As the world watches in horror as the Fukushima disaster continues to unfold, it forces a new look at an on-going global revolution in perhaps the least environmentally destructive fossil fuel -- natural gas.
The good economic news is that the fruits of this natural gas revolution may not be long in coming on-line especially given the seemingly unstoppable rise in the price of oil.
The bad environmental news is that the process by which it is extracted is quite obviously destructive to local eco-systems. In many parts of the world, geologists are now testing the ground for natural gas trapped in:
- shale (shale gas),
- sandstone (tight gas)
- or coal seams,
gas that has been largely unreachable in the past.
Using a new technology called hydraulic fracturing, or "fracking," a sort of controlled earthquake if, after Fukushima, we can consider any earthquake to be "controllable" companies are now bringing the gas to the surface all over the globe:
Australia, China, India, Indonesia, Latin America and even Europe. The entire planet is being resurveyed.
Authorities in Poland have awarded 70 concessions for exploratory drilling in the last two years.
The race for the best reserves is also in full swing in Canada, where the Chinese are leading the pack: The Chinese energy company PetroChina has just spent $5.4 billion (€3.9 billion) on a Canadian project.
In the United States, however, the natural gas revolution is the furthest along.
Newly discovered reserves there are already being exploited. About half of the natural gas consumed in the United States now comes from so-called unconventional sources. The country has already replaced Russia as the world's leading natural gas producer.
"We have twice as much gas as the Saudis have oil," boasts Texan investor T. Boone Pickens.
The euphoria is being fueled all the more by current global fears of new oil price shocks.
The crisis in the Middle East makes it painfully clear, once again, how dependent the world's economy is on petroleum reserves in the Arab world and how sensitively prices and growth react to any changes in the region.
When the unrest began in Libya, the international commodities markets fell into a panic within hours. This was not so much because Libya is such an important supplier on world markets. What had traders and dealers so concerned and triggered worldwide panic buys was the fear that the instability could spread to the United Arab Emirates (UAE) and Saudi Arabia.
Together, the UAE and Saudi Arabia are sitting on the world's largest oil reserves.
Unrest with possible interruptions in delivery would drive the price of oil to astronomic heights.
Since the last major oil supply / price crisis in 1979, the industrialized nations have been trying to reduce their dependency on oil from the OPEC countries, with moderate success.
The world's thirst for energy is massive, especially with the growth of China and India, and there are few alternatives to oil. The situation in world oil makes the exploitation of the new natural gas reserves all the more important. Today's estimates of the volume of gas reserves considered exploitable are several times higher than a few years ago, with prognoses ranging from two to six times as high as earlier estimates.
So far, though, engineers have not pumped a single cubic meter of gas out of the earth in most places, except the United States.
And even if the prospects are promising, there is always the risk that instead of encountering so-called "sweet spots," or locations with high concentrations of natural gas, engineers will hit "dry holes." Nevertheless, the expectation is that the energy mix will soon shift significantly toward natural gas.
In its latest global energy forecast, ExxonMobil predicts that natural gas will replace coal as the most important source of electricity by 2030. And because only half as much CO2 is emitted during gas combustion as in coal combustion, the new boom will also have consequences for the world's climate, and for prices in the emissions trading market.
The business of trading pollution rights will likely come under pressure, which in turn will affect renewable forms of energy. The cheaper CO2 rights become, the harder it is for electricity produced with wind power or solar energy to compete in the market.
Hence, the new global gas rush is also triggering a cascade of effects that will change the world energy market and radically change companies.
Corporations like Exxon, BP and Shell, which have seen themselves primarily as oil producers for generations, are now investing billions in the gas industry. Electric utilities like Germany's RWE have to consider whether it will even be economically viable to use coal to generate electricity in the future.
This is how the game has been played to date:
The big European players, like Gazprom in Russia and Statoil in Norway, exploit their reserves and then transport the gas through thousands of kilometers of pipelines to the border of Germany or other European nations. From there, distributors like Ruhrgas or Wintershall feed the gas into their networks and sell it to municipal utilities or industrial customers.
It has been a profitable business for everyone involved. Prices were not even negotiated -- they were dictated.
Long-term agreements were in place with terms of up to 40 years, and they were based on the so-called gas-oil price link, which means that gas prices follow oil prices, only with a few months' delay. The distributors added a healthy margin of up to 30 percent for the distribution, storage and sale of the gas.
For a company like Ruhrgas, this meant that with its roughly €2 billion in annual profits, it was the most important subsidiary within the E.on group. But ever since efforts began to tap the new gas reserves, such astronomical profits have been a thing of the past.
For the first time, something resembling competition has developed in the gas industry. The volumes being traded on the spot markets are getting bigger and bigger. New competitors are buying up gas at favorable terms, which benefits consumers, who can now choose from among an average of 31 gas providers, as compared with only eight providers two years ago.
"It's a rapid development that's nothing short of a revolution for the international gas markets," says Ruhrgas CEO Schäfer.
Now he and his counterparts in the industry have little choice but to renegotiate the terms of their agreements with the producing companies in Moscow and Stavanger, Norway, in the hope of at least making up for some of their losses retroactively.
This is no easy task.
"There is no reason for price adjustments," says Gazprom Germania CEO Vladimir Kotenev, who points out that the excitement over the new reserves is temporary. The partners have made a lot of money together in the past, says the former Russian ambassador to Germany,
and now they'll just have to "endure a dry spell" together.
Geologists have long known that much larger reserves existed in addition to the known, easily exploitable gas wells. The problem was that there were no technologies to extract the gas from the porous rock at a reasonable cost.
That has since changed. Today drilling companies can:
- drive their wells thousands of meters beneath the surface,
- divert the drill heads and
- even continue drilling horizontally.
The engineers can control their high-tech moles with such great precision that they can reach a target location, down to the last meter, even when it's eight kilometers (about five miles) away. Once the target has been reached, an armada of vehicles, the "frack trucks," is dispatched to the well site. The trucks bring giant 2,400 horsepower pumps to the site, where about a dozen of these monsters are connected.
They force a fluid mixture into the gas deposit at a pressure of about 1,000 bar. The mixture consists of millions of liters of water, special sand and chemicals, including toxic substances.
Some of the chemicals are designed to kill bacteria that inhibit the flow of gas. The process produces enough pressure underground to fracture the rock. This creates fine cracks, some of them hundreds of meters long. The sand keeps the fractures open, hence the term "fracking," or fracturing. The fluid is pumped out of the well and the gas escapes like carbon dioxide from a soft-drink bottle: powerfully at first, and then more slowly for several months, until the pressure is so low that the fracking procedure has to be repeated.
It wasn't major corporations like Exxon, Shell and BP that developed this method, but small drilling companies funded by venture capital companies that believed in the revolution. They began drilling in Texas in the 1990s, in a formation called the Barnett Shale, now one of the largest natural gas fields in the world.
Today fracking is being used to pump natural gas out of about 3,000 wells in the United States, with 120 to 150 wells being added every month.
"It's become (normal) manufacturing," says Andrew Ross, managing director of Elixir Petroleum. The actual procedure lasts only about a week, and then the fracking team moves on to the next on a long list of wells usually leaving in its wake the kind of environmental destruction pictured above.
Production using this new method is generally more expensive than with a conventional gas well, but there has been some progress in bringing down costs.
The drilling engineers at Talisman Energy, for example, managed to cut costs in half in the Marcellus Shale field in the northeastern United States. With each new project, more and more gas floods into the market, which is already saturated today, as evidenced by price trends in the United States.
Almost every other commodity has become more expensive in the last year, while the price of natural gas has dropped by 27 percent. And the pricing pressure could continue if the gas supply keeps growing, says John Corben of the International Energy Agency in Paris.
"It will help keep prices down."
This is bad news for Russia.
The Kremlin derives a large share of its national budget from the exploitation of mineral resources.The Russians have invested billions in the infrastructure needed to develop key markets in Europe for the long term. But whether the investment will pay off is still unclear.
The old calculations, from the days when the gas-oil price link was still fully applicable, are now obsolete.
Even less clear is the outlook for the two other major European projects: South Stream, which will link Russia with Europe farther south, and, most of all, for Nabucco, the European Union alternative, which will transport gas from non-Russian suppliers and is intended to make Europe less dependent on Russia.
Companies within the Nabucco consortium are already in exploratory talks with the EU, with the goal of bringing together segments of the Nabucco and South Stream projects, currently competitors.
In addition to changing worldwide energy markets, the emergence of new gas sources is leading to shifts in the global balance of power. Indeed, the dominant position of classic production countries, especially Russia, could soon erode strongly. Poland, on the other hand, could become a relevant player in the global market.
Polish Foreign Minister Radoslav Sikorski already envisions transforming his country into the "next Norway" -- rich, important and independent -- particularly of its giant neighbor Russia.
The United States, for its part, is on a sure path to becoming a self-provider and even exporter instead of a gas importer. The new developments will "significantly improve the energy security of the United States," notes President Barack Obama.
The world market is expanding, the selection is broadening and the consuming countries are becoming less dependent on the producing countries. Germany still gets 40 percent of its natural gas from Russia, but it is quite possible that more and more gas will be coming from the United States in the future.
A gas rush has even erupted in Germany, a country with few natural resources. But the environmental consequences have aroused intense opposition in most communities where fracking is underway.
"It's up to the industry to take the initiative and explain the technology,"says Bruno Courme, managing director of Gas Shales Europe, a subsidiary of French energy conglomerate Total. "We have to answer questions," he says.
And there are many of them. One is about the ingredients of the fracking fluid that's injected into the rock.
Even more important: How contaminated is the sludge that shoots back up to the surface?
And how is it properly disposed of?
The wastewater contains large amounts of salt, and it often contains benzene, xylene and toluene all highly toxic substances that could contaminate groundwater.
The gas industry's engineers insist that contact with groundwater is highly unlikely, because the layers of rock containing the gas are so much deeper. But they do admit to other potential weak points, for instance, when the steel pipes in the borehole are not properly cemented together.
The US environmental authorities have documented a number of such accidents, in which wastewater has harmed the environment. Not everything is going swimmingly in the German gas production industry, either.
In Söhlingen, where Exxon is producing natural gas, wastewater containing toxic chemicals was leaked from the site about three years ago. Citizens' initiatives have since demanded that the authorities tighten their inspection regimens.
Many regulations of Germany's outdated mining law are not relevant to the new technologies. Green Party members of the German parliament, the Bundestag, want to change this. "Citizens need to be more involved," says Oliver Krischer, the party's energy policy expert.
The North Rhine-Westphalia state government is also pushing for a revision of the law and plans to launch an initiative in the Bundesrat, the upper legislative chamber that represents Germany's states.
One way or another, it will take years before the data from the exploratory drilling have been analyzed and producers have decided whether the German sites are worth exploiting.
Only one thing is clear, namely that gas's share of the energy mix worldwide will keep on growing and the fuel will become more important, which will also have consequences for the gas supply in Germany.
"Precisely this circumstance opens up new possibilities," says RWE executive board member Leonhard Birnbaum.
In all likelihood, gas-fired power plants will become increasingly common, replacing old coal plants. They would be the ideal supplement to a fluctuating flow of energy from renewable sources. Gas also offers new prospects as a fuel.
Logistics companies in the United States are already thinking about converting their fleets to natural gas. The old postulate that natural gas is too valuable to burn is no longer true. "A lot of things that didn't make much sense a few years ago" says Ruhrgas CEO Schäfer, now have to be "reevaluated."
Apparently, this also holds true for the national energy plan the German government unveiled last fall. Natural gas plays only a secondary role in the document, because the experts had based their assumptions on higher prices and smaller reserves. In the end, issues of geology are probably not as likely to hold up the gas revolution.
The biggest obstacle, says London antitrust expert Alan Riley, lies in the question of whether society will accept unconventional drilling for natural gas and, of course, whether the gas price will decouple itself from the oil price in the long term.
But at least one major player, Ruhrgas CEO Schäfer, told Spiegel On-Line he is convinced that the trend "is unstoppable, especially given the current price developments in the oil markets" and, sadly, the nuclear tragedy whose dimensions proliferate daily in Japan.
David Caploe PhD
Chief Political Economist