The impact of the growth in unconventional gas extraction on global prices of energy commodities

The rapid rise in shale gas extraction in North America in recent years has not only considerably changed the situation on the natural gas market, but also affected the prices of other energy commodities, in particular coal. Surpluses of cheap energy coal are being exported from the USA to Europe, and US shale gas is thereby reducing prices of electricity and heat in Europe, including the Czech Republic (see section II.2). The higher coal consumption is also reducing demand for natural gas, forcing suppliers of pipeline gas in Europe to take current natural gas prices on local exchanges into account in their long-term contracts in addition to the price of oil.

There are a number of unanswered questions surrounding the future of shale gas extraction, for example whether the current increase in extraction in the USA is only temporary or is sustainable in the long term. Another question is whether the new technology (which was a precondition for economically viable extraction in the USA) can be applied in other parts of the world and whether it will also result in lower gas prices there. Sceptics regard the current boom in the USA as temporary, because shale gas was initially extracted from areas with the highest rock saturation (“sweet spots”) and is now gradually moving to less favourable conditions with lower yields. This is leading to higher costs and less economical production. Maintaining or increasing production in the USA therefore hinges on prices rising from their current low levels. The current EIA forecast reflects the rapid growth in natural gas prices in the USA this year and has also revised the price growth outlook for 2014 upwards. Growth in gas extraction in the USA should meanwhile slow (see Table 1).

Table 1 (BOX)  EIA forecast for natural gas prices and extraction volumes in the USA     
The rapid growth in natural gas extraction in the USA should gradually slow and the gas price growth this year should almost offset the plunge in 2012. Prices should continue rising next year       
(prices in US dollars per MBtu; production in bcf per day; source: EIA

Note: MBtu = million British thermal units, bcf = billion cubic feet

The extraction costs for conventional and unconventional gas are converging as conventional extraction gradually moves from easily accessible but exhausted mainland reservoirs to tougher locations (onshore and offshore). The costs differ significantly across various regions of the world (see Table 2). For the USA, the EIA estimates the break-even costs for unconventional extraction at USD 5–7 per MBtu; if the reservoir also contains a liquid component, the costs may be only USD 3 per MBtu. In Europe, both conventional and unconventional extraction is more expensive owing to a more complex geology. Potential arbitrage between the two markets is complicated by the cost of LNG liquefaction and transport. Gas prices are therefore higher in Europe than in the USA (see Chart 1).

Table 2 (BOX)  Approximate investment and operating costs of natural gas extraction in various regions             
Extraction costs are lowest in the USA and highest in Europe            
(year-2010 dollars per MBtu; source: IEA)

*The lower range for Russia represents production from the traditional producing regions of Western Siberia and the Volga-Urals; the higher range is for projects in new onshore regions such as Eastern Siberia and offshore and Arctic developments.
Note: MBtu = million British thermal units

Chart 1 (BOX)  Natural gas prices in different regions
Natural gas prices differ markedly across regions; in Europe, pipeline gas prices (Russian gas in Germany) are converging to stock market prices at the ICE 
(US dollars per MBtu; source: Bloomberg)

An IEA study of 2012 (Golden Rules for a Golden Age of Gas) also indicates that the price differences across regions will persist. It simulates two possible future scenarios for unconventional gas extraction. The optimal scenario (the “Golden Rules Case”) assumes that the conditions are in place for a global expansion of supply from all important reservoirs. By contrast, the adverse scenario assumes that the environmental and other obstacles facing this type of extraction in many parts of the world will not be overcome. A gas price forecast was modelled for various regions on the basis of these scenarios (see Table 3). Although current gas prices are significantly outside the forecast band (especially in Europe and Japan), it can be inferred from the table that not even the optimal conditions for unconventional extraction will prevent future growth in natural gas prices. This growth is naturally more pronounced for sub-optimal extraction, but even in the optimal case it is not realistic to expect natural gas prices in Europe to fall to the US level.

Table 3 (BOX)  IEA scenarios for natural gas prices                    
Both scenarios assume future price growth, more so for sub-optimal extraction. Price differences between major regions remain
(year-2010 dollars per MBtu; source: IEA)

Note: MBtu = million British thermal units