Unconventional Natural Gas: The U.S. Experience

Remarks
Robert F. Cekuta
Deputy Assistant Secretary, Bureau of Economic, Energy and Business Affairs
Address to the 2nd U.S.-Indonesia Energy Investment Roundtable
Jakarta, Indonesia
February 6, 2012

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Introduction

Good morning Deputy Minister Widjajono, Ambassador Marviel, members of the Indonesian parliament, Director General Legowo, esteemed colleagues, and friends. I am honored to have this opportunity to speak with you today about unconventional natural gas, and the potential benefits that can be realized by its responsible development. But I would like to start by just mentioning the great potential in the broader energy partnership between our two countries. The leaders of both the United States and Indonesia have worked in recent years to expand and deepen our relations. Indonesia is a natural regional partner and a co-member of the G20. Our countries have agreed to a Comprehensive Partnership, and a Joint Commission - led by Secretary of State Hillary Clinton and Foreign Minister Marty Natalegawa - which includes an Energy Working Group. Energy, I should note, is an area of global foreign policy that Secretary Clinton has determined needs increased focus and emphasis including because of its role in global economic growth and security. These things reflect the importance both our countries place on the relationship and on the issues and opportunities in the energy sector here. Deputy Minister Widjajono, Director General Legowo: Thank you for hosting us in this wonderful country; I hope that this roundtable and related meetings are productive and demonstrate the depth of U.S. commitment to Indonesia’s energy prosperity.

Ladies and gentlemen the reality, something that has surprised many Americans, is that in 2010 the United States produced more natural gas than any country in the world; more than all the countries of the Middle East combined. That one fact alone should give you an idea of the transformative effect of unconventional gas in my country. President Obama mentioned this transformation in his remarks to the Congress in the State of the Union last month. During the last decade, production of unconventional natural gas, which includes shale gas, tight gas, and coalbed methane, grew to reach more than 50 percent of annual U.S. natural gas output. Development of domestic shale gas resources – resources that were once thought technologically and economically unfeasible – has been made possible due to a combination of U.S. government support for research and development and private sector entrepreneurship. The story is not finished; even as we have overcome some of the hurdles to shale gas development, we continue to examine ways to avoid and mitigate environmental and other concerns. The message of this experience is clear, however: The global energy market is changing, and if the right steps are taken, there is a strong potential that responsible unconventional natural gas development will have a significant positive impact on the economic well-being and energy security of Indonesia, as well as of many other countries around the world.

The United States deeply welcomes your interest in examining the potential that unconventional natural gas resources can offer – potentials that need to be developed with attention to the legal, regulatory, environmental, and safety challenges these technologies can pose. The experience of the United States government, and the expertise gained by our private sector,may be useful to Indonesia as it considers going down this road, and we are happy to share it with you and with others who have these resources.

Benefits: Increased Unconventional Gas Production in the U.S. and Globally

Backing up a bit, it is important to recognize explicitly that access to reliable, sustainable, and affordable energy is inextricably connected to increased economic development and a higher quality of life. For most countries, and especially ones as large and economically dynamic as the United States or Indonesia, there is no one single solution to meet the growing energy security concerns as demand for energy in our countries and around the world climbs. All options must be on the table, options that include hydrocarbons, renewables, and geothermal energy as well as increasing the efficiency in how industry, business, and private consumers use energy resources.

The United States Energy Information Administration projects that, due to increased domestic production, the U.S. will be almost completely self-sufficient in natural gas by 2035. Not that long ago, analysts maintained the U.S. would be importing 65% of our natural gas by 2035. We have granted export licenses already for two facilities to export liquefied natural gas (LNG) from the United States, exports which could begin as early as 2014 or 2015. If someone had suggested that just five years ago, they probably would have been laughed at.

Unconventional natural gas production has not only cut our reliance on external suppliers, but it has also meant job creation, a growing resurgence of the chemical industry, the potential to replace coal fired power plants with cleaner burning natural gas, increasing the use of natural gas for transportation, and even potentially employing gas-to-liquid processes that could most immediately offset the use of oil (the price of which is increasingly on the rise). The U.S. experience provides a possible analogue that allows us to speculate about new futures. One recent International Energy Agency analysis considers a scenario of a golden age of gas – in which gas use, on an oil equivalent basis, begins to approach that of oil by 2035. This development has massive consequences, especially in China and the Middle East, if diversification provides a chance to reduce both CO2 emissions and prices.

Let’s talk about prices for a moment. Traditionally the price of natural gas has been linked to the prices consumers pay for oil. While there are world-wide prices for crude, there has been no single world-wide price for natural gas. Pipeline networks along with the proximity of traditional sources of natural gas played a key role in how gas was priced in a market.

Thus, today there are roughly three major markets for natural gas, in North America, Europe and Asia, and each has a different price for natural gas; prices that can differ significantly. In Asia, natural gas often costs three to four times what it does in the United States. Thanks to the development and production of unconventional gas, along with an extensive system for getting that gas to markets, the United States has the cheapest natural gas in the world; we currently pay less than $3 per million btu, as compared to about $9 mmbtu in Western Europe and up to $15 mmbtu in Japan. If Indonesia were able to realize its unconventional gas potential, increased production could mean more gas available to meet Indonesia’s growing energy needs without having to reduce the country’s role as a leading natural gas exporter.

In the last 5 years, LNG that had been originally slated for U.S. markets has been diverted to European spot markets, forcing gas-on-gas competition as Russian suppliers had to accept lower prices for pipeline gas.

In East Asia, recent pricing changes in China that would liberalize natural gas well head prices to reflect market prices could help spur larger development of unconventional natural gas resources. This step could help meet China’s growing energy needs (reduce China’s dependence on natural gas imports) and affect the dynamics of global gas markets.

Our expectations, and the expectations of many others, are that the world will continue to see a growing demand for natural gas, including as a means to lower greenhouse gas emissions and pollutants, as well as a means to improve their energy security. Indonesia is among those who could stand to benefit by realizing this unconventional gas potential.

It is important and timely that we are here today in Jakarta talking about natural gas. Canada, Mexico, Australia, China, and South Africa and numerous others have potentially significant shale gas resources. Quantifying the recoverability of these resources will require years’ worth of technical assessment, exploratory drilling and production modeling. Even in the United States, where the shale gas industry is more than a decade old, the extent of our ultimately recoverable shale gas reserves is uncertain. What is clear, however, is that sizable increases in domestic gas production can be obtained in countries that do have this resource and that have undertaken the steps needed with respect to instituting the right regulatory, political, legal and commercial frameworks to make their shale industries sustainable.

Challenges to Unconventional Natural Gas Development

These steps should not be ignored; the global revolution in the production of unconventional gas is not without challenges. Take shale gas, for example. To realize fully the potential this resource holds, countries must take into account factors affecting the environment and public safety These aspects must be given serious attention. As many of you no doubt know, there has been public discussion, particularly at the state and local levels in my country, about the safety and reliability of the technology and chemicals used in drilling for and extracting shale gas. Not just in response, but to stay ahead of the curve regarding the various aspects of shale gas production, the U. S. Secretary of Energy has established an Advisory Board for shale gas production to examine and improve the safety and environmental impact of shale gas development.

Through public meetings and extensive consultations on issues surrounding hydraulic fracturing, the advisory board developed a report that calls for stronger public communication, improving federal and state regulations, reducing emissions of air pollutants, and eliminating the use of diesel fuel in fracturing fluids. The U.S. Environmental Protection Agency is also preparing an extensive report on the impact of hydraulic fracturing on water resources, including groundwater that should be completed in 2014. The preliminary results, however, will be released at the end of this year. Both of these reports should provide further information and improve best practices among all stakeholders involved. The United States is fully committed to sharing these lessons learned with other countries interested in exploiting their shale gas potential.

An attractive investment climate is another essential component for unconventional natural gas development for foreign and domestic investors alike, as is an adequate infrastructure. To underscore this point, the IEA projects that from 2011 to 2035 $38 trillion worth of investment in power generation, exploration and production, and infrastructure development will be required to meet global energy demand. Most of that investment is expected to occur in non-OECD countries such as Indonesia since that is where more than eighty-percent of this demand increase is expected to occur.

In the United States, geologists knew for decades that shale gas existed, but its geological complexity and associated high economic costs made its extraction unprofitable. However, with the right investment climate in place – a climate which included deregulation of prices, early tax incentives, a predictable regulatory process, and grants for research and development – the United States was able to make investment in this sector more attractive and industry was able to break the shale gas code through technological innovations and greater efficiencies.

Governments alone are not going provide the money needed; to develop these energy resources, the private sector will need to make – and will need to want to make – investments of money and know-how. Furthermore, as we have seen in the United States, industry can be a partner in efforts to counter the negative environmental impacts of unconventional natural gas development. These efforts include multi-well drilling pads, water recycling, the development of hydraulic-fracturing techniques that require less harmful chemicals, and the use of natural gas instead of diesel to fuel drilling equipment. Industry has also been willing on occasion to disclose the chemicals used in the hydraulic fracturing process, at times complying with government regulatory measures before they were established. All these steps resulted in a lower environmental footprint. Industry best practices do not replace sound regulations, but they demonstrate how government and industry can function as partners, not adversaries, in the development of new energy supplies.

UGTEP

All this brings me to the Department of State’s Unconventional Gas Technical Engagement Program, formerly known as the Global Shale Gas Initiative. The name change reflects our focus, on the need to focus, on all sources of unconventional gas, not just shale gas. It highlights too the potential these various sources have to make a significant impact on long-term global energy security and the challenges posed by their potentially harmful impacts. This government-to-government program is an important tool for sharing with other countries the experiences we have had in the United States with the development and production of shale gas and other nonconventional gas and oil resources, and what various levels of government – federal, state, and local – and industry have found to be the best practices associated with unconventional gas development. The program also seeks to inform other countries about the myriad technical, operational, environmental, regulatory, legal and commercial challenges and issues that need to be addressed in order to create a sustainable unconventional gas sector. We invite Indonesia to further its unconventional gas development process by participating in this program.

Conclusion

Deputy Minister Widjajono, Director General Legowo, ladies and gentlemen, in conclusion, let me again say that unconventional gas is continuing to transform the energy outlook of the United States in dramatic ways, and could potentially transform Indonesia’s energy outlook as well. However there are very important pre-conditions that make that transformation possible, and chief among them are an attractive investment climate and stable regulatory framework, policies that provide the right mix of incentives and environmental protection, and the right commercial expertise and technology to exploit safely these gas resources.

While the world faces significant and difficult challenges on the energy front – there are over 1.3 billion people in the world today without adequate access to energy – it seems that the steps needed to boost people’s economic well-being will inevitably result in greater demand for energy even with all our efforts to produce energy more sustainably and utilize it more efficiently than in the past. Moreover, we must strive to decrease greenhouse gases even as we work to meet these increased energy needs. Fortunately there are steps we can take to meet these needs while boosting our countries’ energy security. The development and production of unconventional natural gas resources have made significant contributions to improving the energy security and economic outlook of the United States.

There is no “one size fits all” or magic single answer for countries working to meet these challenges. Nevertheless it may well be that if the right steps are taken and appropriate measures adopted, unconventional natural gas could have a significant impact on the energy security of many countries, including Indonesia.

Indonesia stands poised to benefit from a global market that increasingly looks to natural gas for many uses, including as the bridge-fuel technology to a lower carbon energy future. Through engagement with our private sector, through dialogues such as today’s, and programs such as the Unconventional Gas Technical Engagement Program, we look forward to advancing our strategic partnership for energy security into a long and fruitful future. Thank you for your attention and thank you for hosting us in this extraordinary country.

ENDS

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