IEA's Chief Economist: U.S. Nat Gas Industry a Global Game-Changer

(MoneyWatch)  The boom in unconventional gas production in the United States is an international game-changer that will have far-reaching implications to global supply and prices. At least that's the word -- and an intriguing one at that -- from the International Energy Agency in its highly anticipated 2009 World Energy Outlook. Massive amounts of information are contained within the Paris-based agency's World Energy Outlook report, which was released Tuesday, and provides guidance to 28 member countries. But IEA chief economist Fatih Birol's comments on the U.S. unconventional gas industry, its impact on global supply, spot prices and liquefied natural gas exports as well as the role in fighting global warming were particularly interesting.

Here's how Birol explains it.

Gas exporting nations ramped up their investment in liquefied natural gas industry on the belief that the U.S. would need substantially more supply in the coming years. But the development of unconventional or shale natural gas in the U.S. has changed that outlook, according to the IEA and Birol.

"There is a silent revolution taking place in the United States -- the boom of unconventional gas, shale gas," Birol said during a press conference that also was broadcast via on its Web site. "I'm afraid the world has not yet understood the (global) implications of what is going on in the U.S. This is crucial for the U.S., but has far-reaching implications for the global gas markets."

Here's why.

Gas-exporting countries made significant investments in liquefied natural gas infrastructure and production based on the belief the United States would have to import a substantial amount of LNG to meet demand.

Technological improvements have allowed companies to reach what's called unconventional gas, basically hard-to-reach deposits trapped in geologic formations. The development of the unconventional gas industry in the last few years in both the U.S. and Canada has pushed domestic production up, while reducing the need for imports, Birol explained.

The U.S. gas market coupled with a slump in global demand, which may take time to recover, will likely create a glut of gas. As a result, the world's LNG capacity is expected to rise from around 60 billion cubic meters in 2007 to nearly 200 bcm between 2012 and 2015 -- that's three times higher -- as new projects come on line.

Slumping demand and an oversupply of a commodity typically means downward pressure on spot prices. But it also will likely impact long-term LNG contracts between supplier and importing nations, Birol said.

Europe and Asia will likely push supplier countries such as Russia to change their pricing terms in these long-term contracts and cut prices. Other countries may want to look at LNG as an alternative to electricity generation. Pipeline capacity will be under-used and global LNG capacity will rise.

The IEA's World Energy Outlook forecasts demand for natural gas worldwide is set to resume its upwards trend -- about a 41 percent increase from 3 trillion cubic meters in 2007 to 4.3 tcm in 2030. However, the pace of demand growth hinges on climate policy and economic growth, the IEA said.

The IEA outlined its support of capping the concentration of carbon in the atmosphere at 450 parts per million. The agency also urged all nations to reach an agreement in global climate talks to be held next month in Copenhagen.

Natural gas could play a crucial role as a bridge fuel in the effort to reduce greenhouse gas emissions, Birol said.

"If there is a climate deal reached, gas demand will still increase -- significantly less than the referenced outlook -- but still more than today," Birol said during the press conference. "Gas may well be a transition fuel to go to a clean energy future."