaborne market, and CNG and propane set for exponential growth not only in markets such as Brazil, Egypt, Iran and India, but in Russia and the US as well.
Let’s see where we are today. According to BP, 2012 oil use was 88 million barrels per day and according to Citi, this is how it was broken down:
Up until now, everyone has thought of oil demand as something quasi permanent, something always there on the energy menu. Like coal and nuclear perhaps? But to break down this by sector, we can see that to varying extents, not a single variable will be immune to natural gas substitution.
We’ve thought of oil as primarily a transportation fuel for cars, where it’s dominance is safe -for now at least. Any type of fuel depends on infrastructure to get it from producer to market and replacing every petrol/gasoline station on the planet is not on even the most optimistic radars.
But we don’t need to do that. Cars are just under 30% of all oil, and efficiency gains are almost keeping pace with the number of cars themselves. But in every other sector, potential for gas substitution is ranges from interesting to completely obvious.
Other industrials is a term that covers everything else including refining, mining equipment, industrial machinery and of course the diesel used in operations like fracking.
Trucking is well known for the potential for switching and Citi reports an amazing figure compared to everyone else, most especially the UK of low double figures of trucks and a handful of filling stations:
China already has over 40,000 LNG-fuelled trucks, and exponential growth is expected to continue as many city governments have policies in place to promote them. By end-2010 more than 80 cities in China had more than 1000 CNG/LNG filling stations, and another 1000 are planned for construction. Environmental concerns are complementing economic incentives to drive the shift in China.
Residential oil use is also slipping as the cost of oil is making the case to switch to gas more compelling. Shipping is another use as pollution standards combine with economics. While electricity generation from oil is almost unknown in the UK, it still has significant pockets of demand. Other transport means fleets of buses, taxis and delivery vehicles. Any fleet which can fuel from one central filling station means greatly reduced infrastructure requirement. Rail,itself booming via displacment of road based trucking, is another growing sector.Aviation is the only sector where gas has yet to make the leap from experimental to actual getting off the ground.
Citi goes on to project various cases for oil to substitution:
A high case of 15% lower oil demand in 2025 is great news for both the planet and the natural gas industry.
It is important to note how bullish for global gas consumption this gas-for-oil substitution could be, as 1 mb/d of oil roughly equates to 45m MT of LNG, so 2 mb/d of switching ex-US could go a long way towards absorbing the potential wave of LNG coming to global markets at end decade
In other words,13 million barrels a day is 725 BCM a year of gas, which sounds like one hell of a gap to fill but equals an extra 22% of 2010 production of 3282 BCM.That number is achievable even with gas to coal substitution assuming, as seems likely that on a global basis at least, the US shale revolution can be replicated.
Natural gas is up to 30% lower in carbon emissions, at least in shipping, trucking, transportation and machinery use. Throw in a complete lack of particulate pollution and the consequences are as clear as the air. We can have economic growth, secure energy supplies, lower costs and be kind to the environment. What’s to hate about that?
The answer is: Absolutely nothing, especially as there are almost no green alternative toes to step upon in the above list. A forty ton electric truck would need 42 tons of batteries. One can no easier see a greening of the petrochemical industry (via billions of acres of biomass) than envisage a solar powered one of these:
Green/renewable objections have centred on a false competition. Only a third of natural gas is used to generate electricity for example. Greening of gas heat would be difficult while greening of industrial use would be, apart from nibbling at the edges, physically impossible.
If the industry can explain itself not as rival but enabler of renewables, then natural gas will be free to operate more fully in markets where it has the green advantage. There's so many places for the gas industry to grow by increasing demand that we could acually give up on generation entirelyin some places. But then how would the lights actually stay on? Putting that question into the green court is perfectly valid and it's about time they responded.