Shale Gas and Import Dependency: A Multi-Method Model-Based Exploration

Shale Gas and Import Dependency: A Multi-Method Model-Based Exploration

Ruben Moorlag (Delft University of Technology, Delft, Netherlands), Erik Pruyt (Faculty of Technology, Policy and Management, Delft University of Technology, Delft, Netherlands), Willem L. Auping (HCSS, The Hague, Netherlands) and Jan H. Kwakkel (Delft University of Technology, Delft, Netherlands)
Copyright: © 2015 |Pages: 26
DOI: 10.4018/IJSDA.2015010102

Abstract

Today, many governments are considering the exploration and production of unconventional resources, shale gas in particular, for reasons of security of supply and reduction of import dependency. Large-scale development of these resources promises to significantly lower import dependency of gas supply of many countries. Whether the promise will be met remains uncertain though, not only because of uncertain resources, technological challenges, and environmental concerns, but also because of the interdependence, complexity and uncertainty of gas markets. Modelling and simulation may therefore be required to assess the resulting economic implications of global shale gas development. In this study, System Dynamics and Agent-Based models are simultaneously deployed under deep uncertainty to discover and explore plausible scenarios for the development of shale gas and the effects on regional gas markets and regional import dependency. Among else, it is shown that regional economic growth is likely to have a larger impact on gas import dependency than the actual size of shale gas resources.
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1. Introduction

During the coming decades, the global energy system will be confronted with the challenge of keeping up with increasing demand, as global energy demand is projected to increase by 25-45% by 2030 compared to the 2010 level (BP, 2013; International Energy Agency, 2012). Since the global energy mix changes slowly, fossil fuels are expected to continue to play an important role in the future (Bradshaw, 2009; International Energy Agency, 2012; Kolb, 2011). However, climate change requires the carbon footprint of energy consumption to decrease drastically. Given these developments, natural gas could play an important role as primary energy source due to its relatively low CO2 emissions, high energy density, and widespread applicability. High gas consumption in many industrialized nations has caused conventional gas resources to decline rapidly over the past decades though (International Energy Agency, 2012).

Recent developments in the exploration and production of unconventional energy resources – in particular shale gas – could significantly extend the role of natural gas as one of the primary energy sources. These developments are fundamentally changing the structure of the oil and gas industry (Mitchel & Mitchel, 2014). In the United States -so far the only country to have started to exploit their shale gas resources on a large scale- the development of shale gas resources has already caused large drops in the price of natural gas (Energy Information Administration, 2014). The effects of the lower price and the belief in natural gas as the prevailing cheap energy source for the coming decades are illustrated by the fact that the chemical industry in the United States is considering a switch from naphtha to natural gas as their main feedstock (Snow, 2014).

In spite of these positive effects, the United States’ shale gas revolution has not spread to other parts of the world yet. Geology, experience with resource extraction, the well-developed (energy) infrastructure, the open market, the way property rights are set up, and the low political risk all contributed to a rapid development of shale gas in the United States. While in other countries conditions are less favourable (Alquist & Guénette, 2014), exploitation of shale gas resources is often argued to be beneficial in terms of security of supply in general, and import dependency in particular. As shale gas resources are more evenly distributed across countries than conventional gas resources, national governments across the world want to reduce import dependency by producing a larger share of their energy demand domestically (Medlock, 2012). This is especially the case for European countries: the 2006 and 2009 gas crises painfully confirmed their dependence on Russian gas supply (Kovacevic, 2009). However, decision-making processes regarding the development of shale gas have stalled, mainly due to the uncertainty with regard to the potentially negative environmental effects of shale gas exploration. This resulted, for example, in a provisional ban on test drillings in countries like the Netherlands, Belgium, France, and South Africa (International Energy Agency, 2012). In addition to these environmental concerns, it remains uncertain how shale gas extraction across the world could affect global and regional gas markets in terms of supply, demand, prices, and transport infrastructure. For example, the Henry Hub gas price dropped so rapidly in 2012 that energy companies that had just started exploiting their shale gas fields had to suspend production since the price dropped below their marginal costs (Natural Gas Intel, 2012). The failure of market analysts of multinational energy companies to foresee this major drop illustrates the complexity and unpredictability of gas markets. The complexity of gas markets is caused by a number of factors: Many actors are active on the market (i.e. base load suppliers, peak suppliers, consumers, gas-fired power plants, LNG traders and gas storage operators); Gas is traded on spot markets but also by means of complex medium and long term contracts; Investments in production and transport capacity are characterized by major political and societal processes and delays; Economic growth, energy substitution and weather patterns create external dynamics; Geological aspects of gas fields add to the overall complexity; And congestions in transport infrastructure make gas market dynamics hard to understand.

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