Were it not for the shale revolution started in the United States, the world would now have big problems delivering sufficient oil and gas and would be saddled with even higher oil prices, said Jarand Rystad, managing partner, Rystad Energy.

“Thank you, George Mitchell and all the others in the entire industry, for bringing these technologies out to the global market. We are evaluating what will come next,” he told participants at the Hart Energy DUG 2012 Conference in Ft. Worth, TX, on April 24. “Thank you, America. You have simply saved the world economy. This time also you have a revolution with global impact.”

Rystad participated on a panel presentation on “The Forecast -- New Unconventional Supply and New Demand” with Porter Bennett, president and chief executive officer, Ponderosa Advisors, John Staub, team leader, exploration and production team, Office of Petroleum, Natural Gas and Biofuels Analysis, Energy Information Administration, Bradley Olsen, vice president, midstream research, Tudor, Pickering, Holt & Co. Securities Inc.

Because of the shale revolution in the U.S., Rystad stated, “Changes as fast as this are called revolutions. For natural gas currently, we are approaching a self-supplied situation in the U.S. With the volumes from Canada, North America is already self-supplied.

“Based on the revolution ins liquids from shale, we expect a 50% increase from tight oil and shale oil. If you add on top of that, imports from Canada -- both shale oil and primarily oil sands, we are approaching demand in the U.S. and just need a few more imports from other Americas producers like Mexico and Venezuela. We have far more than we need in the U.S. in 2020.

“Of course, these nations could use a lot of the oil themselves. But, the Americas will be self-sufficient and this will be a big revolution,” he emphasized.

International shale gas is being inspired by North America, but it will take time to understand the geology and develop the industry. By 2030, production is likely to only be 10 trillion cubic feet (Tcf), 25 Tcf in 2040 and 45 Tcf in 2050.
Bennett described the U.S. gas markets. “In my opinion, I think it is important to recognize that this is one of the best positions the gas industry has been in during the 30 years I’ve been watching the industry.

“We have a price environment that is a little bit troubling and a number of other challenges. In the end, the industry is positioned very well to push out coal, alternative fuels and other competitors and even a number of those competitors that are subsidized to varying degrees,” he noted.

“With private money, the gas industry is poised to dominate power generation and I believe it will ultimately cut into the transportation fuels business. Ultimately, we’re in the position now to become the center of the energy economy in this country and perhaps around the world,” Bennett stated.

He pointed to the new peak in natural gas production reached in the U.S. in 2011 of 59.5 billion cubic feet per day (Bcf/d). “We’ve already exceeded that handily at 63.8 Bcf/d. This year, we’re up a little over 5.0 Bcf/d from where we were at this time in 2011.”

Bennett warned the audience about tending to frame their view of the future by what has happened recently. “It is important that you not get trapped by thinking about the future too much from the frame of reference of today. There’s too much change going on.”

Given the low natural gas prices and record-high storage levels, he pointed out that production was not falling off. For example, a lot of drilling rigs have been transferred from gas-prone areas to liquids-rich areas. However, incremental production remained steady.

In a basin-by-basin study of rig movements, Bennett pointed out that two-thirds of the incremental production is now coming from liquids-rich basins. “In other words, we’re moving rigs from dry-gas areas to wet-gas areas, but we’re not losing gas. And, there-in lies the problem.”

Innovation continues to impact production. “The reality is that because of the increased productivity of the drilling rigs, there is a 5% increase in production,” he added.

And, few operators are cutting back on rig fleets. Of the top 20 operators in the shale plays, only five companies have actually reduced rig counts between Dec. 31, 2011, and April 20, 2012. Encana is the only company that has reduced its fleet by five rigs.

He also explained that demand could be impacted by coal-to-gas switching in power generation. “I’ve seen estimates that if gas prices in the low $1.00 to $1.50 range hovered there for very long, you could see as much as 6.0 to 10 Bcf/d of short-term coal-to-gas switching.”

The EIA estimates that essentially 50% of U.S. natural gas will be from shale by 2035. “The U.S. will become an exporter of natural gas -- first to Mexico and then liquefied natural gas (LNG),” Staub said.

“What I want to focus on is the importance of technology, resources and economics. If you don’t have all three, you don’t have any gas or oil,” he emphasized. “You need the resources. You need technology to produce it. And, you need a marketplace that values the technology and resources.”

He also told the conference that one of the challenges facing the industry in the future is that unconventionals will be harder to define.

Olsen focused on the mid-stream markets for natural gas liquids (NGLs). Why should anyone be interested in NGLs? “The simple answer is that NGLs today produce almost as much as natural gas production. Aggregate revenue from natural gas production is about $50 billion. NGL aggregate revenue at current prices is up to about $42 billion.”

NGLs growth is going to outpace crude oil or even natural gas over this decade, he stated. Demand is also growing strong for NGLs.

“Demand is going to face a pretty tough up-hill climb to keep up with the dramatic explosion in supply. My key takeaway here is that we should be prepared for a world where NGLs realizations on a composite, barrel basis are about 40% to 45% of WTI price.”

Over the next few years, about $30 billion is being spent on mid-stream infrastructure. About 40% of those projects will be processing plants. The remaining 60% is for fractionation plants and pipelines, which tend to be long-term, take-or-pay contracts.

“Even if you don’t have the liquids volumes to fill the pipeline or fractionator, you are still paying 80% to 90% of the full tariffs as part of your contract. With a fairly conservative set percentage rate of return, our assumption on the midstream assets is that anywhere from 12% to 20% of the incremental NGL revenue goes to the midstream company for what he has built,” he explained.

Even with large capacity additions in 2013-14, the incremental supply really overwhelms incremental demand for most of the decade. “We think that ethane prices will suffer as a result,” he added.

Propane is also likely to see price erosion until exports pick up to the point of supporting higher prices.

Contact the author, Scott Weeden, at sweeden@hartenergy.com.