Global Energy Market Essay

Global Energy Market

Chapter 1 – Introduction

1.1: Introduction

In the recent times, “The Shale Gas Revolution” is the most talked subjecting the global energy market and is one of the most significant issues in the oil industry. This revolution will not only affect the gas market in the coming years, but it will also have repercussions on the entire energy mix of the world. Shale gas is the form of natural gas which is found within shale. Shale is a kind of impervious sedimentary rock within which this gas is found. Till date this source of energy did not play a huge role in the overall energy market in the world (Nash, 2010). The main reason behind this is that it is very difficult to extract shale gas from the rocks. Further, this process is costly also; therefore, earlier companies were not able to afford its extraction. Since 2000, thanks to technological innovations, its extraction has increased rapidly and it has become a main component of the natural gas market within the United States (Nash, 2010). Shale gas contributed twenty per cent in the production of natural gas in 2010 in United States and the figure is expected to increase day by day (Review of emerging resources: U.S. Shale Gas and Shale Oil Plant, 2011). This source of energy is available in plenty in many parts of the world especially in the United States, China, Algeria, South Africa, Australia, Brazil and many other places (Rao, 2012). With the advancement in the technology, several equipments and processes have been developed that have made the extraction of this form of energy economically viable (although differing geological conditions may lead to qualify this statement). Integrating the availability of shale gas with economic feasibility reflects that in coming years, shale gas will be the one of the main components of the Liquefied Natural Gas (LNG) market across all over the globe (Rao, 2012).

            The present work focuses on development of the shale gas in various parts of the world and its impact on the existing and traditional resources, countries and companies which are the leaders in the business of oil and natural gas. This revolution will not only affect the oil market in the coming years, but it will also have repercussions on the entire energy mix of the world. This work also evaluates the strategies Qatar Petroleum needs to develop to adapt to this new environment.

1.2: Aim and Research Questions

Aim

The main aim of present study is

• To study present scenario of Shale Gas market
• To assess the impact of development of Shale Gas on GCC countries, Qatar Petroleum and others global players strategies

More specifically, the researcher will try to assess the following:

• What will be the impact of development of US shale gas on the petro-chemical sectors?
• Will the development of Shale Gas in the US impact Qatar’s competitive position as an LNG exporter and as a Petrochemical manufacturer?

1.3: Framework Analysis

Research Type:The present work is qualitative in nature as the research is explorative in design and researcher has collected data as per the available literature and through interview (Haimes, 2002).

Data Collection:In the present work both primary and secondary data are used by the researcher. The primary data is collected by conducting interviews of twenty five managers of strategy department of the companies operating in the oil and natural gas industry (Miles and Huberman, 1994). For this purpose a structured questionnaire is prepared by the researcher and accordingly the responses provided by the respondents are recorded (Gill and Johnson, 2002). The questionnaire consists of both open and close ended questions. On the other hand, the secondary data is collected by the researcher from various journals and organisations such as the US Federal Energy Regulatory Commissions (FERC) and the US Government’s Energy Information Administration (EIA). In addition to this, the researcher also referred various books, newspapers, online articles, etc (Gill and Johnson, 2002).

Sampling:In the present work the researcher has adopted judgemental non probabilistic sampling technique. The researcher has selected 25 managers of the strategic department of different companies which are operating in the field of oil and natural gas. Through these respondents researcher will be able to collected most appropriate data (Golafshani, 2003).

Data Analysis:In the present case qualitative tool is used for analyzing the accumulated data. The researcher has employed thematic analysis to plot different themes. On the basis of these themes the researcher will reach to certain outcomes (Babbie, 2010).

1.4: Significance of the work

            The present work focuses on the development of shale gas around the world, the study will be helpful for the companies such as QP to form different strategies so that they get least affected. Qatar is the major leader of natural gas exporter for the European regions through LNG, but with the development of shale gas in this part of the world, reliance of European nation will decrease on the Qatar for energy resource, this could badly impact the economy of the country.

1.5: Limitations of the Research

Research is not an easy task. During the journey, the researcher has to face several challenges. Although, the researcher gave diverse attention on all the parameters, but it is impossible to keep the research limitation free (Ethridge, 2004). Here are some of the major limitations faced by the researcher during this study:

• Since the area of research was not very common, the researcher found it very difficult to collect ample of information. Although, researcher tried his best to accumulate as much data as possible, but availability of data was one of the major limitation of this study (Ethridge, 2004).
• Another limitation for this work was availability of time. Limited time was available to the researcher to conduct the entire researcher process. Thus, in order to complete the work in the given timeframe there may be possibility that some of the data may be skipped by the researcher.
• Since the research has focused on few countries and companies, it is difficult to generalise the outcomes achieved by this work (Ethridge, 2004).
• Managing reliability and validity could be problematic issue for researcher as the researcher has to complete the work in limited financial resources.

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Chapter 2 – The Development of Shale Gas in USA

2.1: Introduction

Since 2000, there has been substantial change in field of global energy market, with the significant change in preferred global energy sources. International Energy agency published the special report “The World Energy Outlook 2011” stating that world is moving towards “Golden age of gas”. This topic has gained much more attention with the emergence of shale gas revolution in US. This further has raised concerns about the stability of gas and energy market globally (Ho, 2013). This section of dissertation attempts to explore the projected impacts of shale gas revolution on global energy demand and supply. It also highlights on future repercussions of shale gas on economies of Qatar, which primarily rely on export of energy resources for their income.

2.2: Evolution of Shale Gas Market

Although this source of energy is available in different parts of the world, still United State has made significant development in this field. Earlier, for many years United Stated was dependent on other countries for requirement of natural gas and therefore, has to import large quantity of natural gas from other nations. However, after the development in the field of extraction of shale gas, it is expected that United State will become an exporter of the shale gas. This is because of available of shale gas in plenty in this region and expansion of shale gas production (Ho, 2013). As per the report published by IEA, by 2035, around seventy per cent of the gas supply in the United State is expected to be consisting of unconventional gas which will include shale gas, coal-bed methane and tight gas. If this happens, then the United State will emerge as energy self sufficient by 2035. The two chart below shows map of major shale gas estimated resources in the world and energy self sufficiency of different nations by 2035 respectively (Ho, 2013).

Since there is large reservoir of shale gas in the United State, it is definitely going to impact the United State market and overall gas demand and supply. Primarily, if we have a look at the consumption pattern of energy, demand of oil primarily generates from the transportation sector, while the demand of natural gas is mainly from the commercial and residential sector. Apart from this, natural gas is also demanded by power generation sector and industrial sector (Ruhl, 2014). As per the recent research study conducted by US Energy Information Administration, China is considered as the largest shale gas reserve with 1100 tcm i.e. trillion cubic meters. This is followed by Argentina with 802 trillion cubic meters, United States with 665 tcm and at last Canada with more than 500 tcm (EIA, 2010).

The evolution of shale gas is considered to be a serious energy issue for Russia. For years, Russia has remained the main gas supplier to many developed and developing countries in the world. Further, international energy community is having a positive outlook on rapid development in the field of shale gas extraction and production in North America. This shows that there is ample of availability of natural gas which will help in diversifying the energy mix, will reduce emission of gases and will contribute in the energy security. But this rapid development will undermine Russian leadership in the global gas market (Ruhl, 2014). Rise in unconventional shale gas production in the countries like United State, China and European region could result as nightmare for the Russia in respect to energy scenario. The United State is producing shale gas since 2009, and in addition to this, China and several other European Nation may also come up as producer of the shale gas to meet their energy requirements (Mathiesen, 2014). The main strategic repercussion of this will be that, Russia, which is the largest producer of natural gas, will lose its attractiveness as a gas exporter. This will not only weaken its strategy related to foreign policy tool, but simultaneously the country will experience decline in its export revenue which significantly supports its national budget. As the United State has increased its production of shale gas and has decreased the import of natural gas, this along with United State’s ability to sell the gas at spot price will result in larger availability of natural gas for the European Nations. Although European nations will need to pay almost 50 per cent more to replace Russia with USA, but in the long run it will be beneficial for them as it will reduce their reliance on Russia (Shiryaevskaya and Strzelecki, 2014). Presently, 10 per cent of Russia’s GDP comes from gas and if the Europena nations switch to US vendors for fuel, the country will have to face some serious repercussions (Decker, 2013).

2.3: Present Scenario of Shale Gas in US

US are the biggest natural gas consumer all over the world. Gas is responsible for twenty five percent of primary energy demand in US, with total annual consumption of gas of 700 billion cubic meters (Huntington, 2007). The major sectors using natural gas include power plants, residential and industries. United States has played dominant role in unconventional gas reserves production such as coal-bed methane, tight gas and shale gas. Share of shale gas with total gas production has increased from 9 percent in 2007 to over forty percent in 2012 in US (Huntington, 2007).

Unique circumstances and an organized framework allowed the development shale gas production technology (such as hydraulic fracturing and horizontal drilling) in US and thus have lead to shale gas boom in the country. One of the primary reasons for sudden increase in shale gas production in US has been upward trend in prices of natural gas during an initial period after 2002 (Gaward and Bugarski, 2013). In addition to this, the success of development of Shale gas in US is mainly attributed to varied factors including favourable geographical conditions and expertise, availability of efficient industry service along with development of new technologies and tax exemption (Gaward and Bugarski, 2013). For more than century, United States has acquired considerable experience as well as technology in drilling in order to extract primary resources of energy such as natural gas and oil. This in turn has given the country a head start when exploring rocks that contain shale gas. In America, Shale gas resources are usually situated in relatively shallow layers and in less populated areas. Therefore, pollution and other environmental concerns do not act as barrier in production of Shale gas in US, like in many parts of Europe (Ho, 2013).

Several specialized companies in US own technologies such as hydraulic fracturing and horizontal drilling that aid in liberating shale gas. Alternate tax reduction offered by the 1980 Crude Oil Windfall Profit Tax Act on production of unconventional gas is also one of the most important success factors of shale gas revolution in US (Gaward and Bugarski, 2013). The tax reduction was about 3USD per BTU of oil barrel. These factors have made production of shale gas economically viable. Subsequently, the rise in supply of shale gas has lead to sharp drop in gas prices in US (EIA, 2010). Additionally, extensive network of pipeline for natural gas existed in US before shale gas became the key gas resource. As well, open access to natural gas pipeline made it possible to produce, store and transport large quantity of shale gas. Apart from that, shale gas production has evolved at rapid pace is due to the fact that in United States, any minerals found below ground particularly belong to surface landowner (EIA, 2010). Therefore, they directly receive monetary benefits, in form of royalties from shale gas production. Many small-scale business corporations have availed the opportunity to immediately close deals with surface landowners for shale gas production (Hoda and Dahlan, n.d). This means that large share of shale gas production in United States is covered by small-scale oil and natural gas companies. Another reason that contributed to boom in shale gas production is the high importance given to fuel independence in US energy policies. Shale gas production has reduced dependence of US on fuel imports and thus has been strongly promoted by policy makers (EIA, 2010).

Shale gas production in US has boomed during last few years. In 2010, total shale gas production amounted to more than 5 tcm. Furthermore, according to Energy Information Agency, this number will get tripled by 2035 (Boersma and Johnson, 2012). Louisiana and Texas have been at forefront of production of shale gas, while production is continuously rising in other states such as Oklahoma, Pennsylvania, Wyoming and Arkansas. As a result, wellhead natural gas prices in US have dropped since 2008 (Boersma and Johnson, 2012). Throughout the past half decade, the substantial increase in shale gas production in United States has led to national self-sufficiency and enabled the country to export gas to Mexico and Canada.

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2.4: Shale gas production and United States Petrochemical industry

The petrochemical industry has witnessed remarkable breakthrough during the last- century; these discoveries include nylon, PVC plastic, polystyrene and synthetic rubber. 46 percent of gas is directly consumed by refining and chemical industry (Rao, 2012). Ethylene and other intermediaries such as butadiene, propylene and benzene are considered as essential component for manufacturing chemical related products. The production of these components is based on two types of feedstock namely naphtha and NGL or Natural Gas Liquids such as propane, ethane and butane (Rao, 2012). Shale gas mainly composes NGL (Ethane and Propane) and Natural gas (Methane). This implies that shale gas revolution tends to have great impact on chemical industry through plummeting prices of key feedstock, particularly ethane, for petrochemical industry.

Traditionally, the petrochemical industry of US relied on naphtha which is produced from oil, in order to produce ethylene, benzene and propylene. This process involved huge amount of financial resources as well as time. The US chemical industry experienced a real challenge in long run due to high production costs (Hoda and Dahlan, n.d). In that period, companies such as Dow chemical were planning to shift their operations and future investment toward the Middle East. However, soon after the shale gas revolution, the situation changed completely. First of all, the prices of natural gas were affected soon after the boom; the prices went down to 68 percent (Hoda and Dahlan, n.d).

It can be inferred from above figure that prices of natural gas in US are considered as one of the lowest all around the world by 2012. The natural gas prices in US were $3 per million BTUs; nevertheless, prices in Saudi Arabia are still lower at $0.75 per million BTUs (Mansour, n.d). But still the fact is that United States is back from years of extremely high prices (Mansour, n.d).

Earlier, petrochemical industry of US was not so much dependent on NGLs as a feedstock in order to produce propylene and ethylene due to high natural gas prices, but it has changed dramatically after boom in shale gas production. This increased the available amount of Natural Gas Liquids as propane and ethane, which further pushed the impact of shale gas to dominate   high natural gas prices and its effects on US petrochemical industry (Ruhl, 2013). The global competitive scenario for petrochemical industry has been reshaped due to lower prices of feedstock and natural gas resulted for shale gas production boom.

Moreover, the increased amount of ethane and other feedstock drove the American gas market to seek new ways to optimally use it. In 2005, the production of the key intermediate (ethylene) for petrochemical industry was primarily depended on Natural Gas Liquids from unconventional gas by 65 percent, NGLs from Naphtha by 32 percent and shale gas by 3 percent (Nash, 2010). The increased shale gas production led to rise in the share of NGLs from shale gas reached to 19 percent in 2010. The percentage of shale gas as feedstock in ethylene production is expected to reach 28 percent by 2015 (Nash, 2010).

The competitive marketplace for global petrochemical industry has been restructured due to drop in prices of natural gas and development of feedstock from exploration of shale gas. The new and relatively lower prices of natural gas pushed the US petrochemical industry total production cost to some extent lower levels than that in Europe, Chine and Latin America (Pirog and Ratner, 2012). The prices of gas in Europe are three to four times higher in comparison to US. For instance, price of natural gas in Europe in 2012 was $11.47 per MBTU whereas in case of US it was only $2.75 per MBTU (Gandolphe, 2013). As a result US gas market has acquired competitive advantage over many international gas markets in production of petrochemicals. In accordance with that, many petrochemical companies all around the world started to operate few of their projects in US market so as to take advantage from boom of shale gas production (Pirog and Ratner, 2012). As well, Energy Information Agency predicts that US marker will have 14 new projects to manufacture propane, ethane and other intermediates with a capacity of more than 10 million metric tons per annum. For instance, BASF, one of the world’s largest chemical companies is investing hugely in American market mainly due to higher natural gas prices in European countries (Mcgregor, 2012).