ENERGY & RESOURCES Archives

01/04/2013by EOS Intelligence EOS Intelligence No Comments

Will Shale Gas Solve Our Fuel Needs for the Future?

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At first glance, shale gas might look too good to be true: large untapped natural gas resources present on virtually every continent. Abundant supplies of relatively clean energy allowing for lower overall energy prices and reduced dependence on non-renewable resources such as coal and crude oil. However, despite this huge potential, the shale gas revolution has remained largely limited to the USA till now. Concerns over the extraction technology and its potentially negative impact on the environment have hampered shale gas development in Europe and Asia on a commercial scale. However, increasing energy import bills, need for energy security, potential profits and political uncertainty in the Middle East are causing many countries to rethink their stand on shale gas extraction development.

How Large Are Shale Gas Reserves And Where Are They Being Developed?

An estimation of shale gas potential conducted by the US Energy Information Administration (EIA) in 2009 pegs the total technically recoverable shale gas reserves in 32 countries (for which data has been established) to 6,622 Trillion Cubic Feet (Tcf). This increases the world’s total recoverable gas reserves, both conventional and unconventional, by 40% to 22,622 Tcf.

Continent	Shale Gas Reserves and Development
North America	Technically Recoverable Reserves: 1,931 Tcf Till now, almost whole commercial shale gas development has taken place in the USA. In 2010, shale gas accounted for 20% of the total US natural gas supply, up from 1% in 2000. In Canada, several large scale shale projects are in various stages of assessment and development. Despite potential reserves, little or no shale gas exploration activity has been reported Mexico primarily due to regulatory delays and lack of government support.
South America	Technically Recoverable Reserves: 1,225 Tcf Several gas shale basins are located in South America, with Argentina having the largest resource base, followed by Brazil. Chile, Paraguay and Bolivia have sizeable shale gas reserves and natural gas production infrastructure, making these countries potential areas of development. Despite promising reserves, shale gas exploration and development in the region is almost negligible due to lack of government support, nationalization threats and absence of incentives for large scale exploration.
Europe	Technically Recoverable Reserves: 639 Tcf Europe has many shale gas basins with development potential in countries including France, Poland, the UK, Denmark, Norway, the Netherlands and Sweden. However, concerns over the environmental impact of fracturing and oil producers lobbying against shale gas extraction are holding back development in the region with some countries such as France going as far as banning drilling till further research on the matter. Some European governments, including Germany, are planning to bring stringent regulations to discourage shale gas development. Despite this, countries such as Poland show promising levels of shale gas leasing and exploration activity. Several companies are exploring shale gas prospects in the Netherlands and the UK.
Asia	Technically Recoverable Reserves: 1,389 Tcf China is expected to have the largest potential of shale gas (1,275 Tcf). State run energy companies like Sinopec are currently evaluating the country’s shale gas reserves and developing technological expertise through international tie-ups. However, no commercial development of shale gas has yet happened. Though both India and Pakistan have potential reserves, lack of government support, unclear natural gas policy and political uncertainty in the region are holding back the extraction development. Both Central Asia and Middle East are also expected to have significant recoverable shale gas reserves.
Africa	Technically Recoverable Reserves: 1,042 Tcf South Africa is the only country in African continent actively pursuing shale gas exploration and production. Other countries have not actively explored or shown interest in their shale gas reserves due to the presence of large untapped conventional resources of energy (crude oil, coal). Most potential shale gas fields are located in North and West African countries including Libya, Algeria and Tunisia.
Australia	Technically Recoverable Reserves: 396 Tcf Despite Australia’s experience with unconventional gas resource development (coal bed methane), shale gas development has not kicked off in a big way in Australia. However, recent finds of shale gas and oil coupled with large recoverable reserves has buoyed investor interest in the Australian shale gas.

What Are The Potential Negative Impacts Of Shale Gas Production?

Despite the large scale exploration and production of shale gas in the USA, countries around the world, especially in Europe, remain sceptical about it. Concerns over the environmental impact of hydraulic fracturing, lack of regulations and concerns raised by environmental groups have slowed shale gas development. Though there is no direct government or agency report on pitfalls of hydraulic fracturing, independent research and studies drawn from the US shale gas experience have brought forward the following concerns:

Will Shale Gas Solve Our Future Energy Needs?

Rarely does an energy resource polarize world opinion like this. Shale gas has divided the world into supporters and detractors. However, despite its potential negative environmental impact, shale gas extraction is associated with a range of unquestionably positive aspects, which will continue to support shale gas development:

Shale gas production will continue to increase in the USA and is expected to increase to 46% of the country’s total natural gas supply by 2035. USA is expected to transform from a net importer to a net exporter of natural gas by 2020.
Despite initial opposition, countries in Europe are opening up to shale gas exploration. With the EU being keen to reduce its dependence on imported Russian piped gas and nuclear energy, shale gas remains one of its only bankable long-term options. Replicating the US model, countries like Poland, the Netherlands and the UK are expected to commence shale production over the next two-five years and other countries are likely to follow suit.
Australian government’s keenness to reduce energy imports in addition to the recent shale gas finds has spurred shale gas development the country. Many companies are lining up to lease land and start shale gas exploration.
More stringent regulations from environment agencies are expected to limit the potential negative environmental impact of shale gas exploration.
Smaller energy companies that pioneered the shale gas revolution in the USA are witnessing billions of dollars worth of investments from multinational oil giants such as Exxon Mobil, Shell, BHP Billiton etc. are keen on developing an expertise in the shale gas extraction technology. These companies plan to leverage this technology across the world to explore and produce shale gas.The table below highlights major acquisitions and joint venture agreements between large multinational energy giants and US-based shale gas specialists over the last three years.

Major Deals in Shale Gas Exploration

Company	Acquisition/Partnership	Year	Investment
Sinopec	Devon Energy	January 2012	USD 2.2 billion
Total	Chesapeake Energy	January 2012	USD 2.3 billion
Statoil	Brigham Exploration	October 2011	USD 4.4 billion
BHP Billiton	Petrohawk	July 2011	USD 12.1 billion
BHP Billiton	Chesapeake Energy	February 2011	USD 4.75 billion
Shell	East Resources	May 2010	USD 4.7 billion
Exxon Mobil	XTO Energy	December 2009	USD 41.0 billion
Source: EOS Intelligence Research

Shale gas production is expected to spike in the coming three-five years. Extensive recoverable reserves, new discoveries, large scale exploration and development and technological improvement in the extraction process could lead to an abundant supply of cheap and relatively clean natural gas and reduce dependence on other conventional sources such as crude oil and coal For several countries including China, Poland, Libya, Mexico, Brazil, Algeria and Argentina, where the reserves are particularly large, shale gas might bring energy stability.

The need for energy security and desire to reduce dependence on energy imports from the Middle East and Russia (and hence to increase political independence), are likely to outweigh potential environmental shortfalls of shale gas production, and some compromise with environment protection activist groups will have to be worked out. Though the road to achieving an ‘energy el dorado’ appears to be long and rocky, it seems that with the right governments’ support, shale gas could become fuel that could significantly contribute to solving the world energy crisis over long term.

19/02/2013by EOS Intelligence EOS Intelligence No Comments

India – Reducing Reliance on Diesel

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India’s subsidy on diesel currently stands at about INR 950 billion (~ USD 19 billion).

Total diesel consumption was 64.74 million tons in 2011.

Diesel accounts for about 38% of India’s total fuel consumption.

3 million ton of diesel is consumed in private power generation.

On 17th January 2013, the Indian government took a major step towards the deregulation of diesel prices. A monthly (duration, undecided) hike of INR 0.50 (USD 0.01) for retail customers and INR 11.00 (USD 0.20) increase in diesel price for bulk customers has been proposed. This move is expected to reduce India’s fuel subsidy burden by about INR 150 billion (~ USD 3 billion) annually.

Why such high dependence on diesel?

Agriculture and power generation account for 20% of India’s diesel demand.

The agriculture sector, the mainstay of India’s economy, accounts for about 12% of India’s total diesel demand. For a typical Indian farmer engaged in semi-mechanized farming operations, diesel can account for up to 20% of the input cost. This primarily consists of expenses towards fuel used to plough field and a substantial amount used to operate water pumps for irrigation purpose.

The power sector demand for diesel is largely driven by inadequate and inefficient power generation, transmission and distribution infrastructure. As per available statistics, there is about 10% supply-demand gap in India’s power sector, which results in regular outages. Though India added about 20GW of generation capacity in 2011, more would be required if the country aims to match global per capita electricity consumption standards of 2,700Kwh. At present, India’s per capita consumption is about 900Kwh.

This mismatch in supply-demand of power is met by private power generation, accounting for 8% of India’s diesel demand. Shopping malls, housing societies, large hospitals and telecom towers are among the major consumers of diesel-generated power.

Across the country, diesel generators operate for 8-10 hours every day, to supplement government-supplied electricity, thus leading to excess demand for diesel.
According to government statistics available for 2011, private power generators and mobile phone towers consumed 4.6% and 1.93% of diesel, respectively.

Power is also lost in the form of aggregate technical and commercial losses, which amount to about 30% of the total power produced in the country. With a generation capacity of 205GW, approximately 60,000MW is lost while transmitting and distributing power to end-users.

As an indicator, reduction of these losses by even 50% can ensure power to about 8 million diesel pumps of 5 HP rating thereby saving of about 4-8 million litres of diesel per hour.
If the government took necessary steps to improve power availability by 50% of the current outage time (assumed to be eight hours daily as an average) then it is estimated that it would lead to the reduction of diesel usage in private power generation by about 4.5 million litres annually.

So, how can the heavy reliance on diesel be reduced?

Reduce price differential – Minimizing the price differential between petrol (gasoline) and diesel, which can be up to 30%, could go a long way in helping reduce the burden on diesel. Artificially-kept low diesel prices (coupled with better efficiency of diesel engines vis-à-vis petrol engine) have led to increased demand for diesel vehicles in India, thus resulting in greater diesel consumption. In 2012, diesel cars accounted for more than 50% of all passenger vehicles sold in India. In 2011, approximately 16% of diesel sold in India was consumed by passenger vehicles. Economists have often questioned the rationale behind selling subsidized diesel to passenger vehicle owners who can afford it at the market price. Policymakers have also mulled options to discourage the sale of diesel cars, which include higher taxes on diesel cars. However, such moves have been opposed by the Indian automobile industry. Industry experts admit that parity in diesel and petrol prices can shift balance in favour of petrol vehicles with a sales ratio of 55:45. For instance, if achieved in 2013, this could reduce the consumption of diesel by 200 million litres (based on a conservative estimate).
Alternate sources of power – Adoption of renewable sources of energy for power generation could also help in reducing the current diesel burden of India. Renewable power currently accounts for only about 12% of total installed capacity. For instance, an Indian telecom service provider Airtel has installed a 100 KW solar power plant in one of its major routing centres in Northern India. This is expected to save 26,000 litres of diesel annually. The company is planning to install similar system in six other locations as well.
Other measures – Better roads and highways would result in improved fuel efficiency of vehicles leading to lesser use of vehicles. Efficient intermodal logistics infrastructure, with a larger share of railways would reduce dependence on road transport.

Diesel demand in India would remain high due to its close linkage with day-to-day economic activity. However, it is apparent that current diesel usages are more than the actual requirement due to infrastructural shortcomings in the power sector. Therefore, addressing these issues would directly help in reducing diesel demand in India.

In the near term, it would be interesting to see how the gradual hike in diesel prices impact the economy at large, and more so, the budgets of the common man. As with several such measures in the past, the step towards change has to be politically driven and with general elections in sight in 2014, only time will tell how effective this much awaited reform is for India.

30/01/2013by EOS Intelligence EOS Intelligence No Comments

Australia – Stepping on to the Mine Field

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While most developing countries have been negatively impacted by the significantly deteriorated economic conditions in the US and European markets, Australian economy appeared to be largely shielded from the impact of the global economic slowdown thanks to its mining industry. Following the onset of the 2008 crisis, when most developed economies slowed down, China continued on its path of infrastructure development and investment. This boosted its demand for minerals and resources, large part of which continue to be imported from mines across Australia.

Thanks to the Chinese economy growth sprint, Australian mining industry has been in a boom mode since 2006, and consequently witnessed soaring levels of capital investment in mining and related logistic infrastructure. The industry growth was significant enough to have resulted in higher dependency of Australian economy on this sector, with the mining and mining-related service industries accounting for about 20% of GDP in 2011-12, compared with only 10% a decade earlier.

The industry is still on a roll, yet the situation might change soon. With the Chinese economy showing signs of slowing down in 2011 and 2012, the Australian government and business executives can no longer be certain of the continuous inflow of Chinese orders for Australian mining output. But the decline in orders is just part of their worries, as mining companies operating across Australia are faced with other challenges as well, which question their ability to remain competitive in the global market.

The Challenges

While currently it is estimated that the strong performance of the Australian mining sector will continue till at least 2014, there are already growing challenges in the industry. Slackening demand, particularly from the Chinese infrastructure sector, has lead to a global drop in commodity prices of coal and iron. This decline in prices, coupled with higher operating costs due to rise in employee wages and energy costs, makes it less economical for Australian ore extractors to trade in global markets.

Skills shortage and union pressures further drive the operational costs upwards. A shortfall in skilled personnel is likely to result in employees being available only at a premium, leading to further increase in costs. A shortage of truck drivers in mining sector has seen employees of large companies, such as Rio Tinto and Xstrata, receive as much as three times their base salary. The insufficient talent is also witnessed in more skilled and experienced jobs, including mine planning engineers, geologists, metallurgists and mineral processing engineers. This skill shortage also gives employee unions an upper-hand when it comes to negotiating perks.

The rise in costs is further multiplied by the introduction of additional taxes, including the Carbon Tax and the Mineral Resource Rent Tax, all of which contribute to the rising cost burden of the Australian mining companies.

At the same time, mining productivity has resurfaced as an increasingly relevant issue. According to 2012 estimates by the Mineral Council of Australia, productivity in mining industry has reduced by about 30% since 2003.

These challenges are a visible sign that Australia’s mining sector is likely to have an increasingly harder job to compete with mining companies in other emerging resource-rich countries, such as Indonesia, whose proximity to important Asian customers results in lower shipping costs to the client. This could result in a considerable decline in Australian mineral exports, and thereby, have a negative impact on the Australian economy as such.

The Way Out

Both the government and mining companies are devising ways to overcome the challenges posed by these increasingly pressing issues.

Expecting that the current peak in mining investment boom will soon be followed by the sector’s decline, the Reserve Bank of Australia (RBA) announced cuts of cash and lending rates in December 2012. Concerned by the fact that the non-mining industries in Australia continue to struggle, RBA has introduced these cuts to support the underperforming non-mining sectors, such as housing, construction, and retail. While the short-term outlook for non-resources investment is likely to remain subdued, these cuts are expected to provide impetus for investment in these sectors over a long term.

Mining companies face a tougher task to remain competitive in the global market. In the short-term, several Australian mining companies are looking at temporary shelving of investment projects to deal with the deteriorating demand and decline in commodity prices. For instance, BHP Billiton, the world’s largest mining company, shelved its Olympic Dam and Bowel Basin projects after witnessing a decline in profits.

However, putting investment projects on hold is not enough and mining companies will have to continue to undertake initiatives to tackle the problem of increase in cost per ton of output.

Initiatives to raise employee productivity are being put in place. In 2012, a contracting company overseeing work on Chevron’s $52 billion Gorgon gas project banned sitting during working hours to improve operational productivity.
Companies are trying to explore alternatives to tackle skill shortage. Rio Tinto has started employing driverless trains and trucks to cart iron ore from its mines in order to tackle the premium wage demands, caused by the shortage of drivers in mining operations.
Companies are cutting employee perks to lower wage costs and offset lower returns. In 2012, Fortescue Metals Group scrapped weekly staff barbecues, and removed free coffee and ketchup from the canteens.

While these initiatives might attract negative publicity, particularly with labour unions, these steps have become increasingly necessary for mining companies to get back on the path of competitiveness and profitability over a long run. But will this be enough? Will cutting weekly employee get-togethers, and making workers stand at work take care of 30% productivity decline witnessed over the past decade? These measures definitely appear disproportionate to the problem’s weight. Or do the Australian mining executives have some more tricks up their sleeves that will actually matter in prolonging the mining sector golden years?

15/03/2012by EOS Intelligence EOS Intelligence No Comments

Solar Photovoltaic Market – Contemporary Scenario and Emerging Trends

As concerns about global climate change become more salient with growing population, depleting natural energy sources and subsequent rise in traditional energy prices, the search for alternative sources of power generation has become a prominent societal issue.

New sources of energy are typically not as cost competitive as traditional sources such as coal and natural gas, thus, local governments across various countries have rolled out incentives for private players to invest in the renewable energy sector, thus driving innovation and creation of cost-effective solutions.

Read our report – Solar Photovoltaic Market – Contemporary Scenario and Emerging Trends

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