TODAY’S STUDY: HOW TO DO NAT GAS RIGHT

Golden Rules for a Golden Age of Gas; World Energy Outlook Special Report on Unconventional Gas

29 May 2012 (International Energy Agency)

Executive Summary

Natural gas is poised to enter a golden age, but will do so only if a significant proportion of the world’s vast resources of unconventional gas – shale gas, tight gas and coal bed methane – can be developed profitably and in an environmentally acceptable manner. Advances in upstream technology have led to a surge in the production of unconventional gas in North America in recent years, holding out the prospect of further increases in production there and the emergence of a large-scale unconventional gas industry in other parts of the world, where sizeable resources are known to exist. The boost that this would give to gas supply would bring a number of benefits in the form of greater energy diversity and more secure supply in those countries that rely on imports to meet their gas needs, as well as global benefits in the form of reduced energy costs.

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Yet a bright future for unconventional gas is far from assured: numerous hurdles need to be overcome, not least the social and environmental concerns associated with its extraction. Producing unconventional gas is an intensive industrial process, generally imposing a larger environmental footprint than conventional gas development. More wells are often needed and techniques such as hydraulic fracturing are usually required to boost the flow of gas from the well. The scale of development can have major implications for local communities, land use and water resources. Serious hazards, including the potential for air pollution and for contamination of surface and groundwater, must be successfully addressed. Greenhouse-gas emissions must be minimised both at the point of production and throughout the entire natural gas supply chain. Improperly addressed, these concerns threaten to curb, if not halt, the development of unconventional resources.

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The technologies and know-how exist for unconventional gas to be produced in a way that satisfactorily meets these challenges, but a continuous drive from governments and industry to improve performance is required if public confidence is to be maintained or earned. The industry needs to commit to apply the highest practicable environmental and social standards at all stages of the development process. Governments need to devise appropriate regulatory regimes, based on sound science and high-quality data, with sufficient compliance staff and guaranteed public access to information. Although there is a range of other factors that will affect the development of unconventional gas resources, varying between different countries, our judgement is that there is a critical link between the way that governments and industry respond to these social and environmental challenges and the prospects for unconventional gas production.

We have developed a set of “Golden Rules”, suggesting principles that can allow policymakers, regulators, operators and others to address these environmental and social impacts. We have called them Golden Rules because their application can bring a level of environmental performance and public acceptance that can maintain or earn the industry a “social licence to operate” within a given jurisdiction, paving the way for the widespread development of unconventional gas resources on a large scale, boosting overall gas supply and making the golden age of gas a reality.

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The Golden Rules underline that full transparency, measuring and monitoring of environmental impacts and engagement with local communities are critical to addressing public concerns. Careful choice of drilling sites can reduce the above-ground impacts and most effectively target the productive areas, while minimising any risk of earthquakes or of fluids passing between geological strata. Leaks from wells into aquifers can be prevented by high standards of well design, construction and integrity testing. Rigorous assessment and monitoring of water requirements (for shale and tight gas), of the quality of produced water (for coalbed methane) and of waste water for all types of unconventional gas can ensure informed and stringent decisions about water handling and disposal. Production related emissions of local pollutants and greenhouse-gas emissions can be reduced by investments to eliminate venting and flaring during the well-completion phase.

We estimate that applying the Golden Rules could increase the overall financial cost of development a typical shale-gas well by an estimated 7%. However, for a larger development project with multiple wells, additional investment in measures to mitigate environmental impacts may be offset by lower operating costs.

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In our Golden Rules Case, we assume that the conditions are in place, including approaches to unconventional gas development consistent with the Golden Rules, to allow for a continued global expansion of gas supply from unconventional resources, with far-reaching consequences for global energy markets. Greater availability of gas has a strong moderating impact on gas prices and, as a result, global gas demand rises by more than 50% between 2010 and 2035. The increase in demand for gas is equal to the growth coming from coal, oil and nuclear combined, and ahead of the growth in renewables. The share of gas in the global energy mix reaches 25% in 2035, overtaking coal to become the second-largest primary energy source after oil.

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Production of unconventional gas, primarily shale gas, more than triples in the Golden Rules Case to 1.6 trillion cubic metres in 2035. This accounts for nearly two-thirds of incremental gas supply over the period to 2035, and the share of unconventional gas in total gas output rises from 14% today to 32% in 2035. Most of the increase comes after 2020, reflecting the time needed for new producing countries to establish a commercial industry. The largest producers of unconventional gas over the projection period are the United States, which moves ahead of Russia as the largest global natural gas producer, and China, whose large unconventional resource base allows for very rapid growth in unconventional production starting towards 2020. There are also large increases in Australia, India, Canada and Indonesia. Unconventional gas production in the European Union, led by Poland, is sufficient after 2020 to offset continued decline in conventional output.

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Global investment in unconventional production constitutes 40% of the $6.9 trillion (in year-2010 dollars) required for cumulative upstream gas investment in the Golden Rules Case. Countries that were net importers of gas in 2010 (including the United States) account for more than three-quarters of total unconventional upstream investment, gaining the wider economic benefits associated with improved energy trade balances and lower energy prices. The investment reflects the high number of wells required: output at the levels anticipated in the Golden Rules Case would require more than one million new unconventional gas wells worldwide between now and 2035, twice the total number of gas wells currently producing in the United States.

The Golden Rules Case sees gas supply from a more diverse mix of sources of gas in most markets, suggesting growing confidence in the adequacy, reliability and affordability of natural gas. The developments having most impact on global gas markets and security are the increasing levels of unconventional gas production in China and the United States, the former because of the way that it slows the growth in Chinese import needs and the latter because it allows for gas exports from North America. These developments in tandem increase the volume of gas, particularly liquefied natural gas (LNG), looking for markets in the period after 2020, which stimulates the development of more liquid and competitive international markets. The share of Russia and countries in the Middle East in international gas trade declines in the Golden Rules Case from around 45% in 2010 to 35% in 2035, although their gas exports increase by 20% over the same period.

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In a Low Unconventional Case, we assume that – primarily because of a lack of public acceptance – only a small share of the unconventional gas resource base is accessible for development. As a result, unconventional gas production in aggregate rises only slightly above current levels by 2035. The competitive position of gas in the global fuel mix deteriorates as a result of lower availability and higher prices, and the share of gas in global energy use increases only slightly, from 21% in 2010 to 22% in 2035, remaining well behind that of coal. The volume of inter-regional trade is higher than in the Golden Rules Case and some patterns of trade are reversed, with North America requiring significant quantities of imported LNG. The Low Unconventional Case reinforces the preeminent position in global supply of the main conventional gas resource-holders.

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Energy-related CO2 emissions are 1.3% higher in the Low Unconventional Case than in the Golden Rules Case. Although the forces driving the Low Unconventional Case are led by environmental concerns, this offsets any claim that a reduction in unconventional gas output brings net environmental gains. Nonetheless, greater reliance on natural gas alone cannot realise the international goal of limiting the long-term increase in the global mean temperature to two degrees Celsius above pre-industrial levels. Achieving this climate target will require a much more substantial shift in global energy use. Anchoring unconventional gas development in a broader energy policy framework that embraces greater improvements in energy efficiency, more concerted efforts to deploy low-carbon energy sources and broad application of new low-carbon technologies, including carbon capture and storage, would help to allay the fear that investment in unconventional gas comes at their expense.

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The Golden Rules

Measure, disclose and engage

 Integrate engagement with local communities, residents and other stakeholders into each phase of a development starting prior to exploration; provide sufficient opportunity for comment on plans, operations and performance; listen to concerns and respond appropriately and promptly.

 Establish baselines for key environmental indicators, such as groundwater quality, prior to commencing activity, with continued monitoring during operations.

 Measure and disclose operational data on water use, on the volumes and characteristics of waste water and on methane and other air emissions, alongside full, mandatory disclosure of fracturing fluid additives and volumes.

 Minimise disruption during operations, taking a broad view of social and environmental responsibilities, and ensure that economic benefits are also felt by local communities.

Watch where you drill

 Choose well sites so as to minimise impacts on the local community, heritage, existing land use, individual livelihoods and ecology.

 Properly survey the geology of the area to make smart decisions about where to drill and where to hydraulically fracture: assess the risk that deep faults or other geological features could generate earthquakes or permit fluids to pass between geological strata.

 Monitor to ensure that hydraulic fractures do not extend beyond the gas producing formations.

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Isolate wells and prevent leaks

 Put in place robust rules on well design, construction, cementing and integrity testing as part of a general performance standard that gas bearing formations must be completely isolated from other strata penetrated by the well, in particular freshwater aquifers.

 Consider appropriate minimum-depth limitations on hydraulic fracturing to underpin public confidence that this operation takes place only well away from the water table.

 Take action to prevent and contain surface spills and leaks from wells, and to ensure that any waste fluids and solids are disposed of properly.

Treat water responsibly

 Reduce freshwater use by improving operational efficiency; reuse or recycle, wherever practicable, to reduce the burden on local water resources.

 Store and dispose of produced and waste water safely.

 Minimise use of chemical additives and promote the development and use of more environmentally benign alternatives.

Eliminate venting, minimise flaring and other emissions

 Target zero venting and minimal flaring of natural gas during well completion and seek to reduce fugitive and vented greenhouse-gas emissions during the entire productive life of a well.

 Minimise air pollution from vehicles, drilling rig engines, pump engines and compressors.

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Be ready to think big

 Seek opportunities for realising the economies of scale and co-ordinated development of local infrastructure that can reduce environmental impacts.

 Take into account the cumulative and regional effects of multiple drilling, production and delivery activities on the environment, notably on water use and disposal, land use, air quality, traffic and noise.

Ensure a consistently high level of environmental performance

 Ensure that anticipated levels of unconventional gas output are matched by commensurate resources and political backing for robust regulatory regimes at the appropriate levels, sufficient permitting and compliance staff, and reliable public information.

 Find an appropriate balance in policy-making between prescriptive regulation and performance-based regulation in order to guarantee high operational standards while also promoting innovation and technological improvement.

 Ensure that emergency response plans are robust and match the scale of risk.

 Pursue continuous improvement of regulations and operating practices.

 Recognise the case for independent evaluation and verification of environmental

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